Removing bottlenecks to flow of remittances should be a top priority during COVID-19: Policy Brief

Removing bottlenecks to flow of remittances should be a top priority during COVID-19: Policy Brief

Summary

With close to $500 billion of remittances flowing around the world, the phenomenon of remittances as a force for community development and individual empowerment cannot be ignored. Remittances impact the lives of almost a billion people, worldwide. While the flow of money during the best of times is constrained by various policy initiatives and the high cost of sending money, during the COVID-19 crisis, this problem has become acute. This policy brief is a call to action on how to ease the bottlenecks and help sustain this important lifeblood, for millions around the world. Remittances in the volume are three times as much as international aid, given by developing countries, to poorer nations and have a transformative impact on receiving communities, existing research has shown.

flow of remittances
source: imf.org

Background

The United States remains the largest contributor to remittances worldwide, recording $68 billion USD in remittance outflows. The rise in remittances could be attributed to a fairly stable economy, strong job prospects for migrants among other reasons. The growth in remittances to South Asia and southeast Asia was 12 percent in 2019, according to The World Bank. To further emphasize the number of monies recorded that flow from the U.S.A., the next highest contributors are the United Arab Emirates and Saudi Arabia, at $44 billion USD and $36 billion USD, respectively. With the shutdown of local economies in the U.S. and concomitant restrictions on travel, the phenomenon of remittances is likely to see a shift, as well. Analysts are already pointing out that there could be at least a 7 percent drop in remittances this year, due to COVID-19 related closures.

With COVID-19 and a dramatic change in the landscape of work and travel, the landscape of remittances is likely to shift, dramatically. If one were to consider the US-Mexico corridor, which sees about $65 billion flows per year, this is likely to be impacted negatively, thus hurting millions of recipients in Mexico. Due to a lack of insurance and costs of healthcare in the U.S., many of the migrant workers are likely to self-medicate rather than approach the formal healthcare system, which may have other implications for their health.

Who sends remittances and why?

Remittances are usually sent by well-meaning family members and friends to their relatives, to help. This money could be used for consumption – paying school fees, medical expenses, or expenses such as weddings, purchasing or constructing a house, etc. These are gifts or repayments of loans that these migrants have taken, to support their journey to the U.S.

As Dilip Ratha, head of Remittances research at The World Bank points out, there are over 270 million migrants around the world, and most of whom live in cities. The remittances they send have a huge poverty reduction impact and are a lifeline for almost a billion people, around the world.

Some programs have evolved to encourage migrants to invest in infrastructure development in the country of their origin.  Tres por Uno, a program initiated by the Mexican government is one such example. Several other countries such as the Philippines and India encourage their diaspora to invest in education, healthcare, and other sectors through NGOs and other organized entities that raise money in the U.S.

While migrants from around the world live and work in the U.S., the majority of remittances outflows are to China, India, and Mexico. It is estimated that 5.7% of U.S. households send money abroad & 2.4% send money on a monthly basis and the average remittance is in the range of $200-$300 per month, according to The World Bank. Researchers have pointed out that migrants of all income groups send money ‘back home’, however, there is empirical proof that those in the lower-income categories tend to remit more, as a proportion of their income than middle to high-income earners.

Remittances are sent via various channels, both formal and informal. For instance, there are reports of individuals collecting cash on behalf of their friends/relatives and handing this over to the recipients across the border. This is done either as a favor or in some cases, for a small fee. Such informal flows of money are obviously not recorded. Besides, there is also the traditional, centuries-old system called ‘hawala,’ which operates in the Middle East and Asia (and also parts of Africa) which evolved out of a need for conducting business and the need for cash liquidity over long-distances. As much as a third of Somalia’s GDP comes from remittances and several countries that are in the middle of a conflict or recovering from a war (Yemen, Syria, Congo, Afghanistan) receive a big portion of their GDP via remittances. This flow of money from high-income countries to developing or low-income countries is possible because of strong family ties, opportunities for migrants to earn more money in the U.S. than they could, in their home countries.

Policy implications

Remittances remain one of the most significant flows of foreign currency reserves to most developing countries. Besides providing support to families, remittances also have the potential to help with local community development, spur entrepreneurship, and sustain traditions and culture. Remittances also have a positive net impact on the American economy, if seen from a macro perspective.

