Slow pace of Remittance inflows growth

Context

According to the projection by the World Bank’s latest Migration and Development brief indicates a dramatic slowing from 2022, when remittances to India grew by more than 24% to reach a record-high $111 billion.

• The reason shown was mainly due to slower growth in OECD and GCC economies, and high base effect.

OECD and GCC: The Gulf Cooperation Council (GCC) is a political and economic union of Arab states bordering the Gulf. Its 6 members are the United Arab Emirates, Saudi Arabia, Qatar, Oman, Kuwait and Bahrain. The Organization for Economic Cooperation and Development (OECD) is a unique forum where the governments of 37 democracies with market-based economies collaborate to develop policy standards to promote sustainable economic growth.

 What are Remittances?

• A remittance is money sent to another party, usually one in another country.
• The sender is typically an immigrant and the recipient a relative back home.
• Remittances represent one of the largest sources of income for people in low-income and developing
• It often exceeds the amount of direct investment and official development assistance.
• Remittances help families afford food, healthcare, and basic needs.

Why they are significant?

• India is the world’s biggest recipient of remittances.
• Remittances sustain India’s foreign exchange reserves and helps fund its current account deficit.

Global scenario: Although remittances amounted to only 4% of South Asia’s GDP in 2022, the variation across countries was large. In Nepal, remittances stood at 23.1% of GDP in 2022, compared with 7.9% in Pakistan, 5.1% in Sri Lanka, and 4.7% in Bangladesh. In India, the largest global recipient, remittances represented only 3.3% of GDP in 2022.

 What are the sources of India’s Remittances?

• Almost 36% of India’s remittances are from the high-skilled and largely high-tech Indian migrants in three high-income destinations — the US, United Kingdom, and Singapore.
• The post-pandemic recovery led to a tight labour market in these regions, and wage hikes boosted remittances.
• High energy prices and low food price inflation in the GCC countries, which remain the single largest destination for less-skilled South Asian migrants, had positive spillovers for all countries.

About World Bank’s latest Migration and Development brief:

• Key findings:
  • Slower growth in OECD economies: The high-tech sector in the United States that could affect the demand for information technology (IT) workers and lead to a diversion of formal remittances toward informal money transfer channels — is likely to impact the flow of remittances this year.
  • For India: India, which registered a growth of more than 24% in remittances in 2022, is expected to post a growth of just 2% in remittance inflows in 2023.
• Trends of remittances in other regions:
  • Remittance flows to low- and middle-income countries (LMICs) are expected to moderate to 4% in 2023.
  • In 2022, the inflows to LMICs are estimated to have increased by 8% to reach 647 billion dollars.
  • For the world, remittance flows are expected to reach 840 billion dollars in 2023.
  • In 2024, the remittances growth rate globally is projected to increase to 0% in 2024, increasing inflows by 18 billion dollars.

Factors affecting Remittances:

• Central banks’ tight monetary policy: stances to counter inflation, limited fiscal buffers to absorb shocks amid historically high debt levels, and continued global uncertainty regarding Russia’s invasion of Ukraine are likely to weigh down growth in the high-income countries.
• Lower fuel prices in 2023: will further dampen demand for migrants in the GCC countries, reducing remittance flows to East Asia and the Pacific Islands.
• The global slowdown will also gnaw into the demand for manufactured goods with implications for East Asian migrants employed in the export factories of China, Malaysia, and Thailand’s manufacturing sectors.

Why are remittances expected to grow at a slower pace in 2023?

• Remittances to India, which account for more than 60% of South Asian inflows, are expected to grow by only 2% in 2023.
• Remittance flows to the other six South Asian countries will also be limited by demand for migrants in the GCC countries where declining oil prices are expected to slow growth from 5.3% in 2022 to 3% in 2023.
• The growth of remittances is likely to be the highest in Latin America and the Caribbean (forecast of 3.3%), as the labour market in the US continues to be strong.
• Remittance growth is expected to be the lowest in South Asia (0.3%), mainly because of the high base in 2022 along with slowing demand for highly skilled IT workers in the US and Europe.
• The Other reason might be slowing demand for migrants in the GCC countries and weak balance-of-payments conditions and exchange controls are expected to divert remittances to informal money transfer channels in Pakistan, Bangladesh, and Sri Lanka.