Africa weekly brief : pandemic leads to slump in remittances

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Africa weekly brief : pandemic leads to slump in remittances

-The Economist Intelligence Unit forecasts that remittance inflows, a key source of financing for a large number of countries in Sub-Saharan Africa (SSA) and an important contributor to consumption, investment and the balance of payments, will fall in 2020. After dipping by 0.5% to US$47.4bn in 2019—which eclipsed inward foreign direct investment (FDI) of US$31.7bn—SSA’s remittance inflows are projected to drop by about 23% on aggregate in 2020.
-Recession and job losses in global markets, including in countries with large numbers of SSA migrants, particularly the US and the EU, will inevitably translate into substantially lower remittances. The impact on individual SSA countries will vary, with some being more resilient than others, partly depending on whether expatriate workers are in high-paid, secure employment, or in low-paid, insecure jobs. On top of tourism losses and weaker FDI, the downturn in remittances in 2020 will amplify SSA’s economic challenges.
-Despite the scope for policy actions, the primary forces driving remittances will continue to be global economic performance and openness to migration, which are both threatened by the pandemic. If global recovery is weak and movement restrictions tighten, SSA would be one of the main losers.
So far Africa appears to have escaped the worst of the Covid-19 pandemic that spread quickly from Asia into the Middle East, Europe and the Americas during the first half of 2020. The public health impact in Africa has been relatively low compared with other major regions, although there remains great uncertainty surrounding the scale and trajectory of the outbreak on the continent, and concerns that transmission of the virus could be accelerating in some countries and that the worst is yet to come. What is much less uncertain, and expected to be severe, is the economic impact of Covid‑19 containment policies implemented in Africa and elsewhere. The region looks set to suffer its largest-ever recession in 2020. The rebound will be modest across the board and most countries will emerge from the crisis with heavy baggage in the form of large fiscal and current-account deficits, weak currencies and troubling debt burdens. Moreover, the pandemic presents an unprecedented challenge to countries with a strong dependence on workers’ remittances. Remittances have tended to be counter-cyclical in nature and have in the past supported macroeconomic stability during periods of economic stress. Amid shocks in senders’ countries of origin—such as economic recessions, natural disasters or political crises—flows of remittances tend to increase as migrant workers support their families from abroad. However, receiving countries will not be able to count on the remittances buffer during the Covid‑19 crisis. The simultaneity of lockdown measures and recessions across the world is a perfect storm that will affect both senders and receivers, causing a significant collapse in remittance flows that will compound coronavirus-induced recessions. For a country to garner a high level of remittances, certain conditions need to be met, including a sizeable expatriate population (preferably skilled and living in richer countries), a functioning banking system (both to facilitate and to measure financial flows) and, increasingly, an accommodating information and communications technology (ICT) environment, to speed transfers and reduce their costs, which remain high in SSA. For instance, in the last quarter of 2019, senders paid an average of 8.9% to send money to SSA, far higher than the global average of 6.8%, and more than double the Sustainable Development Goal (SDG) target of 3% by 2030. In addition, the costs of sending money along remittance corridors—remittance pathways between two countries—in SSA varies greatly between the lowest-cost and the highest-cost corridors. For instance, member countries in the West African Economic and Monetary Union benefit from the lowest costs, while South Africa is one of the most expensive countries to which to send money.

The pre-pandemic picture
Nigeria led the regional remittance league by a large margin in 2019, with inflows of US$23.8bn (5.3% of GDP), roughly half the SSA total (and well ahead of FDI of US$3.3bn), helped by the country’s large population and strong international connections. In second place came Ghana (US$3.5bn; 5.2% of GDP), followed by Kenya (US$2.8bn, 2.9% of GDP), Senegal (US$2.5bn; 10.5% of GDP) and the Democratic Republic of Congo (DRC; US$1.8bn; 3.7% of GDP). Ranking in sixth to 11th place were Zimbabwe (US$1.7bn, 13.5% of GDP), Uganda (US$1.3bn; 4.2% of GDP), South Sudan (US$1.3bn; 34.4% of GDP), Mali (US$1bn; 5.9% of GDP), South Africa (US$0.9bn; 0.2% of GDP) and Lesotho (US$0.6bn; 21.3% of GDP). Other remittance-reliant countries are The Gambia, Guinea-Bissau, Liberia and Togo, and the small island states of Cabo Verde and Comoros. South Africa’s remittance standing is atypical in SSA, as the country is a net outward remitter, because it hosts a high number of migrant workers from other SSA states, especially the neighbouring countries of eSwatini, Lesotho, Mozambique and Zimbabwe, but also from further afield.

Global turbulence hits remittance flows
Most remittance recipients will suffer in 2020 because of lost income opportunities for migrant workers, especially in key source markets such as Europe, the US and Canada, as well as South Africa and the Middle East. Lockdowns of varying severity, accompanied by recession in most countries, will see migrant workers lose their jobs (or suffer pay cuts), leaving them with less disposable income to send to their home countries. Countries in which remittances account for a large proportion of GDP (such as South Sudan, Zimbabwe and Lesotho, and to a lesser extent Senegal) are the most vulnerable, especially in troubled states (like Zimbabwe), where remittances are a vital lifeline for many poor households, helping to fund essential consumption. Countries with diverse remittance sources (such as Kenya) will in theory be more protected than those relying heavily on a single source (such as Senegal, which is heavily dependence on remittances from France). In addition, expatriates in skilled, better-paid positions (largely in the US and Europe) are at less risk of losing their jobs, or have better chances of finding new ones, than less-skilled workers in more vulnerable forms of employment (such as contract work in the Middle East). The precise impact on individual SSA countries will therefore depend on many inter-linked factors.

