Understanding determinants and impact of remittances in the African economy
This paper examines macroeconomic trends, drivers, and impact of remittances in Africa. It documents the increasing share of remittances relative to other foreign capital flows to the region, distribution of remittance inflows across countries, and some other key properties. It provides an analysis of macroeconomic drivers of remittances in recipient countries, such as the level of income, inflation, and nominal exchange rate depreciation. The paper finds that remittances are positively impacted by higher income, but deterred by an unstable macroeconomic environment. It examines the role of remittances in funding the region’s external balances. Drawing on the case of Egypt, the paper also shows the positive impact of rising remittances on public debt sustainability. The paper provides policy implications which include:
Level of income is an important determinant of remittances, hence, policy makers should create an environment conducive to growth;
African policymakers need to do more to leverage foreign savings into increased overall saving and higher investment;
Policy makers and the private sector should strive to incentivize receiving households to either save larger shares of their remittance income in the formal financial sector or invest it in productive capital;
Remittances cannot be a substitute for prudent fiscal policies.