THE WORLD BANK
The International Commitment to Reduce the Cost of
Remittances and the Importance of Remittances for the
Development of Least Developed Countries.
CONCEPT NOTE
Side Event of the UN LDC IV Conference in Istanbul on May 9-13, 2011
Co- Sponsored by Australia, Bangladesh, Benin, France and Italy
April 2011
The World Bank estimates that remittances to developing countries totaled US$325 billion in
2010, involving some 215 million migrants or three percent of world population. These flows are
particularly important for Least Developed Countries (LDCs). The World Bank coordinates the
efforts of various countries and cooperates with international organizations, including the G8
and G20, to increase the benefits of remittances and reduce the cost of remittance services
through the Global Remittances Working Group (GRWG) and other initiatives. The side event
will provide an overview of the work of the GRWG and highlight initiatives and tools of the CoSponsors and other countries that LDCs can use to benefit more broadly from remittances.
Remittances are a large and stable source of external finance for developing countries that funds
economic development, improves their balance of payments and provides access to hard
currencies. In many receiving countries, these flows exceed official aid, portfolio equity, and
debt flows, and in many countries also any other source of external income. Remittances tend to
be more stable than other sources of foreign exchange, and they are often countercyclical,
helping sustain consumption and investment during downturns and performing the role of a
shock absorber.
The recipients often depend on remittances to cover day-to-day living expenses, to provide a
cushion against emergencies or, in some cases, as funding for small investments. The aggregate
cash flows and the number of participants in this market are significant, even when conservative
estimates are considered. As mentioned, the World Bank estimates that remittances to
developing countries totaled US$325 billion in 2010. 1 After several years of double digit-growth
officially recorded remittance flows to developing countries declined by 5.4 percent to $308
billion in 2009 from the levels of 2008 as a result of the global financial crisis. However, with
improved prospects for the global economy, remittance flows to developing countries are
expected to increase at 6.2 percent in 2011 and 7.4 percent in 2012.
Despite the modest decline in remittance inflows during the crisis, these flows have remained
more resilient compared to many other types of resource flows such as private debt and equity
flows and foreign direct investment, which declined, or, in the case of portfolio flows, became
negative in 2009 as foreign investors pulled out of emerging markets.
1
The estimates refer to officially recorded flows, actual numbers are considered to be much higher.
2
The Importance of Remittances for LDCs
Remittance flows to LDCs are estimated to have reached US$26 billion in 2010, an increase of 7
percent from the level in 2009. Top 10 remittance recipients among LDCs in 2010 in US$ terms
were Bangladesh (11.1 bn), Nepal (3.5 bn), Sudan (3.2 bn), Haiti (1.5 bn), the Republic of
Yemen (1.5 bn), Senegal (1.2 bn), Uganda (0.8 bn), Lesotho (0.5 bn), Ethiopia (0.4 bn), Mali
(0.4 bn).2
Figure 1: Remittances to Selected LDCs (2010)
Remittances to LDCs (2010)
Mali
Ethiopia
Lesotho
Uganda
Senegal
Yemen
Haiti
Sudan
Nepal
Bangladesh
0
2,000
4,000
6,000
8,000
10,000
12,000
Remittances in US$ '000s
Remittance flows are equivalent to a larger share of LDC’s gross domestic product (4.5 percent)
compared to the group of all developing countries (two percent of GDP). The 10 LDCs with the
highest ratio of remittances against GDP in 2009 were: Lesotho (24.8 percent), Nepal (22.9
percent), Samoa (22.3 percent), Haiti (15.4 percent), Bangladesh (11.8 percent), Togo (10.3
percent), Guinea-Bissau (9.1 percent), Senegal (9.1 percent), Gambia (7.9 percent), and Kiribati
(6.3 percent)3.
2
3
World Bank Migration and Remittances Factbook 2011
World Bank Migration and Remittances Factbook 2011
3
Figure 2: LDCs with the Highest Ratio of Remittances against GDP (2010)
LDCs with Highest Ratio of Remittances against GDP
30
25
20
15
10
5
0
Remittance flows to LDCs are smaller than official aid (US$38 billion in 2008), but larger than
foreign direct investment (US$17 billion in 2009).
Figure 3: Remittance Inflows Compared with Other Resource Flows in LDCs4
40
US$ Billions
ODA
30
Remittances
20
FDI
10
Private debt and
portfolio equity
0
4
World Bank Migration and Remittances Factbook 2011
4
Table 1: Remittances and Other Flows of Payments to LDCs.
