Modern economies rely on the free movement of people, goods and money to prosper. Free movement increases productivity, creates economic efficiency, and delivers greater opportunities for developing markets to improve in line with the rest of the world.
Small wonder then that organisations such as the WTO have dedicated themselves to removing barriers to the flow of goods. Meanwhile, the EU, and initiatives like the common Schengen area, help people move freely.
Unfortunately, the free movement of money isn’t always subject to the same rigour. In many regions, there are still high overheads associated with cash transfers. These barriers to money transfers impede commercial activities and lower the attractiveness of business dealings. They also hamper remittances – which are among the most powerful financial flows shaping global economies.
It’s difficult to overstate the importance of remittances to emerging markets. For developing countries, money remittances sent home by diasporas bolster GDP, create liquidity and spur investments in critical areas like healthcare, education, power and infrastructure. By volume, remittances far exceed official aid flows1. They also regularly outstrip foreign direct investments (FDIs) – China is a notable exception.
That’s not all. Annual inward remittances to smaller developing markets are larger than, or equal to, foreign exchange reserves. Even for India – one of the world’s largest emerging markets – remittances account for around 25% of total foreign exchange reserves2. In Egypt, remittances are roughly three times the annual revenues from the Suez Canal3.
In fact, TED speaker and economist Dilip Ratha has called remittances “dollars wrapped in love .” Unlike private investment money, they don’t leave at the first sign of trouble. In fact, remittances increase when the family is in trouble, and provide an invaluable safety net.
Remittances are an incredibly powerful tool for prosperity. But their potential is being held back in part by high overheads. The current global average cost of international money transfers is around 7.6%5. Reducing that to 5% (in line with the G20 5X5 objective) would release benefits of USD 16 billion a year for the global economy6. Further to this, the United Nations has set a Sustainable Development Goal (SDG) to bring remittance fees down near the 3% mark by 2030.
High remittance costs are often a result of exclusivity arrangements – where tie-ups between money transfer brands and financial institutions artificially restrict consumer choice. On the other hand, markets that encourage competition typically offer lower costs.
For instance, the South Asia region offers very competitive remittance costs due to a mature financial system with a multitude of competing money transfer brands and financial institutions. In the MENA region, remittance costs are marginally higher than the global average. The good news is that the market is slowly moving towards liberalisation. In 2010, Oman became the first country regionally to abolish exclusive arrangements and create open competition among money transfer brands.
However, challenges remain in liberalising Sub-Saharan Africa, with Nigeria fast becoming a case study in reversing positive gains. Back in 2009, when the cost of remitting to Sub-Saharan Africa stood at around 12%, the country took the bold step of liberalising its remittance sector to encourage competition. The benefits were immediate: money transfer costs declined, inward remittances to Nigeria jumped from USD 18 billion in 2009 to USD 20.5 billion in 2015, and customers gave up informal channels of money transfer in favour of licensed operators.
But in a recent reversal of policy, Nigerian regulators have enacted laws that have effectively pushed all but 3 operators out of the market. The result is an instant restriction, which may encourage cartel pricing. This will not just harm consumers and restrict remittance inflows into the country, but may also see people revert to using informal channels to send cash. These grey channels have no oversight, and can’t be monitored for counterfeiting or money laundering activities.
The math is simple. It’s been proven time and again that liberalised remittances add value to global economies. At Xpress Money, we believe that competition is healthy, benefits consumers, and unlocks benefits – not just in Nigeria but all over the world.
Written by Sudhesh Giriyan, COO, Xpress Money