As some American politicians have argued, remittances can be leveraged to further American foreign policy objectives. This has been tried in the past and can be further explored in the future, as the sheer amount of remittances makes it a significant tool and lever for both the countries, to base their relations. Facilitating the flow of remittances can demonstrate not only goodwill but also can be a smart policy decision, as it helps both countries and is a mutually beneficial transaction. As some scholars such as Kristin Johnson have pointed out, remittances benefit the U.S. as well. Some of the ways that this is true are

  1. Remittances help receiving countries spend more in U.S. dollars, thus facilitating trade and boosting the volume. This is particularly true in the case of Mexico-U.S., with a shared border and very strong trading ties, going back to centuries.
  2. States having large numbers of immigrants also export more.
  3. Remittances help build financial infrastructure, which can help people be part of the financial system. This ‘inclusion’ makes them potential customers and part of mainstream society.

Problem areas & Opportunities

There are three broad areas of concern when it comes to flow of remittances : cost of remittances, regulation of remittances (including Know your Customers (KYC) laws) and the emergence of new forms of technologies that can facilitate the flow of money. These existed before covid-19, but with the new emergency, these areas are further cause for concern.

Given the volume of remittances, there has been a lot of government interest in the phenomenon of remittances. As a Congressional Research Service report points out,  P.L. 111-203 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, has provided federal consumer protections on remittance transactions. It further points out that remittances are also subject to federal regulation to prevent money laundering and terrorist financing.  The banking regulations around KYC are crucial to address, as they are seen as one of the major reasons for the high cost of remittances as well as delays in sending money, abroad.

The discussion and debate around KYC and related efforts includes identity check and ensuring that the recipient and sender are traceable and they are indeed who they claim to be. There are also limits on how much money can be sent as well as documenting the relationship between the sender and receiver.

With the rise of technology and the use of crypto remittances and other newer technologies, analysts have pointed out that through the use of automated identification, real-time transaction scanning, data analytics, and artificial intelligence, the issue of compliance can be dealt with. Biometrics has also been proposed as a potential solution. The use of fingerprint IDs stored on phones can help authenticate parties involved.

Oklahoma is the only state in the U.S, that levies a tax on remittances. This proposal of taxing remittances has been put forth at the federal level as well, most recently by Donald Trump but has been widely seen as a bad idea. The motive behind this move is to raise revenues for the U.S. government, but analysts have argued this is not helpful and ultimately counterproductive.

Several thinkers and scholars such as Peter Singer, have made the argument that taxing remittances is normatively not a moral argument. Given that wealthy nations have not helped the poorer nations as much as they could have, it is not morally right to tax these self-help initiatives such as remittances (Peter Singer, Famine, Affluence, and Morality, 1971).

Regulation and government involvement in this space has created layers of regulation, bureaucracy and unwanted delays in a phenomenon which is driven by individual initiative and creativity.

Many of these problems arise because many of the recipients (and senders in some cases) are unbanked. Lack of literacy and access to financial institutions can cause many of the issues related to tracking them and ensuring that the purpose of sending this money is legitimate. However, at the same time, many observers and practitioners in this space argue that the amount of money sent is so small – often a few hundred dollars – that over-compliance and over-regulating this space does not make sense.

Solutions

The following steps may be taken as a measure to prevent the drop-in remittances volumes due to COVID-19

  1. There has been some debate around whether everyone in the U.S., whether documented or undocumented should be able to send (or receive) remittances. There are a few restrictions around sending remittances, such as the need for identification, etc. this has been criticized by those who care for a freer regime of remittances flow. Easing the requirements for ID can be a first step in facilitating the transfer of remittances. Given that the average remittances are in the range of $200-$300, the risk for this money ending up in the wrong hands is minimal.
  2. While compliance of regulations is one of the main factors leading to a rise in the cost of remittances, there can be mechanisms to reduce this and hence, bring down the cost of sending money. As researchers have pointed out, there is a need to urgently bring down the cost of sending remittances, especially in conflict and post-conflict zones, to nonprofits and other social sector organizations, that cannot afford to spend huge amounts of money on just sending remittances, which often pay for salaries, etc.
  3. Create special provisions for nonprofits and social service sector organizations and individuals sending money to these types of organizations: Existing rules do not facilitate the flow of money for nonprofits and treat them equivalent to other for-profit and government organizations. This means that individuals making donations to nonprofits and similar organizations (and those receiving them) face the same amount of scrutiny as regular for-profit organizations. As a Charity & Securities Collaborative report pointed out, 37% of nonprofits that operate globally face delays in wire transfers.
  4. Leverage technology for the flow of money: Emerging technologies including blockchain promise very low – or no costs – to transfer remittances. Crypto remittances may not be fully operational in all parts of the world but are being experimented with. This may open a new frontier, which is very unregulated but seemingly safe, for those who know how to use it. Governments must move into this space, albeit as partners rather than the cop in town to make use of these emerging technologies to facilitate an exchange for its citizens. Biometrics, data analytics, and Artificial Intelligence can be used to track and monitor transactions for compliance.

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