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010e
Remittances
4.4
5.2
5.7
6.1
6.6
8.4
9.5
10.8
11.9
14.2
17.4
22.9
24.2
25.9
FDI
3.2
4.4
5.8
4.1
6.7
6.5
10.1
8.5
6.7
11.6
14.9
18.2
16.9
ODA
12.9
12.6
12.4
12.4
14.0
18.3
24.1
25.4
25.8
28.3
32.8
38.5
PD&PE
0.0
0.0
0.1
0.0
0.1
0.2
0.0
0.5
0.4
0.5
1.0
0.3
0.6
Sources: World Development Indicators database and World Bank Migration and Remittances Unit. Note: Private
debt includes only medium- and long-term debt. FDI = foreign direct investment; ODA = official development
assistance; — = not available.
The Cost of Remittances in LDCs
The cost that migrants need to pay to send remittances to LDCs remains high and above the
average global price of 8.89 percent to send an amount of 200 USD.5 These costs represent an
unnecessary burden on migrants, reducing the amounts sent and their development impact. In a
survey conducted in Sub-Saharan Africa, almost 70 percent of central banks cited high costs as
the most important factor inhibiting the use of regulated remittance channels.
The high prices are a result of the fact that remittance markets in LDCs remain relatively
underdeveloped in terms of their financial infrastructure and the regulatory environment.
Payment systems, in particular remittance systems of the banks, are often inefficient and require
a high degree of manual interaction to process remittances. Banks have limited technical
infrastructure, often lack core banking or management information systems and connectivity
between their branches. The market is in many cases dominated by a few remittance providers
which in some instances have entered into exclusive agreements6 with the banks able to pay
remittances and as a result are able to lock out competitors and charge high fees. Regulation
sometimes does not provide an enabling framework for remittances and may for example
exclude non-bank financial institutions from processing remittances, lack measures to ensure that
remittances are send through the formal sector and benefit the economy, or prohibit new
5
World Bank Remittance Prices Worldwide Database, http://remittanceprices.worldbank.org/. See Annex I for more
details on selected countries.
6
http://siteresources.worldbank.org/INTPAYMENTREMMITTANCE/Resources/New_Remittance_Report.pdf
page 23/24
5
innovative and low cost remittance providers from entering the market. Also, the central bank
does not have sufficient empowerment or resources to exercise its payment system oversight
function effectively. As a result of these issues, LDCs in Sub-Saharan Africa have the highest
remittance costs among developing countries and the largest share of informal and unrecorded
remittances.
Figure 4: Cost to Send US$200 to Selected LDCs (%)7
25.00%
Angola
Congo, DR
Eritrea
Ethiopia
Gambia
Haiti
Kiribati
Lesotho
Malawi
Mali
Mozambique
Rwanda
Samoa
Sierra Leone
Solomon Isl.
Tuvalu
Uganda
Vanuatu
Yemen
Zambia
World
Linear (Eritrea)
20.00%
15.00%
10.00%
5.00%
0.00%
First quarter 2010
Third quarter 2010
First quarter 2011
However, the remittance market is beginning to change. Leveraging on new technologies (e.g.
internet, mobile phones, “smart” POSs, biometrics) offers the possibility of lower cost
remittances. Higher involvement of banks presents an opportunity for financial inclusion and for
channelling all remittance flows through regulated institutions. At the same time international
compliance requirements and the change away from the traditional agent-based money transfer
service to mobile, online and card-based remittances create challenges for policy makers and
regulators. Several major sending countries have very recently liberalized the remittance
markets, in particular Japan and the European Union. Consequently, new service providers with
lower cost but also different regulatory and operational requirements are entering the market.
7
World Bank Remittance Prices Worldwide Database, http://remittanceprices.worldbank.org/
6
LDCs will need to be prepared to benefit from these developments and need to create the
conditions for the market to develop competitive, reliable and efficient products.
Migration in LDCs
Remittances are necessarily linked to migration and to understand the impact of remittances on
LDCs it is important to observe the migration patterns of these countries. LDCs had 27.5 million
emigrants in 2010, or 3.2 percent of their population (similar to the global average). The largest
emigration countries among LDCs are Bangladesh, Afghanistan, Burkina Faso, Mozambique, the
Republic of Yemen, Mali, Haiti, Nepal, Sudan, and Eritrea. Destinations of migrants from LDCs
include high-income countries, but are predominantly developing countries: high-income OECD
countries receive 19.2 percent of total emigration from LDCs; high-income non-OECD countries
9.8 percent; middle-income countries 44.0 percent, and low-income countries 19.3 percent. The
top 10 migration corridors involving LDCs include Afghanistan to the Islamic Republic of Iran,
Burkina Faso to Côte d'Ivoire, Bangladesh to Saudi Arabia, Nepal to India, Haiti to the United
States, Uganda to Kenya, Eritrea to Sudan, and Mozambique to South Africa8.
