Nagarajan, Subha

English

Research Papers in Economics

A f r i c a n   D e v e l o p m e n t   B a n k
May  2009 Number 4
EDRE
Development Research
Department 
Office of the Chief Economist, ECON
A
ccording to official statistics, the re-
corded migrant remittances to Africa
in  2007  were  USD36.9  billion.  The
amount was expected to increase to
USD 40.1 billion in 2008 (see Table 1).
Despite the scarcity of information and
the fact that most statements on migra-
tion and remittances to Africa still need to
be qualified, studies indicate that remit-
tances play an important role in reducing
the level and severity of poverty. They
also contribute to levelling consumption
of the poor. Research shows that remit-
tances have had a significant role in rai-
sing the income of poor households, and
they  contribute  to  economic  growth
through indirect multiplier effects. Given
their importance to household welfare
and poverty reduction, understanding
how the global financial crisis will in-
fluence remittance flows and, by exten-
sion,  poverty  and  economic  growth,
needs to be explored.
The global financial crisis is ex-
pected to reduce capital inflows to
the developing world from develo-
ped countries.  These include ty-
pical foreign exchange receipts like
foreign direct investment (FDI) and
official  development  assistance
(ODA), as well as receipt of remit-
tances  from  overseas  Diasporas.
While the commodity boom tripled fo-
reign investment in resource-rich Afri-
can countries from 2000 to 2006, the fall
of commodity prices and the drying up
of liquidity in international financial mar-
kets will threaten these private invest-
ment flows and undermine the com-
mercial  viability  of  new  and  existing
investments that had begun produc-
tion/extraction just before the crisis. With
the proposed stimulus packages requi-
red to bail out donor country econo-
mies, donor countries are expected to
re-allocate budgets. This could reduce
ODA anywhere from 20 to 40 percent,
as seen during past banking crises.1
Though remittance flows will likely de-
crease as a result of the financial crisis,
FONDS AFRICAIN DE DEVELOPPEMENT
AFRICAN DEVELOPMENT FUND
BANQUE AFRICAINE DE DEVELOPPEMENT
AFRICAN DEVELOPMENT BANK AfDB
Impact of Global Financial 
Crisis on Remittances Flows 
to Africa
Subha Nagarajan*
1 A positive correlation between banking crises and shrinking ODA was found for all donor countries over the past 30 years. In the year of the crisis, average
ODA dropped by one percentage point, with a cumulative drop of four percentage points by the following year, and thirty percentage points by the fifth year
(Raja, K. Financial Crisis Will Put a Damper on ODA Flows, UNCTAD policy brief no.7, March 16, 2009.) 
Development Research Brief 
Introduction Motivation A f r i c a n   D e v e l o p m e n t   B a n k
2
they are thought to be more resilient to
economic and financial pressures as
compared to FDI and ODA. For this rea-
son, remittance flows could be an im-
portant source of external financing for
Africa during and after this financial cri-
sis.2
The World Bank has revised its original
2009 remittance flow forecasts publi-
shed in November 2008 to reflect the
impact of a protracted financial crisis.
The low-case scenario suggests a shar-
per decline in remittance flows than ori-
ginally ascribed to the 2009 base-case
scenario projections. The implications
are a 7.9 percent decrease in remit-
tance growth rate in the low case fore-
cast for sub-Saharan Africa, versus the
original projection of a 4.4 percent re-
duction in growth rate in the base case
forecast.3
The reduction in remittance inflows can
be attributed to two factors: (1) Reduced
ability of the Diaspora to send money
home, and (2) Return migration as mi-
grants lose jobs and are forced to return
home. This latter effect will be mitigated
to the extent that some immigrants are
properly integrated in their destination
countries and have secured legal resi-
dence. 
The global recession is expected to most
negatively affect migrants employed in
construction,  manufacturing,  finance,
services, retail, and tourism sectors. The
ability of origin communities and coun-
tries to absorb the newly unemployed will
determine the extent of the additional
burden of unemployment presented by
returning migrants.  To the extent that
they can be productively and gainfully
employed, the returning skilled migrants
could introduce an opportunity for origin
communities and countries to harness
their skills for future growth and econo-
mic turn-around. Appropriate policies will
need to be in place to properly identify
and use the skills they bring along.
There is the additional concern that the
global financial crisis will further lead to a
reduction in the amount of remittance
flows sent through formal banking and
non-banking channels.4 The high cost of
sending money in SSA was already a de-
terrent to sending money through formal
channels even before the financial crisis.
It will impose an even greater financial
burden on the disposable income of re-
mitters’  residing  in  countries  suffering
from the economic downturn. Unfortu-
nately, aside from anecdotal evidence
and isolated studies, there is insufficient
information regarding the role of remit-
tance  service  providers  and  the  fre-
quency  and  amount  of  remittances
certain  types  of  migrants  choose  to
send. As a result of money being chan-
nelled  through  informal  means,  the
amount of remittances tracked through
central banks is under-reported, leading
some policymakers and decision-makers
to mistakenly under-value this source of
external financing.  Without credible esti-
mates of migration flows and remittance
inflows, it will be difficult to: (1) Fully ap-
preciate the extent to which remittance
plays  a  role  in  development,  and  (2)
create and garner support for innovative
tools that would secure these flows and
tap into the Diaspora wealth.
Immediate Consequences of the Financial Crisis
