Caribbean & Central America - October 2021

Migrants sent US$1.389bn in remittances to Guatemala in August, the highest monthly total ever recorded, providing a lifeline as the country struggles to recover from the coronavirus (Covid-19) pandemic.

That figure means Guatemalans paid US$9.709bn in remittances over the first eight months of the year, compared to US$11.34bn for the whole of 2020, according to data collected by Guatemala’s central bank (Banguat). As a result, a new annual record should be set this year, continuing a run which has seen the total amount of remittances increase each year since 2009, when migrants sent home US$3.912bn.

Remittances have also come to represent a large proportion of Guatemala’s GDP, at 14.6% in 2020, according to data from the World Bank (WB). In 2001 that proportion was just 3.4%, climbing steeply to reach 12.6% in 2007. This was followed by a period of decline to 9.67% in 2011, then a period of relative stability to 2014 (9.9%) before another period of steady growth. 

When the Covid-19 pandemic hit, the WB predicted remittances would fall. However, flows have proved resilient, with the WB citing, in a May statement, “fiscal stimulus that resulted in better-than-expected economic conditions in host countries, a shift in flows from cash to digital and from informal to formal channels, and cyclical movements in oil prices and currency exchange rates”. In the US, where the overwhelming majority of Central American migrants live, the improvement in the employment situation led to an increase in remittance flows to Guatemala, as well as El Salvador and Honduras, said the WB.

In June the Central American development bank (BCIE) published a report looking at remittances, naming them “the most important international flow to the region”. Remittances have been worth around 9% of regional GDP on average in the last 20 years, said the BCIE, and reached a total value of US$33.7bn in 2020. Their value is 2.6 times that of foreign direct investment (FDI), and 15.2 times that of official development assistance, like foreign aid. Honduras has the highest ratio of remittances to GDP at 24.1% in 2020, followed by El Salvador (24.1%), Nicaragua (14.7%), and Guatemala (14.6%), said the report.

BCIE cites research by the WB which indicates a 10% increase in remittances is associated with a 3.5% decline in the share of people living in poverty, but it emphasises the countercyclical nature of remittances and growth. That means that when countries experience a crisis, such as the Covid-19 pandemic, remittances increase. As a result, the recent increase in remittance flows does not necessarily bode well for the health and wellbeing of Central Americans, given that the payments are likely making up for shortfalls in income due to a lack of work, or to pay medical expenses.

BCIE also emphasises the importance of financial inclusion for migrants paying remittances and the families receiving them, as most remittances are sent through financial intermediaries. In Central America, it costs around 4%-5.5% of the total amount to send remittances, according to the bank, made up of a 2%-3% charge to cash the cheque combined with transaction and exchange rate fees. These costs can be reduced by using financial technology (fintech) and digital platforms, said the bank, but this requires migrants to have a bank account in the US. Only 15% of migrants do, said BCIE, leaving the vast majority paying onerous fees.

This was one motivation for the recent adoption of cryptocurrency bitcoin as a national currency in El Salvador [EB-21-07]. In theory bitcoin allows quick and cheap international transfers which avoid traditional intermediaries, and migrants using the cryptocurrency could transfer money via an online wallet to recipients across international borders. BCIE president Dante Mossi believes the project is attracting regional interest. "Everyone is watching if it goes well for El Salvador and if, for example, the cost of remittances drops substantially...other countries will probably seek that advantage and adopt it," Mossi told international newswire Reuters on 30 August. “Guatemala, Honduras, and El Salvador are the countries that would have the most to gain if the adoption of bitcoin lowered the cost of sending remittances.”

However, the discussion around remittances should also address the implications for Central American economies, wrote Sucely Donis for the Central American institute of fiscal studies (Icefi) think tank on 3 August. An increase in remittances means existing migrants were sending home more of their income than before, or that more people had emigrated from Central America, she said. The implication is that Central American markets are incapable of absorbing those entering the workforce because they aren’t competitive and don’t offer the basic conditions to attract investment that would provide jobs. “The free-market economy as we know it today, which many want and defend, appears to ‘liberate’, ‘discard’, and ‘expel’ a majority of the population,” wrote Donis, saying these are the same people whose remittances are propping up states that cannot provide conditions that allow them to stay at home.