After almost a decade of growth, remittances to Latin America and the Caribbean are likely to decline in 2009 for the first time since the Inter-American Development Bank started tracking these flows in the year 2000. Remittances have been decreasing since late 2008.
The money sent home by migrant workers is a key source of income for millions of families across this region. Last year Latin American and Caribbean expatriates transferred some $69.2 billion to their homelands, 0.9 percent more than in 2007, according to the IDB’s Multilateral Investment Fund (MIF).
The break in the upward trend took place after the first semester of 2008. After a flat third quarter, in the fourth quarter remittances dropped to $17 billion, 2 percent less than in the same period of 2007. For the few countries that have reported data for January, totals were down by as much as 13 percent.
“While it is too early to project by how much remittances may decline in 2009, this is bad news for millions of people in our region who depend on these flows to make ends meet,” said IDB President Luis Alberto Moreno.
“The issue has become more complex, as more factors have come into play. The world is facing its worst economic crisis in recent memory. Unemployment is rising in industrialized nations. The climate against immigration is becoming harsher. Even exchange rate fluctuations are playing a larger role than before,” Moreno noted.
A decline in remittances is likely to translate into greater demand on social safety networks by families who rely on money flows from abroad to cover basic expenses. The IDB has been advising borrowing member countries since before the crisis exploded on strengthening their social programs.
After many years of persistent growth, remittances to Latin America and the Caribbean came under pressure in 2008 as major source countries, including the United States, Spain and Japan, fell into recessions. The crisis has especially hit industries that employ foreign workers, such as construction, manufacturing, hotels and restaurants.
Remittance senders and their beneficiaries back home were also hurt by last year’s spike in oil and food prices, which further eroded their incomes. In addition, exchange rates swings started to have greater influence than in the past, especially in countries that experienced sharp devaluations or have large expatriate communities in Europe.
The Mexican peso and the Brazilian real have lost ground against the U.S. dollar in recent months. As a consequence, remittances from the United States to those countries have increased their purchasing power, offsetting at least in part the decline in volume.
Countries in the Andean region that receive significant amounts of money from Spain benefitted from the strong euro during the first half of 2008 but since then have been hit by declines in the European currency.
Central American countries, which are either dollarized or have currencies pegged to the U.S. dollar, are more protected from exchange rate fluctuations.
Despite the bleak outlook, the MIF sees scant evidence that migrants are ready to return en masse to their countries of origin. In Spain, where there are some five million foreign workers, a government plan to pay welfare benefits in a lump sum to people who return to their homelands has attracted few takers.
“Migrants have proven that they adapt to tough conditions,” said Moreno. “They change jobs, work longer hours, cut back on spending, move to another city and even dip into savings in order to continue sending money to their families,” Moreno said. “Going home is usually a last resort.”
The MIF is currently conducting surveys with banks and money transfer companies and working with think-tanks involved in polling migrant workers to obtain more detailed and first-hand information on how remittance flows may evolve this year.
For the MIF, which emphasizes microenterprises as a development tool to reduce poverty, the crisis provides an opportunity to bring more families who receive remittances into the formal banking system.
MIF General Manager Julie T. Katzman noted that most of the money sent home by migrants pays for food, clothing, medicines and housing, providing families relief from economic hardship. However, fewer than half of these households have bank accounts where they can keep their savings.
“Once basic needs are met, what could be the truly transformative potential of remittances is all too often left under the proverbial mattress,” Katzman said. “Offering the families of migrant workers access to the basic financial services we all take for granted will allow them to maximize the benefit of their remittances.”
“From simply having a bank account to obtaining microcredit, insurance or a loan for housing or the education of their children, these services can empower families to advance on the road to financial independence,” she added.
The MIF will continue to work with central banks, financial regulators, banks, credit unions, microfinance institutions and money transfer companies in Latin America and the Caribbean to find new ways to maximize the economic impact of remittances.
- Peter Bate