We have revised our forecasts for remittance flows to developing countries in the light of a downward revision to the World Bank’s global economic outlook (see our latest Migration and Development Brief 9). We now expect a sharper decline of 5 to 8 percent in 2009 (see figure 1 and table 1 below) compared to our earlier projections.
This decline in nominal dollar terms is small relative to the projected fall in private capital flows or official aid to developing countries. However, considering that officially recorded remittances registered double-digit annual growth in the past few years to reach an estimated $305 billion in 2008, an outright fall in the level of remittance flows as projected now will cause hardships in many poor countries.
South-South remittances from Russia, South Africa, Malaysia and India are especially vulnerable to the rolling economic crisis. Also the outlook remains uncertain for remittance flows from the Gulf Cooperation Council (GCC) countries. Both low-income and middle-income countries are expected to see a similar decline – about 5 percent – in remittance inflows in 2009. Although newspapers are reporting a large number of migrants returning home, new migration flows are still positive, implying that the stock of existing migrants continues to increase. The persistence of the migrant stock will contribute to the persistence (or resilience) of remittance flows in the face of the crisis. Box 1 below outlines the reasons for expecting remittances to remain resilient during the crisis.
There are three sources of risks to the above outlook. First, if the crisis were deeper and if it lasts longer, the decline in remittance and migration flows would be larger. Unpredictable movements in the exchange rates pose a second source of risk to dollar-denominated forecasts. Our base case scenario assumes that during the course of 2009, these currencies will revert back to a level similar to the average in the previous year, with a modest depreciation of the U.S. dollar by the end of the year. However, if the exchange rates of these remittance sources continue to remain weak (i.e. at their current levels) relative to the U.S. dollar, it would result in an even greater decline in remittance flows to developing countries. Finally, the political reaction to weak job markets in destination countries could lead to more tightening of immigration controls. That said, it is almost certain that in many developing countries remittances will become even more important as a source of external financing as private flows dry up.
|Figure 1: Remittance flows will slow sharply in 2009 in U.S. dollar terms
||Table 1: Outlook for remittance flows to developing countries, 2009-10|
Click graph to enlarge
|Box 1: Resilience of remittance flows relative to other types of flows during the current crisis
Despite the prospect of a sharper decline in remittance inflows than anticipated earlier, these flows will remain more resilient compared to many other types of resource flows such as private debt and equity flows and foreign direct investment, which are expected to decline or, in the case of portfolio flows, perhaps become negative in 2009 as foreign investors pull out of emerging markets. There are several reasons for the resilience of remittances in the face of economic downturns in host countries:
(a) Remittances are sent by the cumulated flows of migrants over the years, not only by the new migrants of the last year or two. This makes remittances persistent over time. If new migration stops, then over a period of a decade or so, remittances may stop growing. But they will continue to increase as long as migration flows continue.
(b) Remittances are a small part of migrants’ incomes, and migrants continue to send remittances when hit by income shocks.
(c) Because of a rise in rise in anti-immigration sentiments and tighter border controls, especially in the U.S and also in Europe, the duration of migration appears to have increased. Those staying back are likely to continue to send remittances.
(d) If migrants do indeed return, they are likely to take back accumulated savings. This may have been the case in India during the Gulf war of 1990-91 which forced a large number of Indian workers in the Gulf to return home (Ratha 2003, p 163). Also the “safe haven” factor or “home-bias” can cause remittances for investment purposes to return home during an economic down turn in the host country.
(e) Several high-income OECD remittance source countries are likely to undertake large fiscal stimulus packages in response to the financial crisis. This increase in public expenditure, if directed to public infrastructure projects, will increase demand for both native and migrant workers. Taylor (2000) found that public income transfer schemes in the United States resulted in increased remittances to Mexico – other things being equal, immigrant households that received Social Security or unemployment insurance were more likely to remit than other immigrant households. Also documented migrants are likely to send more remittances to their families, to make up for a fall in remittances by undocumented migrants.