REMITTANCE FLOWS TO COLOMBIA

UNCLAS SECTION 01 OF 04 BOGOTA 005177

SIPDIS

STATE PASS TO USTR
USDOC FOR USITC/LMSCHLITT

E.O. 12958: N/A
TAGS: ECON EFIN SNAR CO
SUBJECT: REMITTANCE FLOWS TO COLOMBIA



1. SUMMARY. Remittances to Colombia grew five percent in
2005 to USD 3.3 billion, with the majority coming from the
U.S. and Spain. While rapid remittance growth assisted the
economic recovery following the 1999 crisis, it has slowed
considerably since 2003. Remittances equal 2.7 percent of
GDP in Colombia, but average transaction costs have fallen
to approximately 7 percent. END SUMMARY.

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Remittances Reach All Time High in 2005
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2. Colombia's Central Bank estimates that remittances, the
earnings of Colombians working abroad which are returned to
the country, reached an all time high of USD 3.3 billion in

2005. Although remittances grew at greater than 20 percent
per year from 2000 to 2003, in the past two years growth has
slowed to the four to five percent range, roughly in line
with GDP growth. In 2005, remittances were 2.7 percent of
GDP, down slightly from the peak of 3.8 percent in 2003. In
2005 they were equivalent to 33 percent of the value of
foreign direct investment (FDI) to Colombia, in part due to
the strong recovery of FDI during the year. When 2005
remittances are compared to exports, they are equivalent to
60 percent of petroleum exports, 128 percent of coal
exports, and 225 percent of coffee exports. From this
perspective, the returns from workers abroad would rank as
Colombia's second largest export, exceeded only by
petroleum.

Workers As a
Remittances As a As a Percent of
to Colombia Percent Percent Percent Petroleum
(USD mil.) Growth of GDP of FDI Exports
-------------- -------------- -------------- -------------- --------------
1999 $1,297 65 1.5 86 34
2000 $1,578 22 1.9 66 33
2001 $2,021 28 2.5 80 62
2002 $2,454 21 3.0 116 75
2003 $3,060 25 3.8 170 90
2004 $3,170 4 3.3 102 75
2005 $3,314 5 2.7 33 60


3. According to a recent IDB study, Colombia is the third
largest recipient of remittances in Latin America after
Mexico and Brazil. With remittances equal to only 3 percent
of GDP, the Colombian economy is less dependent on them than
Central American republics such as El Salvador (17.1
percent),or its Andean neighbors Ecuador (6.4 percent) or
Bolivia (8.5 percent). Colombia's situation is closer to
that of Mexico (2.8 percent) or Peru (3.2 percent). A 2005
survey of remittance costs by Manuel Orozco for the Pew
Charitable Trust showed average transaction costs for
Colombia in the 7 percent range, down from 10 percent in
2001 and among the lowest in Latin America. Only Ecuador,
El Salvador and Nicaragua had lower average cost structures.
Yet as Semana magazine pointed out in a recent article,
costs for transfers within the U.S. averaged 3 percent and
within Europe 3.3 percent, less than half the cost of a
transfer to Colombia.

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Emigration Pattern Explains Remittance Growth
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4. The rapid growth in remittances to Colombia from 1999 is
mainly due to a large emigration of Colombians from 1999 to

2001. According to the Colombian Central Bank, entry and
exit records show that nearly three-quarters of a million
more Colombians exited the country than returned during
these three years. While the normal annual level of net
emigration ranges from 120,000 to 160,000, from 1999 to 2001
net emigration averaged more than 260,000 persons per year.
The primary cause was a deteriorating political, economic
and security situation beginning in 1999. Economic growth
declined 4.2 percent in 1999, and would not recover to pre-
1999 levels for two years. By 2001, the price of coffee,
Colombia's leading agricultural export, fell to nearly half
the 1998 level, and would continue to fall until 2004. With
the depreciation of the peso in the same period, by 2002 the
value in local currency of foreign earned dollars was nearly
double the level four years earlier. Finally, on January
25, 1999, a magnitude 6.2 earthquake hit the densely
populated coffee growing region around Armenia, killing
nearly 1,000 persons, and leaving 200,000 homeless,
complicating the difficult economic picture.

Net Imputed GDP Price of Exchange
Emigration Growth Coffee Rate
From Rate (cents per (COP per
Colombia (percent) pound) USD)
-------------- -------------- -------------- --------------
1998 160,000 0.6 146 1,426
1999 225,000 -4.2 119 1,757
2000 282,000 2.9 102 2,093
2001 282,000 1.5 71 2,300
2002 136,000 1.9 64 2,506
2003 116,000 4.1 65 2,876
2004 158,000 4.1 81 2,636
2005 141,000 5.1 116 2,322

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Mostly From U.S.; Mostly Destined for Coffee Country
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5. As the primary destination of Colombian migrants, the
U.S. is also the leading source of remittances by value,
followed by Spain. According to a Colombian Central Bank
survey in 2004, the U.S. was the source of nearly 58.3
percent of remittance transactions at an average value of
USD 272 per transaction, or 48.4 percent of remittances by
value. While Spain accounted for only 26 percent of total
transactions, the average value per transaction was much
higher at USD 425, and thus Spain accounted for 34.1 percent
of remittances by value. Alfonso Garzon, President of
AsoCambiaria, the national association of exchange houses,
speculates the higher value per transaction from Europe may
be influenced by two factors. Firstly, he believes
Colombian migrants in Europe may earn more than their
counterparts in the US. Secondly, higher transaction costs
from Europe may encourage them to accumulate savings, and
then send more money home at less frequent intervals.


