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Remittances And Domestic Consumption In The Philippines

March 10th, 2020

Remittances And Economic Development in The Philippines

Overseas Filipino Workers, or OFWs as they’re commonly known, are important contributors to economic development in the Philippines. The money they send home in the form of remittances provides their families with the means to pay for essential items such as food, bills and school fees and even the odd treat now and then. This spending generally referred to as domestic consumption, is a key component of gross domestic product (GDP), the most widely recognised measure of national economic growth.

Data helps to put into perspective the importance of remittances to the Philippines. According to the latest figures available from the Philippine Statistics Authority (PSA), 2.3 million Filipinos live and work abroad[1]. The Bangko Sentral ng Pilipinas (the Filipino central bank or BSP for short) estimates they sent home more than US$33.5 billion in 2019, which accounts for nearly 10% of the country’s GDP. That puts the Philippines in fourth place in the list of global remittance receivers, behind India (first), China (second) and Mexico (third)[2].

Inflows continue to grow at a steady pace. Preliminary data for 2019 published by BSP shows that personal remittance to the Philippines hit US$3.2 billion in December, the highest monthly volume over the previous five years and an increase of almost 2% on the corresponding month in 2018. Meanwhile, total annual remittance rose by 3.9% in 2019 compared with a year earlier and has grown by an average of 4.7% since 2014[3].  

What we’ve outlined above is a macro-level view of the Filipino remittance landscape. But how does this translate into improving the day to day lives of people living in the country? And how does the money indirectly benefit economic development in the Philippines?

Escaping the poverty trap
First and foremost, remittances help lift Filipinos out of poverty. Returning to data released by the PSA, between 2015 and 2018, poverty incidence- the percentage of families whose income level falls below the poverty line- dropped from 22% to 16%[4]. Over the same period, total annual remittances rose by 13%, from US$25.6 billion to just short of US$29 billion[5]. There’s a clear correlation here- as inflows have increased over the last four years, the number of people living in poverty has declined.

But there are other reasons for the heavy dependence on remittances in the Philippines. The money sent home by OFWs also helps their families to avoid slipping back into poverty when faced with adversity. In case of an unexpected life event such as someone falling sick or a natural disaster, remittances provide a safety net in the form of financial resources to deal with any unforeseen issues which may arise.     

Digging into the Consumer Expectations Survey (CES) published by the BSP for the final quarter of 2019, we get a clearer picture of how families use the money they receive from OFWs and subsequently boost domestic demand[6]. 97% spent remittances on essential items like food and other household needs, while 64% put it towards education, and 44% used it to cover medical expenses. A smaller proportion invested in more significant purchases including houses or motor vehicles (both 9.3%).

Another priority appears to be financial planning. Over 38% of families used remittances to build up their savings which they can eventually put towards goals such as a house. Those savings can also act as a fund to dip into in case of an emergency. Meanwhile, 20% paid down debt, freeing up funds that can be spent elsewhere.

Boosting entrepreneurial activity
Another interesting data point from the CES is that 5% of families used remittances for investment, part of which goes towards entrepreneurial activities. Micro, small and medium-sized enterprises, known as MSMEs, are the backbone of the Philippine economy. They make up over 99% of businesses operating in the country, according to the Department of Trade and Industry[7]. They employ more than 5.7 million people, 63% of the Philippine’s total employment, and contribute to 35% of the domestic economy’s overall value. Microbusinesses, which require the least amount of startup capital and are therefore relatively easy to set up, account for 88% of MSMEs.

This is another way that remittances drive economic development in the Philippines. MSMEs create jobs and put money in the pockets of their employees. Those wages are then recycled when the workers spend them on local goods and services, providing a further boost to domestic consumption. MSMEs also lift other families who can’t rely on remittances out of poverty by giving them jobs. Ultimately, they may even reduce the need for Filipinos to move abroad to improve their circumstances because more opportunities will become available at home.

Towards a more prosperous future
Philippines remittance statistics provide hard evidence of how the money sent home by OFWs boost the domestic economy, but they don’t tell the full story. There are other ways remittances can help to improve the standard of living that aren’t recorded. Families can use savings to build solid houses or to make improvements to their current homes, so they’re more capable of standing up to natural disasters. Having money to put towards better healthcare saves lives because essential medicines become affordable. If families buy a car, they can get to the hospital quicker, while greater mobility also opens up a more extensive range of job opportunities. Education is equally important. It’s one of the best investments any parent can make to ensure their children don’t get caught in the poverty trap. At school, children learn skills they can use to not only secure employment in the future but also to improve health standards. Then there are local traditions which play such a prominent role in the Philippines. Buying gifts for extended family members may not be a priority in other parts of the world, but it’s an integral part of Filipino culture.   

To sum up, remittances to the Philippines evidently make a significant contribution to the local economy by generating demand for goods and services. However, it’s also worth considering the impact they have at a human level. The money sent home by OFWs gives hope to the families left behind that they can build a better, more prosperous future, one which may reduce the need for later generations to move abroad.

Also Read: What You Need to Know before Transferring a Large Amount of Money to the Philippines

[1] https://psa.gov.ph/content/total-number-ofws-estimated-23-million-results-2018-survey-overseas-filipinos

[2] https://www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data

[3] http://www.bsp.gov.ph/statistics/keystat/ofw.htm

[4] https://psa.gov.ph/poverty-press-releases/nid/138411

[5] http://www.bsp.gov.ph/statistics/keystat/ofw.htm

[6] http://www.bsp.gov.ph/downloads/Publications/2019/CES_4qtr2019.pdf

[7] https://www.dti.gov.ph/dti/index.php/2014-04-02-03-40-26/news-room/179-workshop-on-market-access-for-MSMe-set