Experts Acknowledge Discrepancy Between Official and Actual Remittance Figures
Researchers from the Federal Reserve of the United States and the World Bank have acknowledged that remittances received by households in their countries of origin may exceed the amounts officially registered through formal channels. This discrepancy arises due to many transfers occurring via informal channels, making it difficult to accurately measure the total volume of remittances flowing into developing countries.
Global Remittance Cycle Insights
According to a research document titled “Global Remittances Cycle” released in February 2023, the World Bank reported that global remittances reached a record high of $818 billion in 2023. This figure is four times the total amount of official development assistance provided by OECD countries.
Impact of Digital Technologies and Migration Restrictions
Federal Reserve experts highlighted that the adoption of digital technologies has facilitated remittance flows, while migration restrictions have played a crucial role. The World Bank previously explained that some displaced workers in foreign countries cannot use formal channels to send money home due to regulatory barriers, such as lack of necessary documentation, language difficulties, or additional costs associated with formal transfer services.
Informal Remittance Channels
In a separate analysis from 2023, researchers explained that informal channels sometimes settle transactions through goods trading, eliminating transaction costs associated with formal means like remittance agent fees or financial institution charges.
Informal remittance transfer methods are unregulated and unauthorized ways to send money, often used to circumvent regulations or restrictions. These methods may include sending money through travelers (colloquially known as “mulas”), utilizing family or social networks, or managing unofficial payment systems like cryptocurrencies that aren’t regulated for either the sender or recipient.
Governments occasionally attempt to tax remittances, arguing that the income could be used for productive purposes. However, implementing such a tax proves challenging, making it highly likely that people will evade formal remittance channels.
Taxing Remittances: A Persistent, but Unreliable Idea
Within the analysis titled “The Resilience of Remittances,” researchers noted that governments sometimes try to tax remittances, claiming the income could be used for productive purposes. They emphasized that implementing such a tax is difficult, making it highly probable that people will evade formal remittance channels.
They also suggested a risk-based approach that reduces regulatory requirements for smaller amounts, such as transactions under $200, could unlock the potential of digital cross-border remittances.
According to the World Bank, remittances to low- and middle-income countries grew by 0.7% in 2023, reaching a record $656 billion.
Key Questions and Answers
- What are remittances? Remittances are funds sent by migrant workers to their families and communities in their countries of origin.
- Why are official remittance figures potentially lower than actual amounts? Many transfers occur through informal channels, making it difficult to accurately measure the total volume of remittances.
- How have digital technologies impacted remittances? Digital technologies have facilitated remittance flows, making them more accessible and less expensive.
- What challenges do migration restrictions pose to formal remittance channels? Migration restrictions, such as regulatory barriers and additional costs, discourage the use of formal remittance channels.
- Why is taxing remittances a persistent yet unreliable idea? Implementing remittance taxes proves challenging, making it highly likely that people will evade formal channels.
- What are some examples of informal remittance channels? Informal channels include sending money through travelers, using family or social networks, and managing unofficial payment systems like cryptocurrencies.
Despite these challenges, remittances remain a crucial source of external financing for low- and middle-income countries, surpassing both foreign direct investment (FDI) and official development assistance. Unlike capital flows like FDI, which tend to concentrate in a few large emerging economies, remittances are more evenly distributed among developing countries.
