The falling dollar and remittances

The currencies of many countries have appreciated against the US dollar in recent years. The impact of the dollar depreciation on remittance flows to developing countries has emerged as a serious subject of study amongst economists and policy analysts. In particular, the impact of remittance flows for the Philippines, Mexico and India, the three countries among the largest remittance-recipients, is of immediate concern for economists and policy planners.

 

Remittance flows to the Philippines increased nearly by 50% between 2004 and 2007. However, a large part of this increase has been simply to preserve the purchasing power of recipients, since the Philippines Peso appreciated by 33% against the US dollar and the country has experienced domestic inflation during this period. Similarly, while remittances to India and Mexico increased by 44% and 38% respectively, the rupee appreciated by 15% and the Mexican Peso held firm against the dollar.

 

The World Bank’s recent publication Migration and remittances, Factbook 2008 has come out with some interesting findings. Rising cost of living is further eroding the purchasing power of remittances received by these countries. The cumulative consumer price index (CPI) inflation in these countries during this period has continuously shown an upward curve. Furthermore, the international prices of oil and food grains, measured in current US dollars, have been rising at alarming rates.

 

The price of crude oil nearly tripled from $31 per barrel in January 2004 to $90 per barrel by the end of 2007 and has since crossed $100 mark in 2008, while international prices of maize and rice increased by 56% and 70% respectively during this period. These increases are largely due to global economic factors that are largely outside the control of policymakers in the remittance-recipient developing countries.

 

According to World Bank estimate, among the top 10 remittance recipients, India is the top receiver of remittances from abroad in 2007 with $27 billion, followed by China ($25.7 billion), Mexico ($25 billion), the Philippines ($17 billion), France ($12.5 billion), Spain ($8.9 billion), Belgium ($7.2 billion), Germany ($7 billion), UN ($7 billion, and Romania ($6.8 billion).

 

Using the average annual exchange rates of local currencies against the US dollar and the consumer price index for the three developing countries — India, Mexico and the Philippines — the World Bank estimates how much remittances have increased relative to 2004 after accounting for the appreciation of domestic currencies and inflation.

 

Remittances in current US dollars and in domestic purchasing power terms are defined as the sum of workers’ remittances, compensation of employees, and migrant transfers. The appreciation of a currency relative to the US dollar is calculated as the percentage change in the US dollar value per local currency unit.

 

In the Philippines, while remittance increased by nearly 50% in nominal dollar terms between 2004 and 2007, they increased by 22% after accounting for the appreciation of the Philippines Peso. After adjusting for domestic inflation, they increased by only 3% in this period.

 

In India, which had a similar increase in prices during this three-year period but a relatively smaller appreciation against the US dollar compared to the Philippines, remittances increased by 44% in nominal dollars, by 32% after accounting for the appreciation of the rupee, and by 13% after accounting also for inflation.