Covid-19 And Remittances in Central America & The Caribbean

The coronavirus has led to lockdowns around the world. In this article, we examine how lockdowns are affecting remittances to Central America and the Caribbean, and the outlook for remittances going forward.

• How important are remittances in the Central America and Caribbean region?

Remittances are a key component of the Central America and Caribbean economy, accounting for over 10% of GDP in many countries, and are a vital source of income for many families. The vast majority of remittances originate from the U.S.

• How has coronavirus affected remittances?

Elevated unemployment in the U.S. due to coronavirus lockdown measures has had a huge impact on remittance flows to the region. This effect has likely been magnified by the fact that U.S. immigrants from Central America and the Caribbean tend to work in lower-paid, manual and informal jobs—precisely those most affected by the lockdown. Looking at monthly data for April for selected economies shows remittances were down by double digits in annual terms.

More positively, U.S. labor market data in May was markedly better than expected as states gradually eased restrictions, with the unemployment rate edging down from 14.7% to 13.3% and the economy adding 2.5 million jobs. This suggests April could have been the low point for remittances. Indeed, in May the annual contraction in remittances in Guatemala and El Salvador in May softened markedly from April, while remittances in the Dominican Republic returned to growth.

• What is the outlook for remittances going forward?

Looking ahead, remittances should gradually recover as the U.S. economy reboots. That said, over 2020 as a whole, remittances will still be extremely weak as unemployment in the U.S. is set to stay notably above its pre-Covid level. This, coupled with domestic containment measures, will cause private consumption to contract across Central America and the Caribbean. The outlook is still highly uncertain, and a possible reinstatement of lockdown measures in the U.S. due to a second wave of cases is a key downside risk.

In addition, there is a lack of clarity over the future of the Temporary Protected Status (TPS) scheme, which currently gives certain immigrants from El Salvador, Haiti, Honduras and Nicaragua the right to live and work in the U.S. until 4 January 2021. The U.S. government has said it wishes to end TPS, although the courts are still considering whether it has the right to do so. In addition to the upcoming court ruling, the U.S. elections in November will also have a key bearing on the future of the scheme. Victory for opposition candidate Joe Biden would bode well for remittances, as he has shown willingness to offer TPS holders a path to U.S. citizenship.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: FocusEconomics

Date: June 18, 2020