A new migration brief released by the World Bank underscores the importance of remittances as a source of external financing in many developing countries during the economic crisis. Unlike private capital flows, which declined sharply in 2009, remittances have remained more resilient. However the latter did decline modestly during the crisis -- falling 6 percent from $336 billion in 2008 to $316 billion in 2009.

Remittance flows to Latin America and the Caribbean fell by about 12 percent in 2009, to Eastern Europe and Central Asia by about 21 percent, and to the Middle East and North Africa by about 8 percent. South Asia fared better, with remittance flows continuing to grow by 5 percent, although this is a marked come down from the growth rates of previous years. Flows to Sub-Saharan Africa and to East Asia and the Pacific remained relatively flat in 2009. India, China, Mexico and the Philippines were the top recipients of migrant remittances in US dollars for 2009, with remittances to India averaging about $49 billion.

Top 20 recipients of migrant remittances

Authored by Dilip Ratha, Sanket Mohapatra and Anil Silwal, the brief offers three major conclusions based on regional trends.

Firstly, countries like India and the Philippines, which send migrants to a variety of destinations such as the US and Dubai, countries that have different economic cycles, are less likely to see declines in remittance flows.

Secondly, the lower the barriers to labour mobility, the stronger the link between remittances and economic cycles. Russia, for instance, allows for high labour mobility with neighbouring countries, resulting in remittances being more closely correlated with its business cycles. This could explain why remittances from Russia to these countries declined by 33 percent during the first three quarters of 2009. On the other hand, remittance outflows from Saudi Arabia have been less closely correlated with oil prices, partly because of the country’s strict immigration quotas.

Thirdly, exchange rate movements affect the valuation of remittances in US dollars. For instance, the British pound’s weakening against the US dollar could explain the decline of remittance flows from the UK into Poland. Additionally, exchange rate movements also affect remittances by impacting consumption and investment in assets back home.

Throughout the brief, the authors highlight the importance of remittances as a source of financing for developing countries and point out that these are being factored into sovereign ratings in middle-income countries and debt sustainability analysis in low-income countries. They point to the fact that earlier this month, Bangladesh was rated for the first time by Standard & Poor and Moody’s, receiving a BB-rating and a Ba3 rating from the investor services respectively. The high growth rate of remittance flows and their high share in GDP were cited as being significant in the rating decisions.

The brief’s authors project that remittance flows to developing countries will grow by 6.2 percent in 2010 and 7.1 percent in 2011, and those to South Asia by 4.7 percent in 2010 and 5.2 percent in 2011. Although remittance flows to developing countries will increase at more sustainable rates than during the pre-crisis period, growth will be moderated by high unemployment rates in OECD countries.