What Are Remittances and How Do They Work?

what are remittances?

What Are Remittances?

Developing nations have limited sources of foreign income, but migrant workers play a vital role in establishing a stable flow of money to such countries. They work in foreign nations with inadequate knowledge of the language and social skills just so they can earn enough money to send back home. When migrant workers send money in foreign currency to their home countries, they are called remittances.

Most countries rely on foreign remittances to improve their GDP. In fact, some developing nations depend on remittance payments to stay afloat. In the past, remittances were only cash flow between a migrant and their family. It used to support the families of the migrants, but the modern processes of sending foreign remittances have become a crucial part of a country’s economy, especially in developing countries.

Remittance Transaction

Remittance transactions take place in three simple steps:

Step 1: Migrant workers get help from sending agencies by paying their remittances using a money order, check, cash, credit, or debit cards.

Step 2: Sending agencies to assign an agent in the recipient’s country to deliver foreign remittances.

Step 3: Foreign remittance is paid to the beneficiary with the help of the paying agent.

Types of Remittances

Remittance payment is crucial for the economic growth of a developing country. It can be classified into two types: Inward and Outward Remittance.

1. Inward Remittance

Inward remittance is the transfer of funds from a domestic or international account to another. When parents send money to their children living abroad, they are sending funds as remittances that become inward remittances for the children. Similarly, when children send back money after working in a foreign country, they send inward remittances to their families.

2. Outward Remittance

Sending funds out of the country is called outward remittance, which can be understood with the same example as an inward remittance. When parents send money out of the country to their children’s foreign accounts, it becomes an outward remittance. Outward remittance is for the countries sending funds, and inward remittance is for the countries receiving them.

Impact of Remittances on Developing Countries

Remittances can impact the lifestyle of receiving families as the funds would be higher than what they make in their own country. It also helps them improve their healthcare, education, and sanitary conditions. Foreign remittance can facilitate the accumulation of assets, ease the restraints on credit, and improve financial literacy. It affects a developing country’s economy in a positive way.

Despite the pros of remittances, it has certain cons for developing countries. It increases the use of non-tradable goods by raising prices and decreasing exports. It also makes the country dependable on remittance, making economic growth rely on it.

Final Words

An increase in foreign remittance has improved the lifestyle of many families in developing countries. They depend on remittances to improve their living conditions and provide for family members unable to make a substantial income in their home country. Remittances also play a role in the economic growth of a developing nation. For some, it is the main source of revenue to improve their annual GDP.

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