Every year, Africans who live abroad send billions of dollars to their families back home. But the COVID-19 crisis means these remittance flows have dried up. COVID-19 Crisis Puts Squeeze on Million Africans Who Rely on Remittances.
For countries like Tajikistan, the Kyrgyzstan Republic, Lesotho, and Nepal, remittances constitute as much as 30 to 45 percent of national GDP and, in many other developing countries, remittances outstrip official development assistance as well as foreign direct investment (World Bank 2017).
Remittance literature has extolled this rising volume of remittances for having a substantial positive impact on development and poverty, especially in comparison to the impacts of official development assistance.
COVID 19 & its effect on remittance
COVID-19 could cost the global economy up to $8.5 trillion over next 2 years, pushing 34 million people into extreme poverty.
The Economic Commission for Africa recently estimates that a one-month full lockdown across Africa would cost the continent about 2.5 per cent of its annual GDP, equivalent to about $65.7 billion per month. This is separate from and in addition to the wider external impact of COVID-19 on Africa of lower commodity prices and investment flows.
As a consequence of the covid19 pandemic, the World Bank data indicates that remittances are expected to undergo the sharpest decline in modern history, shrinking by about 20%, or just over US$110 billion. This is a challenge for a lot of countries, not least in Sub-Saharan Africa.
Reduced remittances can have hugely negative effects across economies as investment and consumption decrease. It can also slow down the progress countries have made in achieving some of the Sustainable Development Goals.
The COVID-19 pandemic has severely impacted health systems worldwide, but in terms of economic impacts, low- and middle-income countries may take a greater hit due to the projected decline in remittances for this year.
Data from the World Bank show that remittance inflows are expected to shrink by about 20 percent, which amounts to a fall of around US$110 billion.
Reduced remittances can have major ripple effects across economies as investment and consumption spending decrease. It can also slow down the progress countries have made in achieving the Development Goals.
To mitigate these impacts, the joint call to action encourages stakeholders in the remittances sector to enhance physical and digital access to cross-border financial services, and to bring together actors in the public and private sectors, especially remittance service providers, to innovate solutions that would improve remittance flows.
The hardship of COVID-19 felt by migrants in the form of lost wages and employment – often without government safety nets – is a large part of this crisis in remittances. The decline also results from a host of issues caused by the coronavirus that impact the services migrants use to send money home – including the restrictions placed on remittance services providers and their agents.
The loss of this crucial financing lifeline is devastating for both the migrant households and receiving countries.
Remittances are essential for COVID-19 response and recovery. In countries with limited social safety nets and less diversified economies, they often serve as a lifeline, and more so in times of crisis. The existing obstacles to send and receive money can lead to increased poverty and social insecurity, which would further destabilize national economies.
By building capacity for a conducive regulatory and policy environment, strengthening open digital payment ecosystems, and fostering innovation for inclusive digital solutions for migrants, are supporting governments and the private sector to ensure continuity in the remittance flows to the countries and families hardest hit by the effects of the coronavirus.
Remittance flows have grown in the world economy over the longer-term as the scale of migration between countries has grown.
Migrants sent about US$450 billion to developing countries in 2017, ten times more than they did just 20 years earlier. These ‘workers’ remittances’ are more than four times the value of all foreign aid for development. Some countries are heavily reliant on remittances, for example, half of all Mexican diaspora work abroad, and many send money back home.
Money from remittances goes directly to families – with less risk of waste or corruption – more effective than overseas aid. Some finding reveals that a 1% increase in remittances as a % of GDP leads to a 22% drop in poverty .Remittances provide a key source of foreign savings for low income countries – Remittances are the biggest source of US dollar income for Mexico second only to oil exports.
Higher remittances flows will increase liquidity in financial markets which may push down the interest rate and lead to an expansion of credit and investment The majority of remittance income is consumed – adding to aggregate demand (AD) – Through the multiplier effect they can lead to an even greater boost to economic growth.
In fact the impact of remittances on development is still an area open for debate and further analysis but most experts agree that remittance flows in the form of direct transfers to households raise household incomes and have the potential to contribute to overall poverty reduction.
But, research shows that although the majority of remittances are indeed used for consumption, this consumption improves the fundamental well-being of households by providing added income to afford better housing or more nutritious food.
Remittance in the Ethiopian case
When the coronavirus began hitting Western economies, it hurt the economies like of Ethiopia too – not only because of a loss in trade and tourism, but also due to a loss in remittances.
Hundreds of thousands of Ethiopian families depend on money sent home by relatives working in North America, Europe and elsewhere. The safety net for millions of people is now threatened, and some families fear for the worst.
Elisabet Belayneh is an Ethiopian national living in the outskirt of Addis Ababa. The mother of two says she closely monitors any message that comes to her phone.
“Each time I receive a message alert, I think it’s a money transfer to my account, but it’s not. I was expecting to receive money from my family, it’s the 20th day of the month. I haven’t received anything yet,” she said.
Elsabeth depends financially on her mother and brother who live in the United States. But both have lost their jobs and are staying indoors due to the COVID-19 pandemic.
In 2019, Ethiopia received $6 billion in remittances from abroad, according to the National Bank of Ethiopia. Remittances amount to around 2% of GDP of Ethiopia. With stay-at-home orders throwing millions out of work in Western countries, millions of Ethiopians are feeling the pinch.
The United Nations Economic Commission for Africa (ECA) said last month Africa needs $100 billion to combat the virus and support its vulnerable citizens and economies. Africa may lose half of its GDP with growth falling from 3.2 percent to about 2 percent due to a number of reasons which include the disruption of the global supply chain.
Remittances and tourism are also being affected as the virus continues to spread worldwide, resulting in a decline in FDI flow, capital flight, domestic financial market tightening and a slow-down in investment, hence job losses.