Remittances prop Nicaragua’s economy

Nicas working abroad send more than $1 billion to Nicaragua per annum—more than all the country’s foreign-direct investments combined

While the first family’s political project is subsidized by a wellspring of Venezuelan petrodollars, most Nicaraguan households are relying on foreign subsidies of another type: remittance money sent home by family members working abroad.

Nicaraguans last year received more than $1 billion in remittances from family members in the United States, Costa Rica, El Salvador, and—increasingly—Europe. That’s a 22% increase in remittances sent to Nicaragua in 2010, according to a new report by the Inter-American Dialogue.

That money—sent to Nicaraguan households in average chunks of $152 a month—helps many families remain afloat amid the steadily rising cost of living. Remittances keep poor households from slipping into extreme poverty and help middleclass families keep a nostril above the poverty line. In many cases, the monthly send-home represents the principal source of household income.

To put the importance of remittances into perspective, consider this: Last year, Nicaragua attracted a record-setting $967.8 million in foreign-direct investment—about $100 million less than the total amount of remittances that entered the country. That means that Nicaraguans working abroad have, in effect, become the leading “foreign investors” in Nicaragua’s economy.

The Central Bank reports that last year’s remittance levels were closer to $900 million, about $150 million less than the estimates by Inter-American Dialogue report. Economists say the discrepancy is because remittances are a tough figure to calculate preciously. The Central Bank, for example, measures only remittances sent through financial institutions, and doesn’t take into account all the money sent to Nicaragua each year in shipping packages and envelopes or brought into the country in suitcases and wallets.

Nicaraguan economist Néstor Avendaño says he thinks even the Inter-American Dialogue’s figure of $1.053 billion is conservative.

 “Remittances are both a blessing a curse,” Avendaño says.

In many cases, the economist says, Nicaraguan households earn more from remittances than they do from working a full-time, minimum-wage job. As a result, many families rely entirely on remittance money rather than viewing their monthly trip to Western Union as a source of additional income.

Avendaño says that creates a situation of dependence for many Nicaraguan households and triggers a whole chain reaction of events on the local economy: it increases informal-sector employment, leads to less tax collection, and results in fewer employees paying into the Social Security System.

Still, the economist says, “Remittances help alleviate Nicaragua’s trade deficit, help people consume more and reduce social pressure on the government to provide employment.”

Nicaragua setting pace in remittance growth

Both the pernicious and beneficial side effects of remittances are multiplying faster in Nicaragua than anywhere else in the region. The Inter-American Dialogue study shows Nicaragua lead all of Central America with its 22-percent growth in remittances last year. By comparison, remittance levels to Honduras grew 12%, Guatemala 6%, and El Salvador 3%.

While those three countries receive two-to-four-times more in remittance volume than Nicaragua, Nicaraguans seemed determined to make up ground last year.

Manuel Orozco, the co-author of the Inter-American Dialogue report and director of the organization’s remittance program, says Nicaragua’s growth in remittances is due primarily to three factors: More educated Nicaraguans are emigrating to Europe and remitting from across the ocean; Nicaraguan migrants in Costa Rica are sending home more money than ever before ($100 million last year, up from around $70 million per annum five years ago); and finally, the cost of living in Nicaragua continues to climb, forcing family members abroad to remit more.

Another factor contributing to Nicaragua’s higher-than-average remittance growth is the fact that many Nicaraguans in the U.S. have immigrated there legally, and are therefore less affected by deportations. The U.S. deports an average of 2,000 Nicaraguans each year, compared to 20,000 Salvadorans, 29,000 Guatemalans and 25,000 Hondurans.

While El Salvador, Guatemala and Honduras now have a net-positive immigration flow with the United States (More Salvadorans, Guatemalans and Honduras are deported from the U.S. each year than emigrate there), Nicaragua is still net-negative—for every six Nicaraguans who emigrate to the United States, only one that gets deported back. That translates into more Nicaraguans working abroad and an increased flow of remittances sent home.

“Remittances to Nicaragua are significantly important because the country’s economy does not provide enough resources for its population,” Orozco, a Nicaraguan, told The Nicaragua Dispatch in an email from Washington.

As a result, he says, Nicaragua’s dependence on remittances (65%) is greater than other countries in the region, even though the Nicaragua is not receiving the same volumes of money. In addition, Orozco says, only 40% of Nicaraguans who receive remittance money are able to save anything, “due to budgetary constrains among remittance recipients.”

There are also new challenges emerging on the horizon, Orozco warns. Costa Rica’s recent enforcement of its new Immigration Law (passed in 2010), “Will have a drastic effect on undocumented migrants in that country,” Orozco says.

“Nicaragua is not aware of or prepared for the implications of this law on the 250,000-300,000 Nicaraguan migrants [in Costa Rica],” Orozco says. “Government policymaking is needed and they need to play close attention to how to integrate migration and development into their policies.”

The government of Nicaragua would also be wise to take advantage of the breathing room provided by remittances to craft serious and sustainable development policies to help the country move beyond day-to-day handouts, Orozco says. Short-term dependence on remittances is not a bad thing, he says. But it’s a temporary fix, not a long-term substitute for development.

“Dependence [on remittances] is not unhealthy because the flow allows people to cope with the low paid jobs in the country. However, there is no policy that seeks to leverage these flows,” Orozco says. “Remittances to Nicaraguans allow them to keep themselves out of poverty, but without policies in place they can’t get out of poverty.”