Data shows remittances and development are increasingly linked

CANBERRA — Between 2010 and 2017 global remittances to Tonga grew by just over $74 million. While that represents a minute fraction of global remittances, which increased from just over $458 billion to over $613 billion according to World Bank data, the growth represents the outsized impact remittances can have on small island nations and developing countries.

“For an island nation like Tonga, remittances are vital to the economy, as more than a third of Tonga’s GDP is made up of remittances,” Thomas Jacobs, Pacific manager for the International Finance Corporation, explained to Devex.

As the economic and social impact of remittances continue to spread, donor countries are increasingly placing value on them to complement aid programs in developing nations. In this new interactive, Devex shares where remittances are increasing in importance and the partner countries supporting economic development through remittances.

In Tonga, the growth of remittances — which primarily comes from the United States, New Zealand, and Australia — has been huge, but it remains constrained by the limited choice in money transfer operators and fees charged. The cost of sending money from Australia to Tonga in 2017 totaled at just over 11 percent.

This is why organizations such as IFC are focusing on how to ensure the largest proportion of remitted money meets intended recipients.

In supporting remittances to Tonga, IFC is working with the New Zealand and Tongan governments to reduce costs and increase development impacts through a pilot program for cashless remittance technology launched February last year — the ‘Ave Pa’anga Pau, or Send Money Home, voucher.

“Remittance funds are key to development and that’s why IFC, with donors, was so intent on helping a country like Tonga deal with the issue of de-risking,” Jacobs said. “We recognized the obstacles that are being faced and this product is helping people tackle those obstacles.”

IFC’s role involved conducting market research, collaborating on design, and providing technical advice on implementation. IFC works closely with the Tonga Development Bank and local consultants to develop a solution tailored to the New Zealand to Tonga remittance channel — with the aim of making the application wider if successful.

IFC was able to leverage its reputation to represent the product to the Reserve Bank of New Zealand, National Reserve Bank of Tonga, and regulators in both countries. And this helped in gaining its approval.

Today, Tongans in New Zealand can transfer money to family back home using an affordable service accessed through smartphones and computers. The cost is half what was previously charged, enabling more money to be received in Tonga. Almost 5,000 transactions valued over $2 million Australian dollars (about $1.5 million) have occurred through this new system, according to IFC.

“For this isolated economy in the Pacific, it is essential that migrant workers have a relatively stable, secure, affordable way of transferring their money to their families,” Jacobs said.

Understanding the value to developing economies

Globally, it is clear the impact that better systems could have on local economies. By value, India was the largest recipient of remittances for 2017 with $69 billion in money flowing in. This was followed by China ($64 billion), Philippines ($33 billion), Mexico ($31 billion), and Nigeria ($22 billion). Although high-income countries such as France ($25 billion) appear in the top figures, as a share of GDP flows are negligible.

But it is in investigating remittance as a proportion of GDP where the impact on developing countries can be shown.

In 2017, remittances accounted for 35 percent of the Kyrgyz Republic’s GDP. Followed by Tonga with 33 percent, and Tajikistan with 31 percent.

According to World Bank data, in 2016 India remittances make up 2.8 percent of GDP; France 1 percent; and China, remittances a mere 0.5 percent.

Remittances are of more value to the Philippines where they accounted for 10.2 percent of their GDP in 2017.

The growth since 2010 also demonstrates the increasing value and reliance of remittances to developing countries. In Chile, remittances have grown more than 3000 percent since 2010, growing from $3.2 million annually to over $104 million in 2017.

Liberia too has seen massive growth in the same period, increasing from an annual flow of $31.4 million to $580.2 million. And Ghana grew more than 1,500 percent from $135.8 million to nearly $2.2 billion.

The vast majority of global remittances come from those in the United States. In 2017, remittances sent from the U.S. totaled just over $148 billion — growing from nearly $110 billion in 2010. But Gulf states, which have long been hungry for migrant construction workers, guards, maids, and more, are not far behind in the rankings. Saudi Arabia was the second largest source of remittances in 2017 with $46.7 billion sent followed by the United Arab Emirates with $32.9 billion.

And developing countries themselves are increasingly sending money to neighboring countries, or countries with large diaspora communities. Developing countries are now seeing the largest percentage growth in remittances sent.

Remittances sent from New Caledonia rose from just over $11 million in 2010 to $566.4 million in 2017 — a growth rate nearing 5,000 percent. Vanuatu, Vietnam, and Indonesia are some of the top recipients of remittance from New Caledonia. Remittances from Vanuatu and Solomon Islands have similarly risen with growth exceeding 1,000 percent. New Caledonia, France, Australia, French Polynesia, and Indonesia among Vanuatu and Solomon Islands’ recipient nations.

Tonga, Bulgaria, Burundi, and the Marshall Islands have seen growth in remittances of more than 500 percent.

According to IFC, it is the development of new programs, initiatives, and technology that encourage foreign work programs, as well as easier and cheaper ways of sending remittances, that is supporting growth and changing the picture for donor nations.

Interact with remittance data in our new tableau visualization to gain more insight from this valuable data source.