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Where Remittances Matter Most (The Monito Briefing Issue #12)

Byron Mühlberg, writer at Monito.com
Aug 2, 2021

Hello and welcome to the Monito Briefing! It goes without saying that remittances are a lifeline for many families, communities, and regional economies around the world. But what might be less obvious is that remittances can be a lifeline for entire countries too.

In this week's issue, we look at a few of these all-too-forgotten countries by exploring the role that foreign inflows have on economic stability before zooming out and looking at broader trends in the international money transfer industry.

Industry Highlights

Before we get going, here are three of the top stories from the past two weeks:

Where Remittances Matter Most

When we hear about the importance of remittances to nations around the globe, it's often in the context of giants such as India, China, Mexico, the Philippines, and Nigeria. Indeed, these countries receive the most remittances by absolute inflow volume, which combined came to US$237 billion in 2020, according to central bank and World Bank data.

While around a quarter of a trillion dollars flows into these five countries every year, this amount comes to a relatively small portion of each country's total GDP, ranging from 0.1% of GDP in China to 9.7% of GDP in the Philippines.

However, according to the World Bank, two countries in 2020 saw remittance inflows contribute to more than a third of total GDP: Tonga and Somalia at 37.2% and 35.3% respectively. Furthermore, another two countries — Kyrgyzstan and Tajikistan — saw remittance inflows come in at more than a quarter of GDP at 28.4% and 26.7% respectively. Others still, including El Salvador, Honduras, Nepal, Lesotho, Haiti, Bermuda, and Jamaica, saw remittances make up more than a fifth of GDP in 2020.

Today we're looking at three of these countries — Tonga, Kyrgyzstan, and El Salvador — to contrast the factors contributing to the importance of inflows in high-remittance economies:

Tonga

  • Inflows (USD): $193.5 million (2020)
  • Largest source countries: New Zealand, Australia
  • Key fact: Around 80% of Tongan households receive remittances, which equates to about 30% of total household consumption.

Remittances have long constituted a sizeable portion of Tonga's GDP, having never dropped below 12.22% of the economy since records began in 1975.

Remittances to Tonga have traditionally been characterised by heavy expenses which sit above 10.00% of the transfer value, according to the World Bank's International Finance Corporation (IFC). However, according to the group, the COVID-19 pandemic appears to have spurred the digitization of a traditionally cashless corridor. In 2017, the IFC partnered with the central banks of Tonga, New Zealand, and Australia to launch 'Ave Pa'anga Pau, an online remittance platform that delivers electronic vouchers to Tonga from Australia and New Zealand, claiming to halve the average market cost of sending to Tonga. According to the IFC, 'Ave Pa'anga Pau has 3,000 customers to date, a rather small number largely spurred by the pandemic among Tongans living in New Zealand.

Kyrgyzstan

  • Inflows (USD): $2.2 billion (2020)
  • Largest source countries: Russia, Kazakhstan, Turkey
  • Key fact: According to the UN, remittances were the driver of around 715,000 people being raised out of poverty in Kyrgyzstan in 2019 alone.

Records of the receipt of personal remittances began in 1993, shortly after the collapse of the Soviet Union and Kyrgyz independence in 1991. Since then, the importance of remittances (and migration more broadly) on the traditionally agrarian Kyrgzyz society have become clearly observable, with inflow volumes swelling to an all-time high of US$2.69 billion in 2018, contributing to 32.5% of GDP.

While these remittances are largely used to support families, their sheer size as a percentage of GDP has historically financed high domestic consumption, which, in turn, has driven a high consumption versus investment ratio and inflated the country's trade deficit, according to a 2012 paper by the Eurasian Economists Association.

Moreover, due to the considerable dependence on remittances and, by extension, migrant labour in Russia in particular, the Kygzyz economy was uniquely vulnerable to the impact of the COVID-19 pandemic. According to a December 2020 research paper by the policy thinktank Central Asia Program (CAP) at George Washington University, an estimated 40% of Kyrgyz labour migrants in Russia were left unemployed in Russia, resulting in a staggering 62% year-over-year drop in remittance inflows to Kyrgyzstan in April 2020. While this dropoff recovered in the following months, Kyrgyzstan's inflows dropped by 8.75% year-over-year in 2020.

El Salvador

  • Inflows (USD): $5.9 billion (2020)
  • Largest source countries: US, Canada, Spain
  • Key fact: Around 20% of El Salvadorans are direct beneficiaries of remittances, of whom around 70% are women.

Remittances play a key role in supporting the poorest and most vulnerable echelons of El Saldavoran society. According to a 2016 survey by the Inter-American Development Bank, money sent home from El Salvadorans working abroad constitutes half of the total monthly household income of recipient households, 46% of which were classified as economically "vulnerable" with an income of US$4 to US$10 per person per day.

El Salvador made headlines in June 2021 after it became the first country in the world to formally adopt Bitcoin as legal tender, citing the cryptocurrency’s potential as a remittance currency as a driving reason for the decision. However, while total Bitcoin inflows in May came to US$1.7 million (up 300% from US$424,000 in May 2020), they remain a drop in the bucket next to traditional remittances, which came to US$685 million that month, leaving remittance providers cautious in adding the cryptocurrency as a pay-out method.

What We're Watching

Zooming out once again and exploring the global trends in the international money transfer industry, Monito is keeping an eye on a number of trends that are shaping up to characterise the industry in the coming years.

Besides the growth of digital money transfer business segments among industry-leading incumbents such as Western Union, Wise, and MoneyGram and the clamour around the valuation of challengers such as Wise, Remitly, and WorldRemit, we're keeping an eye on the following in our near-term industry outlook:

  • Emergence of "long tail" regional competitors: The market for specialist services catering to region-specific demand in places such as LATAM, Southeast Asia, the Middle East, and Africa is expected to continue to grow.
  • Popularity of 'Pay to card' model: The growth trend in debit and credit Visa and Mastercards as a pay-out option for international payments is anticipated to accelerate, reducing fees and improving customer convenience in the process.
  • The entrance of big tech: We expect players such as Google (e.g. through its recent Google Pay integration with Western Union and Wise), Facebook (e.g. through Novi), and even Apple to continue to increase their footprint in the cross-border payments space as they vie for increased market share and an edge of existing tech-savvy competitors. The adoption of the partnership versus direct competitor route will be an interesting trend to emerge, one which we anticipate will characterise the entrance of big-tech players.

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