Charles Mkula is a journalist who has worked for a number of newspapers and magazines in Malawi since 1998.
Africa Opinions

Remittances race behind aid and Foreign Direct Investment

LILONGWE- Weakening flows in development aid financing and foreign direct investment (FDIs), two of Malawi’s economic drivers, meet at crossroads amidst a crisis that has left world economies shaking.

But, Malawi, determined to drive through its national development agenda and improve the livelihood of its citizens, has positioned its development and financial sectors to attract and harvest currency dominations from all available foreign funding sources including remittances.

The true value of international remittances to Malawi are scanty but are said to be on the rise and to account for two percent of the Gross Domestic Product (GDP).

Remittance inflows have become a notable source of foreign exchange, especially after the 2016 ten per cent decrease in aid and the decline in the value of flows of FDIs.

The World Bank reports that in 2017 Malawians living in the diaspora remitted back home about US$38 million, $4 million more than $34 million recorded in 2016.

Experts see huge potential for higher remittances once several administrative and operational bottlenecks are removed. They attribute the low volume of remittances to high cost of money transfer transactions and limited access to formal banking services, a situation which makes Malawi one of the most expensive countries to make remittances to since the country’s money transfer market is dominated by few money transfer operators, not counting the duopoly of mobile phone companies.

 

Money transfer market competition

The lack of money transfer market competition and inadequate access to formal banking services in rural areas minimises the amount and impact of remittances on rural and national economies. Only 19 percent of the adult population use the formal banking services though a larger population have been incentivised to use mobile banking services despite mobile cellular subscription remaining relatively low, at 20 percent.

According to an article “Access to finance in Malawi” by GIZ and South African Institute for International Affairs about 5 percent of Malawi’s active population access financial services through microfinance institutions. Estimates suggest that the next 25 percent of the population (in terms of income) is potentially bankable but currently unbanked.

The report suggests that banks could still target this market with basic payments services for urban-rural and international remittances, and government salaries and financial subsidy programs using mobile technology.

Spokesperson for the central bank, the Reserve Bank of Malawi (RBM) Mbane Ngwira, says the country has introduced regulatory frameworks that promote cost-effective, competitive and innovative money transfers to facilitate easy entry of remittances, especially from the diaspora.

“The initiative is aimed at attracting diaspora direct investment and mobilisation of diaspora savings,” he says.

Vast unexploited natural resources combined with a growing population, lack of infrastructure, vulnerability to natural disasters and low earning opportunities push Malawian migrants to more lucrative destinations in search of resources that can help reconstruct the social economic landscapes of their families back home.

It is estimated that with a per capita GDP of US$381 and only 15 percent of the 17 million people population urbanized, Malawi has a combined (internal and international) migrant population of 1.4 percent of the country’s 17 million people population (213,000).

According to a publication titled “Migration dynamics, entrepreneurship and African development: Lessons from Malawi” by Kevin Thomas and Christopher Inkpen, Malawi is the centre of part of Africa’s largest migration system called the Southern African Migration System (SAMS) where 90 percent of all Malawian emigrants, with 79 percent of these destined for South Africa, serve as major suppliers of unskilled and agricultural labour

Latest trends show a surge of unskilled workers moving to distant destinations including Europe and North America, lands that were previously spheres left for skilled professional migrant job seekers such as doctors and nurses who have helped showcase Malawi’s global competitiveness in the training of skilled health professionals.

 

Remittance contribution to growth

Though they have largely gone unnoticed, remittances and investments from diaspora communities are forces that have over the years silently contributed to the country’s economic growth and national development.

For an economy hugely driven by rain-reliant and non-mechanised smallholder agriculture practices that are often challenged by weather shocks, limited access to credit, small plot sizes, and high transportation costs, financial transfers from the diaspora play an essential economic role in financing rural activities such as agricultural production where capital markets including formal insurance are almost non-existent.

In comparison with credit institutions, loans from family or friends and personal savings, remittances are the most preferred source of investment resources into sectors with considerable future growth potential, wealth creation and unemployment reduction.

Since remittances usually target the poor as beneficiaries, the share of people living in poverty has over the years been seen to be decreasing as the money received impacts on consumption and savings behaviour including investment in health, agriculture, education, housing, land acquisition and entrepreneurship (business  start-ups), labour market behaviour, and can act as insurance for shocks.

The 2006 Malawian Migration Baseline Survey (MBS) indicated that remittances contributed an average of six per cent to total household income followed by an additional 31 percent from agriculture produce, casual labour (ganyu) at 27 percent and wage employment 18 percent.

Charles Mkula is a journalist who has worked for a number of newspapers and magazines in Malawi since 1998. He has also worked as a communications officer for the Secondary Centres Development Programme (SCDP), an urban development programme in Malawi set up with support from the German KfW to support urban development. Since his entry into the development field, Charles has been passionate about advancing rural and urban development in Malawi.