Lower remittances will exacerbate Pakistan’s already weak external positions, says Moody’s Investor Services (Moody’s).
In its latest report “Sovereigns – Global: Lower remittances after coronavirus to hurt consumption, raise external risks in major recipient countries” the firm stated that the coronavirus pandemic has triggered a fall in wages of and loss of employment for migrant workers.
Remittance transfers by these workers to their home countries will decline sharply as a result, around 20 percent ($110 billion) globally in 2020, according to World Bank estimates. The countries that are most dependent on remittances are largely low and middle-income economies.
It further stated that for Ukraine (B3 stable), Jordan (B1 stable), Togo (B3 stable), Pakistan (B3 review for downgrade), and Mali (B3 stable), relief on import bills from lower oil prices offsets a drop in remittances of around 20 percent.
Many countries that source a large share of their remittances from the GCC and Russia, where oil production plays a dominant role in the economy, will be indirectly hit by the fall in prices. A retrenchment in the Russian economy would feed into much of the Commonwealth of Independent States (CIS), with remittance reliant Kyrgyz Republic and Tajikistan being especially vulnerable. Weakness in the GCC will especially hurt South Asian economies such as Bangladesh (Ba3 stable), Pakistan, and Sri Lanka (B2 review for downgrade), it added.
The decline in incomes and economic strength is likely to be more gradual; the hit to current account receipts and weakening of external position can be abrupt. The fall in global remittances is credit negative for those sovereigns which are most reliant on such inflows to support economic growth and their external payment positions.
Overall, based on the scale of remittance inflows relative to current account receipts, the decline in remittances will render the Kyrgyz Republic and Tajikistan in the CIS most susceptible to the coronavirus shock, beyond the direct impact on trade. The external resilience of El Salvador, Bermuda, Pakistan, Guatemala (Ba1 stable), Egypt (B2 stable), and Senegal (Ba3 rating under review) will also deteriorate.
For Ukraine, Jordan, and Pakistan, net oil imports and remittance inflows are similar in size. A 20 percent fall in remittances would be offset by lower oil prices. For most of the other remittance-reliant sovereigns, the proportion of remittance inflows to GDP is much greater than net oil imports to GDP.
The effect of a 20 percent decline in remittances outweighs that of the fall in oil prices on the current account balances for these countries. Besides oil prices, a further mitigating factor is that lower consumption will lead to a decline in imports, such as by compressing luxury goods and services imports. This will reduce the negative impact on the current account balance from lower remittances.
Weaker remittances will weigh on the balance of payments of remittance-dependent sovereigns, compounding the impact of lower exports and private investment inflows as the global economy weaken and investors seek safe havens.
As indicated by their respective external vulnerability indicators (EVI), many affected sovereigns such as Tajikistan (293 percent in 2020), Ukraine (204 percent), Sri Lanka (201 percent), and Pakistan (181 percent) already exhibited significant external vulnerability before the coronavirus outbreak. For these sovereigns, lower remittances will exacerbate their already weak external positions, it added.