Updated: Dec 8, 2020
By Melissa Erisen (IAMTN)
Remittance amounts have been growing over time and reached a record high level in 2019, attaining a value of 714.2 billion USD, as compared to 388.1 billion USD just ten years before.
These sums of money that migrants send back to their families and friends in origin countries have important implications for development, both at the macro and at the micro level.
First, they directly impact the economic situation of some countries which rely heavily on them. As an example, remittance inflows accounted for 22% of the GDP of Honduras in 2019 and exceeded merchandise exports by the country. In such countries, remittances are therefore undeniably part of the development process. In fact, remittances have exceeded official development aid since 1995.
Secondly, it is important to highlight that the impact of remittances should also be analysed at a more individual level: remittances are a primary source of income for entire families and contribute to the reduction of poverty. They allow low-income families to reduce the impact of economic shocks. The study and policymaking regarding remittances should therefore take human security and welfare considerations into account. Academic research has shown that remittances help to limit civil unrest and political instability in receiving countries (“Outsourcing Welfare: How the Money Immigrants Send Home Contributes to Stability in Developing Countries”, Roy Germano). Through an analysis of the 2008-2011 period of food and financial crisis, Germano shows that remittances, acting like a safety net, reduced economic grievances and thus conflict in the Latin American region.
Overall, it should be clear that remittance levels substantially affect economic, social, political and humanitarian outcomes.
The COVID-19 crisis threatened the functioning of these mechanisms in the entire world. Many overseas foreign workers lost their jobs, reducing the amounts of money they could send to their families who stayed in their countries of origin. Lockdown regulations aiming at containing the spread of the disease also acted as a barrier to remittance flows, as money transfer operators’ shops closed down, at a time in which remittance income was more important than ever in developing countries struck by the crisis. Remittance levels decreased sharply in the first half of 2020, in particular in March and April. Of course, alternative solutions quickly emerged, the first one being the increasing digitalisation of remittance payments. This allowed remittance levels to rebound a lot more rapidly than expected by experts’ predictions. The reaction of migrants’ economic behaviour to the COVID-19 crisis largely differed across regions, affecting remittance levels in different ways.
The Latin American region is of particular interest, as many countries rely strongly on remittances from their emigrants working abroad, especially in the United States. Remittances are a very large share of the GDP of Haiti (37.13%), and also account for more than 20% of the GDP in Honduras and El Salvador.
Source: Statista (formatting required)
The region has been one of those most impacted by the COVID-19 crisis throughout 2020, and some countries are still in lockdown to this day. An example is Argentina, where infection numbers continue to rise, passing 900,000 in early October. The overall economic situation is therefore unstable in a large majority of countries on the Southern American continent, and some families struggle to pay bills. The economic threat posed by the strict lockdown is leading to anti-government protests in Buenos Aires, thus also threatening an already fragile political status quo.
In this environment, remittances are an essential variable to guarantee income and stability. An analysis by Pew Research Center has shown that, across the six countries included in the analysis (Colombia, the Dominican Republic, El Salvador, Guatemala, Honduras and Mexico), remittances were 17% (or 981.2 million USD) lower in April 2020 than in April 2019. These sizeable figures hide some regional disparities, as some countries were affected much more than others. Remittance drops affected El Salvador very heavily, with a 40% difference in remittances in April as opposed to last year. Conversely, Mexico was much less affected, with a slight drop of 2.6% in March and then an impressive increase up to 35%. COVID-19 negatively impacted remittances initially, but the trends rapidly changed in the following months of the crisis. In fact, remittance levels increased sharply following the initial drop. Thereby, remittance amounts were about 26% higher this summer compared to last year in the Dominican Republic. A similar pattern is observed in other countries included in the analysis.
The overall decline in remittances to Latin America and the Caribbean in 2020 is at -3%, far from the -20% forecasted by the experts. A total volume of 103 billion USD will be transferred in the region throughout the year.
There are many reasons why remittances have maintained a relatively high level during the pandemic. An intuitive explanation is that many migrants who move out of their countries of origin do so to support their families financially. Therefore, a time of crisis doesn’t justify lowering the support, but instead makes remittances even more important for beneficiaries. The uncertainty brought about by the COVID-19 crisis generated feelings of empathy on the part of remitters for their families and friends who stayed in origin countries, where the crisis was often worse. For example, notably more Mexicans sent money than in ordinary times; while only 60% to 70% usually remitted, the crisis pushed 80% of them to send money to Mexico.
Another reason why the drop has not been as sharp as predicted could be because many migrants work in industries that have not been too heavily impacted by the lockdowns, such as food processing and agriculture. The maintenance of their income at a steady level could permit them to continue with remittances. A further possible explanation is that society learned from the 2008 crisis and the following recession, when many people found themselves in very bad economic conditions. Nowadays, a larger share of people were better prepared thanks to the savings they accumulated, allowing them to continue remitting.
All these reasons together explain why migrants still wanted to send money to relatives in their origin countries, and why that money was truly needed on the recipient side. Even though not as large as initially expected, a decline in amounts remitted has still been observed across the region, mainly in the early stages of the COVID-19 crisis. A major explanation for this phenomenon is also lack of access to remittance service providers’ shops due to lockdown regulations. It took some time for migrants to adapt their behaviour and shift to digital remittances.
Social distancing has led to the surge of digital solutions: 45% of Mexican remitters use online or digital money transfer systems. Although physical money still dominates the remittance market today, this trend might soon be overturned. The digitisation initiated by the crisis is likely to continue in the future, as it has made new and better solutions available to remitters. In fact, digital remittance companies are often better evaluated in terms of consumer experience, speed and safety. On top of that, digital solutions are often a cheaper alternative to cash. The familiarity of consumers with digital remittances increased during COVID-19, and people might therefore become more aware of their advantages, which could lead to a long-term shift towards the digitalisation of payments. Blockchain technology is also becoming part of the remittance industry and its importance continues to increase.
These developments will deeply modify the economic and technical structure of the industry. This innovational process has already started, with COVID-19 acting as an initiator of change. In fact, since the beginning of the crisis, digital payments are booming as new wallets are being created.
It is clear that remittances are very important for Latin American economies and populations. The current COVID-19 crisis has been a challenge for the remittance industry, as access to physical remittances was hindered by government measures to slow down the expansion of the virus. This year has been characterised by a drop in remittances compared to the previous year, overturning a long-term trend of growth in remittance levels. However, the willingness of migrants to continue to keep remittances flowing has been observed in most places, no matter the large economic and technical challenges, pushing the remittance industry to innovate and digitalise. As the process is still ongoing, the ensuing developments will be interesting to follow.