A river of financial assistance: the impact of remittances on health outcomes

Ahead of International Day of Family Remittances Day on June 16, we spoke with Dilip Ratha, founder and head of KNOMAD and the Lead Economist for Migration and Remittances in the Social Protection and Jobs Global Practice at the World Bank.

Ratha left his native village of Sindhekela, Odisha, India, to study at an Indian university and then migrated to the United States for graduate school. He has been studying migration and remittances for more than two decades and has personally experienced the frustration of trying to send money across borders and witnessed the impact of the transfers firsthand.

Ratha has contributed to the now well-established body of global research demonstrating the role of remittances as a driver of improved health outcomes, despite the stress migration places on families. Researchers have found that remittances have reduced infant mortality and improved health knowledge in Mexico. Remittances have also improved health expenditure and health knowledge in Ecuador. And they have been found to increase the birth weights of babies in Sri Lanka. Exemplars in Global Health research has found that remittances served as a powerful driver of childhood stunting reduction in three countries: Kyrgyz Republic, Nepal, and Senegal. Researchers have also found that remittances foster financial development and can strengthen women’s empowerment.

Although the monthly remittance sent by a single migrant averages just US$200, “repeated month after month, these small sums of money add up to a river of financial assistance,” said Ratha. Indeed, in 2022, international remittances to low- and middle-income countries (LMICs) amounted to US$647 billion. That is greater than the sum of all donor aid, which totaled US$223 billion that year.

These funds are used to pay school fees, build homes, pay for weddings, funerals, and emergency medical care. And most remarkably, the funds surge when times are hard – remittances actually surged and hit record highs during the COVID pandemic.

We spoke with Ratha about how remittances influence health outcomes and what leaders in LMICs can do to maximize the impact of remittances in their countries.

What are the pathways through which remittances can improve health outcomes?

Ratha: Let’s start with the understanding that remittances are the motivator for migration. This is not to be forgotten. Except in the case of refugees.

Remittances impact health through three key pathways.

The first pathway is obviously affordability. Families who receive remittances have more money, can buy more and healthier food, and better afford preventive and curative healthcare.

The second is access. A migrant might send medicines that are available in places like Dubai and Riyadh but not available, for example, in Colombo. During the COVID-19 Delta variant surge in India, for example, when, irrespective of whether one was a king or a pauper, one just did not have access to oxygen cylinders. Indian diasporas and migrants sent oxygen tanks back home to relieve the shortage across India. That saved lives.

The third pathway involves information flow. Talking to the right people and saying, my wife, or my sister, they are having some difficulties. What should we do? Migrants who have accumulated knowledge and know-how while working overseas can share that information with their communities back home.

Can you share how remittances serve as a cushion during shocks such as the COVID-19 pandemic and how this impacts health outcomes?

Ratha: When there is a family emergency, the migrant is quite likely to send more money home on a timely basis. This behavior is often overlooked, and it hasn't been documented enough in the literature. But we know that in times of family emergencies such as a death or the need to cover funeral expenses, people send more money home. And the data shows that migrants often send home unusually high amounts to meet medical emergencies in particular.

You've written that the costs for transferring money to LMICs is very high – about 6% and even higher in sub- Saharan Africa. What can LMICs do to reduce these costs?

Ratha: The sad news is we will not meet the Sustainable Development Goal aspiration to reduce remittance costs to 3% by 2030.

Remittance costs are somehow sticky and they are not falling below 6% globally. The average is 6.3% according to the World Bank’s Remittance Prices Worldwide database. It still costs more than 8% to send remittances to sub-Saharan Africa, and sending money from one country in Africa to another country in Africa can easily reach 15% or higher. It is unreal that it should cost so much to send money.

The question is why are the costs not falling?

One reason is that foreign exchange markups for going from one currency to another is determined in the market, and those costs can be as high as 10%. There is not enough, as they say, liquidity in the market.

How much one can charge depends on the competitive environment. Some countries have signed exclusive agreements which means that there is no competition and markups are high. That is the case in Europe, where the post offices have exclusive contracts with money transfer companies. And migrants, when they send money home, are actually paying two fees – one to the post office and the other to the money transfer company.

Another driver of high costs is concern over money laundering, where compliance with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations require paperwork which adds costs for banks to process these remittances.

What can governments do to lower these fees?

Ratha: First, Europeans can open post office contracts to more than one money transfer company. Exclusive contracts should be made inclusive contracts. With more competition, prices will come down.

Second, we need to reduce the paperwork required from banks and money transfer companies that puts an unnecessary burden on regulators and banks alike. At its root, it is a compliance requirement that is requiring banks to flag every transaction as possible money laundering. My view is that small remittances, under US$1,000, should be recognized as not money laundering.

Leaders of low- and middle-income countries should lobby for more risk-based and pragmatic AML/CFT regulations. That would unleash opportunities, including perhaps convincing big banks to provide correspondent banking services to money transfer companies, and in particular, companies that are using new and digital technology for delivering remittance services.

Third is linking national payment rails [sometimes called the “glue that connects banks"]. If government-to-government payment platforms are linked and access is provided to major correspondent banks or major money transfer companies, that can lower costs and speed up transactions.

Fourth, we need to reduce the foreign exchange markup. Right now, banks and money transfer companies can charge whatever they want.

There are some corridors where they have managed to get remittance fees down below 3%. Sending money from the United Arab Emirates to the Philippines, or Jordan to Egypt are among the cheapest corridors where costs are below 3%. These corridors share a few traits. They have achieved a certain scale and people are sending funds using their phone or the internet, from bank account to bank account. In these transactions, people on both sides – the sender and recipient – are banked. If you don't have a bank account on one end, then the costs are likely to be high, even when sending to mobile wallets.

How can governments improve the use of remittances to generate larger multiplier effects?

Ratha: Remittances are private money. So, I don’t think we want to get into telling the recipients of the remittances what to do with their funds.

When people spend money, whether on food or on housing, it has ripple effects on the economy. And if they put part of that money in the bank, that leads to financial inclusion and access to financial activities that contribute to growth.

But there is another very direct way countries can leverage diaspora resources and use them productively. It is simply to recognize that people send money home, but they also save a large amount of money where they are. A lot of that saving is kept either under the mattress, which means zero interest rate, or it is in a bank account where the deposit rate is near zero.

If the migrant origin country were to offer a bond product, we call it diaspora bond, and offer a 5% interest rate, many people will buy those bonds. The money is locked in for four or five years, to be invested in projects or programs that build roads, hospitals, train stations, hydropower, solar power, or invest in community health, such as fighting malaria. That's the idea of the diaspora bond. And it is good for everyone. Israel has been issuing diaspora bonds since 1951. Every year they raise close to US$1 billion.

India has also used diaspora bonds to raise US$9 billion. In 1998, they set out to raise US$1 billion and ended up raising US$5 billion to bolster foreign exchange reserves during the Asian financial crisis. All of it happened within a matter of a few weeks, and with not a lot of publicity either. That's the surprising part about the diaspora; word of mouth spreads quickly. And if migrants believe in the cause, and they have confidence in the government, they'll invest in these bonds.

In 2003, when that bond was maturing, the Indian government issued another bond and they again raised another US$4 billion. Another successful example is Nigeria, which raised US$300 million in 2017 through a five-year bond. They have already paid back the money.

Editor's note: For more information on the connection between stunting and remittances, read Exemplars in Global Health research from three countries: Kyrgyz Republic, Nepal, and Senegal.