Remittances to help balance capital outflows: World Bank

India, China two top destinations for flows, making up a third of the total amount

Remittances to developing countries should swell 6.3% this year to $414 billion, flowing from workers abroad to their home countries and helping to offset volatile capital outflows, according to World Bank forecasts released on Wednesday.

India and China are the two top destinations for flows, making up a third of the total amount. For India, $71 billion in remittances is nearly triple what it received from foreign direct investment last year.

"These latest estimates show the power of remittances," said Kaushik Basu, the World Bank's chief economist.

Remittances have grown steadily for the past three decades as migration increased, with only a slight dip during the financial crisis. Including transfers to high-income countries, remittances should be $550 billion this year.

These funds are particularly important as the US Federal Reserve considers whether to pull back its massive bond-buying program. Even the possibility of a slower pace of purchases prompted destabilizing capital outflows from many emerging markets as investors bet on higher rates in advanced economies.

Remittances can help balance the impact of the Fed's taper, Basu said. They also rise when a nation's currency weakens, acting as automatic stabilizers, he said.

For Tajikistan, such funds from abroad make up nearly half of its gross domestic product. And they are a third of the economy in Kyrgyzstan, also a landlocked country in Central Asia. In Egypt, an expected $20 billion in remittances this year dwarfs revenue from the Suez Canal.

Remittances can also help promote development, and are often the biggest source of foreign finance for developing economies. This year, such global transfers are expected to be almost three times larger than official development assistance from governments, and also top private debt and equity flows.

Transfers are growing to all major regions this year, though growth in remittances to Latin America and the Caribbean has slowed, largely because of Mexico.

The World Bank still expects Mexico to receive $22 billion in remittances, the fourth largest destination after India, China and the Philippines. But that is down 2.8% from last year, as Mexico has been hit by an economic slowdown in its northern neighbor the United States.

The World Bank said it remains concerned about the cost of sending remittances, which hurts some of the world's poorest people. The falling cost of technology should have made transfers cheaper, the bank said.

But places like sub-Saharan Africa still have high transaction costs, little competition, and few payout locations.

The Group of 20 leading economies pledged to reduce the cost of remittances to around 5% by 2014, but that deadline is unlikely to be met as the global average cost is still stuck at around 9% of the amount being sent, the World Bank said.

Some banks have also shut down money transfer services because of concerns about money laundering and terrorism finance, as countries like the United States have pressed financial institutions to better monitor cash transfers.

Earlier this year, the issue became particularly acute for Somalia, where annual remittances of about $1.2 billion are the biggest source of foreign currency.

Barclays said in June it would stop offering banking services to some Somali transfer firms due to fears funds might end up in the hands of "terrorists." Some other banks have taken similar steps.