Diaspora remittances can spur economy

Dr Gift Mugano
At the beginning of this year I indicated that Zimbabwe must work very hard to raise national productivity in order to enhance national competitiveness.

Undoubtedly, one of the stumbling blocks to raising productivity is limited finance or liquidity crunch.

In a dollarised economy with limited policy options major sources of finance are exports receipts, foreign direct investment, aid and remittances.

In the Zimbabwean context, export receipts had been falling in recent years due to lack of competitiveness.

With respect to FDIs, Zimbabwe has been trailing behind other African states like Mozambique, Angola, Zambia, South Africa and Nigeria due to perception issues.

Aid for development has not been coming much except one for humanitarian assistance. Our capacity to get aid has been constrained by debt overhang. Tied to this, is the incapacity of our local companies to access offshore finance to finance growth due to country risk caused by the debt problem and country perceptions.

Interestingly, remittances seems to be the only cylinder that is firing which can propel the economy!

In order to unpack the role of remittances in development, this week I will look at the contribution of remittances in developing countries with specific reference to Africa and measures which have been put in place from which Zimbabwe can draw lessons.

More than 30 million Africans (about 3 percent of Africa’s total population) are living outside their home countries.

This figure includes those living within other African countries. These African migrants send money to their families in Africa.

Remittances by African migrants play an important role as a source of financing and foreign exchange for African households and countries.

A report published by the United Nations Conference on Trade and Development (UNCTAD) shows that remittances sent to the world’s poorest countries including 33 African countries have increased to $27 billion in 2011 from $3,5 billion in 1990.

For Africa as a whole, remittance inflows have more than quadrupled since 1990, reaching $40 billion in 2010.

This represents about 3 percent of Africa’s total GDP.

Globally, the amount of remittances reached $300 billion in 2010, surpassing foreign direct investments (FDI) and official development assistance (ODA) combined.

The estimate for the Africa figure is widely believed to be conservative, given the evidence of underreporting as some remittance transfers are sent through informal channels.

According to World Bank, informal flows could raise the total amount of remittances to Africa by about four times.

Zimbabwe last year received a staggering $1 billion from remittances. If the World Bank estimates are anything to go by we could have received around $4 billion coming through the informal channels like buses and other informal channels.

Benefits from migrant remittances

Remittances by African migrants provide many benefits to both African households and governments.

Available evidence suggests that, all things considered, poor households receiving remittances tend to have better living conditions than their counterparts without access to this source of income.

According to the World Bank, remittances by African migrants could support between 10 to 100 people, by boosting household income and spending on healthcare and education.

Thus remittances play an important role in poverty reduction and improving human development.

At a macro level, flows of remittances could improve the balance of payments and bolster a country’s foreign exchange reserves.

By stimulating savings, remittances can also have an impact on financial development and foster long-term economic growth.

Since remittances generally accrue to low-income households, the latter may be induced to save a portion of these flows, thereby connecting them to the formal financing system. Furthermore, remittances could be a catalyst for investment and economic growth by supporting small business start-ups.

Leveraging the role of

remittances in Africa

Although migrant remittances offer sizable benefits to Africa, existing policies in a number of countries create barriers for deployment of these flows for national gain.

According to World Bank, savings by African immigrants amount to $50 billion per year which is higher than the $30 billion of the annual infrastructure funding gap in Africa.

The bulk of this money is stashed in foreign bank accounts. This is real tragedy! This is also a reflection of the potential loss for Zimbabwe.

These funds, if channelled to Africa could significantly improve market liquidity which could be used to finance the region’s investment requirements, particularly in infrastructure. Thus, Africa Development Bank and World Bank are helping African governments to devise measures aimed at encouraging the African Diaspora to send back their savings into African economies. The measures may include the following:

Fostering the role of

micro-finance institutions

Due to exclusivity agreements, the African remittance market is currently dominated by Western Union and Money Gram, two leading global transfer companies.

These two companies control 65 percent of all remittances pay-out locations in Africa, in partnership with selected commercial banks and other financial institutions.

This dominance has been reinforced by tacit restrictions imposed by African countries on companies that can offer remittance services.

Lack of competition has translated into higher transfer costs. For instance, in Africa costs are still 25 percent higher than in Latin America and Asia, which have experienced marked reduction in costs.

To overcome the challenge of high transfer costs, African governments are working on fostering the involvement of smaller organisations such as micro-finance institutions and post offices to facilitate transfer of remittances.

This may improve access to remittance transfers by the poorest especially in rural areas as micro-finance institutions and post offices have larger geographical reach than banks. According to an International Fund for Agricultural Development (IFAD) report, expanding the number of institutions offering remittance transfer services could more than double payment points in Africa.

Saving and credit co-operatives and rural banks, would also be used as payment points for remittances.

In Zimbabwe, we have the same problem of dominance of Western Union and Money Gram but the entry of Mukuru Dot.com and Ecocash has helped in a way to reduce the cost of transfer and access to the rural areas.

Creating enabling regulatory and investment environments

Restrictive or even lack of a regulatory framework for remittances is hampering their power as an economic and social driver.

Regulatory frameworks in many African countries is being examined in order to allow remittances play a better role as a social transformative tool.

Reforming the regulatory framework is an overriding step to leverage the impact of remittances on social transformation. There is ongoing work by African policymakers on measures aimed to ensure that remittance flows go into the formal financial system.

This include work on setting up a regulatory framework aimed at improving flow of information, strengthening competition and reducing transfer costs in order to encourage migrants to use formal channels of money transfer.

Improving the business climate in Africa is another means to attract remittance flows from the Diaspora.

A business-friendly environment may induce African migrants to send more money to their home countries and invest in productive domestic projects.

A possible avenue for investing remittances would be the Diaspora bonds, which some African governments have been contemplating.

According to estimates, Sub-Saharan African countries can raise between $5 billion and $10 billion per annum through the issuance of Diaspora bonds. In 2011, Ethiopia is using Diaspora bond aimed at funding the construction of the Grand Renaissance Dam, which is expected to be Africa’s largest hydroelectric power plant.

Adopting new technologies of money transfer

An estimated 30 to 40 percent of remittances to Africa are sent to rural areas where banking facilities are generally non-existent.

As a result, people travel long distances to receive their money. This cost of travel represents an additional burden to the already high cost of transfer.

Various Governments in Africa are working on expanding payment networks to small-scale merchants and encouraging the adoption of new technologies such as payments through the Internet or mobile phones (as in Zimbabwe case through ecocash) can widen the reach of remittances and enhance financial inclusion to the people that need it most.

In addition to these measures, Zimbabwe can also consider revisiting the Homelink project and identification of specific investment projects for Zimbabwe in diaspora.

With respect to Homelink housing projects, there is need to revisit the pricing structures of various housing models as it is still on the high side.

One needs to consider the critical mass concept. We are not targeting few people from abroad but millions!

Homelink provides a safe investment for the diasporans but the cost is forcing our beloved nationals abroad to use relatives who in turn fleece them of their hard earned cash.

Within the realm of the special economic zones and indigenisation, Zimbabwe must come up with a comprehensive offer which cut across all sector of the economy to the people in the diaspora.

Whenever I hear about investment missions, I have not heard serious missions aimed at targeting our own nationals except during the era of Dr Gideon Gono.

Combining our own measures and also borrowing on what is happening in Africa can help us raise funds for our economy to unleash our potential. Now is the time to release the potential our rich human capital!

Iwe neni tine basa

Mina lawe silomsebenzi.

 Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University & Visiting Lecturer at the University of Zimbabwe’s Graduate School of Management. Feedback: +263 772 541 209 or [email protected]

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