Table 1: Forecasts for remittance flows to Africa, 2009-2011
2 Pre-financial crisis remittances were greater than ODA in Botswana, Cote d’Ivoire, Lesotho, Mauritius, Swaziland, and Togo. Similarly, remittances were greater
than FDI in Lesotho, Mauritius, Swaziland, and Togo (Ratha, D., Mohapatra, S. and S. Plaza. Beyond Aid: New Sources and Innovative Mechanisms for
Financing Development in sub-Saharan Africa, Policy Research Working Paper no. 4609).
3 Ratha, D and S. Mohapatra. Revised Outlook for Remittance Flows 2009-2001: Remittances Expected to Fall by 5 to 8 percent in 2009, Migration and
Development Brief no. 9, March 23, 2009.
4 Pre-financial crisis, 73 percent of remittances to sub-Saharan Africa were sent through unofficial channels (Page, J. and S. Plaza. Migration, Remittances and
Development: A Review of the Global Evidence.” Journal of African Economies 15(2): 245-336). 
Migrant remit-
tances (USD
millions)
2007 2008e Base case forecast Low case forecast
2009f 2010f 2011f 2009f 2010f 2011f
Central Africa 193 193 190 199 213 186 191 200
East Africa 4,681 4,875 4,620 4,733 5,024 4,467 4,447 4,597
North Africa 18,240 20,356 19,415 19,207 19,551 19,415 19,207 19,551
Southern
Africa
1,919 1,943 1,785 1,846 2,018 1,746 1,769 1,898
West Africa 11,817 12,767 12,320 12,791 13,631 11,812 11,801 12,147
Africa 36,850 40,134 38,331 38,777 40,438 37,627 37,415 38,393
The Africa Migration Project
The Africa Migration Project will address
these gaps in knowledge regarding the
impacts of migration and of remittances
on development. The key objectives are
twofold: (1) Improve the understanding of
flows  of  migration  and  remittances  in
Africa and their impacts on growth and
poverty reduction; and (2) Strengthen the
capacity of policy makers, researchers,
banks,  non-bank  financial  institutions,
and donor agencies in Africa to enhance
the development impact of migration and
remittances. The study will broadly cover
three  key  themes:  Remittances,  brain
drain, and mobilising Diaspora resources.
It will investigate the reasons that make
some  African  countries  important
sources of migrants, significant destina-
tions, the relative importance of South-
South  migration  versus  South-North
migration, the main obstacles (including
government policies and regulations) for
migration, and the importance of migrant
networks in reducing the costs and risks. A f r i c a n   D e v e l o p m e n t   B a n k
3
Recommendations for policymakers
1) Encourage remittance receipt through formal channels:
a) Improving access to banking for remittance senders and
recipients, which can also reduce costs associated with
remittance transfers.
b) Strengthening competition in the remittance service pro-
vider industry to reduce money transfer costs.
2) Tap into wealth and investor savvy of the Diaspora:
a) Diaspora bonds and innovative financial products, which
involve securitisation of future remittance flows. 
b) Leveraging private transfers with public funds for com-
munity development initiatives.
3) Strengthen financial, legal, and regulatory frameworks
that govern financial flows and facilitate transparency and
competition within the banking sector. 
Policy Recommendations
5 South Africa launched a project to issue Reconciliation and Development Bonds to both expatriate and domestic investors, and Ghana has begun marketing
the Golden Jubilee Savings Bond to the Ghanaian Diaspora in the US and Europe (Ratha, D., Mohapatra, S. and S. Plaza, Beyond Aid: New Sources and
Innovative Mechanisms for Financing Development in Sub-Saharan Africa, Policy Research Working Paper no. 4609).
6 It is believed that properly accounted for hard currency remittances may be able to improve a country’s risk rating, and therefore (1) improve the country’s
sovereign rating and access to capital market access, and (2) encourage unrated countries to obtain credit rating from major international rating agencies (Ratha,
D. 2006. Leveraging Remittances for Capital Market Access, DEC Working Paper).
Implications for Bank operations
1) Advising on Financial Sector Development for Africa:
a) Securitisation of future remittance flows through Diaspora
bonds. This debt instrument can be issued by a country
or sub-sovereign entity.5 The ability to issue these instru-
ments is constrained by SSA countries that are unrated
and have weak or non-transparent legal systems for
contract enforcement.6
b) Advocating for domestic financial deepening, including
increasing access to the banking system.
c) Multi-lateral guarantees that leverage official financing for
mobilising private capital.
d) Pooling mechanisms to better leverage private transfers
with public funds to use toward public-private partner-
ship activities.
2) Making microfinance work:
a) Incentivising remittances use for entrepreneurship and
enterprise activities.
b) Extending access to finance to rural households.
c) Supporting growth and competition in remittance service
provider industry.A f r i c a n   D e v e l o p m e n t   B a n k
Comments and suggestions can be sent to: 
Leonce Ndikumana
Abdul B. Kamara
Development Research Department
African Development Bank
BP 323, 1002 Tunis Belvedere, Tunisia – Tel.: +216 71 102 876 – Fax: +216 71 103 779 – E-mail: economic-research@afdb.org – Web: www.afdb.org
The views expressed in the Development Research Brief are those of the authors and do not necessarily represent the views
of the African Development Bank, the Board of Governors, the Board of Directors or the Governments they represent. 
*Subha Nagarajan is a Senior Research Economist in the Development Research Department AfDB.
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Development Research Briefs - Impact of Global Financial Crisis on Remittances Flows to Africa

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Development Research Briefs - Impact of Global Financial Crisis on Remittances Flows to Africa

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