Expanding Remittance Flows in Ethiopia: Challenges and Prospects


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Expanding Remittance Flows in Ethiopia: Challenges and Prospects

  1. 1. 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
  2. 2. Introduction <ul><li>Remittances, along with migration, have increased markedly in the recent years </li></ul><ul><li>Around 200 million people migrate around the world (Solimono 2003) </li></ul><ul><li>Remittances are estimated at more than 290 Billion USD in 2009 (WB) </li></ul><ul><li>Remittances in Sub-Saharan Africa doubled in the last five years and reached 10.8 billion USD (WB 2008) </li></ul><ul><li>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) </li></ul>
  3. 3. Cont.. <ul><li>Remittances exceed by far the Official Development Aid (ODA) </li></ul><ul><li>Close to Foreign Direct Investment (FDI) </li></ul><ul><li>Second largest source of external funding for developing countries (Ratha 2001) </li></ul><ul><li>However, remittances are difficult to estimate (lack of data particularly for remittance flows through informal channels) </li></ul>
  4. 4. Objectives of the presentation <ul><li>Provide basic information on the flow of remittances in Ethiopia </li></ul><ul><li>Assess the role of remittances and current initiatives by IFAD/Oxfam Novib/MFIC/AEMFI in Ethiopia </li></ul><ul><li>Identify the challenges of expanding the flow of remittances </li></ul><ul><li>Propose interventions to stimulate the flow of remittances </li></ul>
  5. 5. Positive impact of remittances in Ethiopia <ul><li>Positive impact through effects on saving, investment, consumption and income distribution </li></ul><ul><li>Reducing poverty by increasing recipient individual income </li></ul><ul><li>Increasing financial stability in Ethiopia (remittances are more stable than other sources of external financing) </li></ul><ul><li>Increase the country’s foreign exchange reserves </li></ul><ul><li>If invested, remittances contribute to output growth (financing small projects) </li></ul><ul><li>If consumed, remittances generate positive multiplier effect </li></ul><ul><li>It can finance schools, clinics and other infrastructure </li></ul><ul><li>Development of human capital to fill the skill deficits in Ethiopia </li></ul><ul><li>Diaspora contributing to the flow of foreign direct investment and build partnership between local and international companies </li></ul>
  6. 6. Negative impact of remittances <ul><li>Remittances can encourage dependency culture on the recipient families by discouraging them to be self-supporting </li></ul><ul><li>As a result of remittances, the country could see its real exchange rate becoming overvalued and their non-traded exports being hindered </li></ul>
  7. 7. Determinants of remittances <ul><li>Stock of active Ethiopian migrants in the host countries </li></ul><ul><li>The exchange rate </li></ul><ul><li>The relative saving interest rate in the formal sector </li></ul><ul><li>The fees to be incurred when sending Institutional stability </li></ul><ul><li>The financial sector development </li></ul><ul><li>Other individual characteristics of the migrant such as education, sex, age, income earning profile of the migrant. Etc </li></ul>
  8. 8. Motivation to remit <ul><li>Pure altruistic, support the family and family members </li></ul><ul><li>Self interest of the migrant, invest or save for the future </li></ul><ul><li>Both the family and family members benefit through implicit contractual agreement </li></ul>
  9. 9. Remittance channels <ul><li>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 </li></ul>
  10. 10. Cont… <ul><li>Money transfer through the banking system </li></ul><ul><li>Money transfer through parallel informal channels </li></ul><ul><li>Money carried by migrants themselves </li></ul><ul><li>In-kind remittances which include goods send home or imports financed by remitters </li></ul><ul><li>Payments by emigrants on behalf of relatives </li></ul><ul><li>The informal channels are fast, no paper work, low cost, low transaction costs, accessible to remote places </li></ul>
  11. 11. Flow of remittances in Ethiopia <ul><li>The migrants are both skilled and unskilled </li></ul><ul><li>Economic and political factors contributed to the massive migration of Ethiopians </li></ul><ul><li>About 1 million Ethiopians reside in the rest of the world (EEA/EEPRI 2004) </li></ul><ul><li>Potential remittance is estimated to be more than 1.2 billion USD (assuming a migrant sends on average 1,200 USD per year) </li></ul><ul><li>Remittances (formal and informal) accounts for 6.7% of household expenditure or 1.1 Billion USD (2004/5 Household, Income, Consumption Survey) </li></ul><ul><li>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 </li></ul>
  12. 12. Cont… <ul><li>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 </li></ul><ul><li>The five year average official transfer (1998/99-2002/3) was about 747.9 million Birr </li></ul><ul><li>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) </li></ul><ul><li>In the same year the remittance flow to Ethiopia was 172 million USD </li></ul>
  13. 13. 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
  14. 14. Table: Incoming Remittance Transfers in Million USD <ul><li>Source: National bank of Ethiopia </li></ul>
  15. 15.   Initiatives of the government to increase the flow of remittances <ul><li>Increasing the number of money transfer agencies </li></ul><ul><li>Allowing duty free facilities for emigrants </li></ul><ul><li>Allowing foreign currency account in Ethiopian banks for those with non-Ethiopian passport holders </li></ul><ul><li>Devaluation of Birr </li></ul><ul><li>Facilitate access to land for emigrants to build houses </li></ul><ul><li>Facilitate investment opportunities for emigrants </li></ul><ul><li>Selling development bonds to emigrants </li></ul>
