Remittances and exchange rate

Last update: 3/10/2022


Last Updated: September 15, 2022 at 14:13 PM

Foreign exchange market

Let’s start by recalling that the foreign exchange market is the place where currencies are exchanged and exchange rates are determined according to the supply and demand of foreign currencies against national currencies.

Macroeconomic topics

Migrant remittances are one of the other international private capital flows such as foreign direct investment (FDI), and foreign portfolio investment (FPI).

Why do migrants remit?

For an overview of why migrants in the UK send money, refer to the graph (for 2015-2016). It can be seen that the motives of migrants sending money to support family or friends represent 26.6%. This is by far the highest proportion.
To have a lock at the reasons for remetting Go to…

However, one must remember that migrants rightly complain about the cut taken by banks and money transfer firms. The chart shows, as a % of the amounts of money sent, the involved costs.

Look at the Chart…

Exchange rates are amongst the most dealt with macroeconomic topics in economics whether it’s about fixed or flexible exchange regimes.

Migrant remittances

According to the World Bank’s latest briefing, Washington, DC, May 11, 2022 « the World Bank said today that it expects officially recorded remittance flows to low- and middle-income countries to increase 4.2% this year to reach $630 billion, following a record recovery. Approximately 8.6% in 2021. This came in the latest World Bank Migration and Development Briefing released today. » Go to World Bank site.

Exchange rates and remittances

In this article, we focus on a topic related to how international remittances, from the host countries of migrants to their countries of origin, respond to movements in nominal rather than real exchange rates.
Nominal exchange rate

According to the International Monetary Fund (IMF) « Nominal exchange rate (is) the price of one currency against another. It is usually expressed in the domestic rate of the foreign currency. So if buying one euro (the base currency) costs the holder of the US dollar (the counter currency) 1.36 dollars* (1€=$1.36 US), the nominal rate from the euro holder’s perspective is 0.735 (1/1.3 US dollars = 0.735 euros: or US$1 = €0.735). »
*1 euro = 1.36 US dollars and 1 US dollar = 0735 euro. Go to IMF site.

How variables are associated

The results of changes in exchange rates, that is increase or decrease, can be viewed from two points of view. Let us examine one of them, i.e. how many units of the national currency can be obtained for one unit of foreign currency. Senders are interested in the currency of the country in which they live. Therefore, if a unit of foreign currency buys more units of the currency of the sender’s country (national currency), then this means that the foreign currency is experiencing an increase in its exchange rate against the currency of the sender’s country, which benefits the sender.
India is expected to be the first country to receive remittances in 2022. It is worth noting that contrary to the popular belief that is transmitted and supported by the media, among the countries whose immigrant nationals send money home, we find developed countries such as Germany and France. See the Chart.

It can be assumed that changes in remittance amounts are related to changes in exchange rates. Thus, if the currency of the country of immigrants decreases in value compared to the currency of the country in which the immigrants reside, remittances increase. Of course, there are other factors that influence these conversions.

Some studies covering a sample of Asian countries (econometric studies) report that remittances lead to a depreciation of the exchange rate. It is also considered that the exchange rate may rise significantly if transfers are used for savings, especially under flexible exchange rate regimes.

Exchange rates trends

There is a rise in the value of the US dollar (the dirham depreciates) during the period. Migrants are likely to increase their remittances back to their countries of origin. As of 2021, there is an upward trend in the US dollar as seen on the chart [Choose the evolution over 5 years (5a or 5Y)].
US$/Moroccan dirham exchange rate.

We can also observe the trend of depreciation of the Egyptian pound against the US dollar at the beginning of 2022. This trend is a source of concern and controversy at the moment in Egypt.

Chart Source

You can find out more about Exchange rate changes here in French.

Euro/Moroccan Dirham/ US$
Euro/Moroccan Dirham/US$
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