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Remittance grey areas that deny Africa benefits

remittance
The cost of sending remittance to Sub-Saharan Africa is the highest globally. FILE PHOTO | NMG 

Over the last six years, diaspora remittances have become the largest single source of external funding to Africa surpassing Aid and Foreign Direct Investment.

According to the UNCTAD report on Economic Development in Africa 2018, cash remittance flows to Africa now account for 51 percent of private capital flows to Africa in 2016, up from 42percent in 2010.

Cash flows to Africa from diaspora remittances rose from $40 billion on average in 2010 to $65 billion in 2016.

The World Bank projects that Africa diaspora remittance flows will reach a high of $85 billion in 2019. This tremendous growth, coming in the wake of the decline in the Official Development Assistance to Africa over the years, can help reduce poverty and grow economies.

However, due to various systemic challenges, the full benefits from diaspora remittance flows to Africa have not been realised. The African Development Bank notes that the main challenges constraining the realisation of the full benefits emanate from high remittance costs and little success from efforts to channel the flows to viable investments.

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The cost of sending remittance to Sub-Saharan Africa is the highest globally. On average, it cost almost $19 to send $200 to a country in the region during the first quarter of 2018, the highest cost compared to any other region.

While average remittance costs for Sub-Saharan Africa declined significantly from 14 percent in 2008 to about 10 percent in 2014, little progress has been made since then.

The average cost has now been lingering between nine percent and 10 percent against a low of five percent to South Asia and the global average of seven percent.

The other main challenge has been the difficulty in channeling the remittance flows to viable investments. Principally, remittances are private funds and are treated like any other household income.

Despite some governments offering incentives in the form of diaspora bonds to direct remittance funds towards national development priorities, the efforts have yielded little success. Possible reasons include trust in home country systems, perceptions of system governance, levels of sovereign risk and financial sector stability.

Going forward, Africa needs to build on past efforts to bring down remittance costs. This is how to get the right flow of remittances through the formal channels.

In addition, Africa needs to leverage the development of technologies that enable money transfer to rural areas at affordable costs. African countries can benchmark with the Kenya M-Pesa Global in partnership with Western Union or Equity Bank – Equity Direct which enable sending and receiving money from any part of the world on phone.

African governments could use future flows from exports as a collateral for the bonds or enter into financial guarantee arrangements with local financial institutions.

When this is done, diaspora bonds could be positioned as the best alternative to foreign debts and the best financial vehicle to attract resources from the diaspora community.

The writer is Senior Advisory Consultant.

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