In the fallout from COVID-19, Latin America risks losing its remittance lifeline

Under normal circumstances, Isaac Cubillan would have stayed home, a place he describes as having everything: beaches, beautiful landscapes and delicious food. But, one of the most idyllic countries in south America is also one of the most volatile, and with the coronavirus reaching its borders, Venezuela is now facing a crisis on three fronts: public health, political leadership and a protracted economic crisis.

The average minimum wage in Venezuela as of May 2020 was 400,000 bolívares a month (approximately US$2.33 using historical exchange rates), supplemented by an additional 400,000 bolívares in food vouchers. Even with two jobs and a degree in chemical engineering, Cubillan struggled to make a living. Instead, he now zips across Buenos Aires as a delivery driver. Though far from the dreams he had for himself, it is more than he could have done at home.

The money he makes in Argentina covers his basic expenses: rent, food, savings, and a category that’s common to most migrant workers, remittances – money that he sends home to support his family. “I always try to send home double or triple the minimum salary in Venezuela,” says Cubillan. Though both his parents work, his remittances are critical to the family’s survival.

Venezuela, once awash with cash following the 1970s oil boom, has been anything but normal for years. Without a war or natural disaster, Venezuela’s economy contracted by almost 63 per cent between 2014 and 2019, bringing the oil-rich nation to its knees. Following a plunge in oil prices in 2014, years of economic mismanagement, corruption and severe US sanctions have led to hyperinflation and chronic shortages of basic necessities. This has been exacerbated by a political crisis that began in 2019 when the leader of the National Assembly, Juan Guaidó, declared himself interim president, triggering widespread protests and fracturing international support between the two camps.

Nearly 90 per cent of Venezuelans now live in poverty and a decimated healthcare system means that the country is particularly vulnerable to the coronavirus. In addition, an estimated five million migrants and asylum seekers have left Venezuela since 2015, in the second largest exodus in modern history after the Syrian refugee crisis. As the country hollows out, those who remain are increasingly dependent on financial support from family members who live and work abroad.

However, this vital source of income is also being battered by the coronavirus. Unlike previous crises, where remittances have increased during times of trouble, this time, they’re expected to drop by 20 per cent, equivalent to about US$110 billion, according to a World Bank report released in April. While lockdowns, border closures and quarantines may be needed to protect public health, the economic consequences have been catastrophic, particularly for migrant workers who are more vulnerable to job losses and reduced wages during an economic crisis.

“For the first time, this crisis has hit both sides at the same time,” says Pedro de Vasconcelos, referring to the challenges of both sending and receiving money. De Vasconcelos manages the Financing Facility for Remittances, a multi-donor project administered by the International Fund for Agricultural Development, a United Nations agency based in Rome, that focuses on maximising remittances for development. “It is a very dire moment,” he says. Remittances “are a lifeline for millions of people back home that depend in some way or another on the flows their loved ones send them from abroad.”

The importance of remittances

Unlike the vast sums of money that move into developing countries from official aid or foreign direct investment, remittances can be as little as tens or a few hundred dollars. Yet, these small transactions – made individually, frequently, and often through informal channels – aggregate into enormous amounts that go directly to some of the developing world’s most vulnerable families.

When you add it all up, migrants across the globe sent a record US$554 billion to their families in developing countries last year, according to the World Bank report, eclipsing foreign investment, often considered the key indicator for monitoring resource flows to developing countries. An estimated 800 million people, or one in nine people globally, benefit from remittances every year, according to the IFAD.

Perhaps more importantly, the small amounts of money usually arrive like clockwork. Whatever the circumstance, “I help my family by sending support two or three times a month, so they can buy the food they need to survive,” says Cubillan.

The importance of the amount of money circulating the globe from migrant worker to family member is hard to grasp until you put it in context of what the money is used for.

Remittances can be understood as the most personal form of development, says Vasconcelos, they’re used “to put food on the table, to take people out of poverty, to pay bills, medicine.”

To this end, making sure remittances can be easily and cheaply sent home is part of both the United Nations’ Sustainable Development Goals (SDGs) and the Global Compact for Safe, Orderly and Regular Migration (also known as the Global Compact on Migration). Also known as the 2030 Agenda for Sustainable Development, the SDGs, which consist of 17 goals and 169 measurable targets, are an ambitious attempt to save the planet and protect its most vulnerable people.

Under this framework, reducing transaction fees for remittances to less than 3 per cent was established as a target for SDG Goal 10, which is focused on reducing inequality. The Global Compact on Migration doesn’t go as far as setting a specific goal, but explicitly calls for the promotion of “faster, safer and cheaper transfer of remittances and foster financial inclusion of migrants,” as one of its 23 objectives.

However, the cost of sending remittances remains high, with reasons ranging from the lack of competition in the market to regulatory obstacles to a lack of transparency. According to the World Bank report, the average cost of sending US$200 amounted to 6.8 per cent of the total cost in the first quarter of 2020, more than double the SDG target.

A crisis within a crisis

The plunge in remittances is also an indicator of how sweeping the damage from the coronavirus could be.

During a crisis, migrants are usually still able to continue sending money home. It’s these times that “[the amount of remittances sent] basically goes up. Why? Because families are supporting them…the most important investment that migrants make, is investing in their loved ones,” says de Vasconcelos.

Remittances are typically resilient as seen during the 2008 and 2009 financial crisis, when global remittances to developing countries only decreased about 6 per cent, whereas foreign direct investment decreased by 40 per cent and private debt and equity flows dropped by 80 per cent. However, the World Bank predicts that 2020 will see the sharpest decline in remittances in recent history – something that will reverberate beyond the migrants and their families.

With Latin America currently the epicentre of the pandemic, the draining of remittances is part of a series of factors that could see the region’s economy contract by an unprecedented 5.3 per cent.

With already fragile economies and a large informal economy, the crisis “will be the worst in all its history,” according to an April statement from the Economic Commission for Latin America and the Caribbean (ECLAC). “To find a contraction of comparable magnitude, one must go back to the Great Depression of 1930 (-5 per cent) or even further back to 1914 (-4.9 per cent).”

Along with the diminished demand for tourism services and the nosedive in commodities prices, the reduction in remittances is amongst five factors listed as contributing to the unprecedented regional contraction. A cascade effect could follow, with ECLAC predicting 29 million more people in poverty, a rise in unemployment to 11.5 per cent from 8.1 per cent in 2019 and a direct effect on the ability of households to meet their basic needs.

To mitigate this impact, the World Bank and several UN agencies joined a global call to action to support migrants and the flow of remittances. Amongst the measures proposed are declaring remittance service providers as an essential service, reducing transaction costs and passing social protection policies that are inclusive of migrants.

Battered by international sanctions, Venezuela’s economy was already collapsing. The country’s GDP is expected to shrink an additional 10 per cent and the inflation rate will reach 500,000 per cent, according to 2019 estimates from the International Monetary Fund. The double punch of the pandemic and the collapse in oil prices means that its citizens will need the remittances now more than ever.

For Venezuelans abroad like Cubillan, not sending money home is simply not an option. “I couldn’t even think to stop sending money to my family because I wouldn’t be ok with myself and much less in these uncertain times.”