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Building resilience during the new normal

As Covid-19 cases increase, commodity prices decrease, unemployment rises, stock markets flounder and value chains continue to fail.

Ayorinde Muzite :economist
But how can the Zimbabwean economy be more resilient in these unprecedented times? Cash remittances are a major source of total household income, followed by wages and remittance goods.

Not only just in Zimbabwe, billions of dollars flow to African countries from working migrants in the developed world.

The financial value of this flow, in the form of remittances, exceeds that of foreign aid to Africa.

Remittances are an important source of income based on their size and economic impact on the world, with their global value amounting to US$554 billion in 2019, overtaking Foreign Direct Investments according to World Bank.

Nevertheless, remittance flows in 2020 to low-and-middle-income countries (LMICs) are projected to fall by 19,7% to US$445 billion, one of the sharpest declines in recent history. This fall is largely due to the economic crisis caused by the Covid-19 pandemic.

The decline is projected across all regions: Europe and Central Asia (-27,5%); sub-Saharan Africa (-23,1%), South Asia (-22,1%), the Middle East and North Africa (-19,6%), Latin America and the Caribbean (-19,+3%), and East Asia and the Pacific (-13%).

The potential of remittances in improving economic development through their direct implications on savings and investment in human and physical capital and indirect effects seen through consumption levels cannot be ignored. Before and during these trying times, we have fully experienced how remittances increase the consumption level of rural households. This might have substantial multiplier effects as they are more likely to be spent on domestically produced goods.

In addition, we have also noticed how remittances generate a steady stream of foreign-exchange earnings. Early in 2018 and 2019, we saw how remittances can smoothen consumption during macroeconomic shocks.

However due to the high degree of economic informality, there are also large unofficial flows of remittances which often liquidate informal economic exchange.

The estimated unofficial transfers of remittances to the developing world stands at US$10 billion per year .

The consensus view is that informal remittances to sub-Saharan Africa, encouraged by dual exchange rates, are relatively high. Some micro-level field studies have also indicated that informal or in-kind transfers are substantial. Recent studies propound that informal remittances currently represent twice or three times the amount of formally transferred funds.

Indeed, given widening disparities between official and unofficial exchange rates in some sub-Saharan African countries, the maturing of international migrant populations, and the increase in electronic forms of communication it can be surmised that more informal flows are occurring in absolute terms than previously.

Migration is not a new phenomenon in Zimbabwe. Before independence, families were sending their members to work on farms, mines and in search of jobs in urban centres. Internal migration was dominated by rural-to-urban migration. Educated youth migrated from rural areas, where the level of development was very low compared to urban areas, in search of employment and income generating projects.

However, in this era migrants now use many different channels to send remittances home.

There is a basic distinction between formal channels (including money transfer services by banks and non-bank financial institutions such as foreign exchange bureaux or dedicated money transfer operators) and informal channels (which include the hand carrying of cash by migrants or their family and friends, as well as transfers through unregulated money transfer operators).

However, Zimbabwean migrants prefer trusted informal channels to banks or formal money transfer operators such as Western Union and Moneygram. Almost half of the households that have migrants either prefer to bring cash with them when they return home to visit the family, send remittances via friends and co-workers, or send it by taxi drivers.

Almost half of the households that have migrants prefer to either bring cash with them when they return home to visit the family, send remittances through friends, co-workers or long distance drivers.

Therefore, continual informalisation of remittances will not yield the ultimate desire of economic development and economic resilience in these difficult times.

There is a need for collaborative work between government, migrant groups, the local community, non-governmental organisations and other international organisations on how we can come up with sustainable policies that can spur us through these turbulent times.

The collaborative work should ensure that there is reduction of transaction costs of remittances transfer and dissemination of information on types of transfer channels to use, as well as establishment of voluntary codes of conduct for fair transfers.

There should also be strengthening of the formal financial infrastructure supporting remittances, mainly increasing competition and improving the technology of money transfers and its presence in smaller communities.

There should also be improvement in access to financial services in recipient economies as well as in sending economies for migrants and their families back home by for instance allowing domestic banks to operate overseas.

Moreover, in bolstering a buoyant economy, there should be support for migrant associations’ projects including matching grants, bonds, loans or pension schemes targeted at the Diasporas.

Muzite is an economist based in Harare. — muziteayorinde@gmail.com. These New Perspectives are co-ordinated by Lovemore Kadenge, independent consultant and past president of the Zimbabwe Economics Society – kadenge.zes@gmail.com

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