The remittance flows to low and middle-income countries (LMICs) is expected to decline by over 14% by the end of 2021, only slightly lower than the 15% decline projected in April 2020, a trajectory of more gradual but prolonged decline continuing into 2021.
This was revealed in the report recently released by Global Knowledge Partnership on Migration and Development (KNOMAD), captioned “Phase II: COVID-19 Crisis through a Migration Lens – Migration and Development Brief 33 October 2020.”
The Global Knowledge Partnership on Migration and Development (KNOMAD) is a global hub of knowledge and policy expertise on migration and development, managed by a multi-donor trust fund established by the World Bank alongside other contributors.
According to the report…
- The decline is based on the trajectory of economic activities in many major migrant-hosting countries, especially the United States, European countries, and the GCC countries. Remittance flows to low and middle income countries (LMICs), which are expected to register a decline of 7.2percent to $508 billion in 2020, followed by a further decline of 7.5 percent to $470 billion in 2021.
- The projected decline in remittances will be the steepest in recent history, certainly steeper than the decline (less than 5 percent) recorded during the global recession of 2009.
- Remittance flows to LMICs touched a record high of $548 billion in 2019, larger than foreign direct investment (FDI) flows ($534 billion) and overseas development assistance (ODA) around $166 billion. The gap between remittances and FDI is expected to widen further as the decline in FDI is expected to be sharper.
- Indeed, both new greenfield investment project announcements and cross-border mergers and acquisitions declined by more than 50 percent in the first months of 2020 from a year before.
- FDI flows to developing countries have steadily declined since 2013 (with the exception of 2018), and they could remain below pre-pandemic levels through 2021.
What you should know
- The Organization for Economic Co-operation and Development (OECD) lists countries into LMICs and revises it every three years.
- 109 countries are classified as LMICs across the world and all the countries in Sub-Saharan Africa are included in the list.
- Remittance inflows are being considered a major source of external financing for most LMICs.
- The top remittance recipient countries have been India, China, Mexico, the Philippines, and Egypt since 2019.
- Tonga, Haiti, Lebanon, South Sudan, and Tajikistan are the top five recipients in 2020 based on remittances as a share of GDP.
- Weak economic growth and uncertainties around jobs in several high-income migrant-hosting countries such as the United States and European countries are likely to drive low remittances
- The weak oil price affected the remittance flows as most economies such as Asia, Southeast Asia, and Central Asia depend solely on oil price.
- A more structural factor in the case of Saudi Arabia and other GCC countries is a shift in their employment policies to favor the employment of native-born workers.
- Outward remittance flow from the GCC countries is very unlikely to increase significantly, in the medium term, as they implement their employment policies that would favour the employment of the native-born workers.
- A major factor that could affect the flow of remittances is the exchange rate (vis-à-vis the US dollar) of source currencies for most remittances – the weakening of the euro and other currencies against the US dollar will also reduce remittances originating from Europe and other high-income, migrant-hosting countries.
Why this matters
Remittance inflows have become one of the sources of foreign exchange earnings in LMICs.
Expats transfer money to their home countries to help their loved ones with essential day-to-day needs such as food, school fees, accommodation and medical expenses.
Importantly, many developing countries rely heavily on these inward flows because they make up a significant portion of their foreign-exchange earnings and stimulate domestic consumption, which then boosts their GDPs.