  16. 16. The initiatives of MFIs to expand remittance services <ul><li>Two MFIs, namely DECSI and ACSI, have started money transfer product to allow customers to remit within Ethiopia. </li></ul>
  17. 17. Local money transfer ACSI Client in Addis Ababa branch
  18. 18. DECSI <ul><li>Started money transfer activities by the end of 2007 </li></ul><ul><li>Provides money transfer services in 40 branches and sub-branches covering all districts in Tigray, where the MFI operates </li></ul><ul><li>Opened two branches outside Tigray region, namely Addis Ababa and Gonder, to provide only money transfer services </li></ul><ul><li>Average number of incoming messages: 5,500 per month </li></ul><ul><li>Average amount of money transferred through cables: Birr 28 million or Birr 336 million </li></ul><ul><li>Cumulative number of customers served in two years: 117,000 </li></ul><ul><li>Cumulative amount of money transferred: Birr 600 million </li></ul><ul><li>The highest amount transferred through cable at a time: Birr 3 million </li></ul>
  19. 19. The remittance project with IFAD/Novib/Microfinance International Corporation (MFIC) <ul><li>Project title: Enhancing microfinance and remittance services in Ethiopia </li></ul><ul><li>Implementation period: 24 months </li></ul><ul><li>Project partners: IFAD; Oxfam Novib; MFIC; AEMFI; and the three implementing MFIs, namely, DECSI, ACSI, and OCSCCO. </li></ul><ul><li>Total cost of the project: USD 339,802 </li></ul>
  20. 20. Objectives: 1. To enhance the delivery of remittances and improve and lower the cost of remittance services from Ethiopian senders and receivers
  21. 21. Activities <ul><li>Assessment of the three implementing MFIs </li></ul><ul><li>Market assessment in Ethiopia and the US </li></ul><ul><li>Customer demographic mapping and financing/remittance profile </li></ul><ul><li>Install ARIAS remittance system </li></ul><ul><li>Provide capacity building for AEMFI to support MFIs in Ethiopia </li></ul><ul><li>Develop a marketing campaign </li></ul>
  22. 22. Objectives: 2. Increase access to financial services for Ethiopian remittance senders and receivers
  23. 23. Activities: <ul><li>Provide support to MFIs to enable them to establish the remittance services </li></ul><ul><li>Carry out an analysis of demand and customer profile </li></ul><ul><li>Design financial services products and developing marketing strategies </li></ul><ul><li>Encourage remittance senders to obtain small business and consumer loans </li></ul><ul><li>Develop remittance-based products and services such as transnational mortgage loans </li></ul>
  24. 24. Output: <ul><li>Enable the partner MFIs to enter the remittance market </li></ul><ul><li>MFIC to capture 5% of the market or US 29.5 million </li></ul><ul><li>Provide low cost remittance services (35% below the prevailing fees) for 4,900 senders in the US </li></ul><ul><li>Provide microloans to 1.200 Ethiopian emigrants </li></ul><ul><li>Saving, loans and other financial services will be provided to at least 65% of the recipients in Ethiopia through partner MFIs </li></ul>
  25. 25. Current status of the project and implemented activities: <ul><li>Signed contracts with the three implementing MFIs </li></ul><ul><li>Assessment of the MFIs </li></ul><ul><li>Customer demographic mapping </li></ul><ul><li>Orientation on the ARIAS system </li></ul><ul><li>Developed the marketing plan and designing production materials </li></ul><ul><li>Started opening offices in Washington </li></ul>
  26. 26. Challenges in expanding remittance services in Ethiopia <ul><li>Use of informal channels to remit </li></ul><ul><li>Absence of cheap, fast and reliable transfer services </li></ul><ul><li>Absence of modern national payment system such as ATM, Credit and debit cards, etc </li></ul>
  27. 27. Interventions to stimulate the flow remittances in Ethiopia <ul><li>Increasing the volume of remittances </li></ul><ul><li>Improve the formal remittance system by using the state of art technology </li></ul><ul><li>Making remittance services transparent, competitive and less costly </li></ul><ul><li>Allow emigrants to hold foreign exchange accounts </li></ul><ul><li>Devaluation of Birr </li></ul><ul><li>Designing premium exchange rates or exchange rate bonus for remittances </li></ul><ul><li>Putting mandatory requirements on emigrants </li></ul><ul><li>Provide information to emigrants on how to remit formally and invest in their country </li></ul>
  28. 28. Cont… <ul><li>B . Diverting the flow of remittances from informal to formal channels </li></ul><ul><li>Closing the gaps between the official and parallel market exchange rates though macro policies </li></ul><ul><li>Reducing the cost of money transfer though formal channels </li></ul><ul><li>Expanding the money transfer activities of MFIs, post office networks and other finance providers to reach recipients in remote areas </li></ul><ul><li>Allow emigrants to use their resources for imports </li></ul><ul><li>Formalize the informal remittance service providers through registration and easy licensing </li></ul>
  29. 29. Cont.. <ul><li>C . Directing the remittances towards productive investments </li></ul><ul><li>Set up development bond markets to transfer remittances to promote domestic investment </li></ul><ul><li>Provision of privileges to emigrants to import certain items such as machinery without duty </li></ul><ul><li>Provide advisory and consulting services to assist the recipients of remittances to engage in investment activities </li></ul><ul><li>Design targeted or emigrant specific investment opportunities </li></ul>
  30. 30. Cont.. <ul><li>D . Transfer of skills </li></ul><ul><li>Develop specific schemes or program to enhance transfer of skills though emigrants </li></ul><ul><li>Dialogue and consultation with the Diaspora </li></ul>