Prospects for Remittances to Emerging Markets amid Rising Inflation | Economic news
As rising inflation and the global food crisis put financial pressure on many countries around the world, remittance flows to emerging markets are expected to continue to provide crucial support.
In a recently released report, the World Bank’s Global Knowledge Partnership on Migration and Development (KNOMAD) estimated that global remittances to low- and middle-income countries (LMICs) will increase by 4.2% this year to reach $630 billion.
This figure builds on 8.6% growth in 2021 and follows two years that have highlighted the value of these flows to many emerging markets.
Indeed, despite World Bank projections in April 2020 that the COVID-19 epidemic would lead to a 19.7% contraction in remittance flows to LMICs by the end of the year, they have instead resisted and actually increased by 0.8% in 2020.
These transfers took on greater significance as foreign direct investment (FDI) to the LMICs fell by 13.5% in the same year.
In fact, remittances to LMICs in 2020 ($540 billion) exceeded the equivalent value of FDI ($259 billion) and overseas development assistance ($179 billion) combined.
In many cases, these entries have provided people with an alternative source of income, as curfews or restrictions related to COVID-19 have significantly reduced the ability of many people to work and earn a living, especially those in the informal sector.
Inflation and remittances
Just as remittances have proven crucial during the pandemic, they are also likely to be vital this year following Russia’s invasion of Ukraine and broader economic headwinds.
Rising inflation and rising food prices, which reached historic highs in March and April, have dramatically increased the cost of living in many countries and put a strain on many households…especially in emerging markets.
A continued flow of remittances would therefore be a welcome contribution to many emerging market economies: the United Nations’ International Fund for Agricultural Development (IFAD) estimates that 800 million people worldwide benefit from remittances, which are often used to cover essential expenses such as groceries, medical care, tuition, and housing.
While KNOMAD predicts that remittances will follow the upward trend of recent years, it still expects the growth rate to slow as inflation erodes wages and the invasion of Ukraine by Russia exerts significant pressure on some economies.
There are also expected to be significant regional differences, much of which depends on the country of origin of remittances and how the countries sending them will be affected economically in 2022.
KNOMAD expects a 9.1% increase in remittances to Latin America and the Caribbean, followed by significant growth in flows to Sub-Saharan Africa (7.1%), the Middle East and North Africa (6%) and South Asia (4.4%). ).
However, the report said that remittances to Central Asian countries, the main source of which is Russia, are expected to drop dramatically due to the decline in the value of the ruble and sanctions against Russia.
Remittances to Kyrgyzstan are estimated to fall by 32% while those to Tajikistan (-22%), Azerbaijan (-21%), Uzbekistan (-21%), Armenia ( -19%) and Kazakhstan (-19%) are also expected to see significant contractions.
Just as strong remittance flows should provide support for many emerging markets, such declines could have economic repercussions for those in Central Asia.
World Bank figures show that remittances accounted for 31.3% of Kyrgyzstan’s GDP in 2020, compared to 26.7% in Tajikistan, 11.6% in Uzbekistan and 10.5% in Armenia.
Mobile and digital solutions are gaining ground
Another trend shaping the flow of remittances is how they are sent.
While the overwhelming majority (97%) of inflows are paid in cash and transmitted through traditional banks and financial institutions, there has been a notable increase in remittances using alternative methods.
Lockdowns and border closures led to a 48% increase in mobile phone payments last year alone, while the OBG previously noted that a number of financial technology (fintech) start-ups focused on remittances have started to gain ground in emerging markets.
This development comes as companies and international institutions seek to reduce the cost of international transfers. IFAD says currency conversions and fees account for an average of 6% of the total amount sent, double the 3% target set in the UN Sustainable Development Goals.
Initiatives such as the Community Task Force on Remittances, launched by IFAD in March 2020, are pushing for sweeping changes in remittance policies and legislation, while some financial institutions have sought to reduce or to reduce costs.
For example, in October last year, digital bank Revolut announced that US customers could make 10 free international transfers per month. This was followed in late January by an announcement that customers could also make 10 free transfers to Mexico each month.
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