Stellenbosch Business School celebrates Africa Day 2021

As migrant remittances steadily become the largest source of incoming capital for developing countries, outstripping foreign direct investment and development aid,¹ African countries need to think more innovatively about leveraging these inflows for their development needs in a post-Covid economy.

Remittances – the money sent home by citizens working in other countries – are a financial lifeline for families in poorer countries, directly improving their living standards by enabling food purchases, access to better standards of education and healthcare as well as access to credit, while the multiplier effect indirectly benefits local economies through consumer spending and taxes.

“These remittances could offer a window of hope for development against a backdrop of declining foreign direct investment (FDI) and foreign aid.”

As the continent celebrates Africa Day this week (Tuesday, 25 May), remittances from migrant workers in the African diaspora across wealthier countries are helping families and communities in their home countries to meet their increased needs for livelihood support.

These remittances could offer a “window of hope” for development against a backdrop of declining foreign direct investment (FDI) and foreign aid, says Dr Elizabeth Nanziri, Director of the African Centre for Development Finance at the University of Stellenbosch Business School (USB).

However, she said for Africa to realise the value of remittances there was a pressing need to address the cost of sending money across borders, with sub-Saharan Africa’s payment corridors, and particularly the SADC region, the most expensive in the world.²

There is also a need for greater accessibility to digital payment platforms in Africa as these are consistently cheaper for sending money than non-digital means such as banks and post offices..²

“…Africa needs to be thinking innovatively about meeting its development finance needs, looking to how remittances could not only benefit the recipient families but also fund public services and development projects.”

“FDI and foreign financial assistance to developing countries is likely to continue declining post-Covid, and so Africa needs to be thinking innovatively about meeting its development finance needs, looking to how remittances could not only benefit the recipient families but also fund public services and development projects,” Dr Nanziri said.

While foreign aid was boosted by Covid-19 assistance to developing countries,³ the general trend is downwards; and already declining foreign direct investment (FDI) fell dramatically by 38% in 2020⁴ due to the pandemic, and recovery is expected to be slow, she said.

Meanwhile, defying expectations of a decline due to Covid-19, migrant remittances proved to be resilient and registered only a 1.6% worldwide decrease in 2020, although sub-Saharan Africa registered the largest downturn at 12.5%.⁵ The small global decline was far less than the more than 30% fall in FDI to low- and middle-income countries in 2020.4

Remittances had been expected to decline more significantly, due to migrants often working in service and hospitality sectors that were shuttered due to Covid-19 lockdowns as well as difficulties in accessing money transfer services due to mobility restrictions and shutdowns.

However, fiscal stimulus in migrants’ host countries was one of the factors that kept remittances flowing to their home countries.4

“Aid is not sustainable and leads to dependency, together with the repayment obligations that come with some forms of financial support to countries. Similarly, FDI is not without downsides and mixed evidence on its benefits, with some solid arguments that it tends to benefit the investor more than the recipient country.

“The case for remittances is that, unlike the increasing trend with development aid, they have no repayment obligations.”

“The case for remittances is that, unlike the increasing trend with development aid, they have no repayment obligations. They go straight to the beneficiaries to pay for healthcare, education and food, increasing the ability of households to afford what they need and bypassing the middle-man of government with its tendency to misuse funds and susceptibility to corruption,” Dr Nanziri said.

She said there were several ways that developing countries could leverage the inflowing remittances to support national developmental needs and provide public services.

“There is the aspect of the ‘wealth effect’, by which the multiplier effect of spending by individuals in the local economy increases overall taxable consumption and thus puts more money into the fiscus for public spending.

“…remittances may function as collateral and facilitate access to credit by sovereign borrowers by using future flows of remittances as security for lending in international capital market.”

“And, as it does for households, remittances may function as collateral and facilitate access to credit by sovereign borrowers by using future flows of remittances as security for lending in international capital markets,” she said.

Dr Nanziri said that governments could take this positive effect further and draw on the willingness of migrant workers to collectively contribute to public goods in their home countries, as has been done in Latin American countries, with Ethiopia, Ghana and Zimbabwe the front-runners of this approach in Africa.

Mexico, for example, introduced a “Three-for-One” programme whereby every dollar sent by migrants for public works in their communities is matched dollar-for-dollar by the municipal, state and federal governments.

She said Zimbabwe had some success with the launch through its central bank of a remittance channel called Homelink, which aimed to reduce the cost of migrant remittances by openly competing in the money transfer market. The company has evolved over time to become an established financial services company offering multiple services such as mortgage loans, micro finance and real estate development investments to the diaspora population who want to invest back home.

Diaspora bonds are another avenue, she said, a newer concept in leveraging remittances for development, where a government issues fixed income securities to seek investment from expatriates for large public development projects.

“This has been implemented successfully in India, Bangladesh, Pakistan, Lebanon, Sri Lanka and the Philippines for financing development projects, but despite mixed success in African countries to date, this is still a route with untapped potential,” Dr Nanziri said.

Kenya and Nigeria have had some success, with Kenya raising US$190 million in 2009 for transport, energy and water projects, and Nigeria (which receives over 40% of remittances in sub-Saharan Africa) raised US$330 million for infrastructure projects in 2017.

“Diaspora bonds work where migrants feel a patriotic duty towards their home country, have confidence in the government and are willing to invest a portion of their savings, and conversely a mistrust of governments due to poor governance and corruption counts against the successful issuing of a diaspora bond.

“Ghana announced in 2020 that it aimed to raise US$3 billion for infrastructure development through a diaspora bond, but it has not yet launched, likely due to the economic repercussions of the pandemic, but it will be an interesting one to watch,” she said.

[i] Brookings Institution. June 2020. Remittance flows to sub-Saharan Africa expected to slow after years of growth. https://www.brookings.edu/blog/africa-in-focus/2020/06/25/figure-of-the-week-remittance-flows-to-sub-saharan-africa-expected-to-slow-after-years-of-growth/

[ii] World Bank. Remittance Prices Worldwide (RPW) December 2020 quarterly report, available at https://remittanceprices.worldbank.org/en/resources

[iii] OECD. April 2021. COVID-19 spending helped to lift foreign aid to an all-time high in 2020 but more effort needed. https://www.oecd.org/newsroom/covid-19-spending-helped-to-lift-foreign-aid-to-an-all-time-high-in-2020-but-more-effort-needed.htm

[vi] OECD. April 2021. COVID-19 fallout sinks global FDI flows by 38% in 2020. https://www.oecd.org/investment/statistics.htm

[v] World Bank. May 2021. Defying predictions, remittance flows remain strong during Covid-19 crisis. https://www.worldbank.org/en/news/press-release/2021/05/12/defying-predictions-remittance-flows-remain-strong-during-covid-19-crisis