Discussion 3 International finance

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Multinational Business Finance

Fifteenth Edition

Chapter 3 Mini Case

Global Remittances

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Global Remittances (1 of 3)

One area within the balance of payments that has received intense interest in the past decade is that of remittances.

The term remittance is a bit tricky. According to the International Monetary Fund (I M F), remittances are international transfers of funds sent by migrant workers from the country where they are working to people, typically family members, in the country from which they originated.

According to the I M F, a migrant is a person who comes to a country and stays, or intends to stay, for a year or more.

As illustrated by Exhibit A, it is estimated that nearly $600 billion was remitted across borders in 2014.

Exhibit A Global Remittance Inflows, 1970–2017 (Billions of U.S. Dollars)

For long description, see slide 19: Appendix 1

Global Remittances (2 of 3)

Remittances make up a very small, often negligible cash outflow from sending countries like the United States. They do, however, represent a more significant volume, for example as a percent of G D P, for smaller receiving countries, typically developing countries, sometimes more than 25%. In many cases, this is greater than all development capital and aid flowing to these same countries.

And although the historical record on global remittances is short, as illustrated in Exhibit A, it has shown dramatic growth in the post-2000 period. Its growth has been rapid and dramatic, falling back only temporarily with the global financial crisis of 2008–2009, before returning to its rapid growth path once again from 2010-2014. Growth was stunted again from 2015-2017.

Global Remittances (3 of 3)

Remittances largely reflect the income that is earned by migrant or guest workers in one country (source country) and then returned to families or related parties in their home countries (receiving countries). Therefore it is, not surprising that although there are more migrant worker flows between developing countries, the high income developed economies remain the main source of remittances.

The top remittance-receiving countries over the 1990-2017 period are detailed in Exhibit B.

Exhibit B Top Remittance-Receiving Countries, 1990-2017

For long description, see slide 20: Appendix 2

Source: Derived by authors from Migrant Remittance Inflows, World Bank, 2017.

Payment Means (1 of 2)

Most remittances occur as frequent small payments made through wire transfers or a variety of informal channels (some even carried by hand).

The United States Bureau of Economic Analysis (B E A), which is responsible for the compilation and reporting of U.S. balance of payments statistics, classifies migrant remittances as “current transfers” in the current account.

Payment Means (2 of 2)

Wider definitions of remittances may also include capital assets that migrants take with them to host countries and similar assets that migrants bring back with them to their home countries.

These values, when compiled, are generally reported under the capital account of the balance of payments.

However, discerning exactly who is a “migrant,” is also an area of some debate. Transfers back to their home country made by individuals who may be working in a foreign country (for example, an expat working for a multinational organization) but who are not considered residents” of that country, may also be considered global remittances under current transfers in the current account.

Remittances Prices (1 of 3)

A number of organizations have devoted significant effort in the past five years to better understanding the costs borne by migrants in transferring funds back to their home countries. The primary concern has been excessive remittance charges—the imposition of what many consider exploitive charges related to the transfer of these frequent small payments.

The G8 countries launched an initiative in 2008 entitled “5×5,” to reduce transfer costs from a global average of 10% to 5% in five years.

The World Bank supported this initiative by creating Remittance Prices Worldwide (R P W), a global database to monitor remittance price activity across geographic regions.

It was hoped that, through greater transparency and access to transfer cost information, market forces would drive these costs down.

Although the global average cost had fallen to a low of 7.90% in 2014, the program was still clearly far from its goal of 5%.

Remittances Prices (2 of 3)

Funds remitted from the G8 countries themselves fell to 7.49% in 2014, 7.98% for the G20 countries in the same period.

This was particularly relevant given that these are the source countries of a large proportion of all funds remitted.

Little was known of global remittance costs until the World Bank began collecting data in the R P W database. The database collects data on the average cost of transactions conducted along a variety of country corridors globally (country pairs).

Exhibit C provides one sample of what these cost surveys look like. This corridor transaction, the transfer of Z A R 1370 (South African Rand, equivalent to about U S D 200 at that time) from South Africa to Malawi was the highest cost corridor in the R P W.

Exhibit C Remittance Price Comparison for Transfer Z A R 1370 from South Africa to Malawi Z A R 1,370.00

For long description, see slide 21: Appendix 3

Remittances Prices (3 of 3)

Remittance costs shown in Exhibit C are of two types:

a transaction fee, which in this case ranges between Z A R 43 and 390; and

an exchange rate margin, which is an added cost over and above the organization’s own cost of currency. The resulting total cost per transaction can be seen to rise as high as 36.6% for this specific corridor.

Given that most transfers are by migrant or guest workers back to their home countries and families, and they are members usually of the lowest income groups, these charges-30%-are seen as exploitive.

It should also be noted that these are charges imposed upon the sender, at the origin.

Other fees or charges may occur to the receiver at the point of destination.

