How remittances, diaspora funds can drive growth

 

Motorists queue for fuel in Nairobi. Picture: File 

A recent report by Send Money Africa, an initiative of the World Bank-partnered African Institute for Remittances (AIR) Project, estimated that Africa received a total of $60 billion in remittances last year. According to the same report, these funds were sent by Africa’s 30 million-strong diaspora to around 120 million recipients.

Remittances to Africa exceed official development aid by around 50 per cent, while for most African countries the amount sent home by migrants surpasses foreign direct investment. With limited official data, such figures are only estimates, but what is certain is that remittance flows to Africa have grown remarkably over the past two decades. Indeed, there is a broad consensus that they have more than quadrupled in that time to account for approximately three per cent of Africa’s overall GDP.

It is no surprise therefore that policymakers are looking at ways to harness the development potential of diaspora remittances. A paper released last month following a conference in Abidjan of the Economic


Commission for Africa and the African Union Commission highlighted the growing importance of remittances as a source of external financing, and drew special attention to their potential in driving Africa’s industrialisation and helping to fill its persistent infrastructure gap.

Particularly in sub-Saharan Africa — which between the 1970s and 1990s experienced a larger emigration of skilled people than any other region — remittances have played a vital role in boosting household incomes and keeping millions of people above the poverty line. Once the basic needs of survival are met, recipients with cash to spare often spend it on healthcare and education. Beyond that, a rising trend of investment in land, construction and small enterprise indicates that remittances have become an important tool for sustainable growth. In short, they are a valuable resource for efficient, bottom-up economic development.

Our business, Dahabshiil, is one of Africa’s largest money transfer companies, serving customers from countries across the continent and enabling them to send and receive money to and from locations all over the world. Dahabshiil’s story is closely bound up with that of the Somali diaspora, which grew rapidly during the late 1980s and early 1990s as the state collapsed, and later expanded into the Horn of Africa and beyond.

Since then remittance income has in many ways underpinned Africa’s economy, maintaining consumption and providing the necessary capital for private sector growth. Such is the power of remittances in sustaining communities without access to a formal banking system. As well as supporting livelihoods, remittance flows can act as a form of insurance due to their countercyclical nature — migrants tend to send more when times are hard.

Sub-Saharan Africa’s financial infrastructure, without aping the West’s, is undoubtedly becoming more sophisticated and integrated. That process is essential to the next phase of economic development. Channelling remittances into a formalised financial system with facilities for savings and credit enables recipients to leverage them for productive use.

The effectiveness of microfinance solutions, especially in the empowerment of women, is often discussed in this regard and such services will be increasingly commonplace as it becomes profitable to cater for a broader cross-section of social groups. This crucial progress towards financial inclusion has in recent years been spurred by the rapid spread of information and communication technology (ICT). Telecoms in particular has flourished in many parts of Africa, often driven by demand arising from mass displacement. In the Somali territories, this need together with a deregulated business environment eventually led to a rapid expansion of the mobile industry and the entry into the market of a number of dynamic firms.

But while these latest figures for remittance volumes give reason to be optimistic, more needs to be done at government level for diaspora money to be the kind of catalyst for growth from which the Asian powerhouses such as China and India have benefited.

Investment, as ever, is the key. As living standards rise, an increasing proportion of the inward flow will be available for wealth creation. With millions of African migrants arguably at the peak of their skills and earning potential, now is the time for active engagement to lure human and financial capital back to Africa.

Remittances remain a crucial source of financing but they are just one part of that process, and both the private and public sectors have a role to play. Diaspora funds such as Nigeria’s are a good way to encourage migrants to return with valuable knowledge. Diaspora bonds such as Ethiopia’s make debt available to entrepreneurs who need it. The recent announcement by the AUC of plans for three new financial institutions – the African Investment Bank, the African Monetary Fund and the African Central Bank – is a hugely encouraging one.
Abdirashid Duale is CEO of Dahabshiil, the largest international payments firm in Africa