Expanding Remittance Flows in Ethiopia: Challenges and Prospects By Wolday Amha (Ph.D) Director of the Association of Ethiopian Microfinance Institutions (AEMFI) Presented at the Tunis Remittance Workshop October 22-23, 2009 Tunis

Introduction Remittances, along with migration, have increased markedly in the recent years Around 200 million people migrate around the world (Solimono 2003) Remittances are estimated at more than 290 Billion USD in 2009 (WB) Remittances in Sub-Saharan Africa doubled in the last five years and reached 10.8 billion USD (WB 2008) Remittance is relatively high in Latin America and the Caribbean (12.4%/annum) followed by East Asia and Pacific (11%/annum) and Sub-Saharan Africa (5%/annum)

Remittances, along with migration, have increased markedly in the recent years

Around 200 million people migrate around the world (Solimono 2003)

Remittances are estimated at more than 290 Billion USD in 2009 (WB)

Remittances in Sub-Saharan Africa doubled in the last five years and reached 10.8 billion USD (WB 2008)

Remittance is relatively high in Latin America and the Caribbean (12.4%/annum) followed by East Asia and Pacific (11%/annum) and Sub-Saharan Africa (5%/annum)

Cont.. Remittances exceed by far the Official Development Aid (ODA) Close to Foreign Direct Investment (FDI) Second largest source of external funding for developing countries (Ratha 2001) However, remittances are difficult to estimate (lack of data particularly for remittance flows through informal channels)

Remittances exceed by far the Official Development Aid (ODA)

Close to Foreign Direct Investment (FDI)

Second largest source of external funding for developing countries (Ratha 2001)

However, remittances are difficult to estimate (lack of data particularly for remittance flows through informal channels)

Objectives of the presentation Provide basic information on the flow of remittances in Ethiopia Assess the role of remittances and current initiatives by IFAD/Oxfam Novib/MFIC/AEMFI in Ethiopia Identify the challenges of expanding the flow of remittances Propose interventions to stimulate the flow of remittances

Provide basic information on the flow of remittances in Ethiopia

Assess the role of remittances and current initiatives by IFAD/Oxfam Novib/MFIC/AEMFI in Ethiopia

Identify the challenges of expanding the flow of remittances

Propose interventions to stimulate the flow of remittances

Positive impact of remittances in Ethiopia Positive impact through effects on saving, investment, consumption and income distribution Reducing poverty by increasing recipient individual income Increasing financial stability in Ethiopia (remittances are more stable than other sources of external financing) Increase the country’s foreign exchange reserves If invested, remittances contribute to output growth (financing small projects) If consumed, remittances generate positive multiplier effect It can finance schools, clinics and other infrastructure Development of human capital to fill the skill deficits in Ethiopia Diaspora contributing to the flow of foreign direct investment and build partnership between local and international companies

Positive impact through effects on saving, investment, consumption and income distribution

Reducing poverty by increasing recipient individual income

Increasing financial stability in Ethiopia (remittances are more stable than other sources of external financing)

Increase the country’s foreign exchange reserves

If invested, remittances contribute to output growth (financing small projects)

If consumed, remittances generate positive multiplier effect

It can finance schools, clinics and other infrastructure

Development of human capital to fill the skill deficits in Ethiopia

Diaspora contributing to the flow of foreign direct investment and build partnership between local and international companies

Negative impact of remittances Remittances can encourage dependency culture on the recipient families by discouraging them to be self-supporting As a result of remittances, the country could see its real exchange rate becoming overvalued and their non-traded exports being hindered

Remittances can encourage dependency culture on the recipient families by discouraging them to be self-supporting

As a result of remittances, the country could see its real exchange rate becoming overvalued and their non-traded exports being hindered

Determinants of remittances Stock of active Ethiopian migrants in the host countries The exchange rate The relative saving interest rate in the formal sector The fees to be incurred when sending Institutional stability The financial sector development Other individual characteristics of the migrant such as education, sex, age, income earning profile of the migrant. Etc