Kenya showing resilience

Data on remittance patterns in 2020 to date are sparse in SSA, although Kenya is a notable exception and offers some encouragement. After a fairly buoyant first quarter, with remittances rising by 6.2% year on year to US$707m, flows slumped by 15.1% year on year in April, hinting at the start of a sharp downturn. Remittances rebounded in May, however, rising by 6.2% year on year, before a small, 2.3% retreat in June. Second-quarter inflows were therefore down by just 3.7% from a year earlier at US$755m, which surpassed official expectations, while inflows in January-June were 0.9% higher at US$1.46bn. North American inflows (primarily from the US), which account for about 50% of the total, have been the less affected by the pandemic than inflows from Europe, Saudi Arabia and South Africa, according to the Central Bank of Kenya (CBK), despite a sharp contraction in the US economy and heavy job losses.
The CBK now expects remittances to be largely flat in 2020, rather than posting a 12% decline, but trends remain highly uncertain, especially given a fresh pandemic spike in large parts of the US and Europe, leading to renewed restrictions and bleaker employment prospects. Remittances sent in the second quarter may have been sustained by savings (rather than salaries), pointing to a drop when bank balances shrink. Competition for jobs in the US and Europe could put African migrants at a disadvantage, especially if accompanied by a crackdown on undocumented workers, notably in the US. Kenya’s remittance flows in 2020 to date point to a smaller downturn than the World Bank expects, but whether Kenya’s experience is typical in SSA is tricky to judge, with hard data from elsewhere lacking. Kenya undoubtedly benefits from having diverse source markets, but this is no guarantee of protection during a global recession.

Southern Africa lockdown

South Africa lacks recent figures for inflows and outflows but is a vital source of remittance funding for eSwatini and Lesotho, both fellow members of the Southern Africa Customs Union (SACU), for Zimbabwe and Mozambique, and for countries further afield (such as Malawi and Kenya). Botswana and Namibia, the other two SACU members, are less reliant on remittances. South Africa’s strict lockdown in April, and looser lockdowns in May and June, are having a significant impact on regional migration, as borders remain mostly closed for non-business purposes, including migrant workers. The latest migration data show that African arrivals into South Africa plunged by 96% and 92% year on year in April and May respectively, to 49,200 in the latter month, almost exclusively from other SACU members. The situation improved in July, when South Africa reached a deal with Mozambique to allow for the return of 28,000 mineworkers (subject to testing and quarantine), but the high pandemic caseload in South Africa and a deep recession in 2020 will have a large negative impact on outward remittances (which totalled US$1.05bn in 2019), especially to neighbouring states. SACU members will also be hit by a contraction in their mutual revenue pool because of lower international trade.

Remittances versus FDI

FDI inflows surpassed remittance inflows in 2010-15, but the situation subsequently reversed, as FDI faltered and remittances rose. The gap widened in 2019 (as FDI fell faster than remittances) and the same is probable in 2020. SSA accounts for a much larger share of global remittances (6.6% in 2019) than it does for global FDI (2.1% in 2019), although Nigeria’s dominant position in remittances skews perceptions. Excluding Nigeria from both tallies means regional FDI inflows in 2019 (of US$28.4bn) surpassed remittance inflows (of US$23.5bn). Both funding sources are crucial for SSA, although they have different pros and cons. FDI is mostly discontinuous, vulnerable to commodity price fluctuations and can be withdrawn, but is more focused and often boosts productivity. Remittances play a more diverse role, supporting consumption and investment, but adding less to productivity, especially as the investment portion is often directed towards real estate. We currently expect SSA FDI inflows to fall by about 30% in 2020 (to US$22.2bn), whereas remittance inflows will fall more slowly, possibly by 20% to US$37.9bn, or by less if the Kenyan experience is replicated.

Ripple effect across the economy
Falling remittances in 2020, on top of the plunge in international tourism, lower FDI, reduced trade flows and uncertain commodity prices will all contribute to a region-wide recession in SSA. Risks of households falling back into poverty and food insecurity have risen, while banking sector risks will rise as liquidity tightens with subdued remittance flows. Social pressures will mount as poverty rises and the social safety net provided by remittances dissipates. External imbalances will deteriorate as the buffer created by remittances falls, raising balance-of-payments risks. A post-pandemic recovery will partly hinge on a rebound in remittances, making it critical for governments to pursue liberal reforms to boost investment and overall growth. Diaspora bonds hold promise but remain rare in SSA despite experiments by Ethiopia, Kenya and Nigeria. Despite the scope for policy actions, the primary forces driving remittances will continue to be global economic performance and openness to migration, which are both threatened by the pandemic. If global recovery is weaker than our current baseline, and movement restrictions tighten, SSA would be one of the main losers.Source : The Economist Intelligence Unit

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