Counting costs: The Covid-19 pandemic is set to reduce remittance flows, but new technologies and increased competition could ease the impact


The onset of a Covid-19-induced global recession has affected both labour markets and financial flows around the world. At the confluence of these two are remittances, which have increasingly been among the top contributors to GDP in many emerging markets over recent decades. In April 2020 the World Bank predicted that remittances to low- and middle-income countries would see the sharpest decline in recent history in 2020, falling by 19.7% to around $445bn, compared to $554bn in 2019. This is expected to disproportionately affect emerging economies, which are the greatest recipients of these inflows and whose citizens rely on them to varying extents for a basic income. Given that foreign direct investment flows to emerging markets are expected to fall even further than remittances in 2020, by around 35%, the proportional reliance of some states on remittances as sources of foreign currency may be even more prominent.

Mexican Remittances

The US, as the world’s largest economy, is also the world’s biggest exporter of remittances. According to data from Pew Research, five of the top-10 recipients of US remittances are in Latin America and the Caribbean: Mexico, Guatemala, El Salvador, Dominican Republic and Honduras. While remittance flows into Latin America and the Caribbean grew by 7.4% in 2019 to reach $96bn, the World Bank expects this to fall by 19.3% in 2020. Given its border with the US and large diaspora in the country, Mexico unsurprisingly accounts for the largest share of remittances from the US. According to Pew’s figures, the country received more than $30bn of the $148bn exported from the US in 2017 – nearly twice the level of the destination, China. More recent statistics from Banco de México, the central bank, showed that the country received an all-time high of $36.5bn in remittances in 2019, the vast majority of which came from its northern neighbour. Remittances are now one of Mexico’s top sources of foreign income, accounting for more than its oil export revenues even before the drop in oil prices during March and April 2020. According to the Washington DC-based think tank Migration Policy Institute, there were an estimated 11m Mexican-born migrants in the US in 2017, making this the largest foreign-born population in the country, at around 25% of all migrants living there. Given that as many as half are thought to be undocumented, many have not been eligible for the federal stimulus funds granted to US households since March 2020. This could cause complications in Mexico since some regions depend on remittances for more than 10% of their GDP. However, given the 20-25% slide in the Mexican peso against the US dollar since late February 2020, the relative value of the remittances will increase for recipients.

Before the outbreak, there had been some positive news regarding costs for some customers, with Spanish bank Santander announcing in November 2019 that it would waive all fees for remittance transfers. Still, some experts have called for US-originated remittances to be channelled into more productive areas of the economy for longer-term benefit. “If and when the remittances regain their pre-Covid-19 levels, Mexico would have a second challenge: to translate remittances into development via financial education and financial inclusion,” Aída Chávez, co-CEO of Mexican education technology firm HolaCode, told OBG. “Nearly 60% of remittances are directed to general consumption, such as food, clothing and debt payments, and not to investment or savings.”

Gulf Exception

The UN, through its Sustainable Development Goals (SDGs), aims to decrease the average cost of sending a cash transfer. As of early 2020 the global average stood at 6.8% of the transaction value; the UN is targeting a reduction to 3% by 2030. Costs tend to vary based on market competition. It is therefore unsurprising that remittance commissions charged by operators in the Gulf are among the lowest, given that immigrants represent high proportions of their populations: more than 80% of residents in the UAE are foreign born, as is over 80% of Saudi Arabia’s private sector workforce. While remittances usually flow from developed economies to emerging economies, many Gulf nations are the exception to this trend. In fact, Saudi Arabia and the UAE are the largest exporters of remittances worldwide after the US.

The UAE is already one of the cheapest countries in the world from which to send money. The average commission charged on a transfer of Dh735 ($200) to India was 3.04% as of February 2020, only slightly above the UN’s SDG target for 2030. The country’s remittances market could see costs fall further after the UK financial technology (fintech) company TransferWise began operating in the UAE in April 2020. Its low overheads mean that sending Dh735 ($200) to India now incurs a commission of 1.71%, just over half the average transfer commission charged by traditional firms. In an already competitive marketplace, TransferWise’s presence could cause significant disruption to established institutions’ revenue, especially in light of the predicted fall in remittance volumes in 2020.

High Costs

In 2019 remittances from African migrants abroad grew by 3.5% to total $70.7bn. On average, they account for 2.5% of the region’s GDP; however, for some smaller countries like Senegal, remittances make up around 10% of GDP. Having benefitted from $26.8bn in remittances in 2019, Egypt is the highest recipient on the continent in nominal terms. This mainly comes from Arab countries, the US and the UK. Nigeria is second, having received $23.8bn in 2019, with the UK and the US among the principle source markets once again. In contrast to the UAE, sub-Saharan Africa has the world’s highest average transfer cost for remittances, at 9%. While high, these costs have fallen significantly since 2008, when the average commission charged for sub-Saharan Africa transfers was 15%. They have, however, been reasonably stagnant since 2014, when the rate was 10%. A major reason for these high charges is strict regulations that require money transfer operators to undertake checks to verify that the money is not destined for, or being used in, illicit practices. Amending regulations to reduce or streamline these checks would be one way to lower costs for consumers, who typically send small but regular amounts of money. Moreover, increased competition could further drive down prices. Across the African continent many national post offices have exclusivity agreements with certain operators, which result in near monopolies in some areas.

Harnessing Technology

A technology-centric framework is an attractive avenue to bring down the cost of sending remittances, largely because the physical infrastructure needed to complete the transfer is substantially less than for other methods, such as in-person transfers via outlets like those operated by Western Union. Nigeria is one country in which a relatively high level of digital penetration has facilitated the emergence of digital remittance providers, which is reflected in the nation’s lower prices compared to the rest of the region. Fintech providers Azimo and TransferWise have brought down the cost of transferring £120 from the UK to Nigeria to between 4% and 5%, well within reach of the UN’s 2030 SDG target of 3%. Considering the strict regulations required in Africa, technologies that boost transparency – such as blockchain – could also play a role in lowering fees through safer and more efficient transfers.

Amid falling commission charges, senders may be more willing to reduce their use of informal channels to send money. Such practices, which include friends, relatives or even the person themselves transferring the remittances physically, are particularly high in regions such as Eastern Europe or sub-Saharan Africa. Some estimates suggest that they represent up to 75% of the value of formal remittances, although there is little agreement among analysts on the accuracy of these numbers. Although there is potential for cryptocurrencies to be used for remittances in the future, their market volatility – particularly in current conditions – combined with their complex nature make this an unlikely prospect in the near term.

Asian Flows

While double-digit falls in remittances are expected across all regions in 2020, the East Asia and Pacific region could be somewhat cushioned by the dispersal of overseas workers across a wide variety of labour markets. This phenomenon has been described as a “natural hedge” by Nicholas Mapa, senior economist at ING Bank in the Philippines. Nevertheless, with the US heading into recession in 2020, the knock-on effect is likely to be significant on Asia’s emerging markets. Not only will inflows be impacted, but some migrant workers will return home due to the lack of employment opportunities, which could subsequently increase unemployment figures.

Along with India, the Philippines is one of the countries most reliant on remittances in Asia. The archipelago received $30.1bn in 2019, equal to around 8.5% of GDP. As some Filipino workers return from overseas, one positive is that they could help to drive entrepreneurial activity in the country’s recovery phase.