Stock of active Ethiopian migrants in the host countries

The exchange rate

The relative saving interest rate in the formal sector

The fees to be incurred when sending Institutional stability

The financial sector development

Other individual characteristics of the migrant such as education, sex, age, income earning profile of the migrant. Etc

Motivation to remit Pure altruistic, support the family and family members Self interest of the migrant, invest or save for the future Both the family and family members benefit through implicit contractual agreement

Pure altruistic, support the family and family members

Self interest of the migrant, invest or save for the future

Both the family and family members benefit through implicit contractual agreement

Remittance channels Remittance could be in the form of money, goods or services and a combination of any of the three and take the form of formal and informal channels. Remittances may take the following forms

Remittance could be in the form of money, goods or services and a combination of any of the three and take the form of formal and informal channels. Remittances may take the following forms

Cont… Money transfer through the banking system Money transfer through parallel informal channels Money carried by migrants themselves In-kind remittances which include goods send home or imports financed by remitters Payments by emigrants on behalf of relatives The informal channels are fast, no paper work, low cost, low transaction costs, accessible to remote places

Money transfer through the banking system

Money transfer through parallel informal channels

Money carried by migrants themselves

In-kind remittances which include goods send home or imports financed by remitters

Payments by emigrants on behalf of relatives

The informal channels are fast, no paper work, low cost, low transaction costs, accessible to remote places

Flow of remittances in Ethiopia The migrants are both skilled and unskilled Economic and political factors contributed to the massive migration of Ethiopians About 1 million Ethiopians reside in the rest of the world (EEA/EEPRI 2004) Potential remittance is estimated to be more than 1.2 billion USD (assuming a migrant sends on average 1,200 USD per year) Remittances (formal and informal) accounts for 6.7% of household expenditure or 1.1 Billion USD (2004/5 Household, Income, Consumption Survey) The data on the flow of remittances through the formal channel has shown an increasing trend (481.3 million Birr in 1998/99 to 1.07 billion Birr in 2002/3

The migrants are both skilled and unskilled

Economic and political factors contributed to the massive migration of Ethiopians

About 1 million Ethiopians reside in the rest of the world (EEA/EEPRI 2004)

Potential remittance is estimated to be more than 1.2 billion USD (assuming a migrant sends on average 1,200 USD per year)

Remittances (formal and informal) accounts for 6.7% of household expenditure or 1.1 Billion USD (2004/5 Household, Income, Consumption Survey)

The data on the flow of remittances through the formal channel has shown an increasing trend (481.3 million Birr in 1998/99 to 1.07 billion Birr in 2002/3

Cont… Official remittance from Ethiopians living abroad (2002/3) was 1.07 billion Birr (11% of the official transfer) or about 1.4 % of GDP, while it was 1.2% for Sub-Saharan Africa The five year average official transfer (1998/99-2002/3) was about 747.9 million Birr In the same year, the flow of remittance through informal channels are estimated to be 3.3 billion Birr or 81.6% of the total remittance (1.54 billion Birr from North America and Europe and 1.79 million Birr from Middle East) (EEA/EEPRI 2004) In the same year the remittance flow to Ethiopia was 172 million USD

Official remittance from Ethiopians living abroad (2002/3) was 1.07 billion Birr (11% of the official transfer) or about 1.4 % of GDP, while it was 1.2% for Sub-Saharan Africa

The five year average official transfer (1998/99-2002/3) was about 747.9 million Birr

In the same year, the flow of remittance through informal channels are estimated to be 3.3 billion Birr or 81.6% of the total remittance (1.54 billion Birr from North America and Europe and 1.79 million Birr from Middle East) (EEA/EEPRI 2004)

In the same year the remittance flow to Ethiopia was 172 million USD

Remittance flow through banks in Ethiopia Nigeria, Kenya, Sudan, Senegal and Uganda are among the top five countries in Sub-Saharan Africa with remittance flow of 3.3 billion USD, 1.3 billion USD, 1.2 billion USD, 874 million USD and 856 million USD (WB 2008) Source: National Bank of Ethiopia Year 1997/98 1998/99 1999/00 2000/01 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/08 2008/09 Amount 104.3 71.3 105.9 104.1 93.4 140.6 211.1 350.8 354.9 632.6 800.3 723.2

