Keeping Cross-Border Cash Flowing

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Two days out from Southampton under a gray sky, Cunard’s flagship liner Queen Mary 2 is on her way to New York on her 28th transatlantic crossing of the year.

Down on Deck 5, cabin steward Argie Anova is oblivious to the weather. He has returned to duty from his afternoon nap, a 90-minute break in a grueling 16-hour day in which he cleans, collects laundry, and makes beds in 15 cabins.

Tireless, the stocky 36-year-old Filipino greets everyone with a smile. Anova has been working on cruise ships since 1996 and, on this trip, is accompanied by his wife, Joy, also a steward whom he met in Hong Kong, China. Their 9-month contract is nearly up, after which they’ll have 8 weeks off with their two children who live with grandparents in the Philippines.

The couple has been regularly sending money home. The United States dollars they earn—rivaling what a company executive can expect to get in Manila—is a vital lifeline for the extended family, and is helping educate the kids. A portion also goes to savings.

The Anovas are among a vast army of more than 50 million labor migrants from Asia and the Pacific (150 million worldwide) whose remittances sustain and offer hope of a better life to family back home.

The hundreds of thousands of small sums they send are like raindrops that create a flood. Collectively, these rival the gross domestic product (GDP) of many Asian nations and are nearly three times the world’s foreign-aid budgets combined, according to the International Fund for Agricultural Development (IFAD), a United Nations agency headquartered in Rome.

The latest estimates of annual global remittances vary between IFAD’s $401 billion and the more conservative World Bank figure of $305 billion. Until the onset of the worldwide recession and credit squeeze, these flows had been increasing by between 20% and 30% a year.

Now they’re in decline. Job cuts, a freeze in wage hikes, and a push to hire more unemployed locals in host countries are beginning to bite.

Despite a temporary spike in remittances in some countries (such as Pakistan) resulting from jobless workers returning home with cash, estimates for 2009 are for global transfers to fall between 9% and 20% or between $25 billion and $67 billion.

“The potential drop is huge,” says Massimiliano Cali, research fellow at the Overseas Development Institute, a British independent think tank on international development.

Asian governments and nongovernment organizations fear it will cause widespread misery, and not without reason. The International Labour Organisation estimates 80% of working migrants are the breadwinners for their families. In some Asian countries, as much as 70% of their remittances go to rural areas most affected by poverty.

“The big topic at the moment,” says Pedro de Vasconcelos, remittances coordinator of IFAD, “is how bad will it be?”

Pretty bad, say most experts. The effects are already dramatic in Bangladesh, Cambodia, and Indonesia where the labor-intensive construction industry has been hard-hit. “It’s very evident in Bangladesh, whose GDP is heavily reliant on remittances and where construction workers are unskilled,” says Mr. Cali. “Much of this money comes from migrants in the Middle East.”

In the Philippines, one of the world’s biggest labor exporters, remittances are expected to decline by up to 7%. According to the World Bank, foreign remittances made up 11.6% of the country’s GDP in 2007. Almost eight million overseas Filipinos generate foreign exchange and fuel domestic consumption to cover the trade deficit, repay foreign debt, and finance household spending on everything from basic foodstuffs to cars and real estate.

Indonesia is especially hard-hit. Some 200,000 Indonesian nationals were sent home from Malaysia last year because of the financial crisis, according to a report from the United Nations news and information agency, IRIN.

The registered remittances Indonesian migrant workers send home account for more than $6 billion annually, comprising the second-highest source of income after oil and gas, according to the World Bank. Many of the 1,500 to 2,000 migrants now returning daily through Jakarta’s Soekarno-Hatta International Airport borrowed to pay agent fees to secure their employment and have had little time working to recoup the costs.

Twenty-year-old Risti Ariyani is among them. Her contract with a computer components factory in Malaysia was abruptly canceled last year, leaving her no choice but to return to Central Java. Everyone in her family, including her sisters now in school, depended on the money she sent back. “[They] were counting on me,” she tells IRIN.

Even where remittances go to lower- and middle-income households rather than the very poor, the money can be an important part of a village’s income and drive demand for goods and services in a broader area. “A decline causes a fall in demand for local services, and has a ripple effect on the poorer families who provide services to people and businesses funded by remittances,” explains Mr. Cali.

This conclusion is supported by studies by the World Bank that demonstrate that a 10% increase in per capita official international remittances can lead to a 3.5% decline in poverty. In Nepal, remittances were responsible for almost 20% of the reduction in poverty since 1995.

Remittances are almost as old as the history of man and migration. European countries, including Spain and Ireland, were dependent on money from emigrants during the 19th and 20th centuries. In England, the term “remittance man” referred to an exile who had been sent to the colonies in disgrace, usually for drunkenness or gambling, and paid to stay away.

A Victorian remittance man’s money arrived by ship. Today, “a huge amount”—impossible to estimate with any certainty—is still carried home or comes via informal channels, according to Anil Kapur, senior vicepresident for South and Southeast Asia of Western Union.

