Published on People Move

Reducing remittance costs and the financing for development strategy

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In observance of International Migrants’ Day, December 18th
For a multimedia presentation with a first-hand account of a person sending remittances see:
Reducing remittance costs are a vital element of the Financing for Development strategy. It has been incorporated as a target in the Sustainable Development Goals (the broad set of global strategies and targets for setting the development agenda up to 2030) and the Addis Ababa Action Agenda (the strategies to finance those development goals). Unlike most domestic resources (such as tax revenues redistributed as grants or public goods) or external resources (for example, foreign direct investment or overseas development assistance), remittances sent by migrants reach households directly. They are however, a private resource, and its deployment is best left at the household level.

Research shows that remittances help households cope with adverse circumstances and contribute to improved development outcomes at the grassroots. Moreover, remittances have a positive development impact since they are used to meet education and healthcare needs. A recent study to be featured in the forthcoming World Bank World Development Report on Internet and Development shows that remittances contribute to household IT adoption in Africa. In terms of volume, remittances to developing countries at $435 billion in 2014 were more than 3 times ODA ($135 billion). But global average remittance costs for developing countries are around 8%. Sub-Saharan Africa received $33 billion remittances in 2014. Yet, Africa has the highest remittance costs (around 10%). This effectively translates into a $3 billion super-tax on African households.
In view of the apparent development gains that could be achieved by reducing remittance costs, the SDGs (specifically 10c) and the Addis Ababa Action Agenda have incorporated this as a target. The broad aim is to reduce remittances costs to less than 3% and eliminate corridors with costs higher than 5%. The potential gains from this could be as high a $20 billion in resources flowing directly to households.
So what can be done to achieve this? Recently anti-money laundering regulations increased regulatory burdens. It has resulted in many banks closing their correspondent banking relationships with money transfer operators. This has increased costs and made transfers through formal channels very difficult- at times impossible. African economies such as Somalia have been hit particularly hard (see Those framing regulations need to appreciate that small amounts sent to households are unlikely to be money laundering. A lighter touch approach for small amounts say below $1000 is the need of the hour.
Significant gains in cost reduction can be achieved by harnessing existing technology including mobile money transfer and block-chain technology (such as Bitpesa, the money transfer arm of Bitcoin). While these systems already exist in domestic transfer markets, their use in cross-border transfers needs encouragement and regulatory clarity. Also, it is necessary to increase competition and remove exclusivity contracts between large operators and post offices. Thus, with smarter regulation, use of new technology, and greater competition this target of 3% remittances costs can be achieved.
For a lucid explanation of these issues, watch Dilip’s TED talk.


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