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Importance of remittances highlighted in reports

The World Bank has said in a joint report on remittances undertaken with the Central Bank of Kenya that sub-Saharan Africa (SSA) trails other regions in its annual share of remittances and it should take steps to raise it in order to fund much-needed development.

Total remittances into SSA are expected to rise by 2% this year, from USD 21bn, despite a faltering world economy, the bank said.

“In global terms it is not as high as other regions. For instance, Mexico alone receives a comparable number than the entire sub-Saharan Africa receives,” Benjamin Musuku, World Bank’s head of its Future of African Remittances programme, told Reuters after a news conference.

“So you do see that Africa in that sense is lagging behind in trying to leverage remittances for development, we can do much more.”

Remittance flows represent a significant share of gross domestic product (GDP) for Kenya and many African countries.

In smaller economies like Cape Verde and Lesotho, funds sent home by the nations’ citizens abroad account for more than a quarter of GDP, Musuku said. “These are quite significant flows going into these countries and hence the need to have a very focused strategy on how remittances can be used to leverage development,” he said.

Proposals for enhancing the continent’s share of remittances include, efficiency of data collection (World Bank estimates 20% of money sent is not captured officially), use of technology and a risk-based approach to supervision.

Highlighting the value of remittances, a separate study done by the AfDB early this year titled, ‘The Impact of Remittances and Foreign Aid on Savings/Investment in Sub-Saharan Africa’, found that both remittances and foreign aid promote savings and investment in SSA, but remittances are strongly more effective. The coefficients of remittances were 6 to 7 times higher than those of foreign aid. A 10% increase in remittances increases savings by 7% and investment by 6.5%, while the same 10% increase in foreign aid increases savings and investment by respectively 1.6% and 1%.

According to these results, remittances, although less important in volume and in percentage of GDP, are more effective in boosting savings and investment in SSA than foreign aid. However, when foreign aid is efficiently used, it can be an important complement to remittances by allowing vulnerable households to have income above the threshold subsistence’s level so they can use larger share of remittances for savings and investment purposes.

Of course, during economic downturns, however, migrant workers are often the most vulnerable. As migrants lose their incomes or even their jobs, this may turn remittances into a shock transmitter. Thus it is important for countries to both find a way to encourage and harness remittances, but also to look for mechanisms to help deal with any substantial decline in the same.

Article produced by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.

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