Resilience of remittances proves a lifeline for developing economies

Poorer countries face a long haul to secure vaccine supplies and set their economies on the road to recovery. As discussions over debt relief and concessional finance drag on, there is one very simple thing richer countries can do to help them: keep welcoming migrants who send money home.

Remittances make up more than a quarter of GDP in some small economies. For low and middle-income countries — excepting China — they are now a more important source of funds than foreign direct investment and official aid combined, bolstering weak social security systems. And during the pandemic they have proved to be an economic lifeline.

Their resilience is a surprise. Last April, the World Bank forecast remittance flows to low and middle-income countries would plunge by a fifth in 2020. Last week, it concluded they were just 1.6 per cent lower than in 2019, at $540bn. Despite facing greater precarity, bigger health risks and a backlash in public opinion, migrants have contrived to send home almost as much as ever.

Fiscal stimulus is one of the main reasons remittances held up so much better than expected, according to Dilip Ratha, an economist at the World Bank. This is especially visible in Latin America and the Caribbean, where inflows grew 6.5 per cent on the back of a recovering US economy.

Many migrants could not claim benefits in the US, but policy measures that kept businesses afloat helped them to continue earning. In healthcare and other frontline roles, and by switching into informal gig work, “they have taken extraordinary risks to stay employed”, Ratha said.

But migrants have also been running down their savings. Manuel Orozco, who heads the Center for Migration and Economic Stabilization at Creative Associates International, a development organisation, said migrants in the US had bigger pools of savings to draw on than after the 2008 downturn — partly because Donald Trump’s aggressive policies had “set in people’s minds that it was important to prepare themselves in the event of a deportation”. 

There are other one-off factors — in particular, the large numbers of migrants working in the Gulf and Russia who lost jobs due to the weak oil price and returned home, taking their savings with them.

There are also quirks in the data. The World Bank believes recorded remittances were boosted by a shift from informal to formal channels — people who were no longer able to carry money across borders made digital transfers instead.

This in itself holds a lesson for policymakers. The high cost of remittances — fees averaged 6.5 per cent globally in late 2020 — has long stopped migrants sending as much money home as they might.

Wafa Aidi, an economist at the UN Economic Commission for Africa, noted that several governments in the region stepped in last year to ease these costs, offering tax incentives, waiving money laundering checks for small transactions or making it easier to keep money in e-wallets.

“Mobile money has been an integral part of the African response to Covid-19,” she said.

The World Bank believes remittances will return to growth in 2021, because migrants in the US and other rich economies will see their earnings prospects improve, while families at home still need support.

But developing countries cannot count on the kind of growth in remittances they experienced in the decade leading up to the pandemic. Last year, the global stock of migrants fell for the first time in 70 years and many countries that host migrants are still wary of opening their borders to new arrivals.

Further efforts to bring down remittance fees would help, Aidi said. Remittances sent through official channels have wider benefits, because they bring people into the financial system and provide a deposit base that helps banks in developing countries lend more.

But the biggest factor driving remittances is demand for migrants’ labour. In the coming months, families across the developing world need rich countries to sustain their stimulus policies so that migrants can secure visas and remain in work.