Ethiopia: Remittances Under Threat

By Hibamo Tagesse

For poor countries, the value of remittances is enormous. Since 1996, remittances have been worth more than all overseas development aid (ODA), and for most of the past decade more than private debt and portfolio equity inflows. In 2011, remittances to poor countries totaled 372 billion dollars, according to the World Bank. That was not significantly different to the total amount of foreign direct investment (FDI) that flowed to these countries.

Given that cash is ferried home stuffed in individual pockets as well as sent by wire transfers, the real total value could be 50pc higher.

Remittances have been the walking stick for the very poor in creeping economies like ours. Households in the Ethiopia, experiencing increases in the volume of remittances become more likely to leave poverty status, to send their children to better schools, and to invest in new entrepreneurial enterprises.

One reason for the very recent apparent boom is simply that the data are better. Money senders such as Western Union and MoneyGram have improved their reporting to central banks. Oversight has tightened since September 11, 2001.

This has led to big jumps in some numbers. Still, the most blurred data in the entire world have dwarfed remittances. Some countries posted a near-doubling of remittance receipts recently. In contrast, the weaker oversight in our country has advanced the image of remittances as unparalleled with the nominal monies sent in diverse ways. These sundry approaches are followed in order to preserve the value of remittances, detached from banking and other government operations which are likely to suck off some. Remittance transactions are known to be expensive, with estimates averaging 10pc of the amount sent.

Ethiopia maintains a number of foreign exchange restrictions on payments and transfers that are not consistent with international standards, as determined by the International Monetary Fund (IMF). These contribute to the decrease in remittances. The Ethiopian Birr is not freely convertible because the exchange rates are set by the government. Additionally, Ethiopia limits foreign currency inflows and outflows and the amounts that local and foreign individuals and corporations can hold.

All these restrictions result in foreign exchange rate appreciation, leading to a widening of the current account deficit. This deficit is further driven upward by the significant imbalance between public capital inflows and moribund export growth, which has been stifled by the strength of the local currency and underdevelopment of private sector banking and manufacturing. In turn, this reduces real income for many workers, with a resulting negative effect on consumer spending that assuredly escalates by remittance growth.

IMF data suggest that remittances and official transfers represent more than four per cent of Ethiopia's gross domestic product (GDP), with estimates of remittance values ranging from 387 million dollars to three billion dollars. This range partly reflects the difficulty in measuring these flows due to the significant use of informal channels as a result of an underdeveloped banking industry. It also, likely, reflects the tight foreign exchange control regime that the country imposes.

Some governments are sensitive about providing information. In some economies, there is even a need to employ other methods. For instance, some countries subject remittances to stringent tests. But by examining migration data, the World Bank reckons that some 3.8 billion dollars probably crosses borders every year. Therefore, we can observe the scenario in which massive migration advances to other countries gives a remittances picture proximate to the real one.

Remittances are not just big, but growing - they have nearly quadrupled since the turn of the millennium - and they are resilient. In 2009, when economies around the world crashed, remittances to poor countries fell by a modest five per cent, and by 2010 had bounced back to record levels. By contrast, FDI fell by a third during the crisis, and portfolio inflows fell by more than half. The most astonishing thing about remittances today is their continued reduction, year after year, in line with the global economic crisis.

In the rich world, many countries have closed their borders to protect workers. Richer countries have made their frontiers harder to cross, which partly explains the slowdown in immigration from poor countries as well as people moving to their countries. Emigration has risen, too, since the global economy stalled.

Stricter border controls keep migrants in as well as out, affecting the remittance flow. in addition, remittances are under a big threat with moves by developed countries including the US, Australia, New Zealand, and the United Kingdom to shut down remittance firms due to suspicions that these are being used to funnel funds to terrorists.

A drying up to remittances may be far off but recent central bank data suggest both the composition and the total value of payments sent home by Ethiopian workers overseas are seeing a decrease. If recent trends continue, the domestic economy will have to make up for significant revenues lost from abroad. This slowdown will pose a threat to overall volumes and, potentially, to consumer spending and economic growth at home. Taken together, this should be enough to set alarm bells ringing.

The role of remittances is most likely given less attention in Ethiopia. But we need to harness this potential sector before it runs dry and renders us with significant gaps left carelessly. Foreign exchange restrictions on payments and transfers must be simplified to welcome more remittances.

Hibamo Tagesse Is an Economist. He Can Be Contacted At Hibamo2000@yahoo.com.

SOURCE:ADDIS FORTUNE