It is also obvious from the survey data in Exhibit C that fees and charges may differ dramatically across institutions.

Hence the objective of the program-to provide more information that is publicly available to people remitting funds thereby adding transparency to the process-is clear.

Product Types and Innovation

Other results from the R P W tracks a number of different data dimensions.

According to the World Bank, commercial banks continue to be the most costly service provider type and money transfer operators (M T O s) tend to be the least costly.

Exhibit D provides a breakdown of the types of transactions conducted in the global remittance market in 2013.

Online services are among the least expensive and account-to-account services are the most expensive.

Exhibit D Remittance Product Use and Cost

Product Types	Percent of Transactions	Average Cost
Cash to cash	45%	7.0%
Account to account (to any bank)	19%	12.5%
Online	17%	5.9%
Cash to account	8%	5.6%
Account to cash	4%	7.8%
Account to account (within same bank)	2%	7.9%
Mobile	1%	6.5%
Prepaid card	1%	8.4%
Other	3%	9.5%
Blank	100%	7.9%

Source: Remittance Prices Worldwide, Issue no. 11, September 2014, Figures 11 and 12, page 7.

Growing Controversies (1 of 2)

With the growth in global remittances has come a growing debate as to what role they do or should play in a country’s balance of payments, and more importantly, economic development.

In some cases, like India, there is growing resistance from the central bank and other banking institutions to allow online payment services like PayPal to process remittances. In other countries, like Honduras, Guatemala, and Mexico, there is growing debate on whether the remittances flow to families, or are actually payments made to a variety of Central American human trafficking smugglers.

Growing Controversies (2 of 2)

In Mexico for example, remittances now make up the second largest source of foreign exchange earnings, second only to oil exports. The Mexican government has increasingly viewed remittances as an integral component of its balance of payments, and in some ways, a “plug” to replace declining export competition and dropping foreign direct investment.

But there is also growing evidence that remittances flow to those who need it most, the lowest income component of the Mexican population, and therefore mitigate poverty and support consumer spending. Former President Vicente Fox was quoted as saying that Mexico’s workers in other countries remitting income home to Mexico are “heroes.”

Mexico’s own statistical agencies also disagree on the size of the funds remittances received, as well as to whom the income is returning (family or non-family interests).

Mini-Case Questions

Where are remittances across borders included within the balance of payments? Are they current or financial account components?

Under what conditions-for example, for which countries currently-are remittances significant contributors to the economy and overall balance of payments?

Why is the cost of remittances the subject of such intense international scrutiny?

What potential do new digital currencies-cryptocurrencies like Bitcoin-have for cross-border remittances?

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Appendix 1

Long Description for a graph plots remittance inflows in billions of U S dollars versus time for the period from 1970 to 2017.

A curve represents the following trends in remittance inflows from 1970 to 2017.

Remittance inflows increased at a relatively constant rate from 10 billion in 1970 to 100 billion in 2001.

Remittance inflows rose at an increase rate from the 2001 level to a peak of 460 billion in 2007, before dipping to 450 billion in 2008.

After 2008, remittance inflows generally rose at a decreasing rate to near 590 billion in 2017.

All values estimated.

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Appendix 2

Long Description for a graph plots the inflows for different remittance receiving countries versus time for the period from 1990 to 2017.

Seven curves represent remittance inflows for India, China, Mexico, Philippines, France, Nigeria, and Pakistan. For each country, the following table provides the remittance amount in 1990, the remittance amount in 2017, and any notable changes in remittance inflows with the year in which they were recorded. All amounts are in millions of U S dollars, and all values are estimated.

A table has 7 rows and 4 columns. The columns have the following headings from left to right. Country, 1990 Amount, 2017 Amount, Notable Change with Year. The row entries are as follows. Row 1. Country, India. 1990 Amount, 2000. 2017 Amount, 65000. Notable Change with Year, peak at 70,000 in 2014. Row 2. Country, China. 1990 Amount, less than 1,000. 2017 Amount, 63000. Notable Change with Year, peak at 64,000 in 2014. Row 3. Country, Mexico. 1990 Amount, 3000. 2017 Amount, 31000. Notable Change with Year, peak at 27,000 in 2006. Row 4. Country, Philippines. 1990 Amount, 2000. 2017 Amount, 33000. Notable Change with Year, peak at 6,000 in 1997. Row 5. Country, France. 1990 Amount, 4000. 2017 Amount, 25000. Notable Change with Year, peak 10,000 in 1997, peak at 25,000 in 2013. Row 6. Country, Nigeria. 1990 Amount, less than 1,000. 2017 Amount, 21000. Notable Change with Year, under 2,000 from 1990 to 2003, increase to 15,000 by 2005. Row 7. Country, Pakistan. 1990 Amount, 2000. 2017 Amount, 17000. Notable Change with Year, peak at 4,000 in 2002.

