Remittances Rise for Now But Will Fall in the Long Term

Since the 1970s oil boom and large scale migration of labor to the Gulf countries, remittances from the diaspora have formed a critical part of the economy of many countries, across Latin America and South Asia. But falling oil prices and reduction of dependence of Gulf Arab countries on expatriate labor is likely to result in a dip in remittances over the long term.

For Pakistan, remittances have been key to helping keep the economy afloat. Record flows of remittances to Pakistan helped it accumulate $1.2 billion current account surplus at a time when it is paying back a $3 billion loan to Saudi Arabia. The mismanagement of Pakistan’s relationship with the Saudis, by the incompetent Imran Khan government, is leading to swifter retrenchment of Pakistani workers than Pakistan had anticipated.

One of the impacts of the Covid19 pandemic has been a return of the migrant labor to many countries and there was fear that there would be decline in remittance flows. What is interesting, however is that there has been “larger-than-expected money transfers from migrants overseas” and these have “have provided a tonic for several sickly economies during the coronavirus crisis.” However, economists note that “the outlook for such flows remains fraught with uncertainty even as vaccines are rolled out.”

Why did this happen? According to Reuters “Migrants have cushioned the pandemic’s economic blow, drawing down savings to help out families back home and sending more money via official channels rather than in person, while benefiting from access to state support, including cash handouts, in host countries such as the United States. While vaccinations should help economic activity to return to normal, the risk of mounting job losses as government support unwinds mean such flows, a source of FX revenue and gross domestic product for many emerging countries, may falter in 2021.”

According to analysts, “Countries like Pakistan, Bangladesh and Philippines, which receive about 9% or 10% of GDP from remittances, have a window of opportunity to invest these flows into productive areas of the economy to help their recoveries because at some point this window may close as people may lose their jobs or decide to go back to their home countries.”

The World Bank has predicted an “estimated drop in flows to low- and middle-income countries to 7% from 19.7% previously” in 2020 and a further 7.5% dip in 2021. This is based on several factors including the fact that many countries, including the Gulf States, that account for around 40% of total outward remittances, may replace foreign workers with locals in 2021.

Author: Alia Khan

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Author: Alia Khan