Accurate remittance flow data is essential for policymakers and financial product innovators. However, it is difficult to gather due to imprecise accounting and the choice of informal remittance channels by migrants. Informal remittances have varied conceptual definitions and may range between 35–75 percent of official formal remittances in developing countries.
Some countries view informal remittances as hand-carried or transferred through informal networks. Others consider them to include any transaction not covered by the formal remittance system. Additionally, Money transfer operators (MTO) or digital remittance transfers have blurred the boundary between formal and informal remittances. In some cases, financial service providers may not be required to report remittances, especially when below a certain amount.
Two main approaches are used for estimating informal remittance flows: direct and indirect macro-level procedures. A United Nations Capital Development Fund (UNCDF) Migrant Money note that reviews several survey methods and models for measuring informal remittance flow to low- and middle-income countries suggests using a dual approach.
Direct micro-level procedures rely on surveys and are primarily utilized by Central Banks. They include:
- National Representative Surveys conducted among remittance-sending or receiving households or firms; and
- Targeted Surveys at airports, ports, or border checks to estimate the cash imports and exports.
“Direct surveys at the household or individual level may offer the most accurate data, however, conducting surveys is generally expensive, time-consuming and time-bound, and their insights may not always apply directly to policymaking.”
Indirect macro-level procedures use secondary or macroeconomic data to calculate informal remittances. They require reliable data sources, including Net Errors and Omissions from BoP (NEO), Distance Variable Model, Cost of Remittances, Currency Demand-Based Approach, Money Supply Approach, and Residual Approach.
The residual approach, estimates remittances by accounting for data imbalances in imports and export, current account. It is suited for least-developed countries with a high degree of informal remittance flows. This approach is relatively inexpensive, and comprehensive; however, it has drawbacks linked to macroeconomic data or the country’s economic structure.
Estimation in Ethiopia is calculated by analyzing the import amount, non-cash import and the cash provided by the banking system. (Cash Import – cash provided by banking system = Informal remittance )
“Since there is a gap between total imports excluding noncash imports and total imports based on banking system cashflow, informal remittance is estimated at 68.7 percent of between total imports excluding noncash imports and total imports based on banking system cashflow.”
The note recommends combining quantitative and qualitative methods to achieve a more accurate picture of informal remittance flows. This requires official data sources and short, targeted, and structured surveys. Moreover, it is expected to result in better outcomes if tailored to national economic structures.
Read the full note here.