Remittance payments sent from migrant workers back to their home countries are considered a lifeline for many families in developing countries. Not only do they help families to survive, but they also fuel consumption spending in these nations, which helps drive economic expansion in developing countries.
The COVID-19 pandemic has left a battered economy in its wake, as lockdown measures have taken their toll on businesses and households alike. No sector of the economy has been left untouched and the remittance market is no exception. Plunging unemployment, social distancing measures, and travel bans have stifled the flow of payments to countries that need it the most, including those located in South Asia.
This article was written by Gerelyn Terzo, staff writer at Sharemoney
Not only is it a struggle for migrants to come up with the funds to send overseas but social distancing requirements have made it nearly impossible for those who could send money to do so. This is because the remittance market is still stuck in the dark ages in some countries, where it is all but impossible to send money without having some kind of face-to-face interaction through an agent.
However, a silver lining is beginning to emerge that could guard the remittance market from future shocks. As the discussion expands to not only focus on the problem but also the solution, one of the most popular suggestions involves the digitization of payments.
The World Bank has predicted a sharp 20% drop in global remittance flows to low and middle-income countries this year, from more than $550 billion in 2019 to $445 billion in 2020. This forecast is on track to come true. South Asian countries are usually a hotbed for remittance activity. Therefore, it’s not entirely surprising that the region has found itself in the eye of the COVID-19 storm.
For instance, Bangladesh,where some 10 million migrant workers sent $18 billion last year, has been reeling from the COVID-19 pandemic amid a lockdown measures and what the World Bank describes as “secondary economic impacts” from weaker oil prices. Since Bangladeshi migrants are concentrated in the Middle East, plummeting oil prices combined with the lockdowns present headwinds that have likely shaken their ability to send money home.
While the effect of lockdown measures have been well documented, the oil price plunge has only exacerbated an already precarious situation. This could be traced back to a trend uncovered by the World Bank during pre-COVID days. In a 2016 report, the organization found a potential link between the pace of remittance flows and the strength of commodity prices.
The connection was found in response to a similarly weak oil price that coincided with a drop in remittance flows from migrants in oil-rich Russia. In 2014, the oil price tumbled from $100 per barrel to $27. As a result, the market experienced a drop in the growth rate of remittances to developing countries, the likes of which had not been seen since the 2008 financial crisis.
The analysis at the time suggested that migrant workers in Russia, in particular, were vulnerable to finding themselves unemployed, which in turn would then interfere with their ability to send remittances home. In Middle Eastern countries, the effect of the low oil price on remittances is less evident but remains a risk.
Although the year is only about halfway over, the effects of the pandemic are already being felt. Global remittance flows suffered a decline of almost 25% in April. Bangledeshi migrants sent an estimated $1.09 billion in the month, which was a decline of more than $350 million as compared to the year-ago when flows hovered at $1.43 billion. According to a banker quoted in The Financial Express, the damage might not be over.
"The country's economy may face an extra pressure in the near future if the falling trend in inward remittance persists,” the executive said.
On the other hand, remittance flows into the country could see a pop as a result of the Muslim holiday “Festival of Breaking the Fast” this month, which marks the end of the Ramadan.
The Bangladesh Bank is also doing its part, having reportedly earmarked more than BDT 30 billion in the budget to incentivize migrant workers to send remittances back home via the official banking channels rather than through illegal systems in an attempt to bolster its foreign exchange reserves. While these moves have been cheered, they are not enough to fix the underlying cracks in the country’s remittance system. This is where technology comes into play.
Bangladesh is not alone. The World Bank projects remittance growth of 5.8% for South Asia next year, which reflects combined regional flows of roughly $115 billion.
Nepal is ranked No. 19 by the World Bank for the amount of remittance funds received, with more than $8 billion flowing into the country in 2018. With remittances accounting for more than one-quarter of the South Asian country’s economic output, it is clear that households depend on the income for everything from consumption to healthcare to education.
Therefore, the World Bank’s forecast for a 14% decline in remittances to Nepal this year is concerning. As a result of the COVID-19 pandemic, global recessionary conditions coupled with travel bans are expected to persist, stifling migration patterns and pressuring remittance flows well into 2021.
While the wheels of change could move slowly, some providers are ahead of the curve. Online money transfer services give you the opportunity to send money online and choose the transfer method, such as bank deposit, cash pickup or even door-to-door delivery.
According to a recent poll by the International Association of Money Transfer Networks (IAMTN) and the United Nations Capital Development Fund (UNCDF), more than 91% of remittance companies have experienced changes in transaction volumes, nearly 70% of whom say it has been for the worse. It is not surprising that the industry is so keen to find a solution to the current crisis, and the digitization of remittances on both the sender and receiver sides is being hailed as a possible answer, though not one without its own set of challenges.
As it stands, remittance transactions are largely a cash market that require visits to brick-and-mortar locations to complete. That is due to the fact that cash is still king for many migrant workers and their families back home. Many of the households that are receiving these payments from migrant workers are considered unbanked, which means they don’t have access to a bank account. The rise of COVID-19, however, has called this dynamic into question, as worries about handling physical cash in addition to visiting live agents have cut to the heart of the industry.
To keep money from migrant workers to their families flowing, the integration of digital solutions, including mobile apps is keyHowever, in order to facilitate this shift, collaboration between both the public and private sectors is required.
On the regulation side, standards such as know-your-customer (KYC) protocols are in place to protect the transaction from fraud, but these measures are not yet available in all markets. In an ideal solution, migrant workers would be paid digitally into an account from which they could also send funds to their families. However, it would require cross-border cooperation among employers, remittance service providers, and policymakers alike.
To that end, the UNCDF has launched a Request for Applications in which it is seeking partners to help provide solutions to problems faced by migrants and the families they support through remittances. The organization is looking to bolster both digital remittance channels and digital use cases as well as launch products that support financial access for migrants and their families.
Gerelyn Terzo is a staff writer at Sharemoney, a money remittance service that is passionate about improving the lives of immigrants. The granddaughter of an Italian immigrant from the town of Teora whose first steps in the U.S. were on Ellis Island, Gerelyn resides in New Jersey.
This article was published on Emerging Market Experts (EMEx).
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