LDCs suffer from very high rates of skilled emigration or the so-called “brain drain”. The
emigration rate of tertiary educated people from LDCs is comparatively very high.
Figure 5: Migration Rate of Tertiary Educated in LDCs9
Migration of People with Terttiary Education (%)
90
80
70
60
50
40
30
20
10
0
8
9
World Bank Migration and Remittances Factbook 2011
World Bank Migration and Remittances Factbook 2011
7
At the same time, LDCs received 11.5 million immigrants in 2010, or 1.3 percent of LDCs’
population (compared to 215.8 million or 3.2 percent for the world). Refugees were a significant
share of immigrants amounting to 18.6 percent (compared to 7.6 percent for the world). The 10
countries with the largest immigration among LDCs include Bangladesh, Burkina Faso, Nepal,
Sudan, Tanzania, Uganda, Ethiopia, the Republic of Yemen, Rwanda, and Mozambique.10
Development Initiatives Based on Remittances
Remittances have the potential to lift people out of poverty, fund small businesses, facilitate
financial inclusion, and help countries with their balance of payments and hard currency
problems.
Following a request by the G8 (Sea Island, 2004) and the G-7 finance ministers (Boca Raton,
2004) to develop international standards and guidelines for remittance services, the Payment
Systems Development Group (PSDG) of the Financial and Private Infrastructure Development
Group at the World Bank together with the Committee of Payment and Settlement Systems of
the Bank for International Settlement and several Central Banks and other stakeholders
developed the General Principles for International Remittance Services (General Principles).11
The General Principles cover the following areas:
I. Fostering market transparency and consumer protection;
II. Improving the payment systems infrastructure;
III. Reforming the legal and regulatory framework;
IV. Enhancing market structure and competition;
V. Adopting governance and risk management best practices.
Since then the General Principles have been widely accepted and endorsed as a best practices
standard for remittance services, including by the G-8, G-20, Financial Stability Forum (now
Board), and various other Multilaterals and regional development banks. The PSDG then
10
11
World Bank Migration and Remittances Factbook 2011
http://siteresources.worldbank.org/INTPAYMENTREMMITTANCE/Resources/New_Remittance_Report.pdf
8
established a Remittance Unit (PSDG Remittances Unit) to provide practical support to both
sending and receiving countries how to structure remittance markets effectively implementing
the General Principles.
The work undertaken by the GRWG has been recognized officially by both the G8 and the G20
and both these international organizations have endorsed its activities and committed to the
achievement of concrete results in terms of reduction of the costs of remittances. During the G8
meeting of 2009 in L'Aquila, the G8 Heads of States and Government committed to the
achievement of the "5x5 Objective", the reduction of the cost of sending remittances by five
percentage points within five years. More recently, the G20 adopted a similar wording and, in its
meeting in Seoul in 2010, supported “the Global Remittances Working Group […] and related
international initiatives aimed at a quantified reduction of the global average cost of transferring
remittances”.12
The Multi-Year Action Plan of the G20 under Pillar 6, Action 2 asks the World Bank, Regional
Development Banks and other relevant organizations, including the GRWG, to work with
individual G20 members and non-G20 members in order to progress further the implementation
of the General Principles for International Remittance Services and related international
initiatives aimed at a quantified reduction of the global average cost of transferring remittances.
Considering its specific engagement towards the issue of international remittances, illustrated in
particular by its role in hosting and chairing the GRWG, the World Bank is called to play a
leading role in coordinating the work to be undertaken with other International Organisations
(IOs) on this action.
A number of G20 members have implemented reforms in the area of international remittances.
Several major sending countries have very recently liberalized the remittance markets, for
example Japan and the European Union. The Republic of Korea revised its legal requirements so
that migrant workers have expanded access to banks for remittance purposes. Indonesia is now
undertaking a reform to bring unregulated remittance service providers under the regulatory
framework to improve security and transparency of the remittance market. Despite these
“G8 Leaders Declaration: Responsible Leadership for a Sustainable Future”, L´Aquila Summit, July 2009 and
G20 Communiqué “Seoul Development Consensus for Shared Growth”, Seoul Summit, November 2010.
12
9
advances, there remain challenges in efficiency and cost of transferring remittances among G20
members. These challenges may be different in individual G20 members’ jurisdictions.
