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Viewing cable 06BOGOTA5177, REMITTANCE FLOWS TO COLOMBIA

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Reference ID Created Released Classification Origin
06BOGOTA5177 2006-06-08 22:22 2011-08-25 00:00 UNCLASSIFIED Embassy Bogota
This record is a partial extract of the original cable. The full text of the original cable is not available.

082222Z Jun 06
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. 
 
--------------------------------------- 
Remittances Reach All Time High in 2005 
--------------------------------------- 
 
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. 
 
--------------------------------------------- 
Emigration Pattern Explains Remittance Growth 
--------------------------------------------- 
 
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 
 
--------------------------------------------- ------- 
Mostly From U.S.; Mostly Destined for Coffee Country 
--------------------------------------------- ------- 
 
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). 
 
--------------------------------------------- ------- 
Coffee Growing Regions Most Dependent on Remittances 
--------------------------------------------- ------- 
 
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 
 
--------------------------------------------- --- 
Remittance Payments Dominated by Exchange Houses 
--------------------------------------------- --- 
 
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. 
 
----------------------------------- 
Macroeconomic Impact of Remittances 
----------------------------------- 
 
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. 
 
-------------------------------- 
Money Laundering and Remittances 
-------------------------------- 
 
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. 
 
------- 
Comment 
------- 
 
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