Remittances and the Economic Crisis in Africa

Remittance inflows to sub-Saharan Africa in 2019 stood at US$46 billion and were projected to increase to US$65 billion in 2021, based on the increasing trend from the previous years. But, with COVID-19 hitting most migrant-hosting economies hard, remittances to sub-Saharan Africa (SSA) are expected to decline by about 23.1% in 2020. This reduction is expected as a result of migrant workers losing their jobs and possibly returning to unemployment in their countries of origin. This outcome is having dire consequences on the incomes of individuals, families and societies in regions where remittances are highly consequential for daily survival.
For African countries, a combination of economic factors, such as decline in foreign direct investment (FDI) flows, increases in capital flight, tightening of domestic financial markets and a slowdown in investments, coupled with reduced remittance flows are contributing to weakening economic growth and development in sub-Saharan Africa. The World Bank predicts sub-Saharan Africa’s real GDP growth to sharply decline from 2.4% in 2019 to -2.1 in 2020. As the pandemic continues, the actual loss in GDP growth could actually be higher than estimated.
Policymakers, private sector actors and development partners are taking collaborative efforts to ensure that they cushion the impact of the expected drop and shifts in remittance flows to low-income households. These measures, adopted in a flexible and responsive manner, and provided they embrace financial inclusion (SDG 8.10) and a reduction in the costs of remitting (SDG 10), will contribute to achieving the Sustainable Development Goals (SDGs).

Short-term impact of reduced remittances on African countries
In some countries, low-income and poorer households have already begun to feel the brunt of the decline in remittances. But there are mixed results across African countries. For example, in Ghana and Kenya, remittances, which dipped slightly in early April, increased in the second quarter of 2020. Consequently, some households have not seen a reduction in international remittances, but intra-African remittances have reduced.

The volume of remittances has not reduced across all countries
The COVID-19 crisis, coupled with declining oil prices, is expected to greatly weaken the potential and size of remittance flows to most developing countries. The pandemic has hit the major global economies that double as major migrant employers and thus, the main sources of remittances to low- and middle- income countries. Economic slowdown in major migrant-hosting countries has led to the closure of businesses and industries, leaving the majority of the casual, seasonal and already lowly paid migrant workers unemployed, either temporarily or permanently.
However, due to labour laws and extensive welfare packages of migrant-hosting countries in North America and Europe, migrant workers have either been able to keep their jobs, access some form of employment or benefit from welfare packages, although migrants in an irregular situation have not been able to benefit from some of these packages. Thus, they are able to maintain their obligations of sending their remittances to their families. These have led to remittances being stable or slightly affected by the pandemic, but not totally reduced as expected. Moreover, migrants who could not send money during the lockdown period, sent them in the immediate period after the restrictions were lifted, thus contributing to the upward trend in remittance transfers. Furthermore, some migrant workers are sending their savings to their families, thus remitting reduced amounts. However, these short-term measures are not sustainable.

Paradigm shift from cash-based remittances to digital transfers
For public health reasons, countries reduced the use of cash transactions so as to minimise the coronavirus spread. They are promoting the use of digital payment solutions including the digital transfer of remittances. Digital financial services for remittances recorded a 200% increase in the number of new customers during the pandemic. This short-term increase in the global use of digital payment platforms to send remittances raises two sets of challenges. First, some migrants in the sending countries may not have access to a bank account, legal identification, and/or other basic requirements for using these digital payment platforms. Second, the onboarding process – registration and setting up an account – may be difficult for people who do not frequently use these platforms. Additionally, first-time users may have limited trust in digital platforms because of the increasing number of digital fraud cases that have been reported.
The collapse of informal sending channels due to mobility restrictions has led to the rise in the use of digital platforms. However it may be hard to change consumer behaviour from the use of cash to digital transfers, and the regulatory requirements to promote efficient transfers between financial institutions, banks, telcos and technology firms still requires a lot of work in some African countries. For major remittance-receiving countries such as Nigeria, Ghana and Kenya it may still be possible to receive remittances because of the existence of several digital payment platforms and services. While some African countries have the infrastructure to take advantage of this digital transition, others do not. For example, mobile penetration and financial inclusion rates still remain low in most rural areas where migrants’ families may live.

Reduction in some immediate costs through digital platforms
High transfer costs have always discouraged some migrants from using formal channels of sending remittances to their families. On average, the cost of remitting from major migrant host communities such as Europe, America and Asia is about 6.5% of the US$200 in remittance flows. These remittance fees go as high as 9% of US$200 when remitting within SSA. However, the SSA case may be different as (depending on their host country) migrants may also need to change their remittances into a dominant international currency (US dollar or Euro) first and then to their home country’s domestic currency. The use of formal channels may mean that families and migrant workers may have to pay high transfer fees, thus losing up to 10% of the already reduced amount. On the positive side, the increase in digital transfer platforms is reducing the cost of remittance transfers along certain corridors. Thus encouraging the switch to and use of digital channels.

Read more at: Italian Institute for International Political Studies – ISPI

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