Defying predictions, remittance flows have proved to be resilient during the COVID-19 crisis. In 2020, officially recorded remittance flows to low and middle-income countries reached $540 billion, only 1.6 percent below the $548 billion seen in 2019, according to World Bank’s Migration and Development Brief.
Remittances exceeded foreign direct investment (FDI) flows by a wider margin in 2020. Excluding China, remittance flows surpassed the sum of FDI and official development assistance.
What are remittances?
The money workers send home to their families from abroad has become a critical part of many economies around the world. These money transfers are called remittances. They have been growing rapidly in the past few years and now represent the largest source of foreign income for many developing economies.
Remittances have become an important consumption smoothing mechanism for the recipient households and, as such, they form an increasingly important (private) element of global social protection systems.
According to the United Nations Department for Economic and Social Affairs (UNDESA), the worldwide number of international migrants (including refugees) was estimated at 281 million in 2020. The top host countries for migrants are the United States (51 million), Germany (16 million), Saudi Arabia (13 million), Russia (12 million), the United Kingdom (9 million), the United Arab Emirates (9 million), France (9 million), Canada (8 million), Australia (8 million), and Spain (7 million).
These countries account for about half of the total international migration stock.
Top remittance recipients
India has been the largest recipient of remittances since 2008. India received over $83 billion in remittances in 2020, a drop of just 0.2 per cent from the previous year, despite a pandemic that devastated the world economy.
In 2019, India had received $83.3 billion in remittances.
In India, much of the decline was due to a 17 per cent drop in remittances from the United Arab Emirates, which offset resilient flows from the United States and other host countries.
China, which received $59.5 billion in remittances in 2020 against $68.3 billion the previous year, is a distant second in terms of global remittances for the year gone by.
India and China are followed by Mexico ($42.8 billion), the Philippines ($34.9 billion), Egypt ($29.6 billion), Pakistan ($26 billion), France ($24.4 billion) and Bangladesh ($21 billion).
As a share of gross domestic product, the top five recipients in 2020 were, by contrast, smaller economies: Tonga, Lebanon, Kyrgyz Republic, Tajikistan, and El Salvador.
Top remittance sources
The United States was the largest source country for remittances in 2020, followed by the United Arab Emirates, Saudi Arabia, and the Russian Federation.
Remittance outflow from India in 2020 was $7 billion, against $7.5 billion in 2019.
Drivers of remittance flows
Foremost among the drivers of remittance flows and reasons behind their resilience during the crisis was migrants’ desire to help their families, to send money home by cutting consumption or drawing on savings.
Other drivers included fiscal stimulus in host countries that resulted in better-than-expected economic performance, a shift in flows from informal to formal channels, and cyclical movements in oil prices and currency exchange rates.
Counter-cyclical fiscal policy, especially cash transfer and employment support programmes implemented in many large economies, cushioned a fall in personal incomes and consumption, and supported businesses in the continuing employment of workers. Such programmes also benefited foreign-born persons.
The economic performance of major migrant-host countries, especially those in North America and Europe, proved to be better in 2020 than the projected growth rates.
An increase in the recorded flows was in part due to a broad shift in flows from informal to formal channels in 2020. There was a greater use of digital remittance channels as hand carry was affected by travel bans and lockdowns. The true size of remittances, which includes formal and informal flows, is believed to be larger than officially reported data, though the extent of the impact of COVID-19 on informal flows is unclear.
This is not the first time that remittance flows have proved resilient during a crisis. The same thing was observed, for example, in the aftermath of the global financial crisis.
In fact, remittances often rise in times of financial crisis or natural disasters in the recipient country.
Even during a crisis in the host country, migrants may try to reduce consumption (or rent payments) and draw on their savings to continue to send money home.
During the COVID-19 crisis, the need for financial support for families back home has risen, for essential goods and services including health care. Remittances have provided a lifeline for families back home struggling with loss of income and pandemic-induced economic slowdown. Unable and perhaps unwilling to take the risk of traveling to home countries, migrants have tried to send as much money home as they can.
In the United States, the largest migrant-host country, the employment level of foreign-born workers fell by 21 per cent in April 2020 compared to February 2020, but steadily recovered afterwards. The recovery in employment levels together with cash transfers received directly from the government enabled migrants to send remittances to family and friends back in origin countries. This is an interesting distinguishing feature of the COVID-19 crisis, compared to the global financial crisis of 2009.
Weak oil prices affect remittances
Due to the weak oil price, remittances from oil-dependent economies declined more than they did in non-oil economies. For example, weak oil prices affected the employment of migrant workers in the Gulf Cooperation Council (GCC) countries, leading more recently to declining outward remittances from the region.
Take the case of Saudi Arabia, the third-largest source country of remittances after the United States and the United Arab Emirates. For decades, until after a peak in oil prices in 2014, outward remittances from Saudi Arabia continued to rise even as oil prices fluctuated.
However, in the past few years, a decline is consistent with the longer-term trends in oil prices as well as policy measures that encourage the hiring of nationals in Saudi Arabia as well as other GCC countries.
This overall declining trend in remittance flows from the GCC region, however, is masked by two idiosyncratic factors – the cancellation of the pilgrimage to Mecca (hajj)and floods in Bangladesh, both of which took place in July 2020.
In the case of Russia, the twin effects of weak oil price and depreciation of the source-country currency caused a nearly 10 percent fall in remittance flows to the Europe and Central Asia region.
Outlook for 2021-22
In 2021 and 2022, economies worldwide are expected to rebound further., with advanced countries performing significantly stronger than the low and middle-income countries (LMICs).
With that, incomes and employment of foreign-born workers are also expected to recover, which would lead to an increase in remittance flows to LMICs.
The number of COVID-19-induced new poor in 2020 is likely to have risen to between 119 to 124 million. Thus, families in LMICs need even more support from migrant relatives overseas.
Based on recent trends in remittance flows, and assumption that the international migrant stock will not change much in the near-term, and that economic growth will be stronger this year and the next, remittance flows to LMICs are expected to increase by 2.6 percent to $553 billion in 2021 and by 2.2 percent to $565 billion in 2022.
Remittances are expected to grow twice as fast in Latin America and the Caribbean (LAC) and South Asia, but they are expected to grow in all regions except Europe and Central Asia in 2021.