Keeping remittances flowing is significant challenge for poorer countries amid COVID-19 crisis: Brookings Institute

Doaa A.Moneim , Friday 12 Jun 2020

Supporting essential remittance flows is a significant challenge amid the COVID-19 crisis, with new research pointing to the importance of cross-border payments for poorer countries

Mahmoud Mohieldin
A file photo of Mahmoud Mohieldin, UN Special envoy on Financing the 2030 Agenda for Sustainable Development (Photo: Al-Ahram)

In his new research, published by the Brookings Institute and shared with Ahram Online, Mahmoud Mohieldin, UN Special Envoy on Financing the 2030 Agenda for Sustainable Development, said that remittances reached a record high of $554 billion in 2019, overtaking foreign direct investment (FDI) flows to low- and middle-income countries (LMICs).

The research was published by Mohieldin and Dilip Ratha, the lead economist on migration and remittances at the World Bank.

Remittances have been larger, and more stable, than FDI in India, oil exports in Mexico, and tourism in Egypt, Nepal, and Tunisia, according to the research.

But the economic crisis caused by the COVID-19 pandemic is expected to lead to a 20 percent decline in migrant remittance flows to LMICs in 2020, which is projected to be even sharper in poorer countries and fragile and conflict-affected countries, according to the research.

According to the World Bank, LMICs could suffer a decline of over $100 billion in remittance flows, on top of a projected decline of $200 billion (37 percent) in FDI flows in 2020.

The overall decline in external financing, especially with the significant drop of portfolio investment, can cause difficulties for nations in managing their external payment needs, for essential imports and foreign debt service, in addition, risks of households falling back into poverty and food insecurity have risen, according to the research.

The World Bank estimates that 40 million to 60 million people may be pushed into extreme poverty due to the crisis.

The research highlighted the call that Egypt has launched alongside 20 countries and organisations to keep remittances flowing, urging policymakers to declare remittance services as essential and to support the scaling up of digital remittance channels.

To maintain remittance flows, the research proposed six measures.

According to the research, a tax credit could be offered to remittance service providers equal to the decrease in fees paid by remittance senders and recipients, while imposition of taxes on remittances should be avoided by source and recipient countries.

Also proposed is an increase in market competition in the remittances industry, given that many countries globally have exclusive partnerships, which stifles market competition and imposes a de facto tax on remittance senders and recipients.

“We need to open partnerships among national post offices, banks, and money transfer operators. We should also encourage interoperability of remittance technologies to help increase scale and reduce costs,” the authors argue,

Additionally, using digital technologies and advance adequate and appropriate, risk-based know-your-client (KYC) requirements is essential, as that could help address “de-risking” practices by correspondent banks (intended to avoid rather than manage risks) that continue to affect access to bank accounts for money transfer businesses operating in smaller and poorer remittance corridors.

The authors also argue that borrowers need innovation and credit enhancement amid the ongoing crisis, when even investment-grade-rated entities in emerging markets are facing troubles in accessing international capital markets.

“Diasporas from many developing countries tend to have a more favorable perception of country risk than institutional investors. The savings of such diaspora members, especially those kept as low-interest bank deposits, can be mobilized via the issuance of diaspora bonds. Several countries have raised billions of dollars of financing through diaspora bonds. Recently, Nigeria raised $300 million via a diaspora bond,” according to the research.

Using future flows, including remittance inflows, as collateral can contribute as well to facilitate bond issuances during a financial crisis. 

In this regard, following a sharp increase in borrowing costs in 2002, Brazil raised over $4 billion by issuing bonds backed by diversified payment rights. According to the World Bank, these bonds had a lower borrowing cost, saving more than 700 basis points compared to Brazil’s sovereign bonds, the research notes.

Further, the authors suggest setting up a structured, international effort to improve the data on remittances as a medium-term priority, especially as many countries do not report data on outward remittance flows.

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