After Aid Cuts, Here’s How to Make the Most Out of Remittances

Note: This blog was updated on May 22 to reflect changing projections of future ODA levels.

As the US, the UK, and other European countries institute large cuts to foreign aid, remittances—money that migrants send back to their home countries—are becoming more important. In twenty aid-receiving LMICs, remittances accounted for the equivalent of over five percent of gross national income (GNI) in 2023, where they are pivotal to reducing poverty. Here, we explore ways to maximise the impact of remittances for development.

The impact of ODA cuts

2025 has already seen a wave of aid cuts. In January, the new Trump administration announced a near-full suspension of foreign aid disbursements. One month later, the UK announced a reduction in aid spending to offset increased defence expenditure. For many countries, aid cuts will be a severe economic shock. As colleagues have noted, the suspension of funding by USAID alone over a year would reduce GNI by over one percent in 23 countries, and decrease GNI by three percent or more in eight. Further cuts by other donors only deepen the catastrophe.

For this blog, we use projections of aid cuts taken from Donor Tracker's May 2025 analysis (Figure 1). Some changes are hard to predict: the United States’ plans are opaque and shifting, and Germany’s cuts are expected but not yet formalised. We also don’t know precisely where the cuts will fall. If we look at bilateral aid flows across donors, and assume that each country is given the same relative importance as they were in 2023, we can get a sense of which countries will be worse off. Countries highly dependent on the US will be worst affected: Lesotho, Micronesia, and Eswatini are projected to lose over a third of their Official Development Assistance (ODA).

Figure 1: Bilateral ODA lost by recipient LMICs, 2025 – 2026 vs. 2023

The growing importance of remittances

For decades, remittance flows have outstripped ODA spending; the World Bank estimates that remittance flows to LMICs increased by 5.8 percent in 2024 and will increase by 2.8 percent in 2025, to reach a total of approximately US $704 billion (2023 is the last year we have data from).

For some countries, this flow is a lifeline. Liberia, for example, is projected to lose the equivalent of 2 percent of its GNI to cuts. There, remittances in 2023 totalled more than three times what the country received in aid. However, not all countries heavily affected by ODA cuts have this lifeline. Afghanistan, for example, is projected to lose the equivalent of a huge 3.6 percent of GNI to cuts in 2025; remittances were equal to just 14 percent of ODA in 2023. (This may be a data imperfection due to the widespread use of informal hawala networks.)

We can calculate how remittances’ importance might change using Gross National Disposable Income (GNDI)—a measure that, in addition to GNI, also includes net secondary flows such as ODA and remittances. We apply the World Bank’s estimates of remittance flow increases and inflation-adjusted growth forecasts from the IMF to calculate changes in remittances and GNDI per capita across 2023 – 2026, taking ODA flow changes into account.

For some countries, the resulting shifts are significant (Fig. 2). For Haiti, remittances would rise from 16.06 percent of GNDI in 2023 to 18.43 percent in 2026. The country with the greatest increase in remittances’ relative importance is Sudan, where remittances rise from 0.91 percent of GNDI in 2023 to 1.19 percent in 2025. Some countries’ growth trajectories will also reduce the role of remittances. For several countries, remittances’ importance is projected to rise in the context of cuts –even without factoring in a responsive spike— before falling as projected GDP growth outpaces projected growth in remittance flows. (Note that all projections should be taken with a generous pinch of salt!)

Figure 2: Change in remittances' importance vs. GNDI per capita, 2023 – 2026

How will remittances respond?

The aid cuts are analogous to a major economic shock such as a natural disaster, and remittance flows typically spike following such shocks. For example, in the Philippines, households with international migrants were able to cover around 60 percent of resulting declines in income through additional remittances sent in response to the shock.

Remittances and aid also often substitute for each other. In a study of remittances sent by migrants in Italy to countries of origin from 2005-2011, a one percent increase in aid per capita is associated with a 0.1 percent reduction in remittances. Similar findings are found in remittance flows to small island developing states. Presumably, this relationship would also hold when inverted.

Increases in remittance flows following shocks may be the result of increased sending by existing migrants, or result from increased migration as a response to shocks (migration being deliberately used as a form of insurance). The extent to which remittances respond to GNI shocks may therefore be determined by the overlap between either migrant-sending households or households able to send migrants and households affected by aid cuts.

