Why remittance inflows growth could slow to just 0.2% in 2023

In its previous update of the Migration and Development Brief in November last year, the World Bank had estimated a record $100 billion remittances inflows for India in 2022. In the latest update released on June 13, the World Bank has revised up this number to $111 billion on the back of strong labour market conditions and wage hikes in the high-income destination economies, and higher energy prices in the GCC countries, a key destination for less-skilled migrants.

Why are remittances expected to grow at a slower pace in 2023?

Remittances to India, which account for more than 60% of South Asian inflows, are expected to grow by only 0.2% in 2023. Remittance flows to the other six South Asian countries will also be limited by demand for migrants in the GCC countries where declining oil prices are expected to slow growth from 5.3% in 2022 to 3% in 2023, the report said.

The growth of remittances is likely to be the highest in Latin America and the Caribbean (forecast of 3.3%), as the labour market in the US continues to be strong.

Remittance growth is expected to be the lowest in South Asia (0.3%), mainly because of the high base in 2022 along with slowing demand for highly skilled IT workers in the US and Europe.

“In addition, slowing demand for migrants in the GCC countries and weak balance-of-payments conditions and exchange controls are expected to divert remittances to informal money transfer channels in Pakistan, Bangladesh, and Sri Lanka,” the report said.

What are the top sources of remittances for India?

Almost 36% of India’s remittances are from the high-skilled and largely high-tech Indian migrants in three high-income destinations — the US, United Kingdom, and Singapore. The post-pandemic recovery led to a tight labour market in these regions, and wage hikes boosted remittances.

In addition, India’s other high-income destinations also had favourable economic conditions. High energy prices and low food price inflation in the GCC countries, which remain the single largest destination for less-skilled South Asian migrants, had positive spillovers for all countries.

“High energy prices favoured employment and incomes of the less-skilled Indian migrants in the GCC countries, while the GCC governments’ special measures to curb food price inflation shielded migrants’ remitting potential. As a result, remittance inflows from the GCC countries, which today account for about 28% of India’s total remittance inflows, also soared in 2022,” the report said.

What will be the trend in remittances in other regions?

Remittance flows to low- and middle-income countries (LMICs) are expected to moderate to 1.4% in 2023, resulting in total inflows of $656 billion. In 2022, the inflows to LMICs are estimated to have increased by 8% to reach $647 billion. For the world, remittance flows are expected to reach $840 billion in 2023. In 2024, the remittances growth rate globally is projected to increase to 2.0% in 2024, increasing inflows by $18 billion.

Several economic factors that pushed up remittances in 2022 in the host economies of the migrants in the East Asia and Pacific region are projected to dampen them in 2023. “Central banks’ tight monetary stances to counter inflation, limited fiscal buffers to absorb shocks amid historically high debt levels, and continued global uncertainty regarding Russia’s invasion of Ukraine are likely to weigh down growth in the high-income countries,” the report said.

Figure 1: Estimates and projections of remittances flows to low and middle income countries. (Source: The World Bank-KNOMAD staff estimates)

The projected decline in GDP growth from 2.8% in 2022 to approximately 1.0% in 2023 and 2024 will erode many of the employment and income gains that East Asia’s high-skilled migrants reaped in 2022, dampening remittance flows to the region in 2023.

“Despite some respite from inflationary pressures, tighter financial market conditions are expected to exacerbate the ongoing slowdown globally. Lower fuel prices in 2023 will further dampen demand for migrants in the GCC countries, reducing remittance flows to East Asia and the Pacific Islands,” the report said.

The global slowdown will also gnaw into the demand for manufactured goods with implications for East Asian migrants employed in the export factories of China, Malaysia, and Thailand’s manufacturing sectors, although China’s recent opening up after the Covid-19 pandemic will counter some of this negative trend, it said.

In Europe and Central Asia, the growth in remittances is expected to fall to 1% due to a high base effect, lingering weakness in flows to Ukraine and Russia, and a weaker Russian ruble against the US dollar. Remittances may recover somewhat in the Middle East and North Africa with a decline in oil prices, as remittances to Egypt are expected to rebound. In the other regions — East Asia and Pacific, as well as Sub-Saharan Africa — the expected growth rate for remittances in 2023 is about 1%.

What was the trend for remittances in 2022?

In 2022, India posted more than 24% growth in its inward remittances to reach $111 billion, higher than the World Bank’s earlier estimate of $100 billion. This represented 63% of South Asia’s remittance flows, which grew by more than 12% in 2022 to reach $176 billion.

The top five recipient countries for remittances in 2022 were India ($111 billion), followed by Mexico ($61 billion), China ($51 billion), the Philippines ($38 billion), and Pakistan ($30 billion).

The strong growth in remittances in 2022 came after a 10.6% increase in 2021, on the back of slower growth and high inflation in some OECD countries, which may have reduced the real incomes of migrants. Remittances were supported by the oil surge in member countries of the GCC, which increased migrants’ incomes; large money transfers from the Russian Federation to countries in Central Asia; and the strong labour market in the US and the OECD countries.

Remittance costs remained high in the fourth quarter of 2022. According to the World Bank’s Remittance Prices Worldwide Database, the global average cost of sending $200 was 6.2% in Q4 2022, slightly more than the 6% a year earlier. Among developing country regions, the average cost continued to be the lowest in South Asia at 4.9% and the highest in Sub-Saharan Africa at 8%.

Why are remittances important?

In the aftermath of the Covid-19 pandemic, remittances are being viewed as a critical financial inflow, and an important source of foreign exchange for several countries including those in South Asia.

“Remittances are highly complementary to government cash transfers and essential to households during times of need,” Michal Rutkowski, Global Director of the Social Protection and Jobs Global Practice at the World Bank, said.

Figure 2: Top recipients of remittances among low and middle income countries, 2022. (Source: The World Bank-KNOMAD staff)

Remittances measured almost 326% of foreign direct investment (FDI) inflows in 2022, up from 247% in 2019; and 1,036% of official development assistance (ODA) relative to 935% in 2019.

“Remittances have become a financial lifeline in many economies through the pandemic and will become even more so in the foreseeable future,” Dilip Ratha, lead author of the report on migration and remittances and head of KNOMAD, the Global Knowledge Partnership on Migration and Development, said.

Although remittances amounted to only 4% of South Asia’s GDP in 2022, the variation across countries was large. In Nepal, remittances stood at 23.1% of GDP in 2022, compared with 7.9% in Pakistan, 5.1% in Sri Lanka, and 4.7% in Bangladesh. In India, the largest global recipient, remittances represented only 3.3% of GDP in 2022.

In an indicator of the significance of the remittances for funding current account and fiscal shortfalls, remittance inflows represented very large shares of GDP in countries such as Tajikistan (51% of GDP), Tonga (44%), Lebanon (35%), Samoa (34%), and the Kyrgyz Republic (31%).