The Impact of COVID-19 on Remittance Flows
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- Authors: Antoinette Sayeh, RALPH CHAMI
- Published: June 1, 2020
Overview: role and scale of remittances
- 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 private, countercyclical income transfers that insure families against income shocks by supporting and smoothing consumption.
- A drop in remittances will heighten economic, fiscal, and social pressures on governments of low-income and fragile countries already struggling to cope.
Transmission of shocks
- Remittances sync the business cycles of recipient and sending countries; shocks to host-country economies transmit to remittance-recipient countries.
- 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.
- Remittances represent more than 30 percent of GDP for some countries, led by Tajikistan and Bermuda at more than 30 percent.
- 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.
- Impacts on recipient economies:
- Loss of an important source of income and tax revenue just when needed most.
- Banks in migrant-source countries rely on remittances as a cheap source of deposit funding; reduced remittances will increase banks’ cost of operations and greatly reduce their ability to extend credit.
- Credit-constrained private sector—mostly self-employed people and small and medium-sized enterprises—will lose remittance funding and face tighter bank credit conditions plus lower demand.
- Labor-market and migration dynamics:
- Migrant workers who lose employment are likely to reduce remittances and could lose resident status in host countries, leading to return migration.
- Return of migrants could increase unemployment and strain fragile public health systems in origin countries, heightening social pressure and possibly fueling spillovers and refugee flows.
Global threat and macroeconomic consequences
- This pandemic poses a greater threat to remittance-dependent countries than previous crises because it is global: recipient countries may face both capital outflows and drops in remittance flows simultaneously.
- With global demand likely to suffer, remittance-recipient countries cannot rely on exports or tourism to offset the shock; currency depreciation will not spur demand for exports in this systemic crisis.
- Currency weakness will worsen situations for low-income and fragile states with foreign-currency debt, depressing local demand and contracting local economies further.
Policy implications and recommended actions
- Urgency: The crisis tightens fiscal constraints in migrant-source countries just as public-sector demands increase (pandemic response and economic support), making international support critical.
- Rationale for rich countries’ engagement:
- It is in rich countries’ interest to keep migrants in host countries to sustain services and reduce virus transmission risk associated with mass returns.
- Infection rates are higher in rich countries and especially high among migrant workers; returning migrants risk importing infections to fragile health systems, which could create global spillovers.
- Three key actions to take now:
1. Stabilize migrants’ employment opportunities in host countries.
- Relief packages that target employment protection for citizens can also help migrant workers remain employed.
- Action by host countries preserves remittance flows and helps advanced economies restore production faster.
- Example policy: targeted assurances, wage support, or employer coordination to keep migrants paid so they can send money home.
2. Support countries receiving returning migrants to contain and mitigate outbreaks.
- Donor countries must help with the cost of virus mitigation to lessen the severity of local crises and stave off spillovers.
- Priorities include enhanced testing in urban areas and support for quarantine measures for returning migrants.
- Managed returns could yield longer-term benefits if repatriated migrants bring savings and skills home.
3. Provide fiscal and balance-of-payments assistance through international financial institutions and donors.
- Ensure vulnerable people reliant on remittances can access social insurance programs.
- Advance the global effort to meet Sustainable Development Goal 10 by reducing the high cost of remittances to 3 percent.
Key statistics and factual takeaways
- Remittances to low-income and fragile states: $350 billion as of 2018.
- Expected remittance decline in 2020: about $100 billion, roughly a 20 percent drop from 2019 levels.
- Sensitivity example: recipient countries with remittances ≥10 percent of GDP experience nearly a 1 percent drop in their output gap for a 1 percent decrease in host-country output gap.
- Countries with remittances >30 percent of GDP include Tajikistan and Bermuda.
IMF Finance & Development, "The Impact of COVID-19 on Remittance Flows" — Antoinette Sayeh and Ralph Chami, June 2020.
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