The World Bank has worked with a range of important remittance receiving and sending
countries and delivered concrete and measurable results, including the prohibition of exclusivity
agreements, the inclusion of new remittance providers such as Microfinance Institutions (MFIs),
Cooperatives and Post Offices, and the adoption of consumer protection regulation. It is
currently assisting the Africa Diaspora Program of the World Bank and the African Union to
establish the African Institute for Remittances, works with the Centro de Estudios Monetarios
Latinoamericanos (CEMLA) and the IDB on remittance projects in Latin America and has other
joint initiatives with FAO, IFAD, and the United Postal Union (UPU).
The World Bank has extensive technical expertise to assist in reforms in all areas of remittances,
ranging from private sector remittance operations to government regulation and general payment
systems. It regularly draws on the expertise of the Payment Systems Development Group to
deliver cross-functional payment and remittance system assistance and on the delivery
mechanisms of the Access to Finance group of the International Finance Corporation (IFC) and
on other important resources in the World Bank such as the Development Prospects and
Migration Research Groups. It offers a comprehensive and proven approach to address the
existing inefficiencies in remittance markets that cause high costs, limit services for poor
migrants and restrict private sector participation. Objective of the Program is to increase the
development benefits generated from remittances by providing national authorities such as
central banks and other regulators with concrete recommendations and technical assistance.
In this context, the World Bank has identified a set of initiatives, consistent with the Rome Road
Map on Remittances13, embracing various means to lower the costs of remittances and to
improve their developmental impact:
13
1.
Improvement of data accuracy, for example through the use of migration and remittances
modules in household surveys;
2.
Creation of national databases to inform customers and other interested parties on the
costs of sending remittances;
http://www.esteri.it/mae/approfondimenti/20091230_Rome_Road_Map_for_Remittances_fin.pdf
10
3.
Participation to international initiatives and working groups, such as the Global
Remittances Working Group;
4.
Establishment of codes of conduct for remittance operators;
5.
Creation of sound, predictable, non-discriminatory and proportionate legal frameworks
on remittances;
6.
Elaboration and financing of projects in the field of remittances, including those that
encourage innovative instruments of payments to facilitate the transfer of remittances;
7.
Efforts to continue monitoring the impact of financial crisis on migration and
remittances;
8.
Global survey of Central Banks on various areas to be updated, at least every two years;
9.
Analysis of impact of remittances on development including their role post-natural
disasters, labor market participation, poverty reduction, education and health outcomes,
and role in providing financing for small business investments.
The WB estimated that the achievement of the “5x5” objective and, more generally, of
substantive reductions of the cost of remittances would allow up to additional $15 billion to
remain in the hands of migrants. The commitments adopted by the G8 and the G20 are strong
steps-up in the field of supporting remittances, to be pursued in partnership with governments,
operators and interested stakeholders. The “5x5 Objective” and the GRWG are open to the
participation of all countries, international organizations and stakeholders that are engaged and
motivated.
Side Event on Remittances
During the side event the Sponsoring Countries and the World Bank would like to raise
awareness on the activities of the GRWG and create the momentum for the discussion of
concrete activities to be undertake in the area of remittances to support the achievement of
relevant reductions in the cost of sending remittances to LDCs. Government representatives,
donors, international organizations and other interested parties will have the opportunity to
receive updates on the achieved goals and on the future steps in the direction of a broader
effectiveness of remittances in the development of LDCs.
11
ANNEX I
COMPARATIVE TABLE ON THE COST14 OF SENDING RMITTANCES TO SOME LDCs
Country
Angola
Congo, Dem. Rep.
Eritrea
Ethiopia
Gambia
Haiti
Kiribati
Lesotho
Malawi
Mali
Mozambique
Rwanda
Samoa
Sierra Leone
Solomon Islands
Tuvalu
Uganda
Vanuatu
Yemen
Zambia
World
14
First quarter
2010
14.76%
na
11.10%
11.96%
na
10.93%
10.44%
14.76%
14.76%
9.18%
14.76%
17.97%
13.51%
7.72%
13.21%
10.84%
8.57%
11.42%
1.68%
12.13%
11.77%
Third quarter
2010
14.60%
9.36%
16.24%
10.55%
11.24%
10.10%
10.48%
14.60%
14.60%
8.49%
14.60%
19.04%
12.10%
8.23%
15.74%
10.93%
15.09%
12.77%
3.71%
11.95%
12.21%
First quarter
2011
18.14%
8.70%
14.75%
11.57%
6.30%
8.48%
10.91%
18.14%
18.14%
8.35%
19.37%
18.40%
13.25%
10.35%
16.15%
11.39%
15.07%
14.73%
3.64%
13.59%
12.62%
Average cost (fee and foreign exchange conversion) to send US$200 as a percentage of the amount sent.
12