6. Although information on remittance recipients in
Colombia is limited, the Inter-American Development Bank
(IDB) sponsored a survey in 2004 which sheds some light on
the situation. 56 percent of recipients are women.
Surprisingly, 85 percent of recipients have a high school
diploma or higher, and nearly a third have a university
degree. 68 percent of remittances were reported to be used
for daily living expenses, leaving only 26 percent for
investment in education, business or savings. 70 percent of
remittances from the U.S. originate from three states -
Florida, New York, and New Jersey - reflecting the large
Colombian communities in the Miami and New York City
metropolitan areas. The report also states 50 percent of
remittances are sent to two regions in Colombia - the
Pacific Coast (includes the departments of Valle de Cauca,
Cauca, Narino and Choco) and Coffee Country (includes the
departments of Quindio, Risaralda, and Caldas).

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Coffee Growing Regions Most Dependent on Remittances
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7. Estimates of remittances per capita can be made based on
the IDB survey. In Coffee Country, annual remittances
averaged USD 224 per capita in 2005, more than three times
the national average of USD 72 per capita. The Pacific
Coast region, which includes Cali, received remittances of
USD 131 per capita, nearly double the national average.
According to Enrique Montes, Chief of Economic Research at
the Colombian Central Bank, this supports anecdotal
observations that many migrants who left Colombia since 1999
came from the areas around Pereira and Armenia in Coffee
Country and the coffee growing regions near Cartago in
northern Valle de Cauca department. He explains, "These
regions represent not the poorest parts of Colombia, but
rather the rural regions with the highest standard of living
owing to the income from cash crops such as coffee. They
are the rural areas with the strongest institutions, and the
best educational opportunities. Thus, unlike their
counterparts in other parts of Colombia, they had the
knowledge and the means to emigrate to the U.S. or to
Spain." A recent report in Semana magazine noted that 16
percent of families in Pereira, a major city in Coffee
Country, have at least one family member living abroad.
2005 Average
Region Percent Percent Remittances
Of of of per Capita
Colombia Remittances Population (USD)
-------------- -------------- -------------- --------------
Pacific Coast 32 18 131
Coffee Country 19 6 224
Antioquia 16 13 92
Bogota, D.F. 16 16 74
Caribbean Coast 10 22 33
Eastern Colombia 4 6 51
Central Colombia 3 21 10
National Average 72

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Remittance Payments Dominated by Exchange Houses
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8. Remittances may originate abroad either through
financial intermediaries or through constituent banks. An
IDB study showed that financial intermediaries dominate the
sending end - Western Union and Moneygram together have
nearly a third of the market. Payments are received in
Colombia either at exchange houses or at banks, but the
market for payments is dominated by the exchange houses with
a 90 percent share. According to Alexander Campos, Director
of Financial Research at AsoBancaria, the national banking
trade association, the rapid growth of remittances through
2003 prompted many commercial banks to enter the market, and
their share of payments has increased from 5 percent in 2002
to 10 percent today. Campos admits that banks' market share
has grown slowly due to their poor reputation among low and
middle class remittance recipients. An IDB survey showed
that nearly half of remittance recipients did not have a
bank account, and 70 percent of them had a poor opinion of
banks. President Garzon of AsoCambiaria believes that most
remittance senders prefer the flexibility of exchange
houses, which have longer hours, are often open on weekends
and holidays, and can deliver money in hours rather than
days.

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Macroeconomic Impact of Remittances
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9. An IDB survey showed that nearly 80 percent of
remittances to Colombia are spent for consumption or
education expenses, and only 14 percent are either saved or
invested in a business or property. Alexander Campos of
AsoBancaria estimates remittances represent up to 5 percent
of total national consumption. The more than 20 percent
annual growth in remittances from 2000 to 2003, he notes,
clearly helped the Colombian economy recover in the years
following the 1999 crisis by spurring consumer demand.
Comments that the rapid growth of remittances contributed to
the appreciation of the Colombian peso in 2004 and 2005,
however, are not supported by the evidence of the foreign
exchange market, says Director Campos. With annual foreign
exchange transactions in the USD 95 billion range, he
continues, the USD 3.3 billion in remittances would
represent only three to four percent of annual trading.

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Money Laundering and Remittances
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10. In the past several years, the Colombian press has
reported on the practice of laundering money via remittance
transfers. Launderers evade government controls by
splitting a large transfer into many smaller ones, usually
below the limit of scrutiny by regulatory authorities.
Andres Mutis, Deputy Director for Strategic Analysis at the
Financial Information and Analysis Unit (UIAF),agrees that
laundering through remittances remains a problem in
Colombia. UIAF reviews data on all transfers of USD 200 or
higher, which represent 90 percent of remittances by value.
Director Mutis believes that the import of contraband goods
and hand carrying of unreported currency represent are more
widely used as laundering channels. The Colombian Attorney
General's office, the Fiscalia, does not deny this, but
notes that there has been no noticeable decline in
laundering via remittances, in part because it is difficult
to detect. They emphasize that authorities need to remain
ever vigilant, but are very positive about the participation
of financial institutions in reporting suspect cases and
cooperating with investigations.

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Comment
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11. While statistics show that remittances are not
generally acting as a social welfare net for large segments
of the poor population, they are an indispensable lifeline
to many families in Colombia. Limited banking penetration
constrains the potential benefit of remittance flows in the
local economy, and contributes to higher transaction costs
for recipients.

Wood