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Costs swallow chunk of remittances to Africa: IFAD

Thursday, 29 October 2009 10:43

Source: Reuters
By: Tom Pfeiffer

RABAT (Reuters) - Africans are relying more than ever on cash sent home by relatives working abroad, yet a big chunk of the money gets wasted or lost according to a United Nations study released on Thursday.

As much as 20 percent of what workers pay to support families in Africa can get swallowed up in transaction costs, said Kevin Cleaver, Assistant President of the U.N.'s International Fund for Agricultural Development (IFAD).

Many decide instead to entrust hard cash to relatives or acquaintances to take back home. That money can be lost, confiscated or stolen.

"Even though remittances have declined, they have become more important for the sustenance of poor people than before the recession," Cleaver told Reuters. "We found there is so much wastage, particularly in Africa where transfer mechanisms are more rudimentary than in Asia and in Central or South America."

He said large amounts of money were being wasted that could be used for private investment and rural development in Africa.

The IFAD report, due to be presented in Tunis on Thursday, found that Africa has fewer locations for paying out remittances than Mexico, which has one tenth of Africa's population. Payment points are especially scarce in rural areas.

Some of the worst countries for receiving remittances were fragile states such as Zimbabwe, Sudan and Somalia. But Cleaver pointed to more stable destinations that could do much better such as Kenya, Ghana and Senegal.

The best performer was Algeria thanks partly to its wide network of post offices able to handle remittances.

Cleaver said it was very hard to estimate the drop in remittances to Africa during the global economic slowdown -- more than half probably arrive through informal channels.

"Our best guess, with a big margin for error, is that remittances to Africa have declined by about a third," he told Reuters by telephone from IFAD's Rome headquarters.

A previous IFAD report found that 150 million migrants worldwide sent more than $300 billion to their families in developing countries in 2006.

Some 30 million Africans live abroad and remittance flows to and within the continent approached $40 billion.

Cleaver said that figure could be higher if competition among remittance transfer companies were stronger, because African migrants are often put off by the high cost.

IFAD said that in four African countries out of five, governments restrict the type of financial institutions able to offer remittance services. In West Africa, 70 percent of payments are handled by one money transfer operator.

Cleaver said a foreign money transfer company will often make an exclusivity agreement with a bank in an African country and get that country's government to entrench the agreement.

Such companies "keep others out," said Cleaver. "They keep out institutions that we finance for the purpose of rural development."