22, July 2013

Remittances Gaining Increasing Importance in Africa: New Report from the African Development Bank

Migrant remittances have become an important source of external funding because in 2012 they overtook aid and FDI as the largest external flow to Africa for the first time. Their importance has once again been emphasised by the UN’s Africa Renewal magazine.  The World Bank estimates that official remittance flows have increase from USD 9.1 billion in 1990 to nearly USD 40 billion in 2010. These remittances equalled 2.6% of sub-Saharan Africa’s gross domestic product in 2009, or almost 60% of official aid flows to the region. Egypt and Nigeria are among the top recipients of migrant remittances, says the African Development Bank’s latest report, the African Economic Outlook 2013. The report states, the two countries received 64% of total remittances to Africa in 2012, with Egypt receiving USD 18 billion and Nigeria USD 21 billion.

African countries rely heavily on external funding for development. But foreign direct investments and official development aid have declined over the years, notes the African Development Bank (AfDB). Development experts believe remittance flows can help reduce poverty and grow economies. However, a big chunk of the remittances go to pay hefty bank fees. Three of our focus countries, Ghana, South Africa and Tanzania, are the most expensive countries in Africa to send money to with fees averaging 20%, according to the Send Money Africa database. The G8 plans to reduce these costs by 5% from the current average of 12.4%, by 2014. This commitment was made at the 2009 Aquila Summit and was endorsed by the G20 in 2010, which established a “Development Action for Remittances”. This would return USD 4.0bn back to African migrants and their families.

Remittances are an important share of foreign reserves but for the impact of them to show on development and economic growth, they must be spent on more than just consumption. Struggling African governments attempt to get migrants to invest some money in their homeland in the form of diaspora bonds. In 2012, estimated annual remittances of USD 61 billion were sent to African countries from the diaspora. 

Issuing Diaspora bonds and turning remittance flows into bonds or instruments that can be sold to investors are good alternatives to borrowing from the international capital market, says the AfDB. According the bank’s research, Africa could potentially raise $17 billion annually using future flows of exports or remittances as collateral. Trust is integral in marketing bonds to the diaspora. Transparency in the use of funds could ease concerns. If done right, experts believe these bonds could be a promising financial vehicle for African countries to attract resources, and for the diaspora to satisfy their yearning to contribute to the development of their countries.

For further reading: http://www.un.org/africarenewal/magazine/august-2013