Introduction
Economists from Oxford Economics predict that if the US Senate approves a 3.5% tax on remittances, it could initially stimulate sendings. However, this move might inadvertently push migrants—both documented and undocumented—to rely on US citizens for remittance transfers or opt for cryptocurrencies and informal cash transfer networks, potentially fueling a black market.
Background on Remittances and the Proposed Tax
Currently, remittance service providers charge commissions ranging from 5% to 10%. If the proposed tax is enacted, it would be added to these existing fees. Victoria Rodríguez Ceja, Governor of Mexico’s Bank, warned that implementing the tax would reverse progress in financial inclusion and formal remittance channels.
Impact on Currency Exchange
The economists from Oxford Economics clarified that although they anticipate a limited impact, the tax’s approval would still have consequences. Interruptions in remittance flows will affect currency markets, as dollars sent by displaced workers to their families in Mexico have become a crucial source of foreign exchange.
Mexico’s Remittance Trends
Remittance trends are largely influenced by the US economy and Hispanic employment rates. Although there was a drop in annual remittances to Mexico in April, the $4.761 billion received from “migradólares” aligns with the 18-month volatility trend.
The decline in Mexico’s captured remittance flow could be attributed to reduced pressures that led to increased transfer amounts since the pandemic began, according to Jesús Cervantes González, Director of the Remittances Forum at the Center for Latin American Monetary and Financial Studies (Cemla).
Cervantes González also noted that fears of undocumented migrants being detained while traveling to or working in the US might be affecting employment and, consequently, their financial capacity to send remittances.
Anticipated Remittance Surge in May
Analysts expect a new uptick in the May remittance data, to be reported by Banco de México on July 1. Historically, key emotional and traditional dates like Mother’s Day drive remittance peaks.
Key Questions and Answers
- What is the proposed tax on remittances in the US? The US Senate is considering a 3.5% tax on remittances, which would be added to the existing commission fees charged by traditional remittance service providers (5-10%).
- Who might be affected by this tax? Both documented and undocumented migrants could resort to US citizens for remittance transfers or use informal channels like cryptocurrencies, potentially fostering a black market.
- How could this tax impact Mexico’s currency exchange? The dollars sent by displaced workers to their families in Mexico are a significant source of foreign exchange. The proposed tax could disrupt this flow, affecting Mexico’s currency market.
- What factors influence remittance trends in Mexico? Remittance trends are primarily driven by the US economy and Hispanic employment rates.
- Why might there be a decline in remittances to Mexico despite the proposed tax not being enacted yet? The decline could be due to reduced pressures that increased transfer amounts since the pandemic began, as well as fears of undocumented migrants being detained while traveling to or working in the US.
