The Unexpected Rise in Remittances to Central America and Mexico During the Pandemic
IMF News, September 21, 2022
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- The Unexpected Rise in Remittances to Central America and Mexico During the Pandemic
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- Authors: Yorbol Yakshilikov September
- Published: September 21, 2022
Overview
- Remittances hit record levels in 2021 driven by rising US wages and unemployment insurance relief.
- Remittances are a crucial source of income in Central America, Panama, and the Dominican Republic (CAPDR) as well as Mexico.
- IMF staff research investigates why remittances from the US to CAPDR and Mexico remained resilient during the pandemic.
An unexpected comeback
- Economists predicted remittances to CAPDR and Mexico would decline by up to 20 percent given the fall in US employment at the onset of the pandemic.
- Traditional macroeconomic models linking US labor market conditions with immigrants’ income:
- Accurately predicted the deep but brief collapse in remittances observed in April 2020.
- Failed to predict the strong comeback that followed in 2020 and the record levels in 2021.
Explaining the surge
- Pre-pandemic determinant: the number of remittance transactions—the volume effect—largely determined remittance levels.
- The jump in remittances in the second half of 2020 resulted from:
- An increase in the number of transactions (volume effect).
- An increase in the average amount remitted per transaction (value effect).
- Drivers of the volume effect:
- Increase in the number of people sending remittances rather than new immigrants arriving in the US.
- Shift to digital remitting due to lockdowns, increasing the number of transactions.
- Drivers of the value effect (most important):
- Rising US wages drove increases in average amounts remitted.
- US government assistance through unemployment insurance relief supported incomes and compensated for loss of income.
- A strong “altruism” motive: as COVID-19 cases rose at home, immigrants in the US sent on average more money home.
Persistence in 2021
- Remittances remained strong in 2021 due to:
- US labor market recovery.
- Sustained growth in real wages.
- By the end of 2021:
- The service sectors where CAPDR and Mexican immigrants predominantly work recovered.
- These sectors recorded increases in weekly earnings that were above the US average.
A look ahead
- Growth in remittances to CAPDR and Mexico is expected to slow as some extraordinary factors in 2020 and 2021 dissipate.
- Over time, remittances are expected to grow because:
- Immigration to the US continues to rise.
- The average amount remitted grows in line with US wages.
- If employment and wages remain strong in the US, remittances are expected to increase during times of hardship in Central America and Mexico, as immigrants help families back home.
Source: https://www.imf.org/en/news/articles/2022/09/19/cf-the-unexpected-rise-in-remittances
Content in this bundle
- wpiea2022092-print-pdf
References
- REGIONAL ECONOMIC OUTLOOK
- CAPDR REPRESENTATIVE OFFICE
- https://www.imf.org/en/News/country-focus
- https://www.imf.org/en/publications/weo
- Global Economy in Crosscurrents of War and Technology
- https://www.imf.org/en/publications/gfsr
- Global Financial Markets Confront the War in the Middle East and Amplification Risks
- https://www.imf.org/en/publications/fm
- Fiscal Policy under Pressure: High Debt, Rising Risks
- https://www.imf.org/en/publications/reo
- Asia and Pacific
- Europe
- Middle East and Central Asia
- Sub-Saharan Africa
- Western Hemisphere
- https://www.imf.org/en/publications/areb
- Getting to Growth in an Age of Uncertainty
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- Mexico
- US economy
- Central America
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