Making the most of remittances

Remittances are not a silver bullet. They are a private financial flow and are not targeted towards the vulnerable in the way aid is intended to be. Yet numerous studies confirm that remittances are pivotal in relieving poverty. They can be crucial in allowing households to avoid or pay off debts, smooth consumption, fund healthcare, prepare for climate shocks, and invest in productivity. In an era of cuts, here are three ways to maximize their development potential.

1. Reduce the cost of sending money home

Despite the fact that the Sustainable Development Goals (SDGs) call for a reduction in remittance sending costs to less than three percent, transaction fees remain stubbornly high; in Q3 2024, the cost of sending remittances averaged 6.6 percent.

 In 2020, global remittance costs were roughly equal to all aid provided by the United States.

In Figure 3 we show the amount of money that would be gained by LMICs losing over 5 percent of ODA, if remittance sending costs were cut to three percent, as a proportion of cut ODA. The graph’s y-axis is capped at 100 percent: six countries’ gains would exceed the entire value of ODA lost. In thirteen countries—including three low-income countries— the equivalent of more than 50 percent of cut ODA would be gained.

Figure 3: Remittances gained by reducing sending costs to three percent, as a percent of cut ODA

It will be difficult to overcome the many and varied factors keeping these fees high, but we suggest four options to reduce the cost of sending remittances:

1. Increase awareness of lower-cost options. For example, if all Tongan migrants in New Zealand alone swapped to the more efficient remittance service provider, Tonga’s GDP would grow by approximately one percent. Implementing cost comparison services, as have been launched in the Pacific, may guide migrants towards higher-value options.
2. Increase competition between services. Countries of destination could invest in remittance service providers to increase competition. For example, the UK’s development finance institution has invested US$20 million in the African remittance service provider, TerraPay, enabling them to scale more rapidly.
3. Link central bank payment systems, as the US and Mexico did in 2005 through the Directo a México initiative. This service has reduced the cost to financial institutions of each transaction to a fixed US$0.67, allowing savings to be passed on to customers. Similarly, the Seasonal Worker Superannuation Administration Service (administered between New Zealand and three Pacific Island countries) has driven costs to below three percent and has also been adapted for use in Australia.
4. Waive all fees in some circumstances. Remitly, a large remittance service provider facilitating approximately US$55 billion in transfers each year, has piloted programmes cutting remittance fees following natural disasters. Donors could explore ways to incentivise this behaviour, such as offering tax credits for waived fees.

2. Leverage the diaspora

Various initiatives such as the Foreign Aid Bridge Fund and Project Resource Optimization (who are being hosted by CGD) have been established to keep aid-funded programmes on life support and identify opportunities for investment; governments with large diasporas could try something similar. Diaspora bonds are often hoped to allow lower-cost borrowing thanks to a “patriotic discount”; where countries are struggling to continue life-saving initiatives, diasporas may prove willing to provide concessional loans.

Similarly, donors or ODA-recipient countries could also try to offer “remittance matching”, in which every dollar donated by diaspora members will be matched by donor or national funds. The archetypal example is the” 3x1 Programme” run in Mexico, which saw some initial success. Ensuring that diasporas can trust these programmes (that it is clear how the money is used and for whose benefit) will be crucial to their success.

3. Channel migration opportunities

On the other side of the coin, governments could also seek to direct migration opportunities towards vulnerable communities where access to international remittances would have a major impact on offsetting the loss of ODA.

For example, the UK’s Seasonal Agricultural Worker programme recruits heavily from Uzbekistan and Kyrgyzstan, and 98 percent of the US’ H-2A agricultural visas go to Mexico, Jamaica, and South Africa.

Targeting low-skill migration opportunities towards low-income populations could increase the impact of these programmes. The remittances sent back by a seasonal worker from a bottom-quintile household in Zambia, for example, will have a marginal impact many times greater than those sent to a fourth-quintile household in Jamaica or Uzbekistan (Figure 4).

Figure 4: Seasonal worker remittances as a proportion of annual income by quintile

Governments could achieve this by managing recruitment closely through approved recruitment actors in countries of origin. They could alternatively seek to incentivise employers to recruit from countries where impacts would be greater; for example, by reducing visa fees for seasonal workers from designated countries.

In an environment in which aid must be stretched further—remittances could be a lifeline. Destination country governments need to work in partnership with remittance service providers to reduce the cost of sending remittances while also exploring how to channel remittances towards high efficiency uses and target access to labour migration pathways.

These relatively low-cost efforts can help reduce the impacts of aid cuts and support broader economic development goals.