Table: Incoming Remittance Transfers in Million USD Source: National bank of Ethiopia

Source: National bank of Ethiopia

Initiatives of the government to increase the flow of remittances Increasing the number of money transfer agencies Allowing duty free facilities for emigrants Allowing foreign currency account in Ethiopian banks for those with non-Ethiopian passport holders Devaluation of Birr Facilitate access to land for emigrants to build houses Facilitate investment opportunities for emigrants Selling development bonds to emigrants

Increasing the number of money transfer agencies

Allowing duty free facilities for emigrants

Allowing foreign currency account in Ethiopian banks for those with non-Ethiopian passport holders

Devaluation of Birr

Facilitate access to land for emigrants to build houses

Facilitate investment opportunities for emigrants

Selling development bonds to emigrants

The initiatives of MFIs to expand remittance services Two MFIs, namely DECSI and ACSI, have started money transfer product to allow customers to remit within Ethiopia.

Two MFIs, namely DECSI and ACSI, have started money transfer product to allow customers to remit within Ethiopia.

Local money transfer ACSI Client in Addis Ababa branch

DECSI Started money transfer activities by the end of 2007 Provides money transfer services in 40 branches and sub-branches covering all districts in Tigray, where the MFI operates Opened two branches outside Tigray region, namely Addis Ababa and Gonder, to provide only money transfer services Average number of incoming messages: 5,500 per month Average amount of money transferred through cables: Birr 28 million or Birr 336 million Cumulative number of customers served in two years: 117,000 Cumulative amount of money transferred: Birr 600 million The highest amount transferred through cable at a time: Birr 3 million

Started money transfer activities by the end of 2007

Provides money transfer services in 40 branches and sub-branches covering all districts in Tigray, where the MFI operates

Opened two branches outside Tigray region, namely Addis Ababa and Gonder, to provide only money transfer services

Average number of incoming messages: 5,500 per month

Average amount of money transferred through cables: Birr 28 million or Birr 336 million

Cumulative number of customers served in two years: 117,000

Cumulative amount of money transferred: Birr 600 million

The highest amount transferred through cable at a time: Birr 3 million

The remittance project with IFAD/Novib/Microfinance International Corporation (MFIC) Project title: Enhancing microfinance and remittance services in Ethiopia Implementation period: 24 months Project partners: IFAD; Oxfam Novib; MFIC; AEMFI; and the three implementing MFIs, namely, DECSI, ACSI, and OCSCCO. Total cost of the project: USD 339,802

Project title: Enhancing microfinance and remittance services in Ethiopia

Implementation period: 24 months

Project partners: IFAD; Oxfam Novib; MFIC; AEMFI; and the three implementing MFIs, namely, DECSI, ACSI, and OCSCCO.

Total cost of the project: USD 339,802

Objectives: 1. To enhance the delivery of remittances and improve and lower the cost of remittance services from Ethiopian senders and receivers

Activities Assessment of the three implementing MFIs Market assessment in Ethiopia and the US Customer demographic mapping and financing/remittance profile Install ARIAS remittance system Provide capacity building for AEMFI to support MFIs in Ethiopia Develop a marketing campaign

Assessment of the three implementing MFIs

Market assessment in Ethiopia and the US

Customer demographic mapping and financing/remittance profile

Install ARIAS remittance system

Provide capacity building for AEMFI to support MFIs in Ethiopia

Develop a marketing campaign

Objectives: 2. Increase access to financial services for Ethiopian remittance senders and receivers

Activities: Provide support to MFIs to enable them to establish the remittance services Carry out an analysis of demand and customer profile Design financial services products and developing marketing strategies Encourage remittance senders to obtain small business and consumer loans Develop remittance-based products and services such as transnational mortgage loans

