Why are remittances to emerging markets growing?

– Remittances to low- and middle-income countries are set to increase by 2.6% in 2021

– Morocco has experienced year-to-date growth in remittances of more than 50%

– The positive outlook comes amid a strong economic recovery in host markets

– Remittances are seen as key to the economic rebound in many emerging markets

As emerging markets around the world continue their recovery from Covid-19, remittances are playing a key role in supporting the economic rebound.

In mid-May the World Bank upgraded its forecast for remittances to low- and middle-income countries for 2021, predicting flows of $553bn over the course of the year, reflecting a growth rate of 2.6%.

This is to be led by Latin America and the Caribbean, with a predicted increase of 4.9%, followed by South Asia (3.5%), the Middle East and North Africa (2.6%), sub-Saharan Africa (2.6%), and East Asia and the Pacific (2.1%). Remittances to Europe and Central Asia are projected to fall by 3.2%.

While many of these figures may seem moderate, some individual countries have experienced dramatic spikes in the amount of money transferred home by expats abroad.

For example, remittances grew by 50.2% year-on-year in Morocco between January and May, by 21.8% in Mexico (January-May), by 20.8% in Sri Lanka (January-April) and by 19.7% in Kenya (January-June).

Conversely, remittance flows to Indonesia and Nigeria during the first half of the year have experienced double-digit contractions, of 13% and 24%, respectively.

These regional and national discrepancies are attributable to various factors. For example, while a majority of Moroccan and Mexican expats live in the EU and the US, respectively, which are moving ahead with their economic recoveries, Indonesia sources a large proportion of its remittances from countries such as Saudi Arabia and Malaysia, both of which were significantly impacted by pandemic-related lockdowns.

Meanwhile, in Nigeria’s case, many analysts believe that a dysfunctional foreign exchange market has resulted in remittances being pushed towards informal, undocumented channels.

Resilient remittances

The largely positive outlook comes on the back of a better-than-expected year for remittances in 2020. Despite the World Bank's forecast in April last year that low- and middle-income countries would see a 19.7% decline in remittances in 2020, flows proved to be remarkably consistent, with the bank currently estimating that the drop reached just 1.6%.

In fact, remittances actually increased in Latin America and the Caribbean (6.5%), South Asia (5.2%), and the Middle East and North Africa (2.3%). It was only sharper falls in flows to sub-Saharan Africa (-12.5%), Europe and Central Asia (-9.7%), and East Asia and the Pacific (-7.9%) that brought the overall growth rate into negative territory.

Further highlighting the diverse nature of remittance flows and their resilience throughout 2020, sub-Saharan Africa’s fall was largely due to a dramatic drop of 28% in Nigeria. Excluding Nigeria, the region’s remittances increased by 2.3% that year.

The main reasons behind the stronger-than-expected flows include substantial fiscal stimulus packages that resulted in more positive economic conditions in host countries, many of which are developed nations; a shift in flows from cash to digital, and from informal to formal channels; and movements in oil prices and foreign exchange rates.

Increased importance

The strong flow of remittances underscores their importance to many emerging market economies.

For example, the World Bank estimates that remittances make up 38% of GDP in Tonga, 33% in Lebanon, 27% in Kyrgyzstan, and 24% in both El Salvador and Honduras.  Other countries in the "yellow slice" – the portfolio of markets that OBG covers – that derive significant portions of GDP from remittances include the Philippines (9.6%), Sri Lanka (8.8%), Egypt (8.2%) and Morocco (6.5%).

As further evidence of their importance, remittances to low- and middle-income countries last year ($540bn) surpassed the equiavlent value of foreign direct investment ($259bn) and overseas development assistance ($179bn) combined.

With remittances expected to increase by another 2.2% to $565bn in 2022, there are concerted efforts under way to reduce the cost of transfers.

One such initiative is the Remittance Community Task Force, launched at the outset of the pandemic by the UN’s International Fund for Agricultural Development. In November the group published a series of policy recommendations calling for increased transparency on the costs involved in transferring money, as well as suggested requirements for governments.

Despite these efforts, however, costs remain high. In the fourth quarter of last year the average global cost of sending $200 was 6.5%, more than double the UN Sustainable Development Goal of 3%. While the figure was lowest in South Asia, at 4.9%, it rose to 8.2% in less developed regions such as sub-Saharan Africa.