From Russia with love. Remittances are a good thing, except when they stop
Jan 16th 2016 Economist
Debt crises, capital flight and corruption are all familiar problems for poor countries trying to finance their development. A bulwark, say some, is remittances: money sent home by migrants, worth $580 billion in 2014. Unlike portfolio flows, which tend to flee at the first sign of trouble, remittances usually increase in tough times. And unlike aid, they go directly into the pockets of ordinary people, bypassing corrupt officials. All this is true, and important. But even remittances, alas, cannot always be relied upon. The experience in 2015 of Central Asia and the Caucasus, regions exceptionally dependent on remittances from Russia, shows why.
Some countries there export oil or gas. Others export people. In Tajikistan four in ten working-age adults have sought jobs abroad; in 2014 they sent home remittances equivalent to 42% of GDP, proportionally more than any other country in the world received. Armenia, Georgia and Kyrgyzstan also received remittances worth at least 10% of GDP—more than the Philippines, a country famous for its migrant workers.
Most migrants go north, to Russia, finding work on building sites or in other low-income jobs. But Russia’s economy contracted last year, and remittances have plummeted. In dollar terms, money sent home from Russia by Tajik migrants was down by 44% in the first six months of 2015 compared with the same period in 2014, according to the Russian Central Bank; remittances from Russia to Uzbekistan fell by half, and those to Kyrgyzstan fell by a third.
These figures partly reflect the weakness of the rouble. Other currencies in the region have also fallen, but not as far: every rouble a Tajik migrant sends home buys 35% fewer somoni than in June 2014, for example. Migrants also have less money to spare. Real wages are falling in Russia: they were 9% lower in November than a year before. And migrant numbers are down too, because of job losses and tighter immigration laws (though not for migrants from Armenia and Kyrgyzstan, which this year joined the Eurasian Economic Union, a Russian-centred economic bloc).
Lower remittances are contributing to lower growth. The IMF expected GDP to grow at 2.3% last year for oil and gas importers in the region, down from 4.7% in 2014 and 5.7% in 2013. Those numbers understate the real effects. Since GDP is a measure of domestic production, it only captures declines in remittances to the extent that recipients spend less on local goods or services. Purchasing power has dropped by more than 10%, says the World Bank, once the direct impacts of remittances and declining terms of trade are taken into account. Working longer hours or tapping into savings is helping some scrape by, but even so, 40% of households in Tajikistan say they cannot afford enough food.
As people spend less, governments are spending more to support demand: in the main remittance-receiving countries, fiscal deficits are expected to have widened by about two percentage points of GDP last year. The falling price of regional exports such as aluminium, copper and cotton is adding to economic woes and putting further strain on government finances.
The Central Asian experience is unusual. Elsewhere, remittances grew in 2015. In South Asia they were up by 6%, according to projections from the World Bank. The region’s remittances come mainly from America and the Middle East; a strong dollar and fiscal expansion in the Gulf have kept the money flowing.
But small countries such as Nepal, where remittances were equivalent to 30% of GDP in 2014, look vulnerable to future shocks. Central America and some Pacific islands also depend on remittances: they suffered in 2009, the only year this century that global remittances have fallen.
In the long run, the solution is to diversify. Central Asian countries are trying to improve their infrastructure, supported by Chinese investment; trade with China has increased tenfold in a decade. The lesson of a tough year is obvious: though remittances can finance development, they are not a substitute for it.