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In many developing countries, the phrase “remittance” is a common narrative. So, what is remittance? Remittance is sending money overseas and remittances are monies that are sent from migrants back to their home country. Remittances are savings of families and workers and are spent in the home country for basic needs such as food, clothing and other uses that drive the economy.

Remittances are a vital source of external resource flows for emerging nations as they exceed development assistance; they also offer more stability than portfolio equity flows and private debt. For many emerging nations, remittances form a key source of foreign exchange. Remittances can surpass the earnings made from major exports while covering a significant portion of imports; some are only exceeded by Foreign Direct Investment or FDI. For example, in 2013, remittances sent to Uganda were double the country’s income from its main export product, coffee.

Remittances and Developing Nations

Many emerging countries find it difficult to borrow money. These nations do not have stable leadership and are less likely to repay the debt. While organizations that lend money such as the IMF and the World Bank offer help, the funds come with strings attached. These extra conditions are too much for developing nations because they touch on sovereignty, especially if leadership is being held by a thread.

Remittances allow countries to fund development projects their own way but most developing countries struggle to use remittance funds effectively. For example, India received $70 billion in remittance flows in the year 2013 while the Philippines received $25 billion. These funds can be used to promote a country’s prosperity but policies that promote smart and stable growth without concentrating on the cities must be developed.

Remittance Problems

While remittances are a key factor for many emerging countries, they can create a dependency on outside capital flows instead of concentrating on developing sustainable local economies. It has been noted that the more a nation depends on remittances, the more it depends on a healthy global economy.

Remittances can be affected by a decline in the global economy. Those working abroad can lose their jobs in cyclical industries if the economy takes a hit and ultimately stop sending money back home. Also, workers may move back home as a result of deportation or due to the growth of anti-immigration sentiments in developed nations such as Germany, United Kingdom and lately, the United States.

Remittances are crucial for developing nations and they also play an important role in the global economy. Developing nations should come up with a proper guidance on how the funds are used and in a way that spurs efficient growth.

Further reading

"This year’s remittance flows to developing countries will be an increase of 7.8 percent over the 2013 volume of $404 billion, rising to $516 billion in 2016, according to revised projections from the latest issue of the brief. "

Worldbank, April 11th 2014

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