|The recent forecast by the World Bank shows that 2020 will experience the largest single-year decline in remittances since the past century. / Photo by: Panchenko Vladimir via Shutterstock|
Global remittances, the money that often flows from high-income countries to middle-and lower-income countries, are expected to decline by 20% in 2020. This is according to international financial institution The World Bank, as cited by Quartz.
The largest single-year decline of remittances
The recent forecast by the World Bank shows that 2020 will experience the largest single-year decline in remittances since the past century. The 2009 global financial crisis only saw a remittance decline by 5%. The World Bank based its forecast on the number of migrant workers and the fall in wages.
Many migrant workers are currently working in industries that experienced mass layoffs and in nations that are most affected by the pandemic, particularly in North America and in Europe. The Covid-19 impact is also felt in all regions.
The largest decline of remittances will be observed in Central Asian countries because of the combined effect of the pandemic and the decline in oil prices. Last year, remittances comprised 29% of Kyrgyzstan’s gross domestic product, nearly three-quarters of these remittances came from Russia. As the pandemic has caused border closures, migrant workers in Central Asia are out of luck and stuck in their homes.
|The largest decline of remittances will be observed in Central Asian countries because of the combined effect of the pandemic and the decline in oil prices. / Photo by: William Potter via Shutterstock|
The World Bank staff estimates that personal remittances received by Kyrgyzstan by the percentage of GDP were at 0.088 in 1993 and it gradually increased in the years that followed. In 2008, it was about 23.799 GDP, 2010: 26.41, 2011: 27.57, 2013: 31.056, 2015: 25.272, 2016: 29.276, 2017: 32.271, and 2018: 33.222.
Although Covid-19 has not led to large casualties in Tonga and Haiti, for instance, they are still experiencing economic shock because of the low inflow of remittances on their country. Remittances have been a key source of capital income for poorer nations.
East Asian countries, the least impacted
The World Bank went on to say that the least impacted countries will be those in East Asia. The economies of these countries may be reliant on remittances but they have already enacted their fiscal policies to deal with the impact of coronavirus. A fiscal policy happens when a government adjusts the tax rate and spending level of the country to influence and monitor the economy. It is the sister strategy to the central bank’s policy that influences the money supply.
Global lockdowns have also forced remittance services providers to close their shops or cut open hours. These measures have made money transfer routes more inaccessible. Most countries do not deem these shops as “essential services” because the amount of money coming from these establishments does not comprise a large part of the economic activities, said World Bank’s lead economist for migration and remittances Dilip Ratha.
Ratha pointed out that hundreds of millions, if not billions, of people, nowadays are affected. If we are to only think of other people in the world and think of the world we live in as one, that is when we realize the importance of remittances. Such is the time that people will notice the small changes that could lead to a big impact in many countries.
The World Bank also expects foreign direct investment to decline by 35% this year but remittances will become a more resilient channel of the foreign currency inflow. Meanwhile, the private portfolio flows through bond and stock markets will fall by 80%.
Remittances on economic growth
Remittances represent one of the major international financial resources of a country. Sometimes, it even exceeds the flows of foreign direct investment, said authors Dietmar Meye from Budapest University of Technology and Economics and Adela Shera from Pedagogue Faculty of Economics at the University of Tirana, Albania in a 2017 study.
They said that remittances are a big part of the foreign exchange earnings and made up over 10% of the GPD.
The database company also shows the countries that are most reliant on remittances in 2017. First in the rank is Kyrgyzstan ($2.5 billion remittance inflow and represents 25% of the country’s GDP), followed by Tonga ($0.1 billion, 33%), Tajikistan ($2.2 billion, 31%), Haiti ($2.5 billion, 29%), Nepal ($6.9 billion, 29%), Liberia ($0.6 billion, 27%), Comoros ($0.1 billion, 21%), Gambia ($0.2 billion, 21%), Moldova ($1.6 billion, 20%), and Honduras ($4.3 billion, 19%).
Remittances flow worldwide from the US to other countries
Meanwhile, the amount of USD sent by migrants in US to their home countries in 2017 increased by 7% or $586 billion from the 2016 data. Mexico saw the highest remittances sent from US with a total of $30,019,000,000 in the whole year. This is followed by China ($16,141,000,000), India ($11,715,000,000), Philippines ($11,099,000,000), Vietnam ($7,735,000,000), Guatemala ($7,725,000,000), Nigeria ($6,191,000,000), and El Salvador ($4,611,000,000), according to nonpartisan fact tank Pew Research Center.
Tracking remittance payments in the world is not easy because many countries do not track the funds they receive or send. The Pew Research Center team was only able to come up with a statistical model using the estimate of the World Bank in 2017.
Cross-border money transfer through digital platforms
Remittances have long been part of human history, like migration. For instance, some European countries like Italy, Ireland, and Spain were once reliant on remittances received from migrants. Then money transfer bloomed in the 1990s with companies like MoneyGram and Western Union creating a new business model using their international agent networks.
But today, there is a growth of money transfer through digital platforms thanks to the greater demand for online transactions, increased smartphone penetration, and the need for faster money transfer. The change to digital remittances was also attributed to the growth of younger audience or digital-savvy clients that are using the digital platforms. Because of this, the global remittance industry has become competitive with firms working both offline and online.
To be successful in the industry, firms are prioritizing the safety, speed, convenience, and cost of the remittances. This has led the traditional remittance businesses to also venture into digital remittance methods, which is preferred by many customers because they don’t have to queue for hours like they do in banks.
Remittances in times of Covid-19 have been challenging. Small changes in the remittance policy may have big effects on the financial systems. Even the World Bank has encouraged countries to keep the remittances flowing as they import buffers for unexpected expenses.