Capital Gain

Remittances Are Lifelines To Developing Economies

Published: (Updated: ) in FINTECH by .

In the payments industry, they’re known as remittances. But for the recipients of the cross-border money transfers and peer-to-peer (P2P) payments usually associated with developing economies, they are lifelines.

They have provided critical support for those developing markets during the pandemic and will continue their importance after the pandemic is in the rearview mirror, a report by Oxford Economics, commissioned by Western Union, has found.

“We wanted to draw attention to the impact of remittances on developing economies as this is not a well understood issue,” Raj Agrawal, executive vice president and chief financial officer of Western Union, told PYMNTS CEO Karen Webster. “Person-to-person international transfers form by far the largest foreign economic support for developing economies. They have helped smooth COVID-19 pandemic-induced economic shocks, increased the resilience of developing nations throughout 2020, and they present a potential lifeline for recovery in 2021 and beyond.  The report illustrates the crucial role global remittances play in developing economies, often achieving what governments and private direct investment cannot.”

The report, titled “The Remittance Effect: A Lifeline for Developing Economies Through the Pandemic and Into Recovery,” contends that direct payments between individuals and families are more effective at stimulating economic growth and insulating against tough times than are other forms of fund flows that cross international borders.

At a high level, P2P transfers to these economies can pull of a feat that other capital flows, namely through overseas development aid (ODA for short) and private direct investment cannot. They get money where it needs to go, most urgently, to individual recipients. Those recipients then can put that money to work directly into their respective economies.

Drilling down a bit, remittances benefit recipient households in developing countries, the research found, by providing an additional source of income that can help satisfy essential needs, and help shield recipients. And to Agrawal’s point, they guard against external, economic shocks.

Oxford/Western Union have captioned the positive ripple effect the “remittance effect,” where developing economies see reduced poverty rates and more effective interdependence between nations. There’s also a “multiplier effect” tied to remittances, which means that every $1 of remittances translates to a $0.40 increase in final gross domestic product (GDP) in the recipient country.

“The ‘remittance effect’ drives profound gains for developing economies, including improved standard of living and driving increases in economic activity,” Agrawal said. “It’s an engine for growth enhancing connectivity. It links individuals worldwide, but it also has the effect of contributing to economic, social and political interdependence between nations. This happens even as governments shut borders.”

The Flows — And Where The Money Goes

To be sure, even remittances, overall, did not escape the ravages of the pandemic unscathed last year. The World Bank estimated that remittance flows to developing countries (low- and middle-income economies) contracted by 7 percent in 2020, compared to 2019’s $717 billion tally. But that reading is better than the 20 percent decline that had been forecast by the organization in April, as the pandemic hit hard across the globe. The pressure is such that we may see another 7.5 percent decline this year, said the report.

Agrawal is more optimistic.

“The World Bank forecasts for 2021 may not occur,” he said. “Remittance outturn for 2021 could fall within a wide range between a decline and a return to the pre-pandemic growth trend. We also need to consider positive economic trends, sender resilience, and demand for remittances from receiver countries in the equation. However, uncertainty is still high.”

According to the Oxford report, the 2020 remittance decline was far less than had been seen in foreign direct investment, where those fund flows to developing nations were down between 35 percent to 45 percent. Incomes have been adversely impacted, especially among migrant workers who tend to perform job functions most exposed to the virus. Western Union has found that a third of remittance senders are reporting a negative impact on their incomes from the pandemic.

But according to the report, “The relative stability of remittances in the face of this negative impact on incomes is explained by several factors.

“In some host countries, for example, unemployed migrants were able to access government cash transfers offered by national governments, helping to stabilize their incomes (although this was not the case in Middle East countries); migrant jobs were protected by government support schemes; and others have drawn down savings to send money home.”

And, as the findings indicated: Historically, remittances have tended to be relatively stable and do not closely follow business cycles, and thus remittances “can be viewed as a form of insurance against income shocks in developing economies.”

What Comes Next

The report noted that half of advanced economies could vaccinate a significant portion of their most vulnerable citizens this year, and they will begin lifting at least some restrictions this spring.

“This will likely include more migrant-intensive service sectors, triggering a mid-year rebound in growth and helping them to recover faster than developing economies this year,” Oxford found.

Stimulus programs are likely to be rolled back.

The flow of people, according to the report, is also an important economic recovery factor. Western Union said in a release tied to the report that it is “encouraging policymakers across the spectrum to prioritize legal, smart, safe, and equitable cross-border migration systems.”

“Organized global flows of people and money mean developed economies are rejuvenated,” Agrawal said. “This report represents an important message for governments as they look at international migrations. There is an opportunity to prioritize legal, smart, safe and equitable cross-border migration systems [and] uplift developing nations’ economies while keeping developed economies ticking.”

Agrawal specifically called out the pandemic factor as shining a spotlight on the critical nature of remittances. The urgency to get money into peoples’ hands quickly is spotlighted by the fact millions more people will face financial hardship this year and beyond due to COVID-19. The bank estimates that up to 150 million people will be pushed into extreme poverty this year alone. Western Union, said Agrawal, is committed to understanding the effect “lifelines” have on their recovery.

“We call our customers heroes, but Oxford’s report calls them the world’s ‘Economic First Responders’” he said. “In the light of the pandemic and first responders that serve across essential services closer to home, we like the analogy. We agree that these individuals are truly the world Economic First Responders.”



About: The January 2021, Retail Banking Services’ Paradigm Shift Report, PYMNTS examines how consumers choose to engage with their FIs when accessing information about various products and services, especially since the pandemic’s onset.

Source link


Leave a Reply

Your email address will not be published. Required fields are marked *