According to the International Fund for Agricultural Development (IFAD), one billion people across the world send and receive remittances. Every year, 200 million migrant workers send money home, and 800 million people (in households of four, on an average) benefit from these flows. Notwithstanding disruptions attributed to COVID, remittances have grown.
World Bank data for 2021 show that remittances to low and middle-income countries touched US$ 605 billion, a growth of more than 8% over one year. Migrant workers send on average US$ 200 to US$ 300 home every month or two. This represents 15% of what they earn, but what they send accounts for 60% of a household’s total income back home. “Remittances are thus a lifeline for millions of families,” World Bank says.
IFAD further says that over 50% of remittances are sent to the rural areas, where 75% of the world’s poor live. About 75% of remittances are used to put food on the table and cover medical expenses, school fees or housing expenses. The remaining 25% can be either saved or invested in asset-building or activities that generate income and jobs.
25% is indeed noteworthy as it gives a good base to build an investment culture. Eventually, remittances should be used for investment in development.
In South Asia, in 2017, India was the top remittance-receiving country in the world receiving US$ 69.0 billion. Bangladesh, Pakistan, Nepal and Sri Lanka received US $13.5 bn, US$ 19.7 bn, US$ 7.2 bn, and US$ 7.1 bn, respectively.
According to the Central Bank of Sri Lanka (CBSL), workers’ remittances have been a key pillar of the country’s forex earnings providing a substantial cushion against the widening trade deficit. Workers’ remittances have covered around 80% of the annual trade deficit over the past two decades. Remittances have helped alleviate poverty, and reduce disparities in family incomes. They could, at a future date, help bring down spending on social security schemes.
Increasing Migration
Due to the current parlous state of the Sri Lankan economy (attributable to the bad administrative policies of the previous governments, the COVID 19 pandemic and pandemic-related lockdowns and restrictions) economic opportunities at home have dwindled, forcing Sri Lankans to leave the country.
As before, Sri Lankan migrant workers are, typically, either domestics or are in the skilled and unskilled categories. Qatar, Saudi Arabia, Kuwait, the UAE and Oman are still the preferred destinations. Recently, the government allowed its employees to take up foreign jobs and come back to their posts on return.
During this year, up to the end of July, 174,584 Lankans had gone abroad for employment. Government hopes to send 300, 000 by year-end as the country needs dollars desperately. Foreign Employment Minister Manusha Nanayakkara told the media that in the first half of 2022, inward remittances had plunged by 51.6% year-on-year to US$ 1.6 billion. This was partly due to the workers using unofficial channels in view of the unattractive official exchange rates. The government has now begun giving incentives to use the banking channel.
Pros and Cons
Remittances can immediately facilitate the improvement of sanitary conditions at workers’ homes, promote healthier lifestyles, ensure better healthcare, and higher and better educational attainment. They can increase credit constraints, facilitate asset accumulation and business investments, and also promote financial literacy.
While making the above list, Catalina Amuedo-Dorantes of San Diego State University, also warns that remittances can create a culture of dependency that inhibits economic growth. For example, it is reported that an increasing proportion of Tamil youth in the northern Lankan district of Jaffna, idle away, do not take up employment or do business because their parents get remittances from abroad. They indulge in conspicuous consumption instead of earning their bread or contributing to the economic growth of their areas.
Amuedo Dorantes adds that on the larger economic canvas, remittances could result in an increase in prices, the appreciation of the real exchange rate, and a decrease in exports, “thus damaging the receiving country’s competitiveness in world markets.”
However, Amuedo Dorantes makes the interesting point that the decision to use remittances for consumption or investment might depend in part on their regularity and predictability. If remittances are regular, they are used for consumption and if irregular or intermittent, they are put away for an investment purpose rather than consumption.
To put it in her own words: “Households that receive remittances on a predictable basis will be better able to coordinate their day-to-day expenditure and consumption needs with the receipt of remittances. In contrast, households that receive remittances on an unpredictable basis are more likely to view the inflows as nonpermanent and, therefore, are less likely to include them in their consumption planning. As a result, they might have a greater tendency to save the remittance inflows.”
Writing on the impact of remittances on economic growth in Bangladesh, India, Pakistan and Sri Lanka, Soma Rani Sutradhar (International Journal of Economic Policy Studies Volume 14, 2020) says that empirical studies show that a 1% increase in remittance growth leads to 0.05, 0.021 and 0.004% “decrease” and 0.017% “increase” in GDP per capita growth in Bangladesh, Pakistan, Sri Lanka and India, respectively.
Commenting on the data, Sutradhar says: “The negative result suggests that a larger portion of remittances are used for non-productive purposes like consumption. This tendency of spending indicates the altruistic motive of remittances rather than profit-driven. In India, remittances are used for productive purposes.”
But Ranjan Kumar Dash, writing in South Asia Economic Journal in 2020, gives a more encouraging assessment. He quotes a 2018 survey by the Reserve Bank of India to say that more than half of remittances received by Indian households were used for consumption, followed by deposits in banks (20%) and rest of the amount (9%) for investment purposes. A similar pattern of remittance utilization is also found in the case of Bangladesh and Pakistan too.
Therefore, there is evidence that remittances play a vital role in supporting the development of South Asia by increasing domestic investment, Dash points out.
Sutradhar raises another issue-the possibility of brain drain. She warns that emigration could result in a “brain drain” if the best in a country go away to build and enrich another country. Brain drain depresses the average level of skilled and educated workers in the migrants’ home countries. Therefore, countries that depend on migration for their foreign exchange needs might exhibit tardy economic growth compared to countries with lower migration rates.
Countries should therefore create local capacities for jobs and opportunities for investment for local and foreign entrepreneurs, instead of depending only on migration and remittances. Policymakers should convince both remitters and the recipients to invest a larger portion of the remittance flows for productive purposes, Sutradhar suggests.
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