News Releases

Oct 1, 2008

Economic downturns, inflation hit remittances to Latin America

IDB fund forecasts money transfers made by migrants will decrease in real terms

For the first time this decade, remittances to Latin America and the Caribbean are expected to decrease in value due to the combined effects of economic downturns in the United States and Spain, inflation and a weaker dollar.

According to an analysis of recent remittance data by the Inter-American Development Bank’s Multilateral Investment Fund (MIF), migrants from Latin America and the Caribbean will send some $67.5 billion to their homelands in 2008, against $66.5 billion in 2007.

However, adjusted for inflation, this year’s total will be worth 1.7% less than the total sent in 2007, marking the first decrease in the value of remittances to Latin America and the Caribbean since the MIF started tracking these flows in the year 2000. Until last year, remittances to the region had grown by double digits every year.

These new estimates are based on monthly and quarterly data from nine Latin American central banks in countries that receive about 88.5% of the remittances flowing to this region. The impact of remittances will be a subject of discussion at the upcoming annual Inter-American Microenterprise Forum to be held in Asunción, Paraguay, October 8-10.

Earlier this year the MIF had noted that remittances to Mexico, the leading destination of such transfers in Latin America, were no longer rising, while remittances to Brazil, the second biggest recipient, had dropped in 2007. More recently, Guatemala and El Salvador have reported declines in remittance flows.

According to the MIF, several factors are affecting these flows. Among the leading causes are the economic downturns in the United States and Spain, the two top sources of remittances to Latin America. U.S. census data shows higher unemployment rates among Hispanics, who make up the majority of migrant workers in this country.

Other factors are higher inflation, principally driven by increasing food and fuel prices; a weaker dollar, particularly in countries where the local currency has appreciated against the U.S. currency; more restrictive measures against illegal immigration and improving economic opportunities in migrants’ homelands, especially in the case of Brazilians.

Notwithstanding this slowdown, the volume of remittances to Latin America and the Caribbean still outstrips all the overseas development aid and foreign direct investment in this region. Remittances are and will continue to be a vital lifeline for millions of households. Previous MIF studies have highlighted how, throughout this decade, remittances have been more stable than other currency flows.

“People who are already abroad will adapt, looking for new jobs or cutting back on consumption in order to keep sending money home,” said IDB President Luis Alberto Moreno “Those thinking of migrating will probably opt for destinations where the economy is stronger and more jobs are available. Industrialized nations will continue to attract migrants but we expect to see an increase in remittances between developing countries, as more people move to places less affected by the global downturn.”

From a development standpoint, the IDB sees a more urgent need to bank the millions of unbanked families that receive remittances in Latin America and the Caribbean. By gaining access to the formal financial system, these families would be able to use the kinds of services that allow better-off households to accumulate savings and weather economic hardship.

The MIF started studying remittances to Latin America and the Caribbean to measure their volume and assess their economic impact. Its research helped encourage greater competition among service providers, which in turn led to sharp drops in the cost of money transfers, especially between major urban centers.