The best way to tap the full po­ten­tial of Africa

Financial Nigeria Magazine - - Contents - By Hugo Nor­ton Hugo Nor­ton is an Africa Pol­icy An­a­lyst and Ad­vi­sor at an eco­nomic con­sul­tancy firm in Brus­sels. Ar­ti­cle was first pub­lished by US-based non-profit media, Fair Ob­server – www.fairob­

In­vest money and in­vest in your coun­try too. That is the sim­ple propo­si­tion be­hind the Nige­rian govern­ment's new di­as­pora bond, which hopes to en­tice cit­i­zens liv­ing abroad to help fund in­fras­truc­ture projects and tackle a $25 bil­lion (record) deficit bud­get. To date, the five-year bond has raised $300 mil­lion. In the wake of the G20 meet­ing, where Africa's de­vel­op­ment was high on the agenda, the ini­tia­tive shows how bot­tom-up ap­proaches to aid can of­ten be more ef­fec­tive than cam­paigns driven by out­side ac­tors.

Yet de­spite suc­cess sto­ries, mul­ti­ple ob­sta­cles still pre­vent gov­ern­ments in de­vel­op­ing na­tions from hold­ing suc­cess­ful bond cam­paigns. Coun­tries con­sid­er­ing di­as­pora bond ini­tia­tives of­ten have to con­sider why they have such a sig­nif­i­cant di­as­pora in the first place.

The strat­egy – first pi­o­neered by Is­rael and In­dia – can work well when non­res­i­dent cit­i­zens still sup­port their coun­tries of ori­gin and hold as­sets there. In such cases, di­as­pora bonds are an ex­cel­lent way to lever­age patriotism to raise low-cost cap­i­tal. When mi­grants have es­caped op­pres­sive regimes, en­demic cor­rup­tion or eco­nomic mis­man­age­ment, though, they are much less likely to want to fund the regime that holds power in their home coun­tries, and far more scep­ti­cal about the prospect of earn­ing any re­turn on their in­vest­ment.

Be­cause of these is­sues – com­bined with gen­eral lack of aware­ness of the prod­uct in some di­as­pora com­mu­ni­ties – bond drives by the gov­ern­ments of Kenya and Ethiopia have had dis­ap­point­ing re­sults. As Liesl Rid­dle, a Ge­orge Wash­ing­ton Univer­sity pro­fes­sor who spe­cial­izes in di­as­pora fi­nanc­ing, has pointed out: “Many gov­ern­ments need to re­ally look at them­selves in the mir­ror, as to what has been their his­toric re­la­tion­ship with their di­as­pora and use that re­al­ity in their cal­cu­la­tion when they of­fer in­vest­ments.”

In any case, there is likely a bet­ter way to in­crease the flow of funds into African economies from com­pa­tri­ots abroad: mov­ing to end anti-com­pet­i­tive prac­tices by dom­i­nant money trans­fer op­er­a­tors (MTO) and lever­ag­ing the power of re­mit­tances. Re­mit­tances con­trib­ute far more to fam­ily bud­gets, and by ex­ten­sion govern­ment cof­fers, than for­eign aid and di­as­pora bonds com­bined: re­mit­tances sent to all na­tions in 2012 to­talled $534 bil­lion, three times more than aid funds sent to de­vel­op­ing coun­tries.

Nige­ria is a prime ex­am­ple of this dy­namic. Ac­cord­ing to the lat­est re­port from the In­ter­na­tional Fund for Agri­cul­tural De­vel­op­ment, over the past decade re­mit­tances to and within Africa have grown by 36% to reach $60.5 bil­lion in 2016 – nearly a third of which was chan­nelled to Nige­ria, mak­ing it among the big­gest re­cip­i­ents of re­mit­tances in the world. For 19 African na­tions, in­clud­ing Nige­ria, this flow of money rep­re­sents 3% or more of their GDP, and for five more – Liberia, The Gam­bia, the Co­moros, Le­sotho and Sene­gal – re­mit­tances ac­count for more than 10% of na­tional GDP.

It's clear that re­mit­tances are a crit­i­cal en­gine keep­ing African economies run­ning, but un­for­tu­nately they're still stuck in first gear. For re­mit­tances to truly be­come an un­bri­dled driver of in­vest­ment and growth, gov­ern­ments across the con­ti­nent need to un­der­take reg­u­la­tory re­forms that al­low their cit­i­zens to lever­age what is un­de­ni­ably a mas­sive and still par­tially un­tapped pool of cap­i­tal.

Trans­ac­tion costs for send­ing and re­ceiv­ing re­mit­tances are the high­est in Africa, with a 10% av­er­age cost to re­mit $200; fees are high­est of all in south­ern Africa, where they hover at 14.6% on av­er­age. In the western part of the con­ti­nent, thanks in part to greater scale and com­pe­ti­tion, costs have dropped slightly be­low the global av­er­age to 7.9%, but that's still far above the global goal of 3%.

The trans­ac­tion costs have re­mained un­ac­cept­ably high de­spite cam­paigns to lower them largely be­cause Western Union and MoneyGram have wielded ex­clu­siv­ity agree­ments and other means to bol­ster their grow­ing con­cen­tra­tion of mar­ket share. Ac­cord­ing to the Over­seas De­vel­op­ment In­sti­tute, these MTOs ac­count for two-thirds of re­mit­tance trans­fers and use an­ti­com­pet­i­tive agree­ments with agents and banks to re­strict com­pe­ti­tion, block po­ten­tial en­trants from join­ing the mar­ket, and to con­tinue charg­ing high fees for cus­tomers who have few other op­tions.

To be fair, sev­eral cen­tral banks and com­pe­ti­tion au­thor­i­ties in Africa have al­ready taken up the is­sue. In Septem­ber 2016, Nige­ria's Cen­tral Bank re­versed a con­tentious de­ci­sion that would have se­verely re­stricted smaller MTOs from op­er­at­ing in the coun­try. Ac­cord­ing to the draft directive, MTOs would have had to ful­fil strict re­quire­ments, in­clud­ing hold­ing a net worth of $1 bil­lion, which would have left only the big­gest three MTOs able to op­er­ate in the coun­try. While the Cen­tral Bank's de­ci­sion to back­track is a wel­come one, it could still go much fur­ther. The Rus­sian govern­ment, for in­stance, is one of the few that has out­lawed ex­clu­siv­ity clauses in money trans­fers – and not sur­pris­ingly, trans­ac­tion costs are among the low­est world­wide.

African gov­ern­ments would do well to fol­low Moscow's ex­am­ple. A pow­er­ful way for Nige­ria to com­pound the suc­cess of its di­as­pora bond drive, for in­stance, would be to scru­ti­nize the way Western Union and MoneyGram con­duct their busi­ness within its bor­ders. These play­ers are still mak­ing far too much off African mi­grants' hard­earned re­mit­tances, to the detri­ment of some of the world's least-de­vel­oped na­tions. It's time that grip was loos­ened.

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