Remittances, transfers from expatriate workers to family and friends in their home countries, are a driving force in the reduction of poverty, greater financial inclusion and economic growth. They are especially critical to many countries in Latin America and the Caribbean.
But as Covid-19 delivers devastation to much of the global economy, with GDP forecasts for 2020 plunging faster and more than at any time on record, the flow of remittances are likely to suffer substantially. Indeed, we project that remittances for all countries in our region could fall on average between 20% and 32%, depending on the size of the global contraction.
This could have severe effects on Latin America and the Caribbean, driving households that traditionally receive remittances into poverty and hunger while reducing consumption and its associated tax revenues, which are badly needed now to fight the pandemic.
The key role of remittances as a vital inflow for many countries in the region can be seen in Table 1 below. It shows the impact of remittances in 2019 for countries in which they account for over 5% of GDP, especially highlighting the importance they play in economies such as those of Haiti, Honduras, and El Salvador.
Table 1: Remittances as Percentage of GDP
|Country||Remittances as a share of GDP in 2019 (%)|
Remittances are driven by many explanatory variables. Perhaps the most obvious one is migrant stock, the number of migrants from a country in other countries. Other drivers include the incomes in destination or host countries relative to the home country. That is, countries with lower incomes tend to receive more remittances, and migrants in countries with higher incomes tend to send larger remittances. The general macroeconomic health of both the home and host countries also drives short-term flows. For example, an economic crisis in the home country tends to increase remittance inflows, whereas an economic crisis in host countries tends to decrease them. However, the effect from host countries dominates that from the home country, suggesting that global economic crises have a net negative effect on remittances.
To forecast the impact of the global crisis on remittances to our region we employ a standard model used in the literature, which assumes remittances are a function of a number of determinants. In our case, these determinants are GDP per capita, which we use both as an indicator of short-term changes in the health of economies and as a proxy for income levels, in home and host countries; unemployment; and the overall migrant stock. We weigh GDP per capita in host countries by migrant stocks in those countries in 2019.
Figure 1 shows that the changes in remittances predicted by the model closely track those observed in the data. This is true also for times of global economic stress: Remittances to LAC fell by 11.09% in 2009, and our model fits a value of 11.14% for that year. Given the uncertainty associated with the health crisis, and therefore any economic forecast, we produce three different scenarios from which we forecast change in remittances in 2020 and 2021. The three scenarios are: the baseline scenario, which uses the IMF’s projections for both unemployment and GDP in 2020 and 2021; an optimistic scenario, with the same unemployment forecasts as in the IMF baseline but lower decreases in GDP in 2020; and a pessimistic scenario, which has both higher unemployment forecasts and higher projected drops in GDP in 2020. While the IMF’s projections for GDP growth cannot yet be judged, many countries are already experiencing higher unemployment than the IMF projects in 2020, without even being past the peak of the pandemic.
Figure 1: Observed vs Predicted Percentage Change in Remittances to Latin America and the Caribbean
The results we obtain are striking, as shown in Table 2. We find some countries that are highly dependent on remittances could see them shrink by over a third in 2020.
Table 2: Projected Change in Remittances in 2020, by Country and Scenario
|Trinidad and Tobago||-23.5%||-25.9%||-34.8%|
|Latin America and the Caribbean||-20.6%||-24.0%||-32.0%|
The effects of such a shock would be notable, with the previously mentioned impacts on poverty and hunger as well as reduced consumption and the drop in associated tax revenues that come with it. Finally, despite our model showing a quick recovery of remittance inflows in 2021, caution must be exercised. As we explained, our model uses migrant stocks as of 2019, and it makes no assumptions regarding migration flows. This assumption is valid in the short-term but might be misleading in the longer term, for many migrants might lose their employment and livelihood in their host countries and be forced to return home as a result of the current crisis. Such return migration would hamper a recovery in 2021 and make the shock to remittances, and its associated impact on the economies of the region, long lasting.