Image Credit: Monito – Money Transfer Comparison

The conventional wisdom in the early days of the Covid-19 virus was that workers’ remittances would fall off sharply, bringing additional balance-of-payments and exchange-rate pressures. An early World Bank estimate suggested a 20 per cent decline in aggregate for low and middle-income countries this year to US$450bn. The Bank’s research shows that remittances overtook foreign direct investment last year to become the largest single source of capital inflows to the same group of countries.

Data releases now point to marked differences in-country experiences. Pakistan stands out by reporting record remittances of US$2.5bn in June, an increase of 49 per cent year-on-year. Several explanations come to mind. The easing of lockdown in many Western countries made possible the clearance of a backlog of transfers. The cancellation of the principal Hajj in Saudi Arabia freed up additional funds to transfer. Thousands of expatriates in Saudi and its Gulf neighbours were laid off due to the COVID-driven recession and returned home. Less convincingly in our view, the central bank maintains that its move to reduce the threshold without fees for small transactions from US$200 to US$100 has boosted total inflows.

These factors (other than the last) also apply to Bangladesh, which has reported record monthly remittances od US$1.8bn in June, and a record of US$18.2bn for the fiscal year (July-June). Up to ten million Bangladeshis work abroad including a large population in the Gulf countries. A specific reason for the record inflow is the 2 per cent incentive paid by the government for remittances made through formal channels. Other governments might wish to offer their own rewards, either on the conversion to local currency as in Bangladesh or, as in India, with interest-rate incentives.

Looking forward, a core factor for the two countries and several in the Horn and North Africa such as Egypt, Ethiopia, and Somalia will be the trajectory of the recession in the Gulf. We will have to watch the trend in the number of redundancies and the extent to which they hit professionals and unskilled workers. A well-placed emerging markets (EM) research house argues that remittances will fall away a little in Pakistan but will remain near the current record level in Bangladesh.

In this unusually data-heavy column, we cite the statistics from two African countries. Central bank data put remittances in Morocco at US$2.4bn equivalent in January-May this year, a decline year-on-year of 12 per cent. Worse than the other cases we cited yet better than the World Bank’s estimate, it may be relevant that a large share of remittances come from France and Belgium, where the hit from the virus has been particularly severe. In passing, we note that travel receipts declined by 24 per cent in the same five-month period: we would have expected a larger fall, given the lockdown in Europe and the US.

Finally, for Kenya we see that remittances weakened from February through to April yet returned in May to January’s level. Our incomplete picture tells us that the hit to remittances may not be as great as earlier indicated. There will be some exceptions of course, and these could include fragile states such as Somalia and microstates such as Cape Verde (which has a large community in Massachusetts). We are assuming that there will not be another serious spike in the virus.

As for the broader impact of Covid-19, we note that the IMF’s update to its World Economic Outlook last month slashed its growth forecasts for sub-Saharan Africa (SSA), as it did for the rest of the world. It sees SSA contracting by -3.2 per cent this year and rebounding by 3.4 per cent in 2021, compared with projections of -1.6 per cent and 4.1 per cent made in April.

The more negative view is largely due to its substantially worse forecasts for the two largest economies (Nigeria and South Africa): in the latter case, the contraction has been adjusted from -5.8 per cent to -8.0 per cent, a consequence of its pivotal tourism and travel industry as well as its sizeable incidence of the virus.

Jean Puri

17 July 2020