Thursday, March 4
Mr. Hervé Joly, Director, Joint Vienna Institute
Mr. Norbert Funke, Coordinator, IMF Regional Capacity Development Center for the Caucasus, Central Asia, and Mongolia (CCAMTAC)
Mr. Ralph Chami, Assistant Director, Institute for Capacity Development, International Monetary Fund
Mr. Connel Fullenkamp, Professor, Duke University
Mr. Tigran Poghosyan, IMF Resident Representative in the Kyrgyz Republic
Mr. Holger Flörkemeier, Deputy Director, Joint Vienna Institute
This webinar was presented jointly by JVI and the newly established IMF Regional Capacity Development Center for the Caucasus, Central Asia, and Mongolia (CCAMTAC).
The COVID-19 pandemic is crippling the economies of rich and poor countries alike. For many low-income and fragile states, the loss of remittances—money sent home by migrant and guest workers employed in foreign countries—exacerbates the shock. They represent a lifeline that supports households and a steady source of much-needed demand and tax revenue. As of 2018, remittance flows to fragile and vulnerable countries alone reached $350 billion, surpassing foreign direct investment, portfolio investment, and foreign aid as the single most important source of income from abroad. Moreover, remittances have proved more stable than foreign direct investment or portfolio debt and equity flows to lower and middle income countries.
Remittances are particularly important for several countries in the Caucasus and Central Asia region. In the first joint Caucasus, Central Asia, and Mongolia Regional Capacity Development Center (CCAMTAC)/Joint Vienna Institute (JVI) webinar, Tigran Poghosyan, the IMF’s Resident Representative in the Kyrgyz Republic, presented recent developments of remittance flows to Armenia, Georgia, Kyrgyz Republic, Tajikistan, and Uzbekistan. Gross remittances received dropped substantially (around 20 to 30 percent in most countries) when the pandemic hit during the second quarter of 2020. The fall was driven mostly by a decline in the compensation of employees (minus 50 to 60 percent in Armenia, Georgia, and Uzbekistan). As most migrant workers earn their incomes in the Russian Federation, the fall in dollar-denominated remittance flows was exacerbated by ruble depreciation. Remittance flows partially recovered in the third quarter of 2020, supported by a gradual relaxation of pandemic-related travel restrictions. Nevertheless, the future volume of remittances is likely to be lower compared to pre-COVID projections, reflecting persistent losses in employment and incomes (scarring effects).
Ralph Chami (IMF) and Connel Fullenkamp (Duke University) reemphasized the importance of remittance flows for supporting household consumption, health and education spending, and alleviating credit constraints, while also increasing self-employment and informality in recipient countries. Through their impact on consumption, remittance inflows are also important drivers of consumption-tax revenues, increasing governments’ fiscal space to increase spending on public goods and countercyclical measures. The 2020 drop in remittance inflows has negatively impacted household incomes and consumption as well as consumption tax revenues, thus hurting public health and education spending and increasing borrowing and debt service needs. Moreover, lower remittance inflows have resulted in pressures on exchange rates and financial sector stability, and have strained labor markets and social safety nets.
How should the affected countries’ policymakers respond to the shock? The short-term focus should be on protecting citizens and migrant workers alike, such as through paycheck subsidies and employment protection, and an extended social protection net. Regulatory reforms could help to reduce the costs of remitting funds. Increasingly available digitization and Fintech solutions are very promising in this regard. To reap the full benefits of technological progress, Fintech companies should partner with licensed banks and other financial service providers, fostering the emergence of Banking as a Service and Remittance as a Service. The development of multiple-corridor platforms that allow access to both senders and receivers of remittances, including through digital wallet services, could reduce costs and lessen the reliance on expensive corresponding banking for money transfers.
Holger Flörkemeier, Deputy Director, JVI