The Oxford Economics Report: The Remittance Effect: A Lifeline for Developing Economies Through the Pandemic and Into Recovery identifies several positive economic and remittance consumer fundamentals that could support unexpected strength in remittance flows to developing nations compared to World Bank forecasts of a 7.5% slowdown in 2021. However, with uncertainty around the outlook especially high at the current juncture and important downside risks to the outlook also, the remittance outturn for 2021 could fall anywhere within a wide range between a decline and a return to the pre-pandemic trend of growth as sender economies recover and demand from developing economies remains high.
Below are Key Highlights from the report.
Remittances were a silver lining in a cloudy 2020 for developing nations.
While the World Bank estimates that remittances fell by 7% in 2020, this decline will be significantly less severe than the expected decline in private investment capital. UNCTAD expects foreign direct investment (FDI) to develop economies to decline by 35% to 45% in the full year 2020.
Positive data for 2020 on remittance inflows from several central banks in receiving countries, positive earnings data from leading money transfer companies, as well as survey evidence indicating the resiliency of senders, who have been highly motivated to support families and loved ones back home, have all supported a stronger than expected potential outturn for remittances in 2020
Family ties and rebounding economies may prove resilient for remittance flows, potentially exceeding World Bank forecasts for 2021.
The remittance outturn for 2021 could fall anywhere within a wide range between a decline and a return to the pre-pandemic trend of growth, as uncertainty around the outlook is high.
The World Bank forecast of a further 7.5% slowdown in 2021 may be exceeded. As predicted by the World Bank, a cumulative fall of 14% over 2020 and 2021 would be unprecedented in the recent history of remittance flows, which have tended to trend upwards year-over-year.
Positive economic trends, sender economy recovery, sender resilience, and high demand for remittance from receiver countries could combine to support unexpected strength in remittance flows to developing nations in 2021.
A predicted rebound of GDP growth in sender economies, as vaccines are rolled out, restrictions are lifted, fiscal policy remains supportive and pent-up demand is released, augurs well for remittances in 2021.
Remittances are the hidden engine of global connectivity; people are single-handedly responsible for the massive capital movement across the world’s borders.
Financial flows between individuals/people contribute to interdependence worldwide – social, economic, and political. It is unmatched by any other type of public or private cross-border investment flows.
With no government intervention involved in remittances, these flows are directed to meet the recipients’ specific needs in developing economies. In comparison, governments’ fiscal response and flows of overseas development aid can sometimes be delayed and blunter in their application. Also, developing country governments have less budgetary capacity to support their economies.
Remittances multiply through a nation’s economy contributing 0.40 cents GDP for every USD1.0 of inflow.
The .40 cents multiplier is comparable or higher than some multiplier estimates of FDI or ODA.
Applied to the $548bn of developing-country remittance inflows in 2019, this translates to a direct GDP impact on these economies of $219bn.
Remittances have short-run effects on national output, as additional spending is received as income elsewhere in the economy. However, the full economic benefits of remittances are only realized in the long term due to the transformative effects of increased spending on education, health, and other investments.
Remittances represent social insurance for households in developing countries.
At a micro level, remittances benefit recipient households in developing countries by providing an additional income source that helps fund essential expenditures, lowers the incidence of extreme poverty, shields them against economic shocks, and supports long-term investment in healthcare and education.
The global clout of remittances is underappreciated, despite being the largest foreign capital inflow to developing markets (excluding exports).
Remittance flows to developing economies are indispensable, exceeding ODA by a factor of three. According to the World Bank, remittances to developing countries totaled $548bn in 2019, overtaking FDI to become the largest inflow of foreign capital (excluding exports) to developing markets.
A robust study of the remittance ‘multiplier’ is critical, as the current modeling is inadequate and underestimates the real effects.
The remittance ‘multiplier’ is lower than one due to the impact of ‘leakages’ – some of the funds are saved or used to pay off debt (not spent), while a high share of spending in developing economies is likely to be on imported goods (e.g., medicines). A lack of investment opportunities in developing economies may also explain why remittance flows often fail to generate self-reinforcing development. However, a more complete measure of remittance economic impacts that also captures their longer-term transformative effects would likely result in more extensive estimates of the multiplier effect.
Existing research on multiplier impacts is fragmented in terms of time periods covered, methods used, the multiplier definition, and the range of impacts measured.
There is an opportunity to bridge the gap in existing research to measure the remittance multiplier more comprehensively and consistently across countries, looking at the individual effects of different use of funds and factoring in other country-specific characteristics.