Harnessing Remittances for Africa’s Development
Mar 4th 2013
More than 30 million Africans (about three per cent of Africa’s total population) are living outside their home countries. This figure includes those living within other African countries. These African migrants send money to their families in Africa. Remittances by African migrants play an important role as a source of financing and foreign exchange for African households and countries. A recent report published by the United Nations Conference on Trade and Development (UNCTAD) shows that remittances sent to the world’s poorest countries including 33 African countries have increased to US $27 billion in 2011 from US $3.5 billion in 1990. For Africa as a whole, remittance inflows have more than quadrupled since 1990, reaching US $40 billion in 2010. This represents about three per cent of Africa’s total GDP. Globally, the amount of remittances reached US $300 billion in 2010, surpassing foreign direct investments (FDI) and official development assistance (ODA) combined. The estimate for the Africa figure is widely believed to be conservative, given the evidence of underreporting as some remittance transfers are sent through informal channels. Accounting for informal flows could raise the total amount of remittances to Africa by about 50 per cent.
Benefits from Migrant Remittances
Remittances by African migrants provide many benefits to both African households and governments. Available evidence suggests that, all things considered, poor households receiving remittances tend to have better living conditions than their counterparts without access to this source of income. According to the World Bank, remittances by African migrants could support between 10 to 100 people, by boosting household income and spending on healthcare and education. Thus remittances play an important role in poverty reduction and improving human development.
At a macro level, flows of remittances could improve the balance of payments and bolster a country’s foreign exchange reserves. By stimulating savings, remittances can also have an impact on financial development and foster long-term economic growth. Since remittances generally accrue to low-income households, the latter may be induced to save a portion of these flows, thereby connecting them to the formal financing system. Furthermore, remittances could be a catalyst for investment and economic growth by supporting small business start-ups.
Leveraging the Role of Remittances in Africa
Although migrant remittances offer sizable benefits to Africa, existing policies in a number of countries create barriers for deployment of these flows for national gain. Savings by African immigrants amount to US $50 billion per year which is higher than the US $30 billion of the annual infrastructure funding gap in Africa. The bulk of this money is stashed in foreign bank accounts. Attracting these funds to Africa could significantly improve market liquidity which could be used to finance the region’s investment requirements, particularly in infrastructure. Thus, African governments should devise measures aimed at encouraging the African Diaspora to send back their savings into African economies. The measures may include the following:
Fostering the role of micro-finance institutions: Due to exclusivity agreements, the African remittance market is currently dominated by Western Union and Money Gram, two leading global transfer companies. These two companies control 65 per cent of all remittances payout locations in Africa, in partnership with selected commercial banks and other financial institutions. This dominance has been reinforced by tacit restrictions imposed by African countries on companies that can offer remittance services. Lack of competition has translated into higher transfer costs. For instance, in Africa costs are still 25 per cent higher than in Latin America and Asia, which have experienced marked reduction in costs.
To overcome the challenge of high transfer costs, African governments should foster the involvement of smaller organizations such as micro-finance institutions and post offices to facilitate transfer of remittances. This may improve access to remittance transfers by the poorest especially in rural areas as micro-finance institutions and post offices have larger geographical reach than banks. According to an International Fund for Agricultural Development (IFAD) report, expanding the number of institutions offering remittance transfer services could more than double payment points in Africa. Saving and credit cooperatives and rural banks, would also be used as payment points for remittances.
Creating enabling regulatory and investment environments: Restrictive or even lack of a regulatory framework for remittances is hampering their power as an economic and social driver. Regulatory frameworks in many African countries need to be examined and improved to allow remittances play a better role as a social transformative tool. Reforming the regulatory framework is an overriding step to leverage the impact of remittances on social transformation. African policymakers should adopt measures to ensure that remittance flows go into the formal financial system. This could be achieved by setting up a regulatory framework aimed at improving flow of information, strengthening competition and reducing transfer costs in order to encourage migrants to use formal channels of money transfer.
Improving the business climate in Africa is another means to attract remittance flows from the Diaspora. A business-friendly environment may induce African migrants to send more money to their home countries and invest in productive domestic projects. A possible avenue for investing remittances would be the Diaspora bonds, which some African governments have been contemplating. According to estimates, Sub-Saharan African countries can raise between US $5 billion and US $10 billion per annum through the issuance of Diaspora bonds. In 2011, Ethiopia launched its second Diaspora bond aimed at funding the construction of the Grand Renaissance Dam, which is expected to be Africa’s largest hydroelectric power plant.
Adopting new technologies of money transfer: An estimated 30 to 40 per cent of remittances to Africa are sent to rural areas where banking facilities are generally non-existent. As a result, people travel long distances to receive their money. This cost of travel represents an additional burden to the already high cost of transfer. Expanding payment networks to small-scale merchants and encouraging the adoption of new technologies such as payments through the Internet or mobile phones can widen the reach of remittances and enhance financial inclusion to the people that need it most.
Professor Mthuli Ncube is the Chief Economist and Vice President of the African Development Bank, and holds a PhD in Mathematical Finance from Cambridge University, UK, on “Pricing Options under Stochastic Volatility”.