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| Remittance reversal |
| Business Standard / New Delhi Jul 20, 2009, 00:55 IST |
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A potential source of pressure on the BoP.
A recent report by the World Bank highlights the sharp reversal that has taken place in remittance flows to the developing world. In a number of regions, South Asia being prominent among them, income earned by migrant workers and repatriated to their families has been a significant contributor to providing economic security and improved standards of living. Beyond this welfare dimension, these inflows have helped offset relatively large trade deficits, bringing the current account within manageable limits, which have then been quite adequately covered by capital inflows. The global economic boom over the past few years helped take remittances to record levels. For India and some other countries, this was reinforced by the generally high oil prices during this period, which increased prosperity in West Asia and, consequently, the demand for workers at all skill levels. However, it appears that this was too good to last. The global slowdown has significantly reduced the demand for workers, which typically affects migrant workers most severely as governments scramble to protect the jobs of their own citizens. Demand for workers in West Asia has also been hit by the sharp decline in oil prices. Consequently, the report forecasts that remittances will fall by almost 8 per cent in 2009, after having risen by 15 per cent in 2008.
While this is entirely along expected lines, it does raise concerns about additional pressures being exerted on the balance of payments situation in many emerging economies. 2009 is a year during which exports from emerging economies to advanced ones will also decline quite sharply, on account of the recessionary conditions in the latter. Global portfolio flows, which favoured emerging economies so strongly during the boom years, are also likely to thin down when it comes to these markets. Portfolio flows seem to be recovering but are still tentative, while direct investment may take a while to return to trend. The bottom line is that all three contributors to buoyant balance of payments surpluses are in reversal during this year.
While forecasters are not predicting any serious reversal in the situation, the heightened risks of a balance of payments crisis cannot be underestimated, particularly in countries which do not have the cushion provided by large foreign currency reserves, and whose current accounts are typically in deficit. Of course, these concerns are largely of a short-term nature. From a longer-term perspective, the fact remains that the demographic balance in the working age population is shifting decisively towards South Asia, India in particular. Whether the rest of the world likes it or not, more and more production of labour-intensive services will take place in this part of the world. An increasing proportion of it will be “offshored”, facilitated by technology, but with onshore delivery. Meanwhile, the welfare impacts of the decline in remittance flows on a few parts of the country will evoke calls for policy intervention.
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