Caribbean & Central America - May 2022

The value of remittances grew by an average of 27.5% for four Central American countries in 2021, according to a recent report by US-based think tank Inter-American Dialogue.

El Salvador, Guatemala, Honduras, and Nicaragua averaged a higher rate of growth than the Latin America and the Caribbean (LAC) average of 26%. The report’s authors characterised LAC growth as “exceptionally strong,” outstripping growth in the rest of the world, and Guatemala recorded the strongest growth rate of the four Central American countries analysed.

Total remittances of US$15.3bn to Guatemala in 2021 represent a 35% increase compared to the previous year. Honduras registered the second highest growth, with total remittances of US$7.4bn and a growth rate of 32%, followed by El Salvador (US$7.52bn; 27%) and Nicaragua (US$2.15bn; 16%). This means Central America is a significant contributor to the LAC total of US$134.4bn in remittances. The report found that 90% of migrants from Guatemala, Honduras, and El Salvador were based in the US compared to 43% of Nicaraguans. 

Contributing factors include a strong economic recovery from the coronavirus (Covid-19) pandemic in the US, where the vast majority of Central American migrants are based; continued migration from the subregion; and migrants’ response to natural disasters at home, according to the report. In 2021 an estimated 1m Central Americans left their home countries, with almost 900,000 attempting to reach the US, said the report.

However south-south migration is also important, particularly in the case of Nicaraguans, many of whom have moved to neighbouring Costa Rica rather than the US. The report estimates that just over 400,000 Nicaraguans live in Costa Rica, including minors. The value of remittances from Costa Rica did not increase significantly in 2021 due to a challenging economic situation, but some 100,000 more Nicaraguans made the journey to Costa Rica due to the worsening political crisis at home, said the report.    

The growth in the value of remittances proved a major relief for Central American economies, which have struggled to recover from the impacts of the Covid-19 pandemic. Most countries saw remittances as a share of national income go up in 2021, according to the report.

According to the International Monetary Fund (IMF) projections, remittances accounted for 26.1% of El Salvador’s GDP in 2021, compared to 23.7% in Honduras, 17.8% in Guatemala and 13.4% in Nicaragua. The significance of remittances to regional economies ties them ever closer to the US in terms of both Washington’s economic performance and migration policies.

Another point of interest is the change in methods used to send remittances, with migrants increasingly preferring digital transactions. However, the use of cryptocurrencies to send money home has not taken off as much as predicted in some quarters. El Salvador’s President Nayib Bukele cited commission-free remittances as a major positive for the country’s adoption of bitcoin as legal tender in September 2021, but only 7% of respondents to a survey carried out that month had attempted to send remittances in bitcoin. All of them reported a negative experience,

The Inter-American Dialogue report predicts “modest growth” for remittances in 2022, but the latest figures show significant growth in the first months of the year. Data from Guatemala’s central bank reveals a 25.5% increase in the value of remittances sent to Guatemala from January-March compared to the same period last year, while Honduras recorded a 22% increase for the period. El Salvador recorded a 10.31% increase for the first two months of this year compared to the same period last year, and remittances to Nicaragua for January increased 22.5% on the same month in 2021.

These early signs point to the continued importance of remittances to regional economies. In the last 20 years they have accounted for an average of 9% of GDP and were worth more than 2.6 times as much as foreign direct investment inflows, according to a June 2021 report from the Central American development bank BCIE. But while the payments provide a valuable lifeline for families, regional governments need to do more to provide adequate living conditions rather than relying on migrants to prop up their struggling economies.