The “hand carriage” system is full of risks. Because earnings of regional labor migrants are so low, any loss can have bitter consequences— as in Pakistan and in many parts of the Hindu Kush-Himalayas, where much of the transfer of funds in the country is informal or through shopkeepers, moneylenders, family, and friends.

Corruption, as always, is a prime risk. “I was told to pay 1,200 rupees [at the border] but escaped after paying Rs600,” a returning Nepalese labor migrant told the local media in May. “But that was not enough. Two kilometers from customs, police again asked for Rs300… Our own people look for ways to loot us.”

Despite the slowdown in remittance flows, one piece of good news for working migrants is that the risks of such losses are reducing, even in poorer regions, as transfers through financial institutions become easier and cheaper. In the past decade, the cost of transferring money has decreased from 20% to 25% to between 2% and 10% now, according to IFAD.

Singapore-based Indian Varun Kodthivada sends money home to his family two or three times a year via a simple telegraphic transfer of Singapore dollars to an Indian nonresident account. His transaction costs are extremely low—a telegraphic transmission charge of between one-eighth and onesixteenth of a percent of the amount sent, plus another small percentage to convert the money into rupees. “An efficient channel like this is really useful for me and my family,” Mr. Kodthivada says.

In many parts of Asia, most transfers happen via agents such as Western Union, Moneygram, and, in Pakistan, the Khanani & Kalia Exchange Company. However, online transfers are gaining momentum everywhere.

Governments are promoting competition in the market by lowering the cost for remittance services even further and encouraging transparency. The Reserve Bank of India, for example, recently launched a cross-border one-way scheme from India to Nepal for Nepali migrant workers. Twelve transactions per year per sender are allowed with a maximum amount of about $1,040 by paying a transaction fee of just over a dollar.

Another piece of good news for the rural poor in Asia is that increasingly efficient transfers can increase financial and social inclusion because they promote access to financial services for those who send and receive money.

“If a recipient has a relationship with a microfinance institution or credit cooperative, this mere fact can change their lives by offering them access to financial products, savings accounts, and small loans,” observes IFAD’s Mr. de Vasconcelos.

Once they become clients of financial institutions, new options for wealth creation open up, like ideas on how to invest or start businesses. “This can literally change your world,” explains Mr. de Vasconcelos.

“It’s what we’re trying to do—showing poor people who depend on remittances what others have done and giving them ideas to replicate.”

Partly with this in mind, the World Bank and Bank for International Settlements have developed international standards for such services, which are embraced by G8 nations. The United Kingdom’s Department for International Development has developed a program—Sending Money Home—that gives advice on how to open accounts, get the best fees, and send funds from Canada, South Africa, UK, United States, and several European nations to more than 100 countries.

Technology is making matters easier, too. Increasingly, the internet is being augmented by the use of mobile phones to send money across borders for low fees, particularly in Bangladesh, India, Pakistan, and the Philippines. Bangladesh now aims to launch a mobile phone money transfer service that could reduce costs to 1% of the transfer amount.

What about migrants and dependants who have no access to mobile phones or the internet? Their best option remains distribution points like credit unions, post offices, and rural financial institutions.

“IFAD is promoting systems that allow remittances efficiently to get to poor people and linking them to additional rural financial services and products,” says Mr. de Vasconcelos. “It’s hugely important for developing countries to identify how flows can be improved.”

Admittedly, access to banking and other financial services varies greatly in Asia. Southeast Asians—Filipinos and Indonesians, for example—have more financial opportunities than those living in countries such as Tajikistan and Kyrgyz Republic, where fewer than 10% of inhabitants have bank accounts, or the Indian state of Kerala with only 11%, according to IFAD.

Fortunately, many institutions that weren’t interested in remittances in the past are viewing receivers and senders of money for the first time as valued clients and an important future market, says Mr. de Vasconcelos. This makes sound business sense—people sending money home are traditionally loyal to the institutions handling their cash. (The US was one of the first nations to realize this when dealing with its migrant worker populations.)

As remittances have grown, attitudes have shifted from the traditional view of remittances as money to be spent immediately or hidden under a mattress.

Mr. de Vasconcelos points to India’s ICICI Bank, the second-largest in the country, and its approach. “They’re not looking at rural people just from the NGO perspective of poor folks who must be helped; they’re competing to sell them products and get them as customers.”

Likewise, the Punjab National Bank is hoping overseas expansion plans will provide a major push to its remittances business. It aims to set up a presence in five other non-Indian locations over the coming months.

In the meantime, millions of migrants work on, far from home, hoping that the economic situation will improve or, at least, not worsen. Among them is application software businessman Paresh Khara and his wife, who divide their time between Singapore and their home city of Mumbai. Mr. Khara sends money to his parents and in-laws there once a quarter.

“It helps with their day-to-day living expenses as well as key things like the hospital, medicine or accommodation,” Mr. Khara says. “If I was suddenly unable to send it to them, it could mean hardship for six people. That’s something I really want to avoid.” •