10 facts to know about OFW remittances: Can digital money help cut fees?

The result: the Philippines has consistently ranked among the top recipients of remittances. Here’s what to know about OFW remittances:

#1. There are 10 million Filipinos overseas

Officially, there are 2 million listed as OFWs, but there are a total of estimated 10 million Filipinos overseas (including their families) — about 10 per cent of the country’s population. That’s equivalent of 18,382 fully-loaded Airbus A380s.

Most keep their close links with home and send money to loved ones regularly.  Total remittances — as perby the country’s central bank (Bangko Sentral ng Pilipinas, BSP) hit a record $34 billion in 2021 — and comprise a significant part of the country’s foreign exchange earnings.

#2. What being an OFW means

Being an bona-fide OFW means formal membership with the Philippine Overseas Employment Administration, now under the Department of Migrant Workers (DMW).

Under Republic Act No. 11641, which created the Department of Migrant Workers (DMW), the following agencies will now come under the department to deal with concerns of Filipino migrants:

Unlike OFWs, overseas Filipinos (OFs) refer to those with permanent resident status or have acquired another citizenship and have kept their Filipino citizenship (under RA 9225 or the Citizenship Retention and Reacquisition Act of  2003). A “Balikbayan”, on the other hand, comes rom the word “balik” (“back|return”) and “bayan” (country|nation) — generally means “homecoming”, regardless of citizenship status.

#3: OFW remittances: 4th-highest in the world

The Philippines received a record-breaking $34 billion in remittances in 2021, making it the 4th-highest recipient of remittances in the world. For many decades, the country (population: 110 million) has consistently landed on at the 4th spot among remittance recipient countries — behind India, China, and Mexico.

Non-resident Indians (NRIs) sent home $87 billion 2021, according to a UN report, but India (population: 1.38 billion) is nearly 13 times more populous than the Philippines.

#4: Huge source of foreign currency

Remittances form an equivalent of one-third of the country’s total export receipts. According to BSP, the central bank of the Philippines, personal remittances, cash, or in-kind transfers between families totalled $34.88 billion in 2021, up 5.1% from $33.19 billion in 2020.

By comparison, the Asian country earned $101.45 billion in 2021 from the exports of goods and services. Its major exports are electronic products (42 per cent), other manufactures (10 per cent) and woodcrafts and furniture (6 per cent). Philippines is also the world's largest producer of coconut, pineapple and abaca (hemp).

#5: Remittances boost domestic economy

Money sent home by OFWs end up directly in the hands of the people and households in the country, which leads to a “multiplier effect.”

Among the ways remittances help the local economy:

#6: Forex conversion costs and margins

To entice customers, some remittance companies | banks offer “zero fee” or “no commission” — but customers are then charged in their marked-up exchange rate.

Depending on the money transfer service you pick and the amount of money you're sending, the exchange rate determines how much one currency is worth in relation to another.

For example, at the time of this writing, Friday (July 29, 2022), the peso-dollar exchange rate stood at Php55.7220 vs $1, according to BSP Reference Exchange Rate Bulletin. When sending large amounts of money, even a small rate change might have a significant impact.

#7: Foreign exchange rate: Php vs US$

Data on the Philippine peso exchange rate against US dollar data is updated monthly, with data available going back to January 1945 up to the present. The peso hit record high of Php2 vs $1 in January 1962.

In 1970, exchange rate dropped to Php6.43 vs $1. It dropped further to Php7.77 In 1980; fell to Php19.030 on December 31, 1985; to Php28 vs $1 on December 31, 1990. The US dollar reached an all-time high of Php56.341 vs $1 against the Philippine peso in October 2004 and stood at Php55.7220 vs $1 on Friday (July 29, 2022).

#8: Breakdown of remittance fee

The remittance a fee (usually paid by the sender),  covers the costs of a remittance transaction. It includes the following:

[a] The fee charged by the sending agent

[b] Currency-conversion fee for delivery of local currency to the beneficiary in another country.

#9: Cost to send money to the Philippines: $4 per $100

The average cost of sending $200 to the Philippines from the US is around 4 per cent of the total amount being sent, according to World Bank report published in December 2021. This means your recipient gets only $96 for every $100 sent.

Meanwhile, an IMF paper published in April 2022, analysed data across 365 “corridors” to document time and country variation in remittance fees. While a general reduction in such fees had been seen in the past 10 years, the IMF noted that the goal of fees below 3 per cent has not been met yet in many corridors.

#10. Lower remittance fees 'possible'

The same IMF report stated that they had been looking for ways to bring average remittance fees across the world to less than 3%.

In general, lower remittance fees are associated with (or made possible by) lower risks due to the stability of fixed exchange rates and Internet, rather than cash, payment.

Currently, two factors are associated with higher remittance fees: higher transaction costs charged as a result of a more rural population in the sending country and lower scale (lower amounts sent). In general, remittance corridors dominated by banks and few players are characterised by higher fees, the IMF noted. If internet payments become the norm for remittances, fees are bound to be reduced further, the Fund stated.