India reported remittances of $52 billion in 2008, sharply higher than the earlier estimate of $45 billion, says the most recent World Bank update on migration & remittances. The reason for this unexpected surge are many, including the continued hiring of migrants in the Gulf countries and the falling asset prices, rising interest rate differentials and a depreciation of the local currency, all of which have attracted investments from migrants. There seems to be a switch in the motivation of remittances from consumption to investments, says the report.
Remittance flows to developing countries are, however, expected to be $304 billion in 2009, down from an estimated $328 billion in 2008. Though the flows have slowed down in many corridors since the last quarter of 2008, the total flows in the year was much larger than the previous estimate of $305 billion. In line with a recent downward revision in the forecast of global economic growth, the World Bank also lowered its forecasts for remittance flows to developing countries and the flows are projected to fall by 7.3% in 2009 from the earlier forecast of a 5% fall.
But the remittances will remain relatively more resilient despite the predicted 7.3% decline, when compared to the private flows to developing countries, where the fall is expected to be much steeper contracting at even 50% or more. According to the World Bank, remittances are relatively resilient because, while new migration flows have declined, the number of migrants living overseas has been relatively unaffected by the crisis. However, there are downside risks to the outlook as final flows will depend on the depth and duration of the current crisis, unpredictable movements in exchange rates, and the possibility that immigration controls may be tightened further in major destination countries.
The reason for the fall in remittance in 2009 would vary across regions. Remittance flows to Latin America have been falling in large part because of a slowdown in the US construction sector. The new forecasts show a 6.9% decline in remittances for the Latin America and Caribbean region. Sub-Saharan Africa is also likely to experience a 8.3% fall in its remittance flows. However, flows to South Asia and East Asia have been strong; but remittances are expected to decline somewhat in 2009. Projections show inflows to South Asia will decline by 4%.
A lagged fall in remittance flows to South and East Asia may arise from the current slowdown in economic activities in the GCC countries. This is especially relevant for Kerala (India), Bangladesh, Sri Lanka and the Philippines that have migrant workers in the construction sector in Dubai. As mentioned earlier, remittance flows to some South and East Asian countries also increased sharply in 2008 partly because of the depreciating currencies against the US dollar made assets in the home country more attractive, with the ?sale effect? resulting in a shift from remittances being sent for consumption to investment motives. These currencies appear to have plateaued in recent months. The Reserve Bank of India has also lowered interest rates to mitigate the impact of the crisis. The high base effect of a large increase remittance flows in 2008 will imply that remittances sent particularly for saving and investment motives to these countries could be substantially lower in 2009.
India, China and Mexico retain their position as the top recipients of migrant remittances among developing countries in terms of absolute amounts gained in 2008. Smaller economies such as Tajikistan, Moldova, Tonga, Lesotho and Guyana are the top recipients in terms of the share of remittances in GDP; which exceeded a quarter of their GDP.
The sharper than expected growth in remittances in 2008 was accounted by a few regions. Numbers show that South Asia registered a 33% growth in remittance flows as India reported $52 billion in 2008, higher than the earlier estimate of $45 billion. Remittances to East Asia and the Pacific rose 20% as both China and the Philippines reported strong growth. Flows to Latin America and the Caribbean grew by a modest 2% in 2008, reflecting continuing weakness in the job market in the US.
Interestingly there have been some anecdotal media reports about reverse remittances from Mexico and Dominican Republic to the US which says that the economic crisis in the US is forcing many migrants to dip into their savings and assets back home and to rely on their families for financial help. A modest, and rather indirect, inference about reverse remittances can be drawn from a decline in foreign currency deposits?which are likely held by migrants or their relatives?in Dominican Republic and other countries. In 2008, these deposits declined by 7% in Dominican Republic, 12% in India, and 6% in Mexico. However, these deposits have risen since indicating perhaps that reverse remittances are slowing down because of a bottoming of the US economic downturn, says the report.
A key source of risk to the outlook presented arises from rising protectionist tendencies in destination countries. Almost all major destination countries?for example, the US, the UK, Australia, Malaysia, Russia, South Africa, Italy, Spain, India?have reduced the annual quotas or imposed tougher standards for immigrant workers, says the report.