Money transfers to Africa competing with aid and investment

Out-Law News | 01 Apr 2014 | 3:21 pm | 2 min. read

Money transfers from migrant workers became Africa’s largest external source of finance in 2012, ahead of foreign direct investment (FDI) and official development assistance (ODA), figures show.

World Bank figures indicate that between 2007 and 2012 global money transfers, or remittances, to Africa grew by 34.5% and reached a total amount of $60.4 billion in 2012. The same year, for the first time, remittances became the largest external financial source to Africa, ahead of FDI and ODA, with 35% of global remittances to Africa originating in the EU.

According to latest economic data from the EU, “increased mobility between Africa and Europe is creating new opportunities for improved livelihoods in Africa” through activities such as remittances.

Proposals to step up investment in Africa will be discussed at this week’s fourth EU-Africa summit in Brussels, Belgium. European Commission president José Manuel Barroso said the summit will cover the “expansion of political, economic, investment and trade ties”.

According to the EU, Europe remains Africa’s biggest development partner. From 2007 to 2013, the EU and its member states disbursed the equivalent of around $194bn in aid to support Africa's development. In 2012 and “despite adverse economic developments at home”, EU member states committed more than $25bn of ODA, representing 45% of global ODA to Africa, the EU said.

Meanwhile the EU said it is “spearheading innovative financing solutions such as 'blending', using its aid to make commercial investments more viable” in Africa. To date, the EU has awarded more than 80 grants to infrastructure projects in Africa representing a total value equivalent to more than $8bn.

In terms of infrastructure, the EU said it has supported improved access to modern energy services in Africa for more than 18.2 million citizens between 2007 and 2012. “Over the same period, the EU helped provide access to electricity to over 600,000 households, 15,700 kilometres of electricity lines were installed and 78,000 jobs in the energy sector were created,” the EU said.

Trade between the two continents continues to grow. Between 2007 and 2012, EU imports from Africa increased by 46%. In 2012, the EU imported African goods worth around $258bn – which was less than 10% of total extra-EU imports. African imports from the EU amounted to about $210bn in 2012. “Throughout this time the EU remained Africa's prime source of imports (34% of total African imports) as well as its main export market (40% of African exports),” the EU said. In total, 37% of African trade took place with the EU in 2012.

According to the EU’s statistical office, Eurostat, the EU accounted for 48% of FDI stocks ($305bn) in 2012 and 21% of global FDI flows ($11bn) to Africa. African investments in Europe have also made strides over the last 10 years: direct investment stocks held by African investors in the EU increased by more than 700% to reach about $106bn in 2012.

A 2013 report by the African Development Bank (AfDB) said more than 30 million Africans (about 3% of Africa’s total population) are living outside their home countries.

The report added: “At a macro level, flows of remittances could improve the balance of payments and bolster a country’s foreign exchange reserves. By stimulating savings, remittances can also have an impact on financial development and foster long-term economic growth... Furthermore, remittances could be a catalyst for investment and economic growth by supporting small business start-ups.”

AfDB has called on African governments to encourage smaller organisations, such as micro-finance institutions and post offices, to cater for remittances to stimulate competition. According to AfDB, the African remittance market is currently dominated by Western Union and Money Gram, “who control 65% of all remittances payout locations in Africa, in partnership with selected commercial banks and other financial institutions”.

Remittance costs in Africa “are still 25% higher than in Latin America and Asia”, AfDB added.