The COVID-19 pandemic has negatively impacted remittance flows. Remittances are money or goods sent by migrants back to families and friends in their home country, and the strongest link between migration and development. In April of 2020, the World Bank predicted a drop of approximately 20% in remittance flows globally traceable to the pandemic, shutdowns, and a fall in wages and employment of migrant workers. Migrant workers tend to suffer more socially, economically, and healthwise in periods of crisis.
The implications of this prediction cannot be understated. Remittances are counter-cyclical, they alleviate pressure from macroeconomic shocks in the recipient country. Therefore, remittances play a vital role in reducing poverty levels and child labor in low-income households, encourage increased spending on education, and aid in meeting nutritional targets in lower and middle-income countries (LMICs). If the flow of remittances falters, families will be forced to spend more on immediate needs such as food and healthcare. As remittances may be the sole lifeline to communities and families in LMICs suffering from the global recession, it is paramount to ensure that the advanced economies experience a speedy recovery.
According to a more recent World Bank Migration and Development Brief, in LMICs, money sent by migrants to their home countries is expected to decrease by 14% in 2021 compared to 2019 levels. Concretely, this amounts to $508 billion in 2020 and an additional $470 billion in 2021. The most prominent factors driving this trend are weak economic growth and employment levels in migrant-host countries, the depreciation of the currencies of remittance source countries, and low oil prices.
LMICs rely on remittances as this income source outranks Foreign Direct Investment (FDI) flows and overseas development assistance. World Bank predictions in late 2020 stated that even as remittances fall, their importance will continue to rise for LMICs. In 2019, remittance flows to LMICs attained a record $548 billion, out scaling $534 billion in FDI and about $166 billion in international development assistance. As FDI flows are expected to decrease, the gap between remittance flows and the former is expected to increase.
The drop in remittance flows affected all regions of the world, with the most drastic drops in Europe (16%) and Central Asia (8%). East Asia experienced an 11% drop, the Pacific (4%), the Middle East and North Africa (8% and 8%), Sub-Saharan Africa (SSA) (9% and 6%), South Asia (4% and 11%), and Latin America and the Caribbean (0.2% and 8%).
According to Dilip Ratha, head of KNOMAD, reliance on remittances is unwise as its underlying foundations are weak and can break away in times of crisis. The first erosional trend with important negative impacts is return migration. For the first time in recent history, the stock of international migrants is likely to decrease as many decide to return to their home countries and new potential migrants opt not to travel. Behind both decisions is the reality that migrant workers suffer more from unemployment and health risks. Additionally, national lockdowns and tighter visa restrictions leave migrant workers stranded without access to a social support system.
Michal Rutkowski, Global Director of the Social Protection and Jobs Global Practice at the World Bank, recommends that host countries pursue policy responses supportive of migrant workers. He adds that transit and home countries ought to adopt policies that facilitate the journey home. Host countries and communities make use of migrant workers in factories, hospitals, and farms. Home countries will be tasked with the reintegration of those who left. This includes resettlement, housing, jobs, and the cultivation of an environment favorable to opening new businesses.
Migrants face hurdles when transferring money to their home countries. In light of COVID-19 pandemic-related unemployment and underemployment, temporary measures to facilitate the transfer of funds, especially for low-income migrants, should be explored and enacted. According to the World Bank’s Remittance Prices Worldwide Database, the average cost of sending $200 dollars remained at 6.8% in the third quarter of 2020, more than double the target of 3% set by the Sustainable Development Goals (SDGs). The cost of sending money can be as low as 5%, as it is in South Asia, and as high as 8.5%, as is the case in SSA.
Money transfer and mobile operators are the preferred choices as their services cost less than using conventional banks. The cost of sending remittances through banks stands at 10.9%, followed by post office fees of 8.6%, transfer operators at 5.8%, and mobile operators at 2.8%. Yet, in this time of reduced earning capacity, banks are closing accounts owned by such operators due to concern about compliance with anti-money laundering (AML) and combatting terrorism financing standards (CTF). CTF and AML laws could be simplified for small amounts of income passing through money transfer and mobile operator channels. Additionally, if identity systems and mobile money regulations are strengthened, the transparency of transactions will improve.
Regional Remittance Trends
Reductions in remittance flows occur for a variety of reasons in each region. It was estimated that remittances to Europe and Central Asia would fall 16% to $48 billion as weak oil prices and varied economic impacts of the pandemic hit. Russia is also suffering from a weak Ruble. The International Organization for Migration (IOM) estimated that migrant-dominated industries such as construction, catering, hospitality, and manufacturing industries in Europe and North America would feel the most impact as a result of the pandemic.
Remittance flows to East Asia and the Pacific were predicted to fall 11% to $131 billion due to the impact of COVID-19. China and the Philippines receive the most in remittances. Tonga and Samoa are the 2 highest recipients of remittances as a share of GDP.
In 2020, projections for South Asia indicated a decrease of 4% to $135 billion. In Bangladesh and Pakistan, the effects of the global economic slowdown have been cushioned by the diversion of remittances to formal channels as carrying cash is difficult under current travel restrictions. Bangladesh received a substantial inflow of remittances following the July floods.
Remittances to Latin American and Caribbean countries were only expected to fall 0.2% from 2019. The Dominican Republic, El Salvador, and Columbia received positive year-on-year growth. Remittance flows to Mexico, the region’s top recipient, continued in part because migrants in the United States are employed in essential services.
Remittances to countries in the Middle East and North Africa were expected to fall 8% to $55 billion. Egypt is the country in the region with the largest remittance inflows. These one-off transfers have so far acted in a counter-cyclical manner to the crisis as foreign workers send money home to their families. However, as the economic slowdown is bound to continue for some time into the future, the remittances sent will have less of a counter-cyclical effect. The Gulf countries will suffer in large part due to chronically low oil prices.
Sub-Saharan Africa was expected to see a decrease of 9% to $44 billion in 2020. A fall in remittances in this region will increase poverty and food insecurity. Remittance costs remain high as the use of digital technology requires further promotion and the regulatory environment including AML and CTF standards need revision. A more competitive remittance market should lower fees.
What can be done?
The IMF recommends three main courses of action. First, the employment of migrant workers must be stabilized in host countries. Measures that ensure the employment, compensation, and welfare of the migrant worker population should be undertaken. Migrant workers work for themselves and for their families, this needs to be remembered.
Second, donor countries should aid in the containment of COVID-19 and outbreaks in the destination countries of return migrants. Returning migrants will place extra pressure on services that are already struggling under the weight of the economic slowdown. All measures which keep local economies open and out of a lockdown need to be pursued. This includes testing, quarantine facilities, and contact tracing.
Third, international institutions and organizations and the donor community will need to assist poor countries through fiscal means. In other words, efforts of this nature must work to ensure that the most vulnerable populations who are reliant on remittances can access social insurance programs.
As this global health crisis affects us all, it is important to help one another to ensure an expedited recovery.
Kieran McTague holds a BA cum laude in International Comparative Politics from the American University of Paris. He is currently pursuing a Masters’s in International Affairs, Conflict Resolution, and Civil Society Development at the same institution. His thesis explores protection options available to persons displaced in the context of disasters and climate change in West Africa. He is an advocate for the rights of the child, passionate about education, and has volunteered in France and Greece on the behalf of asylum seekers.