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During the global financial crisis (GFC), remittances fell by about 5 percent. As the COVID-19 recession affects even more countries simultaneously, especially host countries in the emerging markets, a drop of 20-30 percent seems possible, a latest report from Institute of International Finance (IIF) said.
IIF defines remittances as the sum of two current account categories: “compensation of employees” (income earned by migrant workers) and “personal transfers” (all current transfers between resident and non-resident individuals).
Remittances are now as important as non-resident FDI as a source of FX inflows for emerging and frontier markets. They are also more stable than portfolio flows, which have historically been a critical source of external funding for these countries.
“Finally, remittances tend to be countercyclical. In 2020, however, they will likely be much lower due to the global and synchronized nature of shocks,” the global financial industry body said in its report.
Remittances depend on migration, host-and home-country growth, exchange rate fluctuations, and the ability to transfer money across borders.
In host countries, COVID-19 shutdowns have disproportionately affected sectors where migrants are more likely to be employed, for example certain services (food and hospitality, retail and wholesale trade, tourism, and transportation).
Migrants also tend to be employed in sectors that may have stayed (partially) open, but where the infection risk is significantly higher (agriculture, food processing, and healthcare). Furthermore, migrants’ ability to shift across sectors or gain access to government support is likely curtailed, IIF noted.
According to the World Bank Remittance flows are expected to fall across all World Bank Group regions, most notably in Europe and Central Asia (27.5 percent), followed by Sub-Saharan Africa (23.1 percent), South Asia (22.1 percent), the Middle East and North Africa (19.6 percent), Latin America and the Caribbean (19.3 percent), and East Asia and the Pacific (13 percent).
"This will be particularly challenging for countries with high external funding pressure where remittances help reduce otherwise large current account deficits, including most of Central America, Caribbean nations, as well the Philippines and Egypt," Benjamin Hilgenstock and economist with IIF noted.
Vital source of income
The large decline in remittances flows in 2020 comes after remittances to low and middle-income countries (LMICs) reached a record $554 billion in 2019.
Remittances to LMICs are projected to fall by 19.7 percent to $445 billion, representing a loss of a crucial financing lifeline for many vulnerable households.
“Remittances are a vital source of income for developing countries. The ongoing economic recession caused by COVID-19 is taking a severe toll on the ability to send money home and makes it all the more vital that we shorten the time to recovery for advanced economies,” said World Bank Group President David Malpass.
Economies that account for the bulk of global remittances flows are among the most-exposed to the COVID-19 and oil price shocks.
While the US accounts for most of the flows to Latin America, Europe is an important source of remittances for Africa and Eastern Europe, and workers based in the GCC send money to home countries in Africa and Asia.
Finally, more regional patterns exist with regard to Russia, which is an important source of transfers for CIS countries, and South Africa, which accounts for a large share of remittances to its neighbors.
Among key recipient countries, important emerging markets such as India, China, Mexico, the Philippines, Egypt, and Nigeria account for close to 40 percent of all remittances in dollar terms, the IIF report said.
(Reporting by Seban Scaria, Editing by Daniel Luiz)
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