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August 5, 2020

COVID-19 impact: Remittances inflows to be hit by 2pc of GDP, says IMF

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August 5, 2020

ISLAMABAD: The International Monetary Fund (IMF) has estimated that the remittances inflows would be severely hit by around 2 percent of GDP on Pakistan’s net current account impact because of COVID-19 pandemic.

According to the IMF’s latest report titled “Global Imbalances and the COVID-19 Crisis” remittances are highly vulnerable to the COVID-19 crisis because migrant workers are typically more exposed to the risk of unemployment and wage losses during recessions than are native workers.

Migrant workers also work disproportionately in such sectors as food and hospitality, retail and wholesale, and tourism and transportation, which have taken a hit from the crisis.

The decline in remittance inflows in percent of GDP is expected to be concentrated among a number of emerging market and developing economies.

World Bank 2020 forecasts an average 20 percent fall in remittance flows in 2020, based on an empirical model that links remittance inflows to migrants’ incomes proxied by the nominal per capita incomes of the migrants’ economies of destination.

”For economies where remittance inflows represented more than 5 percent of GDP, such as Egypt, Guatemala, Pakistan, the Philippines, and Sri Lanka, the decline would imply significant hardship for many households and small businesses that rely on remittances, just as their domestic economies are hit by the synchronized nature of the COVID-19 crisis” the IMF report stated.

It’s worth mention here that overseas Pakistanis sent home record remittances in the fiscal year 2020, totalling at $23.12 billion and reflecting a surge of 6.4%.

Foreign remittances also shot up almost 7.8% during the four months of the coronavirus pandemic — including March, April, May, and June — and subsequent lockdown specifically, the State Bank of Pakistan last month noted.

While uncertainty is high, depending on the pace of economic recovery and risks of a second wave, effects on current account balances may persist, with remittances expected to rebound only partially (by 5 percent) in 2021.

The world entered the COVID-19 pandemic with persistent, pre-existing external imbalances. The crisis has caused a sharp reduction in trade and significant movements in exchange rates but limited reduction in global current account deficits and surpluses.

The outlook remains highly uncertain as the risks of new waves of contagion, capital flow reversals, and a further decline in global trade still loom large on the horizon.

Our new External Sector Report shows that overall current account deficits and surpluses in 2019 were just below 3 percent of world GDP, slightly less than a year earlier. Our latest forecasts for 2020 imply only a further narrowing by some 0.3 percent of world GDP, a more modest decline than after the global financial crisis 10 years ago.

The immediate policy priorities are to provide critical relief and promote economic recovery. Once the pandemic abates, reducing the world’s external imbalances will require collective reform efforts by both excess surplus and deficit countries. New trade barriers will not be effective in reducing imbalances.

External deficits and surpluses are not necessarily a cause for concern. There are good reasons for countries to run them at certain points in time. But economies that borrow too much and too quickly from abroad, by running external deficits, may become vulnerable to sudden stops in capital flows. Countries also face risks from investing too much of their savings abroad given investment needs at home. The challenge lies in determining when imbalances are excessive or pose a risk. Our approach focuses on each country’s overall current account balance and not its bilateral trade balances with various trading partners, as the latter mainly reflect the international division of labor rather than macroeconomic factors.

We estimate that about 40 percent of global current account deficits and surpluses were excessive in 2019 and, as in recent years, concentrated in advanced economies. Larger-than-warranted current account balances were mostly in the euro area (driven by Germany and the Netherlands) with lower-than-warranted current account balances mainly existing among Canada, the United Kingdom, and the United States. China’s assessed external position remained, as in 2018, broadly in line with fundamentals and desirable policies, due to offsetting policy gaps and structural distortions.