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Report: weak dollar, inflation blunting purchasing power of remittances

After stabilizing in 2010, money transfers to Latin America and the Caribbean are poised to rise this year, according to the MIF

Remittances to Latin America and the Caribbean are likely to rise this year after stabilizing during 2010, although a weaker dollar and higher inflation are reducing their purchasing power in many countries, according to the Inter-American Development Bank’s Multilateral Investment Fund (MIF).

Measured in U.S. dollars, money transfers made by Latin American and Caribbean migrants to their countries of origin reached $58.9 billion in 2010, virtually unchanged from $58.8 billion in 2009, when remittances saw a 15 percent drop due to the effects of the global economic crisis, the MIF said in a report released Monday.

“Remittances remain a vital source of income for millions of families in the region who depend on these flows to cover the cost of basic needs such as clothing, medicine or food,” the report noted. “For many of these recipient families, 2010 was a year of increased economic vulnerability, since with stronger local currency values and rising inflation, the remittances they received did not reach the same value of the previous year.”

Last year’s total was significantly below the record $69.2 billion reached in 2008. Expatriates started sending less money home during the second half of 2008, a trend that accelerated over the following year as the countries where most of them work (the United States, Spain and Japan) fell into recessions caused by the global financial crisis.

However, during 2010 remittances to Latin America and the Caribbean started to stabilize and even rise, albeit with significant differences among subregions. Money transfers to Central America recovered 3.1 percent, as migrants’ employment and earnings prospects improved in the United States. In contrast, remittances to Andean countries fell 4.1 percent, reflecting the prolonged economic malaise in European nations where many of their expatriates reside.

Haiti saw the sharpest increase in the region, a 20 percent jump to almost $2 billion, as its Diaspora responded to the humanitarian crisis caused by last year’s earthquake. Brazil registered the biggest drop, a 15 percent decrease to $4 billion, largely attributable to its continued strong economic performance, which has given Brazilian migrants a powerful incentive to return home.

Mexico remained the region’s leading recipient of remittances at $21.3 billion, a very slight increase from 2009. Guatemala is now the second largest recipient, at $4.1 billion, after recording a 5 percent rise last year. [For more country-by-country data, see the MIF’s 2010 remittances map.]

Going forward, the report added, remittances to Latin America and the Caribbean are likely to continue rising in volume in 2011, although still below the double-digit rates they attained in years prior to the global crisis. The pace of growth will depend principally on how strongly the job markets in source countries such as the United States and Spain recover.

Currency Appreciation and Inflation

The value of remittances to Latin America and the Caribbean was strongly affected by the appreciation of most local currencies against the U.S. dollar and the euro during 2010. On a weighted average, money transfers to this region were worth 4.4 percent less than in 2009 due to currency fluctuations, but in some countries the effect was even more pronounced. In Brazil, the decrease was 22.3 percent when taking into account the appreciation of the real. In Colombia, the value of remittances dropped 12.5 percent; in Mexico 7 percent.

Rising inflation further eroded the purchasing power of money transfers in many countries in the region. Expressed in local currencies and adjusted for inflation, remittances to Latin America and the Caribbean were 8.7 percent lower in 2010 than in 2009. Again, the effect of inflation on remittances varied from country to country, with the largest decreases recorded in some Caribbean countries.

Remittances and the MIF

The Multilateral Investment Fund started studying remittances in the year 2000 to gauge their impact in Latin America and the Caribbean. At the time, these flows were largely overlooked by governments and international agencies. The MIF’s research uncovered their real magnitude, generating greater awareness about their economic and social importance.

The MIF worked to foster competition among money transfer operators in order to reduce the cost of these services. Over the past decade fees charged for remittances to most Latin American and Caribbean countries have fallen substantially. The MIF is currently focused on projects that use remittances as a tool to “bank the unbanked” in order to offer migrants and their families access to formal financial services.