Remittances
What is Remittances?
Remittances are the money migrant workers send back to households in their home country, recorded as transfers in the current account.
For many low and middle-income countries remittances are one of the largest inflows of foreign currency, typically larger than foreign aid and in many years larger than foreign direct investment. They behave differently from those flows: aid is negotiated between governments and investment chases returns, while remittances come from a relative and tend to hold up or even rise when the recipient country hits a recession, a disaster or a currency collapse. Because the money goes straight to families, it mostly funds food, housing, schooling and health rather than public projects. Transfer fees take a real bite, especially on small transfers along thin corridors. In the balance of payments they are a current account credit, not a financial account item, because nothing is lent or owned in return.
Remittances: a worked example
Take a small economy that exports $30 billion of goods and services and imports $40 billion, a trade deficit of $10 billion. Its citizens working abroad send home $7 billion, which enters the current account as a credit and shrinks the deficit to $3 billion, so the country needs far less foreign borrowing to cover the gap. At the household level the same flow looks smaller: a worker wiring $300 a month through a corridor charging 6 percent loses $18 in fees, and the family receives $282.
The mistake students make with remittances
Remittances get filed in the financial account by students who assume any cross-border money movement belongs there. They are a transfer, so they belong in the current account, under secondary income, alongside foreign aid grants. The other error is calling remittances aid. Aid moves between governments or through agencies with conditions attached; remittances are private money moving from one family member to another, with no repayment and no strings.
Remittances questions
Where do remittances appear in the balance of payments?
Remittances appear in the current account, mainly under secondary income, which records transfers. Money earned by someone who is still a resident of the home country but working abroad short-term is recorded instead as compensation of employees under primary income. Either way it is a current account credit for the receiving country, not a financial account entry.
Are remittances good for the receiving country?
Remittances raise household consumption, cut poverty and steady the current account, so most economists count them as a plus. The concerns are that heavy inflows can push the real exchange rate up and hurt exporters, that they can reduce pressure on governments to fix domestic problems, and that recipient households sometimes work less. On balance the direct income gains dominate in most studies.
Why are remittance fees a policy issue?
Fees matter because they are charged on transfers that are already small and are aimed at low-income families. A charge of several percent on a monthly transfer takes money straight out of a household budget that spends it on food and school costs. Competition, mobile money and clearer price disclosure are the usual tools for pushing fees down.
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