IMF staff likens remittances to social welfare insurance
Fluctuations in commodity prices arising from the war between Israel and Hamas and a downturn in remittance flows could negatively affect Jamaica’s growth prospects, staff of the International Monetary warned on Thursday.
Already, remittance inflows are down more than one per cent year-to-date, January to August, but for the month of August alone the falloff was steep at 18 per cent, central bank data shows.
Three IMF staff presented regional findings from the IMF Regional Economic Outlook for the Western Hemisphere at the Bank of Jamaica. The publication forms part of the World Economic Outlook, which revised downwards Jamaica’s growth prospects in 2023 from 2.2 per cent to 2.0 per cent; and in 2024 from 2.0 per cent to 1.8 per cent.
The staff focused on structural issues facing Latin America and the Caribbean, with changing climate, inflation and wars creating disruptions to commerce and livelihoods.
“It is a little bit too early to say about the potential macroeconomic impact of those developments [in Israel]. But what is clear is that the region will mostly be affected by changes in commodity prices,” said Anna Ivanova, deputy division chief for the Western Hemisphere Department at the IMF. “So, if the conflict leads to higher oil prices, then countries in the region that are exporters they will see some relief. But, of course, countries in the Caribbean and Latin America that are importers of fuel will be hurt by higher commodity prices.”
The current round of hostilities between Israel and Hamas began in early October.
The economies of Latin America and the Caribbean are vulnerable to external shocks. Their citizens are at times doubly affected due to lack of unemployment welfare benefits, otherwise referred to as unemployment insurance. Jamaica, being one of those nations that are void of formal unemployment welfare, sees its citizens relying on remittances, which are gifts sent from relatives or friends abroad.
“Remittances have been a good insurance mechanism, especially in Caribbean countries. But we want to stress that it has not been enough to protect the individual,” said IMF economist Hyunmin Park. “It does help, but we need a little more than that,” said Park, who has authored a staff report on Income Volatility and Social Insurance in Latin America, released concurrently with the regional outlook report.
In the past, remittances have not performed as donor countries expected.
Donor agencies expected remittances in the region to drop in 2020 from the economic fallout related to the onset of the pandemic. The World Bank, for instance, expected a 14 per cent drop. Instead, flows rose; and in Jamaica’s case, they rose to record levels.
“We were expecting when COVID-19 hit that remittances would fall and take some time to recover. Remittances however recovered very fast … and that was partly due to the strong response in the US,” said IMF economist Flavien Moreau, who was co-lead in a report titled Trade Integration and Implications of Global Fragmentation for Latin America and the Caribbean, published on Thursday.
Remittance inflows to Jamaica for August totalled US$289 million, down 18.1 per cent from US$307 million a year earlier. From January to August 2023, remittance flows totalled US$2.24 billion, compared to US$2.27 billion the prior year.
Jamaica’s flows dipped 1.1 per cent year-to-date, while its peers experienced robust growth in remittances: in Guatemala, flows rose by 8.6 per cent; El Salvador was up 5.6 per cent; and Mexico up 9.2 per cent, according to BOJ data.
Ivanova said that regional countries, including Jamaica, benefit from remittance flows by leaning on developed nations during their good times. But the global hike in interest rates to tame inflation could lead to hard times in the developed nations, she added.
“If we are facing shocks across the whole world, like climate change, then you cannot expect insurance from remittances. That’s why it is so important to look at domestic sources of insurance,” Ivanova said.