Making Remittances Work for Africa

• Author: Sanjeev Gupta/Catherine Pattilla/Smita Wagh
• Position: Senior Advisor/Senior Economist/Project Officer.

If handled well, migrant transfers can reduce poverty and connect small savers to the formal financial sector

Remittances flowing into developing countries are attracting increasing attention because of their rising volume and their impact on recipient countries. In 2005, they totaled $188 billion-twice the amount of official assistance developing countries received. Moreover, there is evidence that such flows are underreported. Indeed, remittances through informal channels could add at least 50 percent to global recorded flows. Most of the reported flows go to regions other than sub-Saharan Africa (SSA), but SSA has still been part of the overall rising global trend. Between 2000 and 2005, remittances to the region increased by more than 55 percent, to nearly $7 billion, whereas they increased for developing countries as a group by 81 percent.

Studies relying on household data from different countries in SSA yield some insights into how remittances are used. At their core, remittances are private intrafamily or intracommunity income transfers that directly address the single most relevant challenge for SSA countries: poverty. Their long-term development potential is determined by what is left over after basic consumption needs are met. By contrast, study of the impact of remittances at the aggregate level is confined mostly to Latin America and South Asia, where remittance volumes swamp those going to SSA. This article adds some insights about the role of remittances in SSA and offers suggestions for their more effective use.

A snapshot of remittances

Africa receives just 4 percent of total remittances-by far the smallest share-to developing countries and just 33 percent of those to India, the top recipient. In contrast, countries in Latin America and the Caribbean receive about 25 percent of all remittances, as do countries in the East Asia and Pacific region. Since the 1980s, these flows to countries in Latin America and the Caribbean, and East Asia and the Pacific have grown more rapidly than the average for developing countries. In 2005, the top three recipients-China, India, and Mexico-accounted for more than one-third of the remittances to developing countries. Among the top 25 recipients, only one (Nigeria) was in Africa, but three South Asian countries were on the list (Bangladesh, India, and Pakistan).

Relative to GDP, too, the volume of remittances to SSA is smaller than to other developing countries: about 2.5 percent of GDP on average between 2000 and 2005 compared with almost 5 percent for other developing countries. But Lesotho, Cape Verde, Guinea-Bissau, and Senegal are striking exceptions (see Chart 1), and, in some countries, remittances are an important source of foreign exchange.

[GRAPHICS ARE NOT INCLUDED]

Remittances sent to SSA through informal channels, at 45-65 percent of formal flows, are significantly higher than in other regions. In addition, the balance of payments very likely underreports intraregional remittances. Intraregional migration is common in SSA; for example, Botswana and South Africa attract migrant workers from neighboring countries, and strong sociocultural ties in West Africa encourage labor mobility in that subregion.

How do remittances stack up against other flows to SSA? Both official development assistance (ODA) and foreign direct investment (FDI) are considerably higher than remittance receipts but are also more volatile (see Chart 2). The stability of remittances suggests that, through the securitization of future flows, they can potentially ease access to, and lower borrowing costs for, international capital. Some studies have concluded that because remittances are widely dispersed, their Dutch disease effects are relatively contained. However, as with any form of external flows, remittances do carry the risk of real exchange rate appreciation and could hurt export competitiveness in the...