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Economy & Business - July 2020

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CENTRAL AMERICA: Northern Triangle remittance inflows suffer sharp fall

Global remittances have been hit hard by measures taken around the world to stop the spread of coronavirus (Covid-19) and Central America is already suffering a decrease in inflows.

Remittances will fall by about 20% globally in 2020, according to the World Bank (WB), which estimates that Latin America and the Caribbean will suffer a 19.3% decline compared to last year. “The projected fall, which would be the sharpest decline in recent history, is largely due to a fall in the wages and employment of migrant workers, who tend to be more vulnerable to loss of employment and wages during an economic crisis in a host country”, said the WB in a report published at the end of April, blaming the decrease on an economic crisis caused by the pandemic and lockdown measures.

For Central America’s ‘Northern Triangle’ countries - El Salvador, Honduras, and Guatemala - the situation is particularly worrying given the percentage of GDP made up by remittances. While remittances have been increasing for all three countries since 2012, according to WB figures, the first few months of this year have seen significant reductions in transfers. A 15 June report from El Salvador’s central bank (BCR) shows remittances for the first five months of the year totalled US$2.015bn, 11.6% less than the same period in 2019. Honduras’s central bank (BCH) has not published recent figures, but a June 2020 report from the Latin American centre for monetary studies (Cemla) said remittances received during the month of April this year were worth 28.5% less than April 2019. Remittances to Guatemala have so far proven more resilient, with figures from Guatemala’s central bank (Banguat) showing total inflows of US$3.916bn for the first five months of the year, a 3.2% decrease compared with the same last year.

  • The importance of remittances

According to the latest (2018) WB figures, remittances accounted for 20.7% of El Salvador’s GDP, 19.9% of Honduras’s GDP, and 12.0% of Guatemala’s GDP.

While Guatemala may have so far recorded a smaller drop than its neighbours, that may not last. In April Jonathan Menkos, the director of the Guatemala-based think-tank Central American institute of fiscal studies (Icefi) warned remittances could fall 20% this year compared with 2019. Menkos also suggested that Guatemala's GDP could contract by between 0.9% and 1.2% in 2020, in part due to the fall in remittances. Honduras and El Salvador GDP figures are also likely to be affected, adding to negative economic forecasts for the Northern Triangle.

In the short-term there will also be a rise in hunger as those who depend on remittances to buy essential supplies have to get by on less or make do without transfers from relatives abroad. With so many Central American migrants working in the US – an estimated 3.5m in 2017, according to the Migration Policy Institute, a US-based research organisation - the fate of those who receive remittances is tied up with that of the US economy, and the Donald Trump administration’s apparent unwillingness to combat the coronavirus means that the disruption could be prolonged, as the disease continues to circulate.

Perversely this could also drive a new wave of migration north as deteriorating conditions at home inspire would-be migrants to try their luck in the US. However not only are migrants among the first to lose jobs in an economic downturn, they are among the last to regain them according to Manuel Orozco of the US-based think tank Inter-American Dialogue. New arrivals could struggle to find work. Back in Central America, those left behind will have less money to spend, driving down household consumption, which is a major source of income in national economies, Orozco added. As a result, it appears that Central America is in for a rough ride for the rest of the year, and the effects will be felt into 2021.