The importance of remittances as inflows on the balance of payments has risen as the role of development aid has diminished. Indeed they have supplanted other inflows in many economies. In the case of Nigeria in Q1 ’21 they amounted to USD4.3bn (net), compared with USD2.4bn for foreign direct investment and USD2.0bn for foreign portfolio investment (FPI).
They are recovering from the low point at the height of the COVID-19 pandemic but still declined by 24 per cent year-on-year (y/y) in Q1. (The data for net current transfers, in contrast, show a rise in Q1 but only because of unexplained government transactions.) Elsewhere, a number of other emerging/frontier economies have posted growth in remittances. In Kenya the growth in H1 ’21 was 20 per cent y/y. Pakistan has posted good growth, too: the monthly inflow topped USD2bn in June 2020 and has remained above it ever since. Yet the star performer has been Bangladesh, where the inflows in January-May were running 42 per cent ahead of the same period in 2020.
Incentives play a part. A circular from the central bank in Pakistan last week introduced a bonus for recipients based upon the aggregate inflow in the country in the current fiscal year (July 2021-June 2022). The bonus is triggered if the aggregate is five per cent above the previous year, and is raised again when the inflows are 10 and 15 per cent higher.
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In a less cumbersome system, Bangladesh pays a 2 per cent bonus in local currency to the recipients. Additionally, we understand that some banks and mobile finance institutions pay a further one per cent. We should credit the authorities in Bangladesh for grasping the broader economic impact of remittances and for launching their incentives ahead of the pandemic. It would be an error to underestimate the potential impact: they amounted to 6.5 per cent of GDP in Bangladesh last year, compared with 3.4 per cent in Nigeria. Given the partial data we have cited, the gap will be much larger in 2021.
The world of remittances has become more complicated, having moved beyond the standard visit to the local office of Western Union. There are digital alternatives and competing investment products
Several other factors help to explain the different trends across jurisdictions. The location of the diaspora would be one. The economic hit from the pandemic and the pace of the recovery from it vary greatly, so it is significant whether the remitters are based in the US, Western Europe or the Gulf. Secondly, the cancellation of the Hajj pilgrimage for non-Saudi nationals boosted remittances to Bangladesh and Pakistan. Another factor, although marginal we suspect, are warnings from the authorities that remittances through unofficial channels will be viewed as money laundering.
Remitting fees vary greatly and are monitored by the World Bank on a quarterly basis. The average global cost of a USD200 transfer in Q1 ’21 amounted to 6.4 per cent of the total. The trend is downward but the cost is still high, ranging from a low of 4.6 per cent for South Asia to 8.0 per cent for sub-Saharan Africa. We have a potent factor here to explain some of the data we have provided on country flows.
Nigeria has introduced its own incentives for remittances as a reaction to the event (the pandemic), guided perhaps by the realization that the prospects for inflows from FPI had deteriorated due to the global downturn and the emergence of the external payments pipeline at home. In March, the CBN launched its ‘Naira 4 dollar scheme’, which it extended in May until further notice. It had earlier ruled that beneficiaries could take their remittances from licensed international money transfer operators and has since authorized many more operators.
We do not yet have the data to assess the response to the scheme. Our hunch is that the incentive, which amounts to roughly half the bonus payable in Bangladesh, is not large enough. The fx rates on the parallel market underpin our point.
Another factor to explain different trends in remittances under life with COVID in our view is the mindset of the remitters in the diaspora. They have very likely suffered a fall in disposable funds, are inclined to support friends and family at home, and know that the safety net in place is weak. That said, they may choose to increase their transfers if the government at home is in reform mode, and creating jobs and wealth. A remittance to build a house or acquire some land becomes more attractive if the asset increases in value. This is a hunch, untested by surveys. It would help to explain the surge in remittances in Bangladesh.
The world of remittances has become more complicated, having moved beyond the standard visit to the local office of Western Union. There are digital alternatives and competing investment products, both in the diaspora and at home. Governments and central banks need to be more creative with the scale and timing of their incentives.
Kronsten, Head, Macroeconomic and fixed income research FBNQuest Capital