Provide support to MFIs to enable them to establish the remittance services

Carry out an analysis of demand and customer profile

Design financial services products and developing marketing strategies

Encourage remittance senders to obtain small business and consumer loans

Develop remittance-based products and services such as transnational mortgage loans

Output: Enable the partner MFIs to enter the remittance market MFIC to capture 5% of the market or US 29.5 million Provide low cost remittance services (35% below the prevailing fees) for 4,900 senders in the US Provide microloans to 1.200 Ethiopian emigrants Saving, loans and other financial services will be provided to at least 65% of the recipients in Ethiopia through partner MFIs

Enable the partner MFIs to enter the remittance market

MFIC to capture 5% of the market or US 29.5 million

Provide low cost remittance services (35% below the prevailing fees) for 4,900 senders in the US

Provide microloans to 1.200 Ethiopian emigrants

Saving, loans and other financial services will be provided to at least 65% of the recipients in Ethiopia through partner MFIs

Current status of the project and implemented activities: Signed contracts with the three implementing MFIs Assessment of the MFIs Customer demographic mapping Orientation on the ARIAS system Developed the marketing plan and designing production materials Started opening offices in Washington

Signed contracts with the three implementing MFIs

Assessment of the MFIs

Customer demographic mapping

Orientation on the ARIAS system

Developed the marketing plan and designing production materials

Started opening offices in Washington

Challenges in expanding remittance services in Ethiopia Use of informal channels to remit Absence of cheap, fast and reliable transfer services Absence of modern national payment system such as ATM, Credit and debit cards, etc

Use of informal channels to remit

Absence of cheap, fast and reliable transfer services

Absence of modern national payment system such as ATM, Credit and debit cards, etc

Interventions to stimulate the flow remittances in Ethiopia Increasing the volume of remittances Improve the formal remittance system by using the state of art technology Making remittance services transparent, competitive and less costly Allow emigrants to hold foreign exchange accounts Devaluation of Birr Designing premium exchange rates or exchange rate bonus for remittances Putting mandatory requirements on emigrants Provide information to emigrants on how to remit formally and invest in their country

Increasing the volume of remittances

Improve the formal remittance system by using the state of art technology

Making remittance services transparent, competitive and less costly

Allow emigrants to hold foreign exchange accounts

Devaluation of Birr

Designing premium exchange rates or exchange rate bonus for remittances

Putting mandatory requirements on emigrants

Provide information to emigrants on how to remit formally and invest in their country

Cont… B . Diverting the flow of remittances from informal to formal channels Closing the gaps between the official and parallel market exchange rates though macro policies Reducing the cost of money transfer though formal channels Expanding the money transfer activities of MFIs, post office networks and other finance providers to reach recipients in remote areas Allow emigrants to use their resources for imports Formalize the informal remittance service providers through registration and easy licensing

B . Diverting the flow of remittances from informal to formal channels

Closing the gaps between the official and parallel market exchange rates though macro policies

Reducing the cost of money transfer though formal channels

Expanding the money transfer activities of MFIs, post office networks and other finance providers to reach recipients in remote areas

Allow emigrants to use their resources for imports

Formalize the informal remittance service providers through registration and easy licensing

Cont.. C . Directing the remittances towards productive investments Set up development bond markets to transfer remittances to promote domestic investment Provision of privileges to emigrants to import certain items such as machinery without duty Provide advisory and consulting services to assist the recipients of remittances to engage in investment activities Design targeted or emigrant specific investment opportunities

C . Directing the remittances towards productive investments

Set up development bond markets to transfer remittances to promote domestic investment

Provision of privileges to emigrants to import certain items such as machinery without duty

Provide advisory and consulting services to assist the recipients of remittances to engage in investment activities

Design targeted or emigrant specific investment opportunities

Cont.. D . Transfer of skills Develop specific schemes or program to enhance transfer of skills though emigrants Dialogue and consultation with the Diaspora

D . Transfer of skills

Develop specific schemes or program to enhance transfer of skills though emigrants

Dialogue and consultation with the Diaspora