expanding remittance flows in ethiopia: challenges and prospects

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Expanding Remittance Expanding Remittance Flows in Ethiopia: Flows in Ethiopia: Challenges and Prospects 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

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Page 1: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Expanding Remittance Expanding Remittance Flows in Ethiopia: Flows in Ethiopia:

Challenges and ProspectsChallenges 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

Page 2: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

IntroductionIntroduction

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)

Page 3: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Cont.. 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)

Page 4: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Objectives of the Objectives of the presentationpresentation

• 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

Page 5: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Positive impact of Positive impact of remittances in Ethiopiaremittances 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

Page 6: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Negative impact of Negative impact of remittancesremittances

•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

Page 7: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Determinants of Determinants of remittancesremittancesStock of active Ethiopian migrants

in the host countriesThe exchange rateThe relative saving interest rate in

the formal sectorThe fees to be incurred when

sending Institutional stabilityThe financial sector developmentOther individual characteristics of

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

Page 8: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Motivation to remitMotivation 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

Page 9: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Remittance channelsRemittance 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

Page 10: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Cont…Cont…A. Money transfer through the banking systemB. Money transfer through parallel informal

channelsC. Money carried by migrants themselvesD. In-kind remittances which include goods

send home or imports financed by remittersE. Payments by emigrants on behalf of

relatives

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

Page 11: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Flow of remittances in Flow of remittances in EthiopiaEthiopiaThe migrants are both skilled and unskilledEconomic and political factors contributed to

the massive migration of EthiopiansAbout 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

Page 12: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Cont…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

Page 13: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Remittance flow through Remittance flow through banks in Ethiopiabanks in 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

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

Page 14: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Table: Incoming Remittance Table: Incoming Remittance Transfers in Million USDTransfers in Million USD

Source: National bank of Ethiopia

Page 15: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

  Initiatives of the Initiatives of the government to increase government to increase the flow of remittancesthe flow of remittancesIncreasing the number of money transfer

agenciesAllowing duty free facilities for emigrantsAllowing foreign currency account in

Ethiopian banks for those with non-Ethiopian passport holders

Devaluation of BirrFacilitate access to land for emigrants to

build housesFacilitate investment opportunities for

emigrantsSelling development bonds to emigrants

Page 16: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

The initiatives of MFIs to The initiatives of MFIs to expand remittance expand remittance servicesservices

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

Page 17: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Local money transferLocal money transferACSI Client in Addis Ababa branchACSI Client in Addis Ababa branch

Page 18: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

DECSIDECSI

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

Page 19: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

The remittance project with The remittance project with IFAD/Novib/Microfinance IFAD/Novib/Microfinance International Corporation International Corporation (MFIC)(MFIC)Project title: Enhancing microfinance

and remittance services in EthiopiaImplementation period: 24 monthsProject partners: IFAD; Oxfam Novib;

MFIC; AEMFI; and the three implementing MFIs, namely, DECSI, ACSI, and OCSCCO.

Total cost of the project: USD 339,802

Page 20: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

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

Page 21: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

ActivitiesActivities

Assessment of the three implementing MFIs

Market assessment in Ethiopia and the US

Customer demographic mapping and financing/remittance profile

Install ARIAS remittance systemProvide capacity building for

AEMFI to support MFIs in EthiopiaDevelop a marketing campaign

Page 22: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

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

Page 23: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Activities: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

Page 24: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Output: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

Page 25: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Current status of the Current status of the project and implemented project and implemented activities:activities:Signed contracts with the three

implementing MFIsAssessment of the MFIsCustomer demographic mappingOrientation on the ARIAS systemDeveloped the marketing plan and

designing production materialsStarted opening offices in

Washington

Page 26: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Challenges in expanding Challenges in expanding remittance services in remittance services in EthiopiaEthiopiaUse of informal channels to remitAbsence of cheap, fast and

reliable transfer servicesAbsence of modern national

payment system such as ATM, Credit and debit cards, etc

Page 27: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Interventions to stimulate Interventions to stimulate the flow remittances in the flow remittances in EthiopiaEthiopiaA. 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

Page 28: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Cont…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

Page 29: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Cont..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

Page 30: Expanding Remittance Flows in Ethiopia: Challenges and Prospects

Cont..Cont..

D. Transfer of skills Develop specific schemes or

program to enhance transfer of skills though emigrants

Dialogue and consultation with the Diaspora