The coronavirus (Covid-19) pandemic has had an enormous impact on international flows of migrant remittances, which represent a significant source of economic support for many poor countries. The World Bank estimates that global remittances fell by 7% in 2020, surpassing the 5% decline seen during the global financial crisis in 2009.
Recessions in host countries have made it difficult for migrants to send money home, as they face increasing precarity and unemployment. Meanwhile, lockdowns and travel restrictions have created new obstacles to mobility, preventing would-be migrants from working overseas. A further 7% drop in remittances is expected in 2021, owing to the pandemic’s lingering effects on the global economy.
The drop in remittances spells trouble for many emerging economies that have already been hit hard by the global economic recession. Many developing countries rely on remittances as a source of external financing that now eclipses overseas development assistance and even foreign direct investment (FDI). For poor countries, a significant drop in remittances represents bad news on top of an already challenging economic and social situation. Notably, it risks further delaying their economic recovery, increasing the likelihood of balance-of-payments issues and placing new pressures on their (sometimes already frail) currencies.
This short report by The Economist Intelligence Unit examines the scope and nature of this threat.
We find that not all remittance-receiving countries will feel the pinch, with some in a more precarious situation than others. At greatest risk are countries with structural current-account imbalances that rely heavily on remittances. These include Bangladesh, Egypt and Pakistan as well as a number of smaller economies (such as the Kyrgyz Republic, Nepal and Tajikistan).
Can lightning strike twice?
Three of the world’s largest recipients of remittances (Mexico, Pakistan and Bangladesh) actually registered a rise in flows in 2020 compared with 2019 (of 4%, 9% and 8%, respectively, according to World Bank data). The increases were no doubt the result, at least in part, of a shared desire among migrants from these countries to support loved ones back home during an exceptional economic crisis.
However, there are likely to be additional differing explanations, which could shed light on whether these increases will be replicated in 2021.
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A sharp depreciation of the peso at the onset of the pandemic encouraged the flow of remittances to Mexico from the US, as the value of remittances in local currency was artificially increased. Access to stimulus payments in the US is also likely to have supported these flows, even as unemployment rose while the pandemic progressed (more than 90% of Mexican migrants are based in the US, and many have access to social protection via resident status or a work permit). Going forward, remittances are likely to be supported by a fairly brisk recovery of the US economy throughout 2021, a fall in unemployment and the introduction of additional fiscal support measures. This means that Mexico could continue to see a rise in remittances in the near term, particularly as its own recovery remains slow and fragile.
In Pakistan and Bangladesh, increased remittance inflows were likely tied to factors unique to 2020.
These included the repatriation of overseas savings by nationals returning home after losing their jobs; this trend was especially notable in the Gulf economies, which suffered greatly amid the crash in oil prices and tourism. The headline rise in remittances was probably also prompted by the shift in flows to formal channels, as travel restrictions complicated the informal transfer of remittances across borders—effectively meaning that the 2020 rise may be partially explained by an accounting change.
The introduction of new remittance tax incentives by the authorities—in 2020 by Pakistan and in 2019 by Bangladesh—could also have boosted flows, but those effects may well be temporary. The one-off nature of these factors increases the risk of remittances falling in 2021. This could be problematic for Pakistan and Bangladesh, which both ran pre-Covid current-account deficits and rely on remittances for a sizeable share of current-account credits (40% and 29%, respectively, in 2019).
Asia’s exceptionalism
Three other large recipients in Asia (China, India and Vietnam) saw their remittance inflows fall in 2020 compared with 2019 (by 13%, 9% and 8%, respectively). However, all face only modest pressures on their current accounts, and should therefore be able to navigate the drop in remittances without encountering serious issues.
China relies on remittances for only a small share of its current-account credits (a mere 2% in 2019).
The country ’s current account has long been in surplus, and goods exports remained fairly resilient amid the pandemic-induced trade disruptions of 2020. (China’s economic recovery started in the second quarter of 2020, while the rest of the world was sinking; unlike in other countries, Chinese factories were open to meet high global demand for consumer electronics and other items). Vietnam faces a similar situation; remittances accounted for just 6% of current-account credits in 2019, the current account is solidly in surplus and goods exports increased in 2020. Hence, for these countries, a fall in remittances presents a minimal balance-of-payments risk.
India faces slightly more pressure, although it is far from being the most vulnerable country.
Remittances account for a significant share of current-account credits (13% in 2019), but not nearly as much as for other major recipient countries (see below). India traditionally runs a current-account deficit, which will return in 2021 after a decline in imports generated a temporary surplus in 2020. However, the deficit will be constrained in the medium term as the government’s “self-reliant India” initiative looks set to cut the import bill. FDI flows will also remain strong and offer further support to the balance of payments—like China, India saw an increase in foreign capital inflows in 2020 (of 13%), bucking the global downward trend.
The most vulnerable
Apart from a few exceptional cases, most remittance-receiving countries are in a very difficult position.
Many registered a steep fall in remittances in 2020 compared with 2019, such as the Kyrgyz Republic, which suffered a 22% drop. This group also tended to run current-account deficits before the pandemic (Haiti was an exception, largely owing to remittance flows). They also rely on remittances for a large share of their current-account credits, exceeding 20% for most of them in 2019 (see chart).
The sources of this vulnerability are varied. Many of these countries ( including the Kyrgyz Republic, Nepal, Tajikistan and Tonga) are small economies with limited international trade. Others, such as Ukraine, have suffered shocks to their external sectors amid the pandemic, compounding the impact of the fall in remittances inflows. In other cases, such as the Philippines, pandemic-induced travel restrictions have prompted a collapse in tourism that has increased balance-of-payments imbalances.
Egypt has faced a similar situation, with global trade disruptions compounding the fall in tourism by reducing traffic on the Suez Canal. Meanwhile, Nigeria’s trade balance slipped into deficit in 2020 owing to the drop in oil prices and oil production cuts coordinated by OPEC.
The fall in remittances, and their expected continued decline in 2021, present significant challenges for these countries—particularly if their reliance on remittances grows in the immediate term. This places these countries at increased risk of experiencing financial crises that would only prolong their post-pandemic recovery. If one emerging economy experiences such a crisis, financial contagion could ensue and destabilise other developing countries.
Wider economic and social costs
Beyond balance-of-payments concerns, the pandemic-induced drop in remittances will also have broader negative economic and social impacts. Across the main recipient countries, the drop in remittances will constrain consumption, delaying the economic recovery. This will be particularly felt in (often poorer) communities that disproportionately rely on remittances for their financing needs.
In some cases, the situation may be especially challenging. The Indian state of Kerala, for example, faces the daunting prospect of having up to 500,000 workers return from overseas amid the pandemic; migrant remittances account for nearly one-third of the state’s GDP.
This comes at an inopportune time for these countries. Nearly all will face protracted economic recoveries from the pandemic, with many unlikely to see widespread vaccination of their populations before 2023 or 2024 ( if at all). A decline in remittances means a narrowing of a vital safety net, raising the risk of worsening poverty and hardship across the world.
A report by The Economist Intelligence Unit
