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What explains the increase in remittances during the COVID-19 crisis?

Photo: Reuters

Remittances play a vital socioeconomic role in economies around the world, especially in developing countries where they are the sole source of income for many households. According to the Organization for Economic Co-operation and Development (OECD), “Egypt is the fifth-largest recipient of remittances in the world, reaching USD 26.8 billion in 2019 and nearly 10% of GDP.” Remittances are also a major source of foreign currency, with its proceedings almost equaling those coming from exports. The flow of remittances to Egypt has witnessed an upward trend during the past decade.

When the world was hit hard last March by the COVID-19 pandemic, predictions indicated that the slowdown of economic activity would affect the earnings of Egyptian migrants abroad and so reduce their money transfers to the country. This prediction was exacerbated by the fall in oil prices affecting the Gulf Cooperation Council (GCC) countries, a key migration destination for Egyptian labor.
D Code Economic and Financial Consulting developed the infographic we feature in this article using the latest available data (no data in remittances is available beyond July). The figures show that following a decrease in remittances in April and May, remittances in June and July witnessed a monthly increase and were also higher compared to the same months in 2019. The infographic shows a similar effect on remittances in countries in the East Asia and Latin America regions; the largest recipients of remittances in the world.

Dina Abdelfattah, assistant professor of economics at the AUC School of Business, sees two main reasons behind the increase in remittances, contrary to the expectations. “The first is the return or the expected return of Egyptians, bringing in their accumulated savings. The second is, during the lockdown period, banks were closed and aviation was suspended, making it difficult to send money to Egypt, either formally or informally.” This explains the drop during March and April. Following the lifting of the strict lockdown measures in June and July, remittances to Egypt increased to compensate for the preceding months. Abdelfattah adds, “There are also families who had to return to Egypt with the head of the household still in migration, sending the family remittances.”
Recent studies of the pandemic’s effects on Egyptian households by the Central Agency for Public Mobilization and Statistics (CAPMAS) mention an increase in unemployment, an actual or expected drop in income, and change in the work status. This might have also triggered an effect on the flow of remittances. The historical pattern of remittances show that they increase during times of difficulties, according to Abdelfattah. This is applicable to Egypt, Lebanon, Jordan and other similar remittances recipient countries. “It is sort of like the ‘added worker effect’; if a family member loses a job, remittances to this family could increase to compensate for this loss of employment. However, we have no confirmation of which side of the story we should follow given the extreme lack of data and limited supported research,” Abdelfattah explains.

She also draws a comparison to the Gulf war, “where we saw an increase in remittances mainly due to the return of Egyptians at the time. After things became stable again, Egyptians were back to the Gulf countries with a slightly changed geography of migration,” Abdelfattah says.
In conclusion, what was predicted as a dual shock of a fall in oil prices and a loss of jobs in the Gulf area, materialized as a negative effect on jobs that was not as harsh as expected to strongly affect remittances, and oil prices that started to pick-up even if still below their pre-pandemic prices, according to Abdelfattah. “In the absence of another complete lock down, we expect the trend [for remittances] to continue with its average numbers.”

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