How remittances are worth more than all development funding combined

The world of development has been focused for a long time on cash from institutions: official development assistance, or ODA, and foreign direct investment, FDI. But there is another key funding mechanism that’s often overlooked: remittances. These are a massive source of external finance for low- and middle-income countries. At the end of last year, the World Bank published a brief about migration and development, which contains preliminary estimates for 2023, showing that remittances to the global south are likely to be worth $669 billion, more than ODA and FDI put together. There are other sources of funding from the global north not included in the report, such as philanthropic cash and individual donations via NGOs. But since there are also significant amounts of ODA which never reach the global south, it appears likely that remittances now exceed all development funding to low- and middle-income countries combined. The World Bank report shows that in 2023, the estimated amount of remittances to LMICs increased by 3.8% from 2022. Global remittances are estimated at $860 billion. In 2022, remittances to LMICs grew by 7.7%, so the growth in 2023 was relatively smaller. Over the past eight years, remittances to LMICs have become a more and more significant source of funding, growing consistently faster than the world economy. From 2016 to 2023 — the period for which detailed data is available in the World Bank report — remittances to LMICs have grown by 42.4%. Even in 2020 — when world growth slowed because of COVID-19 — remittances dipped only very slightly. But how do remittances compare to other sources of funding? Remittances are the largest source of external funding for LMICs, and in the last two years, they have been a greater source of funding than the other two largest sources of funding combined. For the last two years, ODA has been steadily increasing, with the latest data showing total ODA as nearly $224 billion. FDI, however, fluctuates more wildly. In recent years, the war in Ukraine has caused inflation, which has pushed up interest rates in the United States and Europe, and made investment in the global north more attractive, which in turn has pushed down investment in the south. A recent analysis by the ONE Campaign found that these changes mean the global south is now paying out more in debt than it received in grants and loans. Data from the World Bank puts FDI at around $400 billion in 2023, down sharply from previous years. . Where do the remittances go? Regionally, remittances to East Asia and the Pacific, excluding China, are estimated to have grown by 7% in 2023, sitting at $83 billion. Flows to Europe and Central Asia are expected to reach $78 billion; then the Middle East and North Africa to reach $61 billion; South Asia, a whopping $189 billion; and sub-Saharan Africa, $54 billion. Country-wise, it is estimated that the top recipient country is India with $125 billion, followed by Mexico with $67 billion, China with $50 billion, the Philippines with $40 billion, and then Egypt with $24 billion. But where do remittances come from? The largest sources of remittances are the United States and then Saudi Arabia. If we’re looking in terms of share of gross domestic product, then Saudi Arabia has a larger volume of outward remittances compared to the U.S. Remittances are on the rise in the U.S. and Saudi Arabia especially because of the recovery of job markets following COVID-19. Despite the strong presence of foreign employees in Saudi Arabia, outward remittances have gone down compared to 2022. This reflects the country’s post-COVID adjustments and its new policy that allows migrant workers to bring in their families. How much does it cost to send remittances? There is an SDG target of keeping the cost of sending money to just 3% by 2030, but the global average cost of sending $200 is at 6.2%. Digital remittances sit at 4.6%, while nondigital remittances are at 6.9%. From the Group of 20 major economies, the cost of sending money has increased to 6.3%, though the G20 intends to keep it at 5%. The costliest country to send money from is South Africa — where sending $200 has a 13.9% payment — while the lowest is in South Korea, with 3.6%, followed by Saudi Arabia, with 4.7%. Banks continue to be the costliest means of sending money, at 12%; post offices, at 7%, money transfer offices, at 5.3%; and mobile operators, at 4.1%. What’s going to happen next? The World Bank report forecasted that remittances to LMICs will grow at a slower rate of 2.4% in 2024, but growing at a constant rate. Global remittances, on the other hand, are expected to grow by 3.1%. The slowdown of growth is attributed to slowing economic growth and weaknesses in the labor markets of the U.S. and the European Union. Based on the statements above, as long as access to capital markets does not improve, or a country’s debts continue to rise, remittances will always remain the main source of external funding for LMICs. Try out Devex Pro Funding today with a free five-day trial, and explore funding opportunities from over 850 sources in addition to our analysis and news content.