Diaspora remittances outpace FDI, but costs remain a major hurdle

Saturday April 13 2019

A customer (right) waits to collect money at the Juba Express money transfer outlet in Mogadishu on February 12, 2015. PHOTO | AFP


East African countries received $17.38 billion from their citizens living abroad between 2013 and 2018, as foreign remittances outpaced foreign direct investment to become the largest source of external financing in low and middle-income countries

According to the latest World Bank brief, during the period, Kenya topped the region as the biggest beneficiary of remittances, receiving $10.74 billion, followed by Uganda ($6.28 billion), South Sudan ($2.85 billion), Tanzania ($2.39 billion), Rwanda ($1.13 billion) and Burundi ($257 million).

The Bank’s latest Migration and Development Brief shows that the volume of remittances into the five East African countries increased by more than 60 per cent to $4.66 billion in 2018, from $2.84 billion in 2013.

An analysis of the World Bank data for 2018 by the Washington-based Pew Research Centre shows that most of the inflows into Tanzania were from the United States, Kenya, Uganda, Burundi, South Africa, Malawi and Australia.

On the other hand, foreigners living and working in Tanzania remitted some $629 million to their countries last year, with most of the outflows going to India, Kenya, China, Uganda, US, Germany, Burundi, Italy, Britain, Rwanda and Pakistan.

FDI inflow


According to the EAC trade report (2017) East Africa’s FDI inflows declined by 25.3 per cent to $6.6 billion in 2017 from $8.8 billion in 2016.

Kenya recorded the highest decline in FDI inflows—a drop by 60.6 per cent to $717.7 million, down from $1.8 billion.

It was followed by Uganda, whose FDI fell by 14.2 per cent to $1.3 billion from $1.5 billion while Tanzania recorded a seven (7) per cent drop in FDI to $3.3 billion from $4.8 billion in the same period.

However, FDI inflows to Burundi increased to $146 million from $65.1 million, while in Rwanda FDI grew to $1.2 billion from $600.1 million in the same period.

For Tanzania, the rise in diaspora remittances is an indication of changing attitudes among citizens living abroad, many of whom remain disillusioned by the country’s reluctance to allow dual citizenship.

The current law restricts dual citizenship only to Tanzanian women acquiring foreign nationality through marriage, or persons under 18 who acquire Tanzanian citizenship by birth or descent.

Remittances flow

Meanwhile, remittances to the low and middle-income countries (LMICs) were estimated at $462 billion in 2018, significantly larger than FDI flows, which stood at $344 billion

“With FDI on a downward trend in recent years, remittances reached close to the level of FDI flows in 2018. This makes remittances the largest source of foreign exchange earnings in the LMICs, excluding China,” reads the report.

This year, remittance flows to LMICs are expected to reach $550 billion, becoming their largest source of external financing. Remittances are already more than three times the size of official development assistance in these countries.

But, while remittances continue to be an important source of external financing, the cost of sending money home has been high.

Dilip Ratha, the World Bank’s lead economist in charge of migration and remittances and the lead author of the Brief, said the high cost of money transfers continues to reduce the benefits of migration.

Commercial banks are the most expensive remittance channels, he said, charging an average fee of 11 per cent in the first quarter of 2019, followed by post offices at over seven per cent.

The global average cost of sending $200 remained high, at around seven per cent during the quarter, with sub-Saharan African countries recording the highest at 9.3 per cent.

Remittance costs across many African countries and small islands in the Pacific remain above 10 per cent of the value of the amount transmitted.

Money transfer costs are the lowest in South Asia, at five per cent. Reducing remittance costs to three per cent by 2030 has been the global target under the UN Sustainable Development Goals.

“The highest-cost corridors are mostly in sub-Saharan Africa. These feature high transfer fees and, in some cases, also high foreign-exchange margins,” the Bank says.

Anti–money laundering norms

According to the brief, the ongoing de-risking by international correspondent banks, which involves the closing of bank accounts of money transfer operators to avoid the risk in their efforts to comply with anti–money laundering and countering financing of terrorism norms, has affected remittance services and is driving up costs.

In the case of post offices, the brief noted that remittance fees tend to include a premium where national post offices have an exclusive partnership with a money transfer operator.

This premium was on average 1.5 per cent worldwide and as high as four per cent in some countries in the last quarter of 2018.

According to the World Bank, renegotiating exclusive partnerships and letting new players operate through national post offices, banks, and telecommunications companies could remove entry barriers, increase competition, and lower remittance prices.

Mobile money is, however, increasingly becoming attractive as a channel to send remittances, due to its scope, convenience and privacy.

The success of Kenya’s M-Pesa has partly been attributed to its role of making it easier and cheaper to receive remittances.

According to the global association of mobile network operators GSMA, it is 50 per cent cheaper to send remittances using mobile money than using global money transfer operators, with the cost of sending remittances through mobile phones continues to decline.

Remittances to sub-Saharan Africa grew almost 10 per cent to $46 billion in 2018, supported by strong economic conditions in high-income economies such as Poland, Russia, Spain and the United States.

Globally, global remittances, which include flows to high-income countries, reached $689 billion in 2018, up from $633 billion in 2017.

Among countries, the top remittance recipients were India with $79 billion, followed by China ($67 billion), Mexico ($36 billion), the Philippines ($34 billion), and Egypt ($29 billion).

Remittances to the East Asia and Pacific region grew almost seven per cent to $143 billion in 2018, faster than the 5 per cent growth in 2017.

Additional reporting by Bob Karashani.