Difficult to sustain

Remittances from abroad

Migration remittances are seen by analysts of economic issues as golden eggs as they contribute crucially to the foreign exchange earnings of many developing countries. Also, remittances generate both micro and macroeconomic effects. According to the World Bank, remittances make an important welfare contribution to the receiving households.
It is also used in human and social capital such as healthcare, nutrition, education. In other words, there is always the ripple effect that stems from increased consumption as a result of increased remittance money received.

In macroeconomic terms, remittance money provides stability by assured supply of funds. Besides being an important source of foreign exchange, it helps strengthen the value of local currency when remittance flows go up in volume.

According to the latest World Bank data, remittance flows to developing countries in 2008 reached $328 billion, which exceeded the previous estimate of $305 billion. Though remittances grew steadily during 2007 and 2008, it began to slow down in the October-December 2008 period. In line with the Bank’s downward revision of global economic growth, the forecasts for remittance flows to developing countries is also lowered to -7.3 per cent in 2009 from its earlier forecast of -5 per cent.

In contrast to Latin America, flows to South Asia and East Asia have remained strong, though there is always the risk of a downward trend. The predicted decline in remittances by -7.3 per cent this year is far smaller than that for private flows to developing countries. Despite the slowdown in remittances, it has remained resilient because the number of migrants living overseas has been relatively unaffected by the crisis.

There are several factors for this trend towards slowdown in remittance money. These include the uncertainty about the depth and duration of the current crisis, the volatility in the exchange rate, prospects of tightening immigration controls in major destination countries.

According to Hans Timmer, Director of the World Bank’s Development Prospects Group, “such restrictions would curb remittances more than forecast and would slow the global recovery in the same way as protectionism against trade would endanger a global upturn.”

South Asia registered a 33 per cent growth in remittance flows as India reported $52 billion in 2008, up 34 per cent compared to a year ago, and far exceeding the earlier estimate of $45 billion. While remittances to East Asia and the Pacific rose 20 per cent, triggered by strong growth in China and the Philippines, flows to Latin America and the Caribbean grew by a modest 2 per cent in 2008.

Top 10 recipients

As per the World Bank study, in 2008 India retained its position as the top recipient of migrant remittances among developing countries, followed by China ($40.6 bn) and Mexico ($26.3 bn). The top 10 recipient list also include the Philippines ($18.8 bn), Poland ($10.7 bn), Nigeria ($10.bn), Egypt ($9.5 bn), Romania ($9.4 bn), Bangladesh ($9 bn), and Vietnam ($7.2 bn).

What are the factors responsible for a surge in remittance to India in 2008? These are: increased migration to the Gulf and other destinations, a weak rupee (hovering around Rs 50 a dollar), wide differences between domestic and international interest rates, and a boom in real estate and stock markets (until mid-2008), thereby creating investment opportunities.

As is well known, transfer of remittance money is made through both formal and informal channels and the actual remittance money will never be known. But technology intervention in the transfer of funds, coupled with easing of regulations, by Indian and international banks and exchange houses in the Gulf such as direct transfers to bank accounts, a growing array of remittance-linked financial products have reduced transfer costs and shifted remittance flows to formal banking channels. This will help check transaction through hawala and closer to the approximation of estimates.

Another factor that contributed to the increased flow stemmed from the economic crisis that plagued the developed countries from mid-2008 onwards, low deposit rates and the lack of faith in the international banks as their performance was under suspect. India was seen as ‘safer haven’ for transferring savings. The depreciation of the Indian rupee against the US dollar resulted in a ‘sale effect’ as this made local assets cheaper and attractive to migrants.

However, this rosy picture may not be sustained for long and the change may be seen in 2009 figures when they emerge next year. The steady appreciation of the rupee, falling interest rates, and a lagged response in remittance flows emanating from current slowdown in economic activities in the Gulf may result in slowdown in remittance flows.

States like Kerala and some others which have sent a larger number of migrant workers, especially in the construction sector in Dubai, may feel the effect first.

World Bank predicts that remittance flows to India in 2009 is expected to decline by nearly 7 per cent. However, remittance to the entire South Asia as a region as compared to other parts of the world, though would also decline marginally, will be small as robust growth in flows to Bangladesh, Pakistan and Nepal will help maintain the share of South Asia vis-à-vis other regions of the world closer to the current level.

(The writer is senior fellow at the Institute for Defence Studies and Analyses, New Delhi)