Deposit Money Banks (DMBs) in Nigeria are likely to see an increase in their cost of operations as well as a reduced ability to extend credit, if as widely projected, the coronavirus (Covid-19) pandemic leads to a drastic drop in remittance flows to developing countries, the International Monetary Fund (IMF) has said.
The Fund made the prediction in an article by its Deputy Managing Director Antoinette Sayeh and the Assistant Director, of the IMF’s Institute for Capacity Development, Ralph Chami, which was obtained by New Telegraph Tuesday.
Citing World Bank forecasts that the pandemic will likely result in remittance flows dropping by about $100 billion in 2020, which represents roughly a 20 percent drop from their 2019 level, the IMF staff said that the crisis will affect remittance flows more negatively than during the financial crisis of 2008, adding that: “it will come just as poor countries are grappling with the impact of COVID-19 on their own economies.”
They stated: “Banks in migrant-source countries rely on remittance inflows as a cheap source of deposit funding since these flows are altruistically motivated. Unfortunately, these banks are now likely to see their cost of operations increase, and their ability to extend credit—whether to the private sector or to finance government deficits—will be greatly reduced.
“Furthermore, the typically credit-constrained private sector—mostly comprising self-employed people and small and medium-sized enterprises—is likely to lose remittance funding, in addition to dealing with even tighter credit conditions from banks. All this will come on top of lower demand for their services and products as a result of the crisis,” the officials added.
Furthermore, they stated that compared with previous economic crises, the coronavirus pandemic poses an even greater threat to countries that rely heavily on remittance income.
“The global nature of this crisis means that not only will recipient countries see remittance flows dry up, they will simultaneously experience outflows of private capital, and maybe a reduction in aid from struggling donors.
“Typically, when private capital flees a country because of a macroeconomic shock, whether climate related or because of a deterioration in the country’s terms of trade, remittance flows come in to lessen the impact of capital flight. By contrast, in this current crisis, poor countries can expect to experience both phenomena—capital flight as well as a drop in remittance flows,” the IMF staff said.
Continuing, they said: “As of 2018, remittance flows to these countries reached $350 billion, surpassing foreign direct investment, portfolio investment, and foreign aid as the single most important source of income from abroad. A drop in remittance flows is likely to heighten economic, fiscal, and social pressures on governments of these countries already struggling to cope even in normal times.”
Last month, the Chief Executive Officer, Financial Derivatives Company (FDC), Mr. Bismarck Rewane, projected lower diaspora remittances and trade flows to sub Saharan Africa this year, citing migrants’ loss of jobs to the pandemic-induced global economic shutdown.
Noting that Nigeria was the highest recipient of remittance flows in 2019, he said: “Remittances are a major source of foreign exchange earnings for the SSA region. COVID-19 will hit twice as hard on low and middle income economies as it affects both the recipient and host countries.”