Diaspora remittances take knock after Brexit

BRITAIN’s decision to leave the EU is rippling through the global economy via an important but hidden channel: the money that migrant workers in the UK send home.

The World Bank estimates migrant workers sent back about US$24,9 billion last year, making Britain the fourth-largest source of remittances in the world.

The sharp fall in the value of sterling since the Brexit vote (it is down 14,6 percent and 13,2 percent against the dollar and euro respectively) means those remittances are suddenly worth less to the people back home who receive them.

The money Tibor, a 32-year-old Slovak architect, sends home from London each month not only supports his disabled mother and elderly grandmother, it is also building his family a house in the small village of Bela nad Cirochou in the east of his native country.

But since Britain’s vote to leave the EU this summer, the pounds he sends home are worth a lot less than they used to be.

“He is worried about the impact of Brexit,” said the architect’s grandmother Stefania, who declined to give her surname. “The plan was for him to come back home only after he retired.”

But the hit to his income meant he was now “waiting until the situation is a bit clearer”, Stefania added.

Karolis Rudys has been working as an automotive engineer in the UK for two years, saving up to buy a house in his native Lithuania.

He estimates his savings are now worth thousands of euros less than they were before the Brexit vote. He would need to become “a bit more creative about how to earn money”, he said, though that would not be easy.

Globally, remittance flows are three to four times larger than official development assistance, which makes them “really important for people in poor and middle-income countries,” said Vijaya Ramachandran, a senior fellow at the Center for Global Development, a US-based think-tank.

“Maybe migrants (in the UK) will work harder to make up some of that shortfall, but (given) the fall in the value of the pound, it is going to be hard to make up for all of that.”

The issue extends far beyond Europe.

Nigeria, India and Pakistan are the top three recipients of remittances from the UK, excluding high-income countries who have wealthy and globally mobile workforces.

In South Asia, a region that has strong historic ties to the UK — its former colonial power — millions of people depend heavily on remittances from overseas workers to stay afloat.

India, which received £3,6 billion in remittances from the UK last year, is the world’s largest recipient of overseas money sent home by migrant workers, accounting for approximately 3,4 percent of Indian GDP.

Though the amount of funds flowing from the UK to Bangladesh, Pakistan and Nepal was far lower than the total sent to India, these more fragile economies depend far more heavily on total remittances, which account for about 8,5 percent, seven percent and 29 percent of each country’s GDP respectively.

The only European economies to make the top 10 recipients of UK remittances are Poland and Hungary.

Nevertheless, it is an increasingly important source of income in the “EU8” eastern European countries since they joined the EU in 2004.

The UK is the second-biggest source of remittances to the EU8 countries after Germany.

For example, they are now worth between 3 and 6 per cent of GDP for Latvia, Lithuania and Hungary.

Some experts believe the fall in sterling — together with the predictions of higher unemployment in the UK — will prompt fewer people to move to the UK and more to leave.

Research by the UK’s department for work and pensions suggests this is what happened during the 2007-09 financial crisis.

The sterling-zloty exchange rate was tightly correlated with the outflow of EU8 migrants over that period, although it is hard to disentangle any single cause since this was also a time when UK unemployment was rising sharply.

“I think migration from eastern Europe is quite likely to fall quite sharply over the next year or so and the exchange rate is one of the factors,” said Jonathan Portes, an economist at the UK’s National Institute of Economic and Social Research.

The psychological impact of the Brexit vote on the UK’s migrants could be profound, he added.

“If people feel less welcome, they are less likely to stay and more likely to tell their friends not to come. You cannot quantify that, but I think it’s pretty clear there has been a psychological shift in attitudes.”

One solution is to move to a healthier economy with a stronger currency.

When the Irish economy contracted sharply during the financial crisis, for example, many Polish migrants moved to places with better job prospects, most notably Norway, according to Michal Myck, director of the Centre for Economic Analysis in Szczecin, Poland.

But sterling’s drop may not repel everyone. Britain’s universities and schools are hoping it will draw in more international students.

Jacqui Jenkins, senior adviser on educational engagement at the British Council, said the current exchange rate was an opportunity to “strengthen the UK’s position” in critical markets such as China, India, Malaysia, Nigeria and the US.

She added that some universities were already receiving requests from international students to pay their entire course fees upfront while the exchange rate was in their favour.

“Our social media monitoring indicates that a cheaper environment for students in the UK could be a real benefit,” she said.

Nick Hillman, director of the Higher Education Policy Institute, agreed.

“If a student is on a knife-edge decision whether to go to the UK or the US, Canada, Australia or New Zealand, the exchange rate fluctuation might be the factor that makes the difference.” – Financial Times.

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  • Emperor

    These students would be rather narrow widened as the formal exchange rate does not say much about it’s internal value,
    because the UK is not a cheap place after a just 10 to 15 percent depreciation of it’s currency, it would need a 50 percent fall in the Pound to make it a reasonable priced place.