Remittances during COVID-19: Reduce costs to save livelihoods

By Paul Horrocks, Manager, Private Finance for Sustainable Development; Friederike Rühmann, Policy Analyst; and Sai Aashirvad Konda, Consultant at the OECD Development Co-operation Directorate

This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.

Mumbai, India – Migrant workers return home during a nationwide lockdown due to COVID-19, on May 2020. Photo: Manoej Paateel / Shutterstock

The COVID-19 crisis is severely affecting migrants’ ability to send money home to their families.

The World Bank predicts a decline in global remittances by about 20 percent in 2020 due to the economic downturn caused by the COVID-19 pandemic. This decline threatens the livelihoods of millions of households in developing countries, and the international community must urgently invest in innovative, resilient, and cost-reducing solutions to support developing countries amid the crisis and in their recovery.

Impact of COVID-19 on remittances

Remittances serve as an important source of income for millions of households in developing countries and act as a safety net in times of emergencies, natural disasters and crises. In 2019, the flow of remittances reached a record flow of $554 billion to low-and middle-income countries.

As COVID-19 continues to affect the global economy, remittances become more important than ever before to prevent large-scale poverty and starvation. However, a drop in migrants’ wages and employment, fall in tourism, and restrictions on the movement of people, goods and services will likely cause remittances to decline this year.

The travel restrictions in countries like Malaysia, Saudi Arabia, Qatar, United Arab Emirates (UAE) and Kuwait threaten to leave millions of South Asian migrant labourers without work. The economic slowdown and lockdown in the United States is likely to have tremendous impacts on Central and Latin American countries. Job losses in Europe and North America will affect the flow of remittances to Africa and result in massive reduction in disposable incomes. In countries like Haiti, South Sudan and Liberia where remittances account for 37.1%, 34.4% and 9.4% of GDP in 2019 respectively, the decline in the flow of remittances during and after the COVID-19 crisis will severely hit their livelihoods.

Reducing costs to save livelihoods

To protect the livelihoods of migrants and their families, it is crucial for the international community to fulfil their commitments to reduce the cost of remittances. The global average cost for sending $200 to low and middle-income countries is 6.9 percent — almost 4 percent higher than the 3 percent commitment under SDG 10 C. The United Nations Secretary General recently called for countries to take a step further and get the cost as close to zero as possible. Amid the crisis, the costs of remittances could increase due to lockdowns, closure of agents and reduced working hours of brick-and-mortar remittance service providers.

The growth in mobile money services has made it possible to reduce costs by increasing competition, reducing transfer time and improving convenience, but access to these services is far from universal. The digital payments ecosystem is unevenly distributed and has yet to reach many parts of the world. A study by GSMA shows that there are only 184 unique corridors connecting 35 sending countries and 40 receiving countries where mobile money is used to send and/or receive international remittances. While digital remittances are gaining traction, cash remains the most commonly used means of transaction. Poor and irregular migrants do not have access to mobile wallets or bank accounts to send remittances, and many recipients in low-and middle-income countries do not have transaction accounts to receive remittances. Moreover, just over 40% of the population from low-and middle-income countries has internet connectivity to use digital services, and the rest are excluded from the social and economic benefits that mobile internet can enable. The vast financial exclusion, digital divide and use of cash hinders the potential of mobile money.

Besides mobile money, the use of blockchain technology can potentially reduce the cost of remittances. It can produce multiple benefits for settlement, freeing-up cash reserves, reducing counter-party risks, client on-boarding and Know Your Customer (KYC) identification processes. For example, the use of stablecoins might offer new opportunities to facilitate easier cross-border payments by expediting clearing and settlement process, enabling peer-to peer transactions and avoiding intermediaries. However, any stablecoin initiative by both the public and private sector must safeguard privacy and address the associated legal, regulatory and oversight concerns, such as consumer protection, cybersecurity, tax compliance, money laundering and terrorist financing. The application of blockchain technology has produced mixed results, and there is an urgent need for scalable projects and additional experimentation. Regulatory sandboxes and innovation hubs could be established to foster exploration and develop appropriate regulatory framework.

Against this background, what are some next steps for countries to support the flow of remittances during the COVID-19 crisis and accelerate an inclusive recovery?

  • Include Remittance Service Providers on the list of essential services during in lockdown measures, as this would ensure migrants can send money back and money can be received even during lockdown;
  • Support existing mobile money platforms which offer opportunities for transfers without the need to physically go to a money transfer operator and may help reach households in remote areas;
  • Invest in programmes and policies for the development of digital infrastructure and internet connectivity in remittance-receiving countries, as well as financial literacy and education;
  • Continue to advance efforts to fulfil the international commitment to reduce to less than 3% the transaction costs of migrant remittances, including by improving data collection and monitoring of remittance corridors.

As many countries take steps towards recovery from the COVID-19 pandemic, governments should leverage the crisis to understand gaps in the cross-border payments space and make consistent efforts to establish a payments ecosystem with resilient payment infrastructure, accessibility to the whole population, and broad acceptability. With a more efficient payment system in place, the benefits from cost reduction are likely to affect investment, economic growth, education, health, and financial inclusion positively, thereby promoting economic development and welfare in emerging and developing economies in the aftermath of COVID-19.

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