Remittances have become an important element of several economies in the subregion, and in some countries, they are a key source of foreign income that help keep current account deficits under control in spite of chronic trade deficits. However, they may also have adverse effects on an economy from a macroeconomic perspective, and these factors must be studied in more depth. One negative impact is that remittances may reduce the incentive to introduce economic reforms which could lead to improving a country’s trade balance.
The bulk of remittances to the key countries of origin of migrants in the subregion seem to come from temporary labour migrants working in GCC countries. There are two groups that remit the most funds, highly skilled migrants and migrants who have worked in these countries for an extended period (through repeated temporary contracts). The highly skilled migrants earn relatively high wages while the long-term migrants benefit from higher pay scales that come with more experience and decreasing migrant costs.
By serving as a direct source of income to households, remittances have the potential to contribute to the alleviation of poverty. The majority of remittances received by households are used to pay for daily consumption needs.
The high costs associated with migration hampers the ability of migrants to use remittances to support their families and invest. In fact, in the first months abroad, the entire income of migrants often is used to pay debts. These high costs limit the potential development impacts of remittances and steps should be taken to reduce them. Also remittance flows used to finance the migration of other family members adversely affects the development impacts of remittances.
Although the bulk of remittances is used for daily consumption, a significant amount is spent on education and health. Research has shown that remittance-receiving households can afford more nutritious food and better quality health services.
As noted earlier, remittances from migrants who remain abroad for longer periods of time tend to be greater due to higher salaries in tandem with more experience. Long-term migration of one family member is more economical that using remittances to finance the migration of another family member. However, long-term migration tends not to be the preferred option of many migrants due to the social costs associated with it, difficult working conditions in the countries of destination and the cost of separation from their families.
A large proportion of remittances are transferred through informal channels. To promote the use of formal channels, banking procedures need to be simplified and the bank transfers must be more efficient and cost less. In addition, improving the financial literacy of migrants as well as remittance recipients would make them more familiar with banking procedures and reduce obstacles to remit through official channels.
In many countries of the subregion, investment opportunities and incentives must be made available to migrant workers. Currently, only a small proportion of remittances are used for investment purposes. The percentage could be increased by offering more investment products catering to migrants. These types of remittance flows would ultimately generate long-term income as well as enable the offering of remittance-backed bonds.
From a financial perspective, male migrants generally receive higher wages than women migrants, putting them in a better position to gain from remittances. Meanwhile, women left behind by migrant men are often not the holders of the family’s bank accounts or the actual remittance-receivers. In many cases, remittances are sent to the father of the migrant. Improving financial literacy of women would help them reap more benefits from migration. However, notably, despite receiving lower wages, reports show that women migrants have gained socially by sending remittances and thus becoming the main breadwinners of the family.
The countries of South and South-West Asia have varying experiences in handling remittances. This, consequently, has created large scope for subregional cooperation and sharing of experiences. One example would be in the area of sharing of experiences pertaining to designing specific products targeting migrant workers and in issuing remittances-backed bonds.