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Reuters
Global remittances are set to tumble by $US142 billion in 2020, the sharpest fall in recent history, the World Bank estimates, as the coronavirus crisis chokes off a cash lifeline for hard-pressed households in poorer countries.
The World Bank on Wednesday said that drop of almost 20 per cent in money migrant workers send home – about four times greater to low and middle income countries than during the 2009 financial crisis – would largely be due to a fall in their wages and employment overseas.
“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.
Foreign workers are seen at a construction site in Dubai, United Arab Emirates, on 13th November, 2006. PICTURE: Reuters/Ahmed Jadallah/File photo
In recent years, remittances have become an integral part of funding for governments in emerging economies, exceeding official aid by a factor of three since the mid-1990s and last year overtaking foreign direct investment flows as the main source of foreign exchange for low- and middle-income countries.
REMITTANCES EXPLAINED
HOW MANY PEOPLE RELY ON REMITTANCES?
Each year more than 200 million migrant workers around the world send money home to an estimated 800 million people, mostly in developing countries, according to the United Nations’ International Fund for Agricultural Development. This means at least one billion people – or one in seven – are involved in the process. Economists and development experts say they play a crucial role in reducing poverty and hunger. Migrants usually send around $US200-$US300 per transaction, which represents, on average, 60 per cent of total household income, said the UN agency, which manages a multi-donor financing facility aimed at maximising the impact of remittances. Of this, 75 per cent goes towards meeting immediate needs, it added. The World Bank said there were around 272 million international migrants in 2019.
WHY ARE THEY IMPORTANT TO LOW INCOME COUNTRIES?
Remittances account for a significant chunk of GDP in these countries. They make up more than nine per cent of GDP in fragile and conflict-affected situations, nearly nine per cent in poor countries and 7.7 per cent in small island developing states. “Migrant remittances provide an economic lifeline to poor households in many countries; a reduction in remittance flows could increase poverty and reduce households’ access to much-needed health services,” the World Bank said. Remittances also dwarf many other sources of external financing. Money sent to low- and middle-income countries in 2019 surpassed foreign direct investment for the first time, said the World Bank. The money sent home in 2017 was more than three times official development assistance that rich nations provide to poorer nations to improve their welfare, said IFAD.
HOW DO REMITTANCES HELP POOR HOUSEHOLDS?
Studies have shown that remittances not only reduce poverty but also child labour, improve nutrition and are associated with higher spending on education, the World Bank said. Remittances are becoming even more crucial for poor nations because FDI could slump by more than 35 per cent, due to travel bans, disruption of international trade and declines in the stock prices of multinational companies, it added. The 10 countries where remittances account for more than a fifth of GDP are Tonga, Haiti, South Sudan, Kyrgyzstan, Tajikistan, Nepal, Montenegro,
Honduras, Lesotho and El Salvador.
WHICH REGIONS AND COUNTRIES WOULD BE HARDEST HIT BY THE FALL IN REMITTANCES?
The World Bank said the decline would be sharpest in Europe and Central Asia (27.5 per cent), sub-Saharan Africa (23 per cent) and South Asia (22 per cent). The drop in Europe and Central Asia is due to the combined effect of the coronavirus pandemic and lower oil prices. Particularly vulnerable are smaller remittance-dependent countries such as Kyrgyzstan and Tajikistan. The drop in sub-Saharan Africa, where nearly one in four people do not have enough to eat, is because a large share of migrants from this region are in the United states, Europe, Middle East and China, which are badly hit by the coronavirus. Similarly, the economic slowdown in the United States, Britain and EU nations are expected to hurt flows to South Asia. India and Pakistan would see the biggest declines in percentage terms but Nepal, where remittances account for 27 per cent of GDP, could be hardest hit.
CAN ANYTHING BE DONE?
The World Bank said governments should consider migrants and remittances in policy responses to the pandemic and said host countries should extend social safety nets to migrants.
– THIN LEI WIN, Thomson Reuters Foundation
An estimated one billion migrants – some 270 million who work outside their home countries and 760 million internal migrants – help feed, clothe and shelter up to three people “back home”, Dilip Ratha, lead author of the World Bank’s new report on the impact of COVID-19 on remittances told Reuters in an interview.
“You’re looking at one-third of humanity.”
Yet such workers tend to be more vulnerable during crises.
With a rocketing jobless rate in the United States and the economies of the Gulf and Russia reeling from lower oil prices, the flow of such money from the world’s largest sources has been hit.
The remittance drop so far this year is the largest since the World Bank began recording the data in 1980, said Ratha.
Such flows have increased since a dip in 2016 mainly due to low oil prices, and remittances reached $US714 billion in 2019. But they look set to shrink to $US572 billion this year, the World Bank said.
For low and middle income nations, which account for the bulk of flows, remittances would fall 19.7 per cent to $US445 billion in 2020 from a record $US554 billion in 2019.
“The economic crisis induced by the pandemic is going to sharply reduce the income of migrants and their ability to send money back home,” Ratha said.
Emerging markets face biggest hit
As well as hurting households who rely on the money, waning flows from abroad are another blow to emerging markets where state budgets are already strained from having to spend more on healthcare and stimulus to mitigate reduced economic activity. Many have also seen record outflows of foreign capital since the crisis began.
Hardest hit will be countries such as Tajikistan and Nepal, where remittances account for around 30 per cent of GDP, said Ratha. Other countries that rely on remittances include the Philippines, South Sudan, Tonga and Haiti.
As a bloc, Europe and Central Asia will see the biggest fall in remittances at around 28 per cent due to the combined effect of the pandemic and the oil price slump, the World Bank estimated.
Remittances to Central Asia in particular would take an added hit from a dip in the exchange rate of Russia’s rouble against the dollar, Ratha said.
The World Bank, which with the IMF is providing funds to poorer nations during the crisis, has expressed concern about the temporary closure of some money transfer businesses due to shutdowns in some economies. It urged authorities to recognise them as essential service providers so they can stay open.
One positive is remittances are expected to recover in 2021, swelling more than five per cent to $US602 million, with a slightly faster pick-up in flows to developing countries.
“The underlying causes of migration are not going to disappear and may be exacerbated by the COVID-19 crisis,” said Michal Rutkowski, the World Bank’s global director for social protection and jobs. “These are income differentials between different countries and demographic changes.”
