Economy

Every few months Rodgers Tom takes a bus across the border from South Africa to Zimbabwe with a new television, associated appliances, and big bags of maize meal, one of which will have little pouches of money concealed within. Once In Zimbabwe, Rodgers goes first to Harare where he has a contact at a small store waiting for the television and appliances he has to sell. He sells them at a fair profit, pockets the proceeds, which he then takes back to his family in their home village in poverty-stricken Gokwe. At home he distributes the financial proceeds to his family on which they will live for some months, gives them maize meal, cooking oil, toiletries and has books and stationery for the children. The excess he sells and also gives the small money parcels concealed in the meal to families in the village from friends in South Africa who come from the same village, but lack his legal status in South Africa and can’t travel easily across borders.

For each of the parcels he delivers he keeps a small commission.

Rodgers is part of a $167bn economy of migrants who make remittances to their home country, boosting economies and helping families escape poverty. The World Bank says that $167bn in remittances is more than twice the value of foreign aid flows, and according to research by id 21 insight (stet), at least 10 percent of remittances globally are spent on education and health.

Worldwide, one of every 35 people, an estimated 175 million live outside their country of origin, up from 75 million in 1965, the World Bank says. In the industrialised world, the top sources of worker’s remittances in 2001 were the USA, Saudia Arabia, Germany, Belgium, Switzerland and France. Mexico was the world’s largest recipient of remittances in 2004, according to id 21 insights (stet), with some $16,6bn, while Somalia is the country most dependent on remittances.

New research from the World Bank says that a 10 percent increase in international remittances from migrants could lead to a 3,5 percent decline in the share of people living in poverty. They say that “counting only officially recorded receipts, remittances in 2002 represented 1,3 percent of GDP for sub-Saharan Africa, 2,2 percent of GDP for the Middle East and North Africa and 2,5 percent of south Asian GDP”.

Morocco is the top receipt in North Africa followed by Egypt. In sub-Saharan Africa, Nigeria receives between 30 and 60 percent of all remittances to the region, followed by Lesotho, Sudan, Senegal, Mauritius, Tunisia, Sudan and Mozambique. The bank notes that actual flows are difficult to track accurately given the paucity of reliable data from most African countries.

But take Somalia, its GDP in 2005 was $4,2bn, a quarter of which was remittances. In that country those who exchange remittances have replaced the collapsed formal banking infrastructure. A study from 1975 to 2002 by the International Monetary Fund concluded that remittances boost growth in countries with less developed financial systems by providing an alternative way to finance investment. “Remittances act as a substitute for the domestic financial system,” it said.

And so far in the developing world financial institutions have failed to adequately tap into this massive market. In most cases people who remit send money to their relatives via people like Rodgers or through taxi drivers. They will account for a third-to half of all remittances, according to various studies. The next preferred means is via post offices and last are financial institutions such as money transfer agencies or banks.

Chiko Mordi, Executive Director: Retail Banking, United Bank for Africa which is Nigeria’s largest bank, says, “Some economies can’t exist without remittances, they include some countries in south east Asia and Africa. Even in my country, Nigeria, which is a major oil producer, remittances constitute a major source of forex revenue. Each year between $2,3bn and $4,5bn flows into the country from remittances. There were some years when oil prices were not high that remittances constituted about a third of oil earnings. At present they average about 5 to 8 percent of forex in Nigeria.”

Mordi says that “more than half of remittances to Nigeria come from the USA”. According to the World Bank in 2003, Africans form the most highly educated professional migrants living and working in the US.

Mordi says that high levels of remittances come from the “United Kingdom, Italy and Spain and reflects the number of Nigerians living in the diaspora. Those living in Europe tend to be blue-collar workers. Nigeria does not allow remittances out of the country.”

Ghana and Zimbabwe also do not allow remittances out – and ironically create a considerable smuggling trade among their citizenry. But regardless of what governments allow, remittances home are staggering: The World Bank reported in 2003, as an example, that remittances to Eritrea were 194 percent of exports and 19 percent of GDP in 1999. “For Cape Verde the same values were 51 percent and 12 percent, for Comoros 24 percent and 6 percent, for Egypt 26 percent and 4 percent and for Morocco 18 percent and 5 percent.”

It notes that remittances contribute substantially to the balance of payments in several countries, “During the 1980s international remittances covered 80 percent of the current account deficit in Botswana, they were equal to almost three-quarters of total commodity export earnings in Sudan and more than half of Lesotho’s foreign exchange earnings. In the 1990s Basotho mine workers’ remittances from South Africa accounted for as much as 67 percent of Lesotho’s GDP. In Ghana in 1998, remittances constituted the fourth biggest source of foreign exchange after cocoa, gold and tourism.”

A report by Johannesburg-based Genesis Analytics notes that “remittance flows comprise a very large proportion of total aid flows for many countries in the Southern African Development Community (SADC)”.

Genesis records that one in ten households surveyed in Botswana and Lesotho received some form of remittance and almost one in three households in Swaziland.

