EditorSpeak: The real amount of international remittances

The real amount of international remittances

There has been much debate on putting a number to the flow of international money transfers and the World Bank has recently released reports that peg the number at $300 billion. Industry insiders know that the true amount of informal remittances can only be guessed at and previous IMF numbers peg this amount at 50-100% of formal remittances. The fact that money transfers are growing annually has attracted the attention of banks and financial institutions worldwide, which are looking for ways to leverage this growth and increase their falling revenues. Banking organisations like Citigroup and HSBC, major credit card companies and all types of credit unions are looking towards the lucrative immigrant remittance market.

But the question is how much is the real growth and what is the changing pattern of remittances. The two questions are linked – both relate to immigration; global immigration is on the rise and the US tops the list of host countries and, therefore, the list of sending nations. With the US widely believed to be going into a recessionary cycle and the country’s currency weakening fast, there are implications for the remittance market and those invested in it.

Alan Greenspan, the former head of the US Federal Reserve has released negative comments on the state of the US economy, going as far as to say that this recession may be worse than the last two. Merrill Lynch and Goldman Sachs are amongst those that claim the US economy will contract this year and the Fed has cut the growth expectations to between 1.3 to two percent. Analysts claim that the true extent of the subprime crisis is yet to be registered and some fallout is still being seen in the spread to Europe with UBS and possibly, Societe Generale involved in it. The dollar has been weakening for months now and further declines can be expected.

Now what does this have to do with the remittance market? As the dollar weakens and emerging economies with higher growth rates strengthen, the difference between the currencies erodes and each dollar sent home equals less of the local currency. For the typically low-paid remittance sender, the amount sent home needs to increase for their family to receive the same amount in local currency back home. The dollar amount remitted thus increases but the value of the increase is insignificant. Euro-denominated remittances also translate to higher dollar-denominated amounts than earlier, since the euro is stronger against the dollar. Other industries are facing the same question – the oil producing nations question the denomination of crude oil in US dollars, as this seems to reduce the selling price of oil in other currencies. Should the amount of international remittances be calculated in a more stable currency over time, how much would the organic growth in remittances really be?

There have been reports from small MTO locations that customers are bringing in euros in place of dollars even in New York. While most players in the remittance market have focused on strengthening networks in Europe and the Middle East for these and other reasons, the shift may be greater and faster than expected. Immigrants may find employment harder to obtain and less lucrative in the contracting US market and be forced to move to countries in the EU or the Middle East to support their needs and those of their family back home.

At the same time, goods and services in the emerging economies are becoming dearer as these economies develop. Thus the goods and services that can be purchased with the same amount of received money reduce. The sender now needs to remit a much greater amount in real terms than before for the receiver to be able to purchase the same products as previously. Opportunities in the home nation may become more attractive than before and the option to migrate may become more of a choice than a necessity. The move will be towards “gold-collar” migration, i.e. highly skilled migrants who are not forced to leave their home countries but have a choice to maximize their profit from the global labour market.

Clearly, the latter scenario is a picture of the distant future – currently there are estimated to be 200 million migrants worldwide. However, the shift in migration patterns will depend heavily on the state of the global economy and migrants will move where they are needed and where they will benefit the most. With this shift, remittance patterns may change forever. Already, the real, organic growth number for the total remittance market is up for debate due to the decline of the dollar. Further weakening of the currency will mean more inflated growth numbers for the future. Is it time to put an end to the US dollar as the universal measure.