## Lifelines in Danger

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**Canonical URL:** [Lifelines in Danger](https://www.imf.org/-/media/files/publications/fandd/article/2020/june/covid19-pandemic-impact-on-remittance-flows-sayeh.pdf)

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### Impact overview
- Remittance flows to low-income and fragile states reached $350 billion as of 2018, surpassing foreign direct investment, portfolio investment, and foreign aid as the single most important source of income from abroad.
- Remittances are countercyclical transfers that insure families, smooth consumption, finance trade balances, and provide tax revenue for governments that rely on value-added tax, trade, and sales taxes.
- According to the World Bank, remittance flows are expected to drop by about $100 billion in 2020, which represents roughly a 20 percent drop from their 2019 level.

### Transmission of shocks
- Remittances synchronize recipient countries’ business cycles with those of sending countries; shocks to migrant-host economies transmit to remittance-recipient economies.
- For a recipient country that receives remittances representing at least 10 percent of its annual GDP, a 1 percent decrease in the host country’s output gap will tend to decrease the recipient country’s output gap by almost 1 percent.
- Many countries receive much more than 10 percent of GDP from remittances, with Tajikistan and Bermuda receiving more than 30 percent.

### Economic and fiscal consequences
- A drop in remittance flows will heighten economic, fiscal, and social pressures on governments of low-income and fragile countries already struggling to cope.
- Banks in migrant-source countries rely on remittance inflows as a cheap source of deposit funding; reduced remittances will increase banks’ cost of operations and greatly reduce their ability to extend credit to the private sector and to finance government deficits.
- The typically credit-constrained private sector—mostly self-employed people and small and medium-sized enterprises—will lose remittance funding while facing tighter bank credit and lower demand.
- A prolonged crisis could lead to migrants losing resident status in host countries and being forced to return home, increasing unemployment in home countries, straining fragile public health systems, and potentially fueling cross-border spillovers and refugee flows.
- Recipient countries may simultaneously experience capital flight and a drop in remittances, undermining the usual stabilizing role remittances play during shocks.
- Currency depreciation is unlikely to spur demand for exports or attract tourism because the shock is systemic; currency weakness will worsen situations for countries with foreign-currency debt.

### Key statistics
- $350 billion: remittance flows to low-income and fragile states, as of 2018.
- $100 billion: expected drop in remittance flows in 2020 (World Bank estimate).
- 20 percent: expected decline in global remittance flows in 2020 relative to 2019.
- 10 percent: threshold cited for remittances as a share of annual GDP used in output-gap transmission example.
- More than 30 percent: remittance share of GDP for Tajikistan and Bermuda.

### Policy recommendations (three key actions)
- Host countries should stabilize employment opportunities for migrant workers:
  - Relief packages that target employment protection for citizens in rich countries can also help migrant workers remain employed.
  - Extending protection to migrants will help advanced economies return to full production sooner and preserve remittance flows.
  - Enhanced testing for infection among migrant workers and assurances about health, welfare, and livelihood can maintain remittance lifelines.
- Donor countries should assist migrant-source countries to contain and mitigate outbreaks for returning migrants:
  - Provide enhanced testing in urban areas and support implementation of quarantine measures for returning migrants who may be infected.
  - Help cover the cost of virus mitigation to lessen severity in local economies and stave off spillovers.
  - If managed well, returnees may bring savings and skills that could benefit home-country development.
- International financial institutions and the donor community must shore up fiscal and balance of payments assistance:
  - Ensure access to social insurance programs for those most reliant on remittance inflows.
  - Prioritize efforts to reduce the high cost of remittances to 3 percent in support of Sustainable Development Goal 10.

*Antoinette Sayeh and Ralph Chami; Finance & Development, June 2020.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2020/june/covid19-pandemic-impact-on-remittance-flows-sayeh.pdf_