Some countries, understanding the value of remittances to their economies, compel residents living outside the country to submit a certain, usually significant, part of their income. All Mozambican mineworkers are forced to repatriate 60 percent of their income for six months of the year, while Lesotho mineworkers are forced to repatriate a third of their income for three months, thereafter 15 percent of income for the remainder of the year.

Despite the significance of these financial in and outflows, precious little is done by either nations or banking systems to encourage or harness this revenue – most money is carried by friends or taxi drivers.

Genesis says that in the domestic market only 47,5 percent of remittances are carried by formal financial service providers and despite stringent exchange control regulations in South Africa, only “about 5 percent of the estimated R6bn (about $890mn) cross-border remittances to SADC are recorded via the SA Reserve Bank’s costly reporting system … Almost 60 percent and probably more of remittances flowing out of South Africa do so outside of the regulated financial system.”

Genesis recommends that all authorised agents be exempted from reporting transactions of R5 000 or less.

But still, bank and money order charges are simply too hefty to be worth it for all, but the comparatively wealthy. Genesis report that if client ‘a’ wants to send to ‘b’, who also has a bank account, it will cost on average R158,51 (about $24) to transfer R250. “This is an underestimate of the cost of this transaction, on the receiving side banks make a retail spread on the exchange – converting into the local currency and sometimes charge substantial receiving end fees.”

Mordi says such research does not give the whole picture. “Basically what happens is that the countries where you have recipients tend to be not very rich counties, in Africa, Asia and Latin America. Banks in those countries have a limited international footprint, they do not have a strong network in Europe or the US and so can only transfer money through alliances with banks in those countries, or by working with a specialised agent like Moneygram or Western Union.

“Many people lack bank accounts and do not know they can use an agency. The costs of money getting lost or stolen through informal networks is far higher than sending through formal institutions. And too, the costs of transfer differ from operator to operator.

“Moneygram is cheaper than Western Union and there are tariff differences from corridor to corridor. If you move money from West Africa to Europe, it costs less than if you move money from Asia to somewhere else. The larger the amount you transfer, the lower the cost.”

Mordi says ways to further reduce costs need to be examined. “I think doing remittances by Internet would help and using credit cards for transfers. Governments should also allow payout in foreign currency in receiving nations. And then of course, there needs to be better levels of governance in banks.”

Moneygram, which has 3 200 agents in Africa, and 89 000 around the world, advertises that it costs only $9,99 to send $500 from the US to Africa, but the costs of sending from within Africa to the US are somewhat steeper. Vicky Johnston, Moneygram’s regional director for Africa notes that to send $500 (about R3 250) from South Africa to the US would cost R195 ($31,34). Johnston says they are rolling out a lower cost strategy with simplified pricing. She insists that it is still cheaper and safer than sending by the most common remittance method – through a taxi driver or friend. “If one was to use an informal transfer at Park Station, Johannesburg, where a person would give R100 to a taxi driver to deliver it would cost them about R20.”

By contrast, however, to send money to the UK, Jersey, or northern Ireland costs R21 via the South African Post Office, although not more than R2 000 can be sent a month, according to Genesis. Costs drop even further with a R17,50 bill for money not exceeding R2&Nbsp;000 a time sent to Botswana, Kenya, Mauritius, Mozambique or Zambia.

A slightly more expensive telegraphic money order is still cheaper than using a bank or money transfer agency, with the cost from South Africa to Lesotho, Namibia or Swaziland reaching a moderate R30,25 with no limit on the money orders sent. Similarly a telegraphic money order to Botswana, Kenya, St Helena, or Zambia costs R40 from South Africa.

Johnston says Moneygram in Africa is growing 40 percent year on year. “Usually money is sent back for basic consumption, some transactions are for special occasions, Mothers Day is popular.

“It is a pay-as-you-use type of service and does not require people to have bank accounts.” But the insistence of financial institutions that sending with them is better is bedevilled by costs and contradictions in the way bank policies are applied - as an example, a SWIFT fee is charged for transfers between South Africa and Swaziland, but not between South Africa and Namibia. Genesis in its report says “there seems no reasonable explanation why a transfer to Ladybrand (a short distance from Maseru on the South African side of the border) and Maseru should differ in cost by a factor of seven”.

They also say that international FICA regulations applied in South Africa to prevent money laundering have “made the cost of banking products more expensive”.

And so people give money to relatives, friends and taxi drivers to ferry across borders, creating a strong black market across Africa for currency and ensuring a smuggling culture. In the instance of Rodgers Tom, as an example, those who entrust money to informal couriers take precautions. Tom only carries money for people in his village or extended family – he dare not steal money because pressure would be brought to bear on him or his family.

And so, when governments fall apart, or are overly bureaucratic, when capitalist financial institutions lack innovation or charge way too much, the poor find ways to survive.

This article was first published in Business in Africa Magazine, May 2006. To subscribe click here