Analysis in brief: The amount of remittances sent by Africans working abroad to their home countries is so great that they are a factor in nations’ economic growth. But high transaction costs and customer accessibility are troubling these financial lifelines. While remittances to Africa were up in 2022, the rate of growth for these transactions is being hindered.
The importance of remittances will only grow
Remittances are defined as financial transfers made by migrants to their friends or family members back in the places from which they originated. Usually, remittances are country-to-country transfers. However, in-country remittances are also important, as workers in one part of the country, often under contract or perhaps employed by the UN or an NGO, send home portions of their earnings. Remittances are an important and, in some cases, essential source of household income for citizens of Low- and Middle-Income Countries (LMIC) – a definition that incorporates all African nations except for Mauritius. Remittances are lifesavers when it comes to mitigating the impact of disasters faced by the sender’s relatives, who have little or no income, and act as a social safety net for family members living in underdeveloped areas.
Studies have shown that remittances are linked to overall poverty reduction within a community and a nation. They are responsible for improving the nutrition of communities, and this, in turn, is linked to increased birth weight and better health of babies and higher school enrolment rates for children in disadvantaged households, who use remittances to pay school fees. Remittances are also linked to better housing in communities.
On a macro-economic scale, remittances rank so highly in received revenue for many countries that they are a factor in GDP along with industrial output and tourism income, assisting with the overall balance of payment. The importance of remittances will grow as global trends accelerate, such as an aging Western population that will require imported labour to do jobs on all levels of their economies and global warming, which will increase the importance of remittances to mitigate family’s financial shocks when drought, storms and associated climate-change challenges worsen.
Consequently, the World Bank, which recognises the role these transactions play in sustaining household incomes in LMIC, launched the International Working Group to Improve Data on Remittance Flows in April 2022. By facilitating the remittance process by lowering transaction fees and making it easier to send and receive funds, the group seeks to boost sustainable development overall. The International Monetary Fund is the main provider of international remittances statistics. Its information is not amassed from the myriad companies that carry out remittance transactions but from countries’ central banks, for whom remittances are incorporated into their balance of payments statistics.
Impact on economies and national growth
Remittances to LMICs managed to overcome a challenging global landscape in 2022 to grow 5% (to US$ 626 billion). This was half the 10.2% growth recorded in 2021. Several reasons for slower remittances growth in 2022 preview similar situations likely to be repeated in the future. Fewer migrants were employed because economic activity that relied on foreign labour during the Covid-19 pandemic saw the indigenous workforce resume their jobs. High inflation throughout the globe meant more of migrants’ pay cheques had to be spent on meeting migrants’ own needs and less was available to be sent home. Additionally, the migrant workforce was affected in Russia and other countries by Russia’s invasion of Ukraine.
According to the World Bank, African nations are most at risk from global crises and economic downturns. Consequently, while remittances to Sub-Saharan Africa in 2022 increased 5.2%, to US$ 53 billion (slightly above the global average), the growth was less than a third of the growth of 16.4% achieved in 2021. Strong remittance amounts sent to Kenya and Nigeria accounted for most of the continent’s remittances growth, meaning that other countries saw less or even negative growth in that year. For 2023, remittances are projected to grow but at a slower rate of 3.9%. The countries primarily impacted will be those that receive the highest percentage of their GDP from remittances. These countries include Comoros (20%), The Gambia (where remittances comprise more than a quarter (28%) of GDP) and Lesotho (21%). In terms of value of remittances, of the top five recipient countries for remittance inflows in 2022, one was African: Egypt received a total amount of US$ 32 billion sent home by Egyptians working abroad. Altogether, for the past eight years (since 2015), remittances have been the single largest source of external finance flows to LMICs. The amount of remittances received by LMICs the world over are three times the amount of official development assistance since at least 2010.
Remittances are more than money
Economists and development officials have noted that remittances are more than money sent home. Of growing importance and value are so-called ‘social remittances’, defined as “the ideas, behaviours, identities and social capital that flow from receiving to sending-country communities.” Examples of these are migrants conveying home innovative ideas, knowledge, political values, policy innovations and technological skills. Once abroad, the migrant’s ability to aid others through social networking – finding job opportunities or alerting communities to NGOs and international bodies from whom they can seek assistance – expands the definition of social remittances.
The main encumbrance to remittances is the high cost of sending and receiving funds. In 2022, the average costs of sending US$ 200 to LMICs globally remained high at 6%. In Sub-Saharan Africa, the cost is higher: 7.8% on average to send US$ 200. This is well above the ideal set by the UN Sustainable Development Goal 10.c.1, which targets a cost of no more than 3% to send funds. While the cheapest method to send and receive remittances is by using mobile apps, which charge 3.5% per transaction, digital transactions account for less than 1% of total remittances in Sub-Saharan Africa. Although digital platforms allow for faster as well as cheaper transactions, most African countries’ underdeveloped digital networks discourage this option. One study also found that international Anti-Money Laundering and Combating Terrorism Financing regulations, which have had the effect of restricting the number of new service providers to correspondent banks, further reduce African migrants’ options for remittance services.
No longer just the generous remembrances by African migrants to their families in their home communities, remittance revenues are now instrumental to their sender’s national GDP growth, poverty reduction and national development. The UN seeks to facilitate remittances by pushing for lower transaction costs. This will be of great importance as remittances from abroad aid communities to overcome climate change shocks like drought and storms, food insecurity and health crises. Fortunately, digital platforms make sending and receiving easier, if these can be assisted through national policies that help boost this significant source of revenue.
The critical points:
- Growth in remittance transactions went down in 2022 and will fall further in 2023 due to global economic conditions; however, growth is still positive
- Some African countries’ GDPs rely on remittances from citizens working abroad
- The cost of sending and receiving remittances must be halved to achieve the fees targeted by the UN. If African nations boost their internet systems, digital technology can provide cost- and time-efficient platforms to expedite remittances