The effect of remittance and volatility in remittances on macroeconomic performance in Africa: any lessons for COVID-19?

Abstract

Premised on the World Bank’s projection of a 20% fall in global remittances due to the effect of the COVID-19 pandemic, there have been concerns that remittance-dependent countries may be excessively affected. In this study, we explore the link between remittance, remittance volatility and macroeconomic performance to make a case for the potential impact of the COVID-19 pandemic. Specifically, the study examined the impact of remittance volatility on some macroeconomic variables [real gross domestic product (RGDP), consumption, investment, export and exchange rate] in a panel of seven African countries with the highest remittance–GDP ratio. This was done within a fixed effects and random effects model, using annual secondary data from 2004 to 2018. Our results show that remittance volatility exerts a negative but insignificant impact on RGDP, consumption, investment, export and exchange rate; while remittances itself has positive significant impact on RGDP, consumption and investment. Based on these findings, while any COVID-19-induced volatility in remittances flow into Africa may yield negative macroeconomic consequences, it is not likely to significantly affect the macroeconomic fundamentals of the most remittance-dependent African countries due to strong kinsmanship and the altruistic nature of remitting African migrants.

Time-frequency nexus between remittances, exchange rates, and growth in Vietnam

“…The findings indicate that remittances exert upward pressure on the real exchange rate. To estimate the possible impact of the COVID-19 pandemic, Awode et al (2021) investigate the links between remittances, remittance volatility, and macroeconomic performance in seven African nations. The authors find that while remittances themselves have a positive and considerable impact on GDP, consumption, and investment in this region, remittance volatility has a negative but negligible influence on exports, exchange rates, and GDP.…”

Foreign remittances, deprivation and patriotism

“…But the empirical link between foreign remittances and reductive or weak growth, increased feelings of economic inequality and deprivation has also been established in the academic literature. Remittances was found to associate with real exchange rate appreciation, net export deficiency, non-tradable consumption, reductive investment, lower labour participation, production market deficiency, inflation, Dutch disease and increased feelings of deprivation (Chami et al 2005 ; Mishra 2005 ; Azam and Gubert 2006 ; Catrinescu et al 2009 ; Acosta et al 2009 ; Lianos and Cavounidis 2010 ; Vacaflores 2012 ; Mokhouf and Mazhar 2013 ; Khan and Islam 2013 ; Ball et al 2013 ; Amuedo-Dorantes 2014 ; Sutradhar 2020 ; Awode et al 2021 ; Imran and Mohammed 2022 ). In another vein, a study by International Monetary Fund, IMF ( 2005 ) on 101 developing countries found no significant relationship between remittances and economic growth.…”

Effect of the External Shocks on the Predictability of Remittances flows from Developed Countries

“…In light of this literature review, one could argue that uncertainty (i.e., unpredictability) of remittances inflows would likely be detrimental to remittance-receiving households, and ultimately adversely affect the domestic economy of the recipient country, for example, through lower consumption, lower investment not only on human capital but also on businesses. Existing studies that have examined the macroeconomic effects of remittances inflows uncertainty (or unpredictability) are very limited, and have proxied the unpredictability of remittances inflows by the volatility of these resource inflows (e.g., Amuedo-Dorantes and Pozo, 2014;Awode et al 2021;Opperman and Adjasi, 2018). For example, Amuedo-Dorantes and Pozo (2014) have shown that both the size and the uncertainty of remittances influence (positively) the accumulation of human, physical and financial assets among recipient households in Mexico.…”

“…Opperman and Adjasi (2018) have established empirically that the volatility of remittances inflows is detrimental to both banking sector depth and efficiency, but exerts no significant effect on stock market development in Sub-Saharan African countries. More recently, Awode et al (2021) have uncovered that there is no significant impact of the volatility of remittances inflows on the real gross domestic product, consumption, investment, export, and the real exchange rate.…”