When it comes to remittances, the countries of Latin America and the Caribbean (LAC) have become an unlikely global exception. In April, the World Bank reported that the money sent by migrants to their developing home countries fell for the second year in a row in 2016, to US$429 billion, a 2.4% decrease over the previous year. The decline is remarkable because such a sustained drop in global remittance flows had not been seen for about three decades.
The trend could hardly be more different in LAC, to the benefit of millions of families throughout the region that regularly receive these money transfers to pay for education, health care and other life necessities. As the new yearly report on remittance flows to Latin America and the Caribbean by the Center for Latin American Monetary Studies (CEMLA) shows, in 2016, remittances to the region broke the historical record that had been set just a year earlier, reaching a total of US$70.4 billion. What is more, the increase is equivalent to an annual growth rate of 7.2%, the highest recorded in 10 years.
The report, which was commissioned by the Inter-American Development Bank´s Multilateral Investment Fund (MIF), also highlights that the growth in LAC-bound remittances was evenly distributed across the region. None of the sub-regions experienced declines in incoming remittances, with Mexico, which receives almost two-fifths of all migrant money transfers to LAC, showing 8.5% growth, while Central America received 8.8%, the Caribbean countries 6.5% and South America 3.5% more in said transfers compared to the previous year.
What are the factors that contributed to this exceptional and generalized trend? Looking at the region as a whole, two principal causes stand out. First, significantly higher employment and average wages in the main destination countries of Latin American and Caribbean migrants – the United States (U.S.) and Spain – meant a boost to the community’s overall money sending capacity. Specifically, LAC migrants’ average weekly wages in the U.S. reached US$627, the highest figure observed in the past fifteen years, with a 3.8% annual growth rate compared to the previous year, the highest rate registered since the 2008-2009 financial crisis. In Spain, although wages in sectors that employ a particularly high share of persons of LAC origin declined somewhat, overall employment rates among migrants from the region increased substantially, by 5.7%.
Secondly, a major depreciation of the currencies of most Latin American and Caribbean countries against the U.S. Dollar and Euro resulted in an increased local purchasing power of remittances sent to the region, in turn likely encouraging migrants to send even more remittances home. Corrected for the impact of inflation – which was 4.1% on aggregate – the purchasing power of remittances among recipients was 14.1% higher in 2016 than in the previous year.
One of the conclusions of the report is that remittances are growing despite regional and global trends expected to threaten their growth. The phenomenon of migrants returning to LAC due to economic difficulties in the US or Europe has not affected remittances to the region, at least in net numbers. Also, “de-risking”, the growing trend of major banks to quit business relationships with money services providers due to compliance concerns, does not appear to affect remittances to LAC as much as other world regions, for example Africa and the Middle East.
One challenge of the remittances market for data compilers continues to be the diversity of channels used by senders and receivers alike. User surveys, by CEMLA and others, point to a growing use of remittance apps and websites to send and receive money from abroad, especially when at least the receiver or the sender has a debit card or other digital payment instrument. However, information provided by the Central Banks is still not sufficient to report usage by channel. CEMLA and the MIF are working together to tackle this issue.
Fermin Vivanco has more than 20 years of experience in inclusive finance. At the IDB´s MIF, he leads projects that are part of the Inclusive Cities focus area, focused on urban financial solutions and technologies, social entrepreneurship; and savings, including pension savings.
Lukas Keller is a consultant with the Labor Markets and Social Security Division (LMK) of the IDB. Before joining LMK, he coordinated the MIF’s Remittances and Savings Program. Lukas holds Master’s degrees in Politics and Public Administration from Rutgers and Konstanz universities.