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Appendix 3 (1 of 2)

Long Description for illustrate the remittance price comparison for transfer from South Africa to Malawi.

The first table has columns for the following information from left to right. firm, firm type, product, fee, exchange rate margin in percent, total cost percent, total cost in currency, and net transfer in currency. The table reads as follows.

A table has 11 rows and 8 columns. The columns have the following headings from left to right. Firm, Firm Type, Product, Fee, Exchange Rate Margin in Percent, Total Cost Percent, Total Cost in Currency, Net Transfers in Currency. The row entries are as follows. Row 1. Firm, MoneyGram. Firm Type, M T O. Product, Branch. Fee, 149.6. Exchange Rate Margin in Percent, 2.1. Total Cost Percent, 13.02. Total Cost in Currency, 178.37. Net Transfers in Currency, 1191.63. Row 2. Firm, Mukuru. Firm Type, M T O. Product, Branch. Fee, 123.3. Exchange Rate Margin in Percent, 6.76. Total Cost Percent, 15.76. Total Cost in Currency, 215.91. Net Transfers in Currency, 1154.09. Row 3. Firm, Mukuru. Firm Type, M T O. Product, Branch, call center. Fee, 123.3. Exchange Rate Margin in Percent, 6.76. Total Cost Percent, 15.76. Total Cost in Currency, 215.91. Net Transfers in Currency, 1154.09. Row 4. Firm, Western Union. Firm Type, M T O. Product, Branch, call center. Fee, 194.84. Exchange Rate Margin in Percent, 1.7. Total Cost Percent, 15.92. Total Cost in Currency, 218.13. Net Transfers in Currency, 1151.87. Row 5. Firm, Nedbank. Firm Type, Bank. Product, Branch, call center. Fee, 228. Exchange Rate Margin in Percent, 6.06. Total Cost Percent, 22.7. Total Cost in Currency, 311.02. Net Transfers in Currency, 1058.98. Row 6. Firm, A B S A. Firm Type, Bank. Product, Branch, call center. Fee, 193.8. Exchange Rate Margin in Percent, 9.39. Total Cost Percent, 23.54. Total Cost in Currency, 322.44. Net Transfers in Currency, 1047.56. Row 7. Firm, Standard. Firm Type, Bank. Product, Bank Branch, call center. Fee, 235. Exchange Rate Margin in Percent, 10.35. Total Cost Percent, 27.5. Total Cost in Currency, 376.8. Net Transfers in Currency, 993.21. Row 8. Firm, Bidvest. Firm Type, Bank. Product, Bank Branch, call center. Fee, 356. Exchange Rate Margin in Percent, 2.1. Total Cost Percent, 28.09. Total Cost in Currency, 384.77. Net Transfers in Currency, 985.23. Row 9. Firm, Bank of Athens. Firm Type, Bank. Product, Bank Branch, call center. Fee, 390. Exchange Rate Margin in Percent, 1.96. Total Cost Percent, 30.43. Total Cost in Currency, 416.85. Net Transfers in Currency, 953.15. Row 10. Firm, F N B of South Africa. Firm Type, M T O. Product, Branch, call center. Fee, 235. Exchange Rate Margin in Percent, 19.45. Total Cost Percent, 36.6. Total Cost in Currency, 501.47. Net Transfers in Currency, 868.54.

Appendix 3 (2 of 2)

Row 11. Firm, South African Post. Firm Type, Bank. Product, Branch. Fee, 43.1. Exchange Rate Margin in Percent, 0. Total Cost Percent, 3.15. Total Cost in Currency, 43.1. Net Transfers in Currency, 1326.9.

The second table has columns for the following information from left to right. firm, fee, exchange rate margin in percent, total cost in percent, total cost in currency, and net transfers in currency. The table reads as follows.

A table has 4 rows and 6 columns. The columns have the following headings from left to right. Firm, Fee, Exchange Rate Margin in Percent, Total Cost Percent, Total Cost in Currency, Net Transfers in Currency. The row entries are as follows. Row 1. Firm, Bank Average. Fee, 280.56. Exchange Rate Margin in Percent, 5.97. Total Cost Percent, 26.45. Total Cost in Currency, 362.38. Net Transfers in Currency, 1007.62. Row 2. Firm, Money Transfer Average. Fee, 165.21. Exchange Rate Margin in Percent, 7.35. Total Cost Percent, 19.41. Total Cost in Currency, 265.96. Net Transfers in Currency, 1104.04. Row 3. Firm, Post Office Average. Fee, 43.1. Exchange Rate Margin in Percent, 0. Total Cost Percent, 3.15. Total Cost in Currency, 43.1. Net Transfers in Currency, 1326.9. Row 4. Firm, Total Average. Fee, 206.54. Exchange Rate Margin in Percent, 6.06. Total Cost Percent, 21.13. Total Cost in Currency, 289.52. Net Transfers in Currency, 1080.48.

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Discussion 3 International finance

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