How do remittances help developing countries in Africa?

How do remittances help developing countries in Africa?

In the article How remittance helps economy in Viet Nam FinFan gave some cases of remittance helping poverty people in Vietnam to improve the quality of life as well as their education.

FinFan also discussed the impact of remittance on the lives of people in the LATAM region through the article Types of remittance – Can online remittances help the education and economy of developing countries in LatAm (Latin America)?

In this article, let’s find out with FinFan how remittances help other developing countries in Africa.

The relationship between life in Africa and remittance

In some nations in Africa, you will easily see images of children with only one piece of cloth covering their bodies, and adults having to go to bed hungry.

Why are African countries still poor despite having so many mineral resources?

First, because of their natural advantage in mineral resources, accounts for more than 30% of the world's mineral reserves, including gold, diamonds, oil, and gems. Tanzania is famous for gold, Congo for copper, Nambia for Uranium, Botswana for diamonds (see map of minerals of Africa).

That leads to African countries being over-exploited and over-relied on them. As a result, these countries miss out on agricultural development, despite the fact that the terrain is not so parched that nothing can grow there.

Second, corruption, abuse of power, and lack of capacity of authorities lead to ineffective resource management. Most of the revenue from resource exploitation (oil, coal, gold, etc.) falls into the hands of political elites. National revenue is not distributed to the lower classes. The trickle-down process takes place slowly, or even not at all.

Third, we must mention the influence of external factors. After the fieldwork, the World Bank and the IMF approached the African governments with the proposal of structural adjustment aid packages, investment in socio-economic development programs, however, accompanied by conditions for opening the market economy, moving towards a democratic regime.

Looking back at the effectiveness of these programs, it can be said that the program failed, if not miserably. The privatization of national companies with massive capital from Western countries, later criticized as essentially neo-colonialism, led to the bankruptcy of the unit's local economic situation, widespread unemployment, and product output shortages.

In addition, the approach of these programs is a top-down approach and not from the bottom-up approach of the people, so these programs quickly fail.

Furthermore, the proposal to establish a democratic model further separates African countries, which are characterized by multi-tribal and tribal characteristics, which are not linked together.

Interesting statistics about remittances in Africa

*It is not an exaggeration to say that remittance is the life of African countries. Over the last decade, remittance flows to Africa doubled, reaching $100 billion in 2022, surpassing the funds received through Official Development Assistance (ODA) and Foreign Direct Investment (FDI).

In some African countries, remittances represent over 20 percent of Gross Domestic Product (GDP), highlighting their importance to the economy. A recent study by the United Nations Office of the Special Adviser on Africa (OSAA) established that remittances have important income-equalizing effects, and lower transfer costs are usually associated with higher remittance flows.

Remittances are also resilient during crises, such as the COVID-19 pandemic, remaining stable and providing a lifeline to millions of African families while other external sources of finance decline sharply. On the continent, Egypt is among the top five remittance recipients globally, and together with Nigeria and Morocco, accounted for 65 percent of the total remittances flowing into Africa in 2022.*

*Sourced by United Nation

Remittance fees are always a huge problem when Africans people abroad send money to these countries.

Africa is the place with the highest money transfer costs in the world (reaching 8%). This is due to the lack of unified payment systems by governments among African countries.

Meanwhile, African people, if they move abroad, usually move around the area of ​​African countries (usually from foreign countries migrating to South Africa or Egypt - countries that are considered wealthier).

Furthermore, the effect of the partnership contracts between money transfer operators and national banks and post offices can be a problem for higher fees of remittance.

Some cases have caused the fee to increase by more than 35% when transferring money between these countries, such as in the case of sending 200 USD from Tanzania to Uganda, which will cost more than 70 USD.

Currently, digital wallets are the most effective solution for cross-border remittances between African countries. However, this transfer is also governed by limitations on cash transfer costs.

Can stablecoins be a good solution for reducing that fee?

In many countries of Africa, English is a local language that is used a lot and the US dollar is also a currency used by many locals to exchange and trade here.

This is a condition for countries here to upgrade and use conversion methods with stablecoins such as USDT and USDC.

Furthermore, transferring money using stablecoins can shorten the time people spend traveling between countries. Now, they will no longer have to go to bed with an empty stomach.

Moreover, Africa is a continent with countries with a very high rate of crypto adoption. Even the countries here have established communities such as the Central African Economic and Monetary Community to be able to exchange and trade in Bitcoin and other cryptocurrencies.

Another indicator of interest is that in Africa, the proportion of people in the underbanked class who do not yet qualify to access a bank is up to 57% according to Findex's latest report from their survey. That further promotes the stronger development of cross-border use and payments using stablecoins between these countries.