Economic paradox of Diaspora Remittances

Edwin Musonye

Diaspora remittances are an essential financial input in many developing countries.  Kenya in particular, greatly values the conception. Processes are thus in place to capture data of the inflows. In further backing, national efforts supporting citizens to go work abroad are evident. This determination is popular because it seems to solve two shortcomings in a single blow. One is unemployment, which remains is at a high of 40 per cent – which is eased when job seekers find placement abroad – and, two , and perhaps more importantly, bonus funds, which are obtained and pumped into the ever distressed economy.

Trends have remained positive since 2004 when the relevant agencies began collecting the data in earnest (see graph below). There is no doubt that many households, especially those in the economically marginalised category, benefit when their relatives send them the money. It is easy to obtain confessions from homesteads that appreciate the role of such monies in their upkeep.

This subsidy’s bearing can be collaborated by the World Bank which once assessed that the percentage of people in sub-Saharan Africa who were living on less than $1.25 (Sh125) per day in the years between 1990 and 2010, fell from 56.5 to 48.5 per cent. This rate of nearly 0.8 percent per year may probably be because of diaspora remittances.

However, despite this reality, low follow-up has been made to appraise its tangible impact. Unfortunately, this lack of sequential attention denies policymakers and implementers the specifics to act upon. What structures may be built to boost effect of these incoming resources? In the case that it is found that an unnecessary overrating of the phenomenon is discovered, then focusing on the aspect mightn’t be so important.

In the onset of the remittance culture, Kenya and other developing countries enrolled in the diaspora bonanza were profiting from a foreign exchange gain. However, host countries, in thoughtful strategies, put in place measures to prevent their hard currencies flowing out of their territories and instead allow the equivalent value in destination countries’ currency be paid instead. Therefore, local foreign exchange reserves have never increased despite the impressive inflows.

In the past 10 years, the Kenyan diaspora has sent back home an accumulated Sh1.16 trillion. This outwardly massive amount, however, contributes very meagrely to the economic growth. Public records confirm this by not ranking it as a GDP contributor even when it hit Sh197 billion in 2017 alone which is an equivalent of what the country has sought in Eurobond II. The remittances surpass some sectors such as mining and quarrying, and accommodation and food service activities in the country.

Scientifically analysing the impact of the remittance against other economic factors such as national saving levels, national capital investment, and annual balance of trade levels on gross domestic product confirms that this activity is not as important on the economy.

Whereas, comparatively, the contribution is lower than the other factors, this does not necessarily suggest that it is hopeless. Indeed, its strength value is far above zero. The challenge to policymakers is to investigate this paradox and identify remedial processes that can mainstream and make the pursuit a manifest economic factor. Conversely, they may outright discard it as being insufficient from a macro-economic viewpoint, and fittingly concentrate on other viable activities.

In this circumstance, in which we are yet to probe the reasons for the dismal economic show, three suppositions can be offered as intermediate explanation. The first is that the proceeds are mostly utilised for consumption than for investment. The second is that, those who choose to invest prominently go into non-generative sectors such as land buying as opposed to generative sectors such as manufacturing, agriculture, and services. The third is that the raw data of all, or most of the factors, is inconclusive. ^