International remittances shape lives and livelihoods in The Gambia. Fatou lives with her family of six in a small village close to Basse. Like many young men in the country, her husband Hamidou left the country to look for work in Europe. To finance his journey, the family had raised lots of money and expected Hamidou to transfer money back home if he was able to reach Europe. After a long arduous trip, Hamidou arrived in Italy, where he first worked on a farm, and then sold souvenirs to tourists. When COVID-19 spread rapidly in March 2020, his life changed drastically. In response to a strict lockdown, Hamidou could no longer work. He mobilized any savings, but still struggled to send money home when international travel restrictions were imposed, collapsing informal transfer channels.
Remittances can contribute to better living standards in a crisis but can also expose a vulnerable economy to shocks. In 2019, private remittances reached 15.6 percent of GDP, supporting consumption, investment, and poverty reduction. According to a survey in August 2020, 16.0 percent of Gambian households reported that money transfers from abroad were among the three most important sources of income over the past 12 months (compared to 8.3 percent in Senegal). Remittances can be a lifeline during localized crises, such as the Ebola outbreak, as the diaspora steps up. However, a global shock such as COVID-19 can disrupt remittances, thereby further exacerbating the crisis.
A puzzle: did remittances fall or rise during the COVID-19 crisis?
In March 2020, the World Bank predicted a sharp decline of international remittances for countries in Sub-Saharan Africa by about 23.1 percent in 2020. In response to COVID-19 and lockdowns, employment and income were expected to drop globally. International travel bans also undermined transfers through informal channels.
Ex-ante, The Gambia seemed especially vulnerable to a collapse of remittance inflows. First, one in four households receives international remittances. Second, three-quarters of migrants went to Italy, Spain, Germany, Great Britain, and the United States – countries which had been severely affected by the pandemic. Third, Gambian workers abroad rely on jobs that cannot be done remotely, especially in the service sector.
Nevertheless, Balance of Payments (BoP) data show a rapid increase of formal remittances starting in March 2020. During the second and third quarters of 2020, remittances grew by 89.3 percent year-on-year, compared to 18.5 percent for the same period in 2019. Notably, the start of this record-breaking growth coincided with the first state of emergency declaration on March 27 and the subsequent border closures. However, this presents a partial picture since remittances through formal channels, as reported by money transfer operators (MTOs), are only a subset of total remittances.
Balance of Payments shows a rapid increase of formal remittances starting in March 2020
Figure 1: Time Series of Formal Remittances (inbound, in million USD), including a trend line using a moving average
In contrast, household survey data indicate a significant decrease. Between March and August 2020, 84.6 percent of households reported a decline of international remittances, and only 1.3 percent witnessed an increase. When answering the survey, households do not differentiate between formal and informal channels, whereas the Balance of Payments only captures formal remittances. Informal channels include friends, families, and home visits to the country – and occur outside the formal banking system.
One explanation might be a switch from informal to formal channels. This would be consistent with the increase in formal remittances as registered in the BoP following travel bans; yet the decline of informal remittances was even higher, leading to a drop of total remittances as reported by households. This explanation is supported by The Gambia’s elevated level of informal remittances pre-COVID19. Data collected through another survey in August 2019 suggest that 32.3 percent of The Gambia’s total remittances were transferred through informal channels, compared to 6.9 percent in Senegal. Further available data also suggest remittance flows have shifted from informal to formal channels in The Gambia.
The relatively higher share of informal transfers in The Gambia might be associated with the higher cost of remittances. On average, financial intermediaries charge USD 11 for every USD 100 sent through formal channels (it’s USD 5.4 in Senegal).
Transfer cost for remittances in The Gambia are twice as high than Senegal
Figure 2: Average transaction cost of sending remittances to a specific country (2016, in percent).
Although alternative explanations are possible, they are unlikely to resolve this puzzle. One caveat is that BoP data also capture investment flows, unlike household surveys. While exact data is unavailable, estimates for the transfer component of BoP remittances show 36 percent year-on-year growth for the second and third quarters of 2020. Hence, given the global recession, it is unlikely that the explosive remittance growth in BoP data can be fully explained by investment. Relatedly, remittances in the form of savings or real estate purchases by potential returning migrants may not be captured by household surveys. However, such flows are unlikely to spike immediately after the COVID-19 outbreak, given the enacted travel bans. Further, the Central Bank improved monitoring and coverage of MTOs in 2020, but not sufficiently to solely explain the surge in formal remittances immediately after the COVID-19 outbreak. Lastly, it is not uncommon for BoP data to overstate remittances compared to household surveys. However, such differences would not affect the diverging trends following COVID-19.
Bring the cost down!
The high cost of sending remittances to the Gambia is mainly driven by the lack of digitalization and the large foreign exchange margins, while regulation and the low volume in global comparison hinder competition. Regulations, low financial inclusion and a fragmented digital payment infrastructure have limited digitalization, which has led to a reliance on cash to receive payments. This involves many entities, which contributes to high costs. Further, it is not currently permitted for mobile money providers to pay out international remittances. The relatively small volume of Gambian remittances also means the country is not a focus of larger international MTOs. Nevertheless, it also appears that there are high profit margins being made in the foreign exchange.
Due to safety measures, COVID-19 has accelerated the adoption of mobile money. Total transactions measured by the deposits and withdrawals from Mobile Money Wallets increased by 66 percent y/y, while membership increased by 4 percent in September 2020. Further, the leading mobile carrier reported a three-fold increase in mobile money transactions between March and August 2020.
Lowering the costs of remittances would increase formal transfers, household welfare and macroeconomic stability. The choice of transfer channel depends on cost, reliability, speed and convenience . If fees had been lower, migrants could have used formal channels more frequently to replace the collapsed informal channels. Currently, The Gambia is still far from the Sustainable Development Goal (SDG) of reducing remittance costs to 3 percent by 2030. Further, lowering costs could increase investment by the diaspora. Formal remittances also support foreign reserve accumulation better, thus contributing to macroeconomic stability. Lastly, cost reduction may lead to virtuous cycles, as an increase in formal remittance volumes could increase competition from international MTOs, thereby further lowering costs.
This imaginary world is within reach! The onset of COVID-19 and the subsequent shift in transfer channels for remittances have demonstrated that the technology exists and demand for mobile money is vivid.
This blog benefited from guidance from Johan Mistiaen, Theo David Thomas and Feyifolu Boroffice. Farah Dib, Katie Kibuuka and Mehwish Ashraf provided valuable feedback during the preparation.