By Raghbendra Jha
CANBERRA, Australia, Nov 6 2020 (IPS)
Remittances are an essential part of economic activity in low and middle-income countries (LMIC), including those in South Asia. Because of the pandemic remittances to LMIC are expected to drop from $548 billion on 2019 to $508 billion in 2020 and $470 billion in 2021. The implied growth rates for 2020 and 2021 are -7.2% and -7.5%. For South Asia the drop will be from $140 billion in 2019 to $135 billion in 2020 and $ 120 billion in 2021 with implied growth rates of -3.6% and -10.9%.
For smaller South Asian countries, remittances are an even more significant part of their economic activity. For instance, remittances account for nearly 28% of Nepal’s GDP and 8 % of Pakistan’s.
Even for India, remittances have accounted for nearly 3% of GDP in recent times. Remittances thus serve the triple purpose of augmenting resources available to households to which these transfers are made, increasing funds for investment to the extent that remittances finance investment and support the current account balances of these countries. There are large deficits in the balance of trade of most South Asian countries.
In the absence of remittances and other invisible flows, the deficits would continue to be very large, thus threatening a perpetuation of macroeconomic imbalances in these countries. The drop in remittances would thus disadvantage these economies in all these areas. At the same time, FDI flows to South Asia have dropped significantly during the first half of 2020. Short-term economic prospects do not appear sanguine for the region.
The reasons for the drop in remittances are rather straightforward. For one, economic growth has been negative for most economies (both developed and developing). The earlier optimism about a V-shaped economic recovery has all but dissipated. This has sharply increased unemployment (with no end in sight) in most of the countries that have traditionally hosted migrants. Secondly, the drop in oil prices has led to a sharp reduction in economic activity in the Gulf and other Middle-east countries where many workers from South Asia traditionally work. Accompanying this is a pandemic induced shift in labour demand in Saudi Arabia and other Gulf Cooperation Council countries towards domestic workers since employment opportunities have sharply fallen. Even in OECD countries (e.g. Australia) net migration has become negative. Third, some exchange rate movements (e.g. the depreciation of the rouble against the US dollar) have led to a drop in the dollar value of remittances from Russia. These factors will be ameliorated only gradually and, even when economic activity picks up, jobs will continue to be offered first and foremost to domestic workers in most of the host countries.
The pandemic induced downturn has led to a large return of migrants to their own countries. This has caused severe disruption in the lives of these people as well as those of the families they had held behind. The World Economic Forum and other agencies have warned that this revers migration and spinoff effects have the potential of increasing poverty, under-nutrition and deprivation in most of these countries.
Thus, human development indicators will be badly affected in these countries.
The corona pandemic presents a complex challenge wherein the economic and public health effects of the crisis interact with each other to worsen both economic and public health outcomes. The public health crisis worsens economic outcomes, which, in turn, reduce the resources to combat the public health challenge. Addressing the challenges thrown up with respect to remittances must, therefore, wait until the incidence of the economic and public health challenges has been restrained. Once this has happened policy can intervene to improve the return flow of workers to former host countries. This can happen if migration policy and remittance policy are integrated to some extent. First, all migrants must have dual registration in the domicile and host countries. For policy purposes, a continuous record of in-migration and outward remittances should be maintained. An insurance policy to protect such workers from unscrupulous migration agents and dodgy avenues for transferring remittances should be enacted. Following from these costs of sending money through remittances should be lowered.
Although the Sustainable Development Goal (Indicator 10.c.1) is that average cost of sending $200 through remittances should be 3.8% the average cost in Q3 2020 was 6.8%. Costs are low in high traffic areas such as Middle-east to India but very high in low traffic areas such as Pakistan to Afghanistan. Furthermore, costs of sending remittances vary considerably across regions and the means used to make these transfers with bank transfers being the most expensive. Steps should be taken to harmonise these methods of transfers and to reduce the costs, if necessary by making compensating transfers to the bank accounts of intended recipients.
Raghbendra Jha, Professor of Economics and Executive Director, Australia South Asia Research Centre, Australian National University
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