Sunday, September 19

Why are remittances to emerging markets growing?

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As emerging markets around the world continue their recovery from Covid-19, remittances are playing a key role in supporting the economic rebound.

In mid-May the World Bank upgraded its forecast for remittances to low- and middle-income countries for 2021, predicting flows of US$553 billion over the course of the year, reflecting a growth rate of 2.6 per cent.

This is to be led by Latin America and the Caribbean, with a predicted increase of 4.9 per cent, followed by South Asia (3.5 per cent), the Middle East and North Africa (2.6 per cent), sub-Saharan Africa (2.6 per cent), and East Asia and the Pacific (2.1 per cent). Remittances to Europe and Central Asia are projected to fall by 3.2 per cent.

While many of these figures may seem moderate, some individual countries have experienced dramatic spikes in the amount of money transferred home by expats abroad.

For example, remittances grew by 50.2 per cent year-on-year in Morocco between January and May, by 21.8 per cent in Mexico (January-May), by 20.8 per cent in Sri Lanka (January-April) and by 19.7 per cent in Kenya (January-June).

Conversely, remittance flows to Indonesia and Nigeria during the first half of the year have experienced double-digit contractions, of 13 and 24 per cent, respectively.

These regional and national discrepancies are attributable to various factors. For example, while a majority of Moroccan and Mexican expats live in the EU and the US, respectively, which are moving ahead with their economic recoveries, Indonesia sources a large proportion of its remittances from countries such as Saudi Arabia and Malaysia, both of which were significantly impacted by pandemic-related lockdowns.

Meanwhile, in Nigeria’s case, many analysts believe that a dysfunctional foreign exchange market has resulted in remittances being pushed towards informal, undocumented channels.

Resilient remittances

The largely positive outlook comes on the back of a better-than-expected year for remittances in 2020.

Despite the World Bank’s forecast in April last year that low- and middle-income countries would see a 19.7 per cent decline in remittances in 2020, flows proved to be remarkably consistent, with the bank currently estimating that the drop reached just 1.6 per cent.

In fact, remittances actually increased in Latin America and the Caribbean (6.5 per cent), South Asia (5.2 per cent), and the Middle East and North Africa (2.3 per cent).

It was only sharper falls in flows to sub-Saharan Africa (drop by 12.5 per cent), Europe and Central Asia (minus 9.7 per cent), and East Asia and the Pacific (minus 7.9 per cent) that brought the overall growth rate into negative territory.

Further highlighting the diverse nature of remittance flows and their resilience throughout 2020, sub-Saharan Africa’s fall was largely due to a dramatic drop of 28 per cent in Nigeria. Excluding Nigeria, the region’s remittances increased by 2.3 per cent that year.

The main reasons behind the stronger-than-expected flows include substantial fiscal stimulus packages that resulted in more positive economic conditions in host countries, many of which are developed nations; a shift in flows from cash to digital, and from informal to formal channels; and movements in oil prices and foreign exchange rates.

 

Increased importance

The strong flow of remittances underscores their importance to many emerging market economies.

For example, the World Bank estimates that remittances make up 38 per cent of GDP in Tonga, 33 per cent in Lebanon, 27 per cent in Kyrgyzstan, and 24 per cent in both El Salvador and Honduras. Other countries in the “yellow slice” – the portfolio of markets that OBG covers – that derive significant portions of GDP from remittances include the Philippines (9.6 per cent), Sri Lanka (8.8 per cent), Egypt (8.2 per cent) and Morocco (6.5 per cent).

As further evidence of their importance, remittances to low- and middle-income countries last year (US$540 billion) surpassed the equiavlent value of foreign direct investment (US$259 billion) and overseas development assistance (US$179 billion) combined.

With remittances expected to increase by another 2.2% to $565bn in 2022, there are concerted efforts under way to reduce the cost of transfers.

One such initiative is the Remittance Community Task Force, launched at the outset of the pandemic by the UN’s International Fund for Agricultural Development. In November the group published a series of policy recommendations calling for increased transparency on the costs involved in transferring money, as well as suggested requirements for governments.

Despite these efforts, however, costs remain high. In the fourth quarter of last year the average global cost of sending US$200 was 6.5 per cent, more than double the UN Sustainable Development Goal of three per cent. While the figure was lowest in South Asia, at 4.9 per cent, it rose to 8.2 per cent in less developed regions such as sub-Saharan Africa.

This column was produced by the Oxford Business Group.