World Bank predicts sharpest decline of remittances

Global remittances are projected to decline sharply by about 20 per cent in 2020 due to the economic crisis induced by the Covid-19 pandemic and shutdown.

The projected fall, which would be the sharpest decline in recent history, is largely due to a fall in the wages and employment of migrant workers, who tend to be more vulnerable to loss of employment and wages during an economic crisis in a host country. Remittances to low and middle-income countries (LMICs) are projected to fall by 19.7 per cent to $445 billion, representing a loss of a crucial financing lifeline for many vulnerable households.

Studies show that remittances alleviate poverty in lower- and middle-income countries, improve nutritional outcomes, are associated with higher spending on education, and reduce child labour in disadvantaged households. A fall in remittances affect families’ ability to spend on these areas as more of their finances will be directed to solve food shortages and immediate livelihoods needs.

“Remittances are a vital source of income for developing countries,” World Bank Group president David Malpass said, adding that the ongoing economic recession caused by Covid-19 is taking a severe toll on the ability to send money home and makes it all the more vital that we shorten the time to recovery for advanced economies. “Remittances help families afford food, healthcare, and basic needs.”

As the World Bank Group implements fast, broad action to support countries, we are working to keep remittance channels open and safeguard the poorest communities’ access to these most basic needs, he adds.

The World Bank is assisting member states in monitoring the flow of remittances through various channels, the costs and convenience of sending money, and regulations to protect financial integrity that affect remittance flows. It is working with the G20 countries and the global community to reduce remittance costs and improve financial inclusion for the poor.

Remittance flows are expected to fall across all World Bank Group regions, most notably in Europe and Central Asia (27.5 per cent), followed by Sub-Saharan Africa (23.1 per cent), South Asia (22.1 per cent), the Middle East and North Africa (19.6 per cent), Latin America and the Caribbean (19.3 per cent), and East Asia and the Pacific (13 per cent).

The large decline in remittances flows in 2020 comes after remittances to LMICs reached a record $554 billion in 2019. Even with the decline, remittance flows are expected to become even more important as a source of external financing for LMICs as the fall in foreign direct investment is expected to be larger (more than 35 per cent). In 2019, remittance flows to LMICs became larger than FDI, an important milestone for monitoring resource flows to developing countries.

In 2021, the World Bank estimates that remittances to LMICs will recover and rise by 5.6 per cent to $470 billion. The outlook for remittance remains as uncertain as the impact of Covid-19 on the outlook for global growth and on the measures to restrain the spread of the disease. In the past, remittances have been counter-cyclical, where workers send more money home in times of crisis and hardship back home. This time, however, the pandemic has affected all countries, creating additional uncertainties.

“Effective social protection systems are crucial to safeguarding the poor and vulnerable during this crisis in both developing countries as well as advanced countries,” global director of the Social Protection and Jobs Global Practice at the World Bank Michal Rutkowski said. “In host countries, social protection interventions should also support migrant populations.”

The global average cost of sending $200 remains high at 6.8 per cent in the first quarter of 2020, only slightly below the previous year. Sub-Saharan Africa continued to have the highest average cost, at about 9 per cent, yet intra-regional migrants in Sub-Saharan Africa comprise over two-thirds of all international migration from the region.

“Quick actions that make it easier to send and receive remittances can provide much-needed support to the lives of migrants and their families,” lead author of the Brief and head of KNOMAD Dilip Ratha said, adding that these include treating remittance services as essential and making them more accessible to migrants.

Remittance flows to the East Asia and Pacific region grew by 2.6 per cent to $147 billion in 2019, about 4.3 percentage points lower than the growth rate in 2018. In 2020, remittance flows are expected to decline by 13 per cent. The slowdown is expected to be driven by declining inflows from the United States, the largest source of remittances to the region. Several remittance-dependent countries such as those in the Pacific Islands could see households at risk as remittance incomes decline over this period. A recovery of 7.5 per cent growth for the region is anticipated in 2021.

Likewise, the average cost of sending $200 to the East Asia and Pacific region dropped to 7.13 per cent in the first quarter of 2020, compared to the same quarter in 2019. The five lowest cost corridors in the region averaged 2.6 per cent while the five highest cost corridors averaged 15.4 per cent as of 2019 fourth quarter.

Remittances to countries in Europe and Central Asia remained strong in 2019, growing by about 6 per cent to $65 billion in 2019. Ukraine remained the largest recipient of remittances in the region, receiving a record high of nearly $16 billion in 2019. Smaller remittance-dependent economies in the region, such as Kyrgyz Republic, Tajikistan, and Uzbekistan, particularly benefited from rebound of economic activity in Russia. In 2020, remittances are estimated to fall by about 28 per cent due to the combined effect of the global coronavirus pandemic and lower oil prices.

Similarly the average cost of sending $200 to the ECA region declined modestly to 6.48 per cent in the first quarter of 2020 from 6.67 per cent a year earlier. The differences in costs across corridors in the region are substantial; the highest costs for sending remittances were from Turkey to Bulgaria, while the lowest costs for sending remittances were from Russia to Azerbaijan.

Remittances to South Asia are projected to decline by 22 per cent to $109 billion in 2020, following the growth of 6.1 per cent in 2019. The deceleration in remittances to the South Asian region in 2020 is driven by the global economic slowdown due to the coronavirus outbreak as well as oil price declines. The economic slowdown is likely to directly affect remittance outflows from the United States, the United Kingdom, and EU countries to South Asia. Falling oil prices will affect remittance outflows from GCC countries and Malaysia. Remittance costs: South Asia had the lowest average remittance costs of any region, at 4.95 per cent. Some of the lowest-cost corridors had costs below the 3 per cent SDG target. This is probably due to high volumes, competitive markets, and deployment of technology. But costs are well over 10 per cent in the highest-cost corridors due to low volumes, little competition, and regulatory concerns. Banking regulations related to AML/CFT raise the risk profile of remittance service providers and thereby increase costs for some receiving countries such as Afghanistan and sending countries such as Pakistan.