Image Credit: Monito – Money Transfer Comparison

 

As we all began to understand the scale of the Covid-19 virus a little more than 12 months ago, the World Bank made the bold prediction that annual remittances would fall by about 20 per cent in aggregate across low and middle income countries to USD450bn. It noted that remittances had overtaken foreign direct investment as the leading source of capital inflows for the same countries in 2019. (They had overtaken what used to be termed ‘aid’ many years previously.)

 

Pandemics aside, remittances are a stable source of support for economic development, employment and the balance of payments (BoP). They increase by about 5 per cent per year, and potentially more with incentives (see below). Foreign portfolio flows (‘hot money’) are fickle in contrast: here today, gone tomorrow (usually for good reasons such as self-inflicted poor government policy).

 

If we look narrowly at the BoP, we see that remittances are particularly valuable when the country does not export services on any scale. So Nigeria registered inflows of USD43.4bn in the 12 months to September 2020 from merchandise exports, USD18.9bn from remittances and USD4.0bn from services. The inflows are more diverse when the BoP sees sizeable inflows, for example, from tourism (Kenya, Morocco, South Africa and others), financial services (Mauritius), transportation (Ethiopia) and outsourcing (India).

 

The World Bank’s projection passes the test of hindsight fairly well. In Egypt remittances declined by 23 per cent in Q2 2020 from the previous quarter, and in Nigeria by 40 per cent over the same timeframe. This was the low point of lockdown in most advanced economies. A recovery is underway. Remittances in Kenya in January and February this year were about 13 per cent ahead year-on-year.

 

The picture is brighter in South Asia. Both Bangladesh and Pakistan have posted double-digit growth in remittances year-on-year every month since June. The de facto cancellation of the Hajj for non-Saudi nationals in 2020 may have helped, it is thought, since the large diaspora from both countries in the Gulf, unable to make the pilgrimage, may have then increased their payment orders.

 

Incentives have a role to play. In Pakistan authorised remitting agencies have waived their fees for transfers above a set threshold (USD200). In Bangladesh the central bank pays a 2 per cent bonus for all remittances. Regulation has been eased to the extent that remittances below the equivalent of about USD6,000 do not require documents of the beneficiary beyond proof of identity. In passing, we see that the authorities in Bangladesh have adopted a lighter touch in several areas of policy and therefore made the country an increasing favourite for foreign investors in frontier equity markets (subject to reservations around governance for the fastidious).

 

While both South Asian governments launched their incentives before Covid-19, the central bank of Nigeria introduced its ‘naira 4 dollar scheme’ in early March. It pays a five naira bonus for each dollar remitted to the beneficiary whether they choose to take the payment in local or foreign currency. It has also added to its list of authorized international money transfer operators. We hope that the scheme is extended beyond the current expiry of 08 May. We will need time to see whether the incentive is adequate, given the large differential with the parallel market rate (currently more than NGN70 relative to the market fx window).

 

Beyond the incentives, we can speculate about other reasons for the different country trends in remittances. The economic impact of Covid-19 has been greater in Europe, where the diaspora from most African countries is concentrated, than in the Gulf, where large Bangladeshi and Pakistani communities are based, or the US. We then drill down into households: individuals working from home and subject to restrictions on their movements would generally have more funds to remit while the opposite is clearly the case for those made unemployed under Covid.

 

Finally, transaction costs are higher for Africa than any other region, and highest of all for small economies.

 

Jean Puri

5th April 2021