Defying the odds: Remittances held up during the COVID-19 pandemic

Kangni Kpodar, Montfort Mlachila, Saad Quayyum, Vigninou Gammadigbe 27 September 2021

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The COVID-19 pandemic has upended lives and livelihood across the world. However, one bright spot in this pandemic has been how remittance flows to developing countries have evolved. Despite predictions of a large collapse of these flows in the early months of the pandemic (e.g. World Bank 2020), remittances to developing countries have proved to be fairly resilient, thus providing much-needed external financing and support for low-income households. 

After an initial significant decline, remittances staged a remarkable V-shaped recovery and generally ended the year 2020 strong in most countries (Figure 1). This is a surprise, as remittances to developing countries seemed to have fared much better in the pandemic compared to the Global Financial Crisis (GFC) although the recession in major migrant-hosting countries was much deeper compared to GFC. This salutary outcome helped steady developing economies given that other external financing flows such as foreign direct investment (FDI) fell significantly (World Bank 2021) and official development assistance did not keep pace with the countries’ financing needs. 

Figure 1 Evolution of the growth rate of cumulative remittance flows in 2019 and 2020
(median year-on-year growth rate, percent)

Source: Authors’ calculations
Notes: Cumulative remittances are defined as the sum of total remittances received from the beginning of the year. The sample includes 52 countries for which monthly remittance data was available.

We explore factors that can explain the strength in remittances across the globe in a new study using a novel high-frequency cross-country dataset (Kpodar et al. 2021). Understanding how different factors affected remittances during the pandemic can help policymakers design appropriate policies as the pandemic continues to take a toll, particularly in developing countries. After controlling for economic activity and other factors (such as virus containment measures), we find that remittances responded positively to COVID-19 infection rates in migrant countries (Figure 2). In other words, the data show that when COVID-19 infection rates went up, migrants sent more money to support family members back home in subsequent months. 

This highlights the crucial role remittances play as an automatic stabiliser for home country output and consumption.1 The fact that this has happened when the migrant host countries were in distress and when many migrants themselves faced job insecurity and economic hardships, is no small feat.2 It seems that the recession and containment measures in host countries – which would normally put downward pressure on remittances – have been dwarfed by the urgent need of the migrants to support their families back home. This result is particularly encouraging as vaccination against COVID-19 in developing countries is lagging behind significantly compared to advanced economies, which makes them particularly vulnerable to surges in COVID-19 infection rates going forward.    

Figure 2 Impulse response function (IRF) of remittance growth with respect to COVID-19 infection rate in the home economy

Source: Authors’ calculations
Notes: the chart shows how remittance flows evolve after a one percent increase in COVID-19 infection rate in the migrant home country. For instance, a 1 percent rise in COVID-19 cases per million population would lead to 0.03 percentage point increase in remittances on a cumulative basis after 5 months. The IRF is obtained using the local projection method (Jorda, 2005)

The analysis further shows that fiscal stimulus in host countries, particularly its role in stabilising output, helped to support remittance flows when the home country saw infections rise. We thus document positive spillovers from the unprecedented fiscal policy support in advanced economies to emerging and developing countries. 

We also find evidence that limited cross-border mobility partly contributed to higher remittances being sent through official channels. Prior to COVID-19, anecdotal evidence suggests that a significant amount of money from migrants to their families was sent through informal channels, such as hawala or hundi or with people travelling. In the midst of the pandemic, some scholars hypothesised that migrants were sending more money through official channels because of travel restrictions. We use flight arrival data to test this hypothesis and find that lower flight arrivals are indeed associated with a pick-up in official remittances after accounting other factors that drive remittances. 

Finally, we find that stricter containment measures in remittance-receiving and sending countries have the unintended consequence of dampening remittances holding all else equal. This is not surprising as lockdown measures can disrupt banking and money transfer services and limit people’s access to them. As countries continue to fight new variants of the virus through lockdowns, it is hence important for policymakers to ensure that households in need of financial support can still access and receive remittances. Including money transfer services as part of essential services that remain open during lockdown can thus be helpful. Many countries have also successfully leveraged digital technologies to facilitate remittances flows during the COVID-19 crisis.3

As the battle against COVID-19 continues, remittances have provided much-needed help to weather the storm. Migrants have stepped up in times of need – supporting struggling families at home – and performing essential and often contact intensive jobs that jeopardise their health in host countries. The crucial question is whether they can continue to send money home to keep remittances strong. Migrant-friendly policies in both home and host countries will be necessary as this pandemic continues to take a toll.4 Given that much of remittances are sent to low-income households, supporting remittances is an effective way to not let households slip into poverty in this pandemic and reverse the gains made in recent decades.  

References

Bettin, G, A Presbitero and N Spatafora (2014), “Remittances and Vulnerability in Developing Countries: Results from a New Dataset on Remittances from Italy,” VoxEU.org, 10 February.

Bossone, B and H Natarajan (2020), “Getting Funds to Those in Need and Enabling Access to Money during COVID-19: Government Payments and International Remittances,” VoxEU.org, July.

Chami, R, D Hakura and P Montiel (2009), “Remittances: An Automatic Output Stabilizer?” IMF Working Paper 09/91.

Combes, J and C H Ebeke (2011), “Remittances and Household Consumption Instability in Developing Countries,” World Development 39(7): 1076-1089. 

Fasani, F and J Mazza (2021), “COVID-19 and Migrant Workers’ Employment Prospects in Europe,” VoxEU.org, 25 January 

Jordà, O (2005), “Estimation and Inference of Impulse Responses by Local Projections,” American Economic Review 95(1): 161-182.

Kpodar, K, M Mlachila, S Quayyum and V Gammadigbe (2021), “Defying the Odds: Remittances During the COVID-19 Pandemic”, IMF Working Paper 21/186.

Quayyum, S and K Kpodar (2020), “As Covid Rages On, Countries Need to Support Migrant Workers” CNN Business, 27 September.

World Bank (2020), “COVID-19 Crisis Through a Migration Lens,” Migration and Development Brief 32, April.

World Bank (2021), “Resilience: COVID-19 Crisis Through a Migration Lens,” Migration and Development Brief 34, May.

Endnotes

1 A number of studies such as Bettin et al. (2014), Chami et al. (2009), and Combes and Ebeke (2011) have previously documented the role of remittances as an automatic stabiliser against shocks in home countries. 

2 Fasani and Mazza (2021), for example, find the pandemic put 9 million immigrant workers at high risk of unemployment in Europe.

3 Bossone and Natarajan (2020) highlights how the payment system can be improved further to facilitate remittance flows. 

4 Quayyum and Kpodar (2020) highlight policies to support migrant workers.

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Deputy Unit Chief, Strategy, Policy and Review Department, IMF; Senior Fellow, FERDI

Assistant Director, Monetary and Capital Markets Department, IMF

Economist, IMF

Researcher, Central Bank of West African States

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