N26, the German neobank backed by billionaires; Peter Thiel and Li Ka-Shing, said it will end its United Kingdom (UK) operations citing Brexit. Blaming Brexit for its abrupt withdrawal, the company said that it won’t be able to operate in the UK with its European Union (EU) banking license.
Brexit is the term that refers to the withdrawal of the UK from the EU. In one of the most divided national referendums, 52% of the voters in the UK voted to leave the EU in 2016. The decision sent shock waves all around the globe and the UK closes nearly half a century ties with Europe on 31st January 2020 by officially leaving the EU after three years of the Brexit vote in 2016.
London, the UK financial center, could struggle to grip its stronghold. In addition to neobanks, big banks like Goldman Sachs, JP Morgan, and Morgan Stanly have kept many UK bankers on standby to be reshuffled to other cities even before the final parliament's vote, according to the news article by the Guardian. In the case of Bank of America, over 100 UK bankers got transferred to Dublin and 400 to Paris.
Brexit marks a symbolic milestone and the beginning of a transition period that will end on 31st December 2020, which is eleven months from now. During this Brexit timeline, the UK will try and settle a deal that involves negotiations over trade in manufactured goods as well as services with Brussels. The British economy depends largely on these negotiations and deals. Failure to reach an agreement would mean the hardest economic period for the UK. Here is a simplified Brexit timeline
Brexit effects are multifold. Let’s first come to the Brexit impact on the UK itself. In terms of trade, there is no pre-agreed tariff-free trade status between the UK and the other EU members. Without a trade agreement, with the tariffs imposed, both exports and imports will become more expensive. Considering one-third of the UK imports including food is from the EU, the consequence of expensive imports could mean high inflation for the UK.
Now, let's look at something else that is majorly affected by Brexit. This is the remittance industry which is money sent by the migrant workers in the UK to their home countries. The UK is one of the largest sources of remittance for the developing countries. As per the World Bank, around $29 billion was remitted from the UK to countries around the world in 2018.
The UK has a sizable Indian diaspora and one of the largest non-British nationals residing in the country. Between 2000 and 2018, total foreign direct investment (FDI) into India from all channels from the UK amounted to $50.57 billion. Of this, $26.09 billion were direct investments to India according to the Reserve Bank of India.
Brexit effect on pounds
Brexit's biggest impact is on the UK’s economic growth. The British pound fell from $1.48 to $1.36 following the referendum. The fluctuations in the pound and the uncertainty surrounding the final outcome impacted the economy greatly. It slowed from 2.4% in 2015 to 1.5% in 2018. Brexit might lower the growth further by 6.7% over 15 years depending on how it leaves the EU.
The effect on INR/GBP as a result of the weakening of GBP is estimated against all major currencies and not just against INR. This repercussion will impact the NRIs in the UK. For UK based NRIs that have already committed for investments in India would have to send more GBP to fund those investments.
If NRIs have already invested, they would find their investments in India increase suddenly in GBP. It may be a good opportunity for them to repatriate part of their investments to the UK. While repatriation will give a positive return on their past investments, they will be missing out on their future investments as the growth of the UK would decrease as a result of Brexit.
UK remittances and India post-Brexit
From the World Bank data, India received around $4 billion in remittances from the UK. A weak pound will reduce the value of remittance from the UK. With Brexit, the amount of remittance has reduced due to the weak pound. Many NRIs who were planning to buy a home back in India or even invest are deferring their plans. Instead, they are thinking of selling their homes in India and repatriate the money taking advantage of the weak pound.
The slow growth of the UK economy will diminish the earning potential of the migrants which will reduce the remittance amount. It is estimated that the economy could remain stagnant for the next two years. There are also fears that tax rates may escalate, affecting the salary of UK-based employees.
Although Brexit effects the remittance to India, there are numerous upsides as follows:
The UK has long been debating Brexit’s pros and cons on its economy. According to a study by Bloomberg Economics, in the years since the 2016 referendum, Brexit has cost the UK's economy close to GBP 130 billion and counting. Furthermore, figures from the House of Commons library document shows that the cost to the British economy has already passed the total contributions made to the EU from Britain since 1973. It is believed that the UK's net contribution to the European Union and European Commission budget since 1973 is roughly around GBP 177 billion and the estimated cost is expected to cross GBP 200 billion.
As far as currency rates are concerned, it is clear that the GBP will be affected compared to the other currency rates such as INR/USD or INR/EUR, that is, it may not be materially affected as much as the GBP. In the current financial market, it is still not clear to which extent the processes and procedures of sending money back to the home country of the NRIs would be affected since the exit has been concluded.
If there are going to be any changes in the remittance industry, it would be negligible since many monetary institutions have repeatedly assuaged that money in whichever form would be safe and accessible. If you are sending money from the UK to India, compare the money transfer companies and pick the one which offers you the best deal and save your hard-earned pounds. Follow us on Twitter @CompareRemit for more Brexit updates.