Covid-19 and remittance-dependent economies

The pandemic has highlighted how migrant workers are essential to the effective functioning of Western economies. Progressive governments should take measures to support workers who in turn support families at home through remittances

The economic effects of the Covid-19 pandemic are seemingly endless. Industries all over the globe are seeing revenues fall, jobs lost, and budgets slashed while governments everywhere are grappling with the enormous public policy implications of the global health crisis.

Even the richest countries in the world have spent billions attempting to protect their citizens and to support their economies. The lasting effects will likely be far-reaching and will only play out fully in the years and decades to come.

The negative consequences of the pandemic are being felt acutely in those economies that are disproportionately reliant on remittance payments. Remittance-dependent economies see a large percentage of their GDP (and the cash flowing through the economy) coming from citizens that are earning their living in other countries and who send money home. These countries are therefore heavily reliant on work being available for their migrant workers in other countries. For example, more than 13% of staff in the British NHS are non-British, continuing the long history of migrant workers across the national health service.

Meanwhile, as pandemic-related restrictions on movement and economic activity began to take shape, output in the services and manufacturing sectors fell, sometimes overnight, with direct consequences for the capacity of many migrant workers to earn an income. This is where the damage being done to the world’s largest economies can trickle down and have major consequences for remittance-dependent economies.

What countries does this affect?

There are countries all over the world where many people rely on remittance payments with a high concentration among Pacific Island countries. According to the World Bank, around 21% of all remittances sent in 2019 went to economies in the Asia Pacific region. Of these countries, Tonga is the most remittance dependent – 38.5% of its GDP was made up of remittances in 2019.Other countries from the region in a similar situation include Nepal, the Philippines, and Samoa.

Many people from the Asia Pacific region move abroad to work in especially service-related jobs. Women often find themselves in domestic and caregiving roles, and men often earn money from seasonal agricultural work or in construction. In the Asia Pacific region, many such migrants tend to work in Australia, New Zealand, the United States of America, and Canada.

Another region that sees heavy reliance on remittances is Central Asia where millions head north to Russia to find better paid and more reliable work. One notable case is Tajikistan, the poorest of the Central Asian countries. One of the main reasons for Tajikistan’s relative poverty is its lack of arable land, given its mountainous terrain, with over 90% of its land considered upland that is able to sustain only the hardiest of crops. Thus, land degradation increasingly affects the economy and quality of life in the country. While more than 70% of the population live in rural areas and in 2018 45.5% of all employment was in agriculture. However, this dominant sector accounts for only 23% of GDP growth in 2017 and 11% in the first nine months of 2018. Thus, it us unsurprising that over 33% of Tajikistan’s GDP is made up by remittance payments. Since the onset of the pandemic however, many Tajik workers have been unable to travel to Russia and elsewhere due to restrictions on travel. This has driven up unemployment in the country, while stranding Tajik workers in Russia, many of whom also lost their work as the economy began to lock down. Notably, Russia’s economy has been stagnating since 2014, meaning remittances were already decreasing.

What are the effects of a reduction in remittances?

Beyond the obvious fact of less money being bought into and moving through the economy as a result of the drop in remittance payments, the issue of migrant workers being forced to return home – to a country that has little or no work for them – also causes major societal and economic strains on remittance-dependent economies, which can force workers and their families into poverty, as has occurred in Bangladesh.

The lack of opportunities for migrant workers is undoing years of gradual improvement in poverty rates in Bangladesh. The Bangladeshi government reports its progress on reducing poverty to the United Nations, and have said that the poverty rate has halved from 40% in 2005, to 20.5% in 2019. The pandemic is rapidly deleting this progress, and by June 2020, the poverty rate had surged to 29.5%. Meanwhile, World Bank estimates projected that total remittances by migrant workers from Bangladesh would fall to $14 billion in 2020 – around a 25% fall from the previous year. Figures released by the Central Bank of Bangladesh show that year-on-year remittances in April 2020 fell by 25% compared to the same month in 2019 indicating that the World Bank’s projection is, unfortunately, likely to hold true.

Meanwhile, even in cases where workers have been able to stay abroad and earn money throughout the pandemic, they often still struggle to send money home as it is common for remittances to be bought back in cash to avoid taxation or banking fees.

What can be done to improve this dire situation? In the short term at least, finding a way to convince migrant workers and their families to open bank accounts could help increase the rate of remittances payments during what will hopefully be the final stages of the pandemic. This would require cooperation between migrant workers, financial institutions and governments in both home and host countries, and such cooperation is unlikely to happen quickly, it at all.

Overall, if the pandemic has highlighted nothing else, it is that migrant workers are essential to the effective functioning of Western economies. Progressive governments should take measures to support workers who in turn support families at home through remittances. Governments can take measures to make remittance payments easier, including by relaxing fees on transactions under $1000. By encouraging competition between private companies, costs for sending remittances should thus fall, which in turn can help pull some of the world’s poorest people out of poverty.

The intense manner in which remittance payments are scrutinised by banks is what makes transactions take so long, and cost more than many would deem to be reasonable. Banks are worried that remittances are actually money laundering, and Dilip Ratha, manager of the migration and remittances unit at the World Bank, believes that has to change if remittances are going to become quicker and more affordable.

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