“Cash Back:” Remittances from the African Diaspora

Written by Mario Wiedemann on August 3, 2011. Published in Cash back on Africa, Cameroon, Chad, Côte D‘Ivoire, Ethiopia, Ghana, Kenya, South Sudan, Sudan, Uganda.

The African diaspora is comprised of over 30 million emigrants from Africa‘s 54 nations. The International Fund for Agricultural Development (IFAD) estimates that each year the African diaspora contributes about 40 billion USD in the form of remittances to their families and communities. Between 1960 and 2003, the continent of Africa received over 600 billion USD in aid, but diaspora remittances were double that sum in the same period.

From a macroeconomic standpoint, diaspora remittances account for a significant percentage of some African nations‘ gross domestic products (GDPs). For example, in 2006, remittances to Uganda totaled 845 million USD or 9.3 percent of the GDP. Between 2006 and 2010, remittances from Ugandans living abroad increased bya staggering 235% to about 2 billion USD. This comprises about 4.76 percent of Uganda‘s current GDP, according to International Monetary Fund (IMF) data. In 2010, Lesotho was the largest recipient of remittances in terms of GDP, with money transfers accounting for 28.5 percent of GDP. Click here for this working paper on “Determinants and Macroeconomic Impact of Remittances in Sub-Saharan Africa” which provides more useful information.

While the cost of sending money back home has decreased due to increased competition and new technologies, it still remains relatively high. The cost of money transfers from the United States and Europe are generally lower than those from Asia or South America. And the cost of sending money across borders within Africa is still higher than that of sending money to African nations from abroad. Trransfer costs range from 12 to 25 percent of the total amount sent.

The IFAD report on “Sending Money Home To Africa: Remittance Markets, Enabling Environment and Prospects” focused on remittances to rural areas in Africa. The research indicates that the African remittance market exhibits a “low level of competition” and has limited payout presence in rural areas. Furthermore, two major money transfer companies [Western Union and MoneyGram] control 65 percent of all remittance payout locations. In Kenya and Sierra Leone, where some 50 percent and 78 percent (respectively) of recipients of remittances are rural residents, this is problematic.

Recipients of remittances typically have higher levels of education and have twice the savings rate of those who do not receive money from abroad. These facts suggest that remittances can contribute to improving the economic well-being of Africans and to creating a more highly-trained labor pool in the context of high unemployment rates- particularly among the youth. Ghana’s Minister of Foreign Affairs and Regional Integration Alhaji Muhammd Mumuni asserted that remittances from migrants have aided government policies targetting poverty reduction and economic empowerment. In 2011, Ghanaians abroad sent over 2 billion USD home, an increase in “cash backs” despite the global economic recession.

Even so, three questions still remain to be answered: are remittances going to the people who need them most? Are diaspora remittances fostering a culture of dependency? And are these remittances being leveraged for long-term investment?