July 27, 2020 (MLN): A report published by Moody’s has said that lower remittances after coronavirus are likely to hurt consumption, raise external risks in major recipient countries, including Pakistan.

The coronavirus pandemic has triggered a fall in the wages of and loss of employment for migrant workers. The remittance transfers by these workers to their home countries will decline sharply as a result, by around 20% ($110 billion) globally in 2020, according to World Bank estimates.

Weakened external positions resulting from lower remittances will be main channel of credit impact. Remittance-receiving countries are largely net oil importers and will benefit from the large drop in oil prices since the start of 2020. 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%.

The global economic downturn precipitated by the coronavirus outbreak has led to a slump in demand for oil. This caused the price of Brent crude to collapse to a low of around $18 in April 2020, from $64 at the start of the year, before partially recovering to $40 in June. Weakness in the GCC will especially hurt South Asian economies such as Bangladesh, Pakistan and Sri Lanka.

Overall, based on the scale of remittance inflows relative to current account receipts, the decline in remittances will render 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% 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% decline in remittances outweighs that of the fall in oil prices on the current account balances for these countries

As indicated by their respective external vulnerability indicators (EVI),6 many affected sovereigns such as Tajikistan (293% in 2020), Ukraine (204%), Sri Lanka (201%) and Pakistan (181%)7 already exhibited significant external vulnerability before the coronavirus outbreak (see Exhibit 7). For these sovereigns, lower remittances will exacerbate their already weak external positions.

Moody’s

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