2014 Flash Back: Concept on harnessing economic power from financial remittances and human resource potential of Ugandans abroad

 2014 Flash Back: Concept on harnessing economic power from financial remittances and human resource potential of Ugandans abroad

by Hon. Amongin Aporu Christine Hellen Minister Of State For Teso Affairs

 

DISCUSSION WITH SELECTED DIASPORA GROUP AT UGANDA HIGH COMMISSION, LONDON – FRIDAY OCTOBER 10, 2014 AT 10.00 AM

  1. Ugandans in Diaspora Financial Remittances to Uganda
  2. Introduction
  3. Present Situation
  4. Benefits from Remittances from Diaspora
  5. Challenges
  6. Way forward
  • Streamline and formalize remittances from Ugandan in Diaspora
  • Application of the remittances – Investment vis-à-vis consumption expenditure

 

INTRODUCTION

Since the 1990s, Uganda has enjoyed strong and impressive gross domestic product (GDP) growth supported by prudent macroeconomic management. However, although Uganda registered 7.1% growth in GDP in fiscal year 2008/09, this was below the projected growth of 8.9%. Furthermore, analysis at sectoral level reveals differences in performance, notably the poor performance of the coffee sub-sector, resulting in an overall poor performance by the cash crop sector. The drastic deceleration of the construction sub-sector had impacts for the overall performance of the industry sector. The agriculture sector grew, although from a low base. Studies have shown that Uganda seems to have emerged from its vulnerability to the second-round effects of the mid 2007-2009 global financial crisis without serious damage to its financial sector relative to Kenya with the main pillar being through the balance of payments. Specifically, the main transmission channels which cushioned Uganda against the crisis have included trade, private capital flows, private transfers and aid.

 

Remittances

Aid

International remittances have become a major source of external development finance, and have been found to be relatively more stable and more dependable than other forms of foreign-exchange inflows such as Portfolio Equity (PE), Foreign Direct Investment (FDI) and Overseas Development Assistance (ODA), and may even counter a financial crisis in the economy in times of economic recession.

 

The flow of remittances to developing countries including Uganda has attracted increasing attention because of the volume and impact on the receiving countries. According to a 2011 Report of the African Development Bank, between 2000 and 2010, individuals living outside their countries grew from 175 to 215 million people worldwide, representing 3.2% of the world’s population. According to the Bank, in 2010, official recorded remittances received amounted to US$ 293 billion, exceeding total official development aid (US$90 billion), and amounted to roughly sixty-three per cent of foreign direct investment inflows (US$463 billion) received by developing countries in that year. Very often however, the remittances’ transfers are backed by self-interest motives.

 

Uganda, like many countries the world over, face a lot of unprecedented economic turbulences as a result of fall in commodity prices (such as oil and other petroleum products, coffee, steel, gold and wheat), civil conflict and wars, crop and livestock loss as natural disasters. These countries must cope with such shocks as they affect the national wealth, the government’s future financial plans and the growth of the economy. They do this by relying on external financial flows in times when they experience these transitory income shocks.

 

As part of a private welfare system, remittances transfer purchasing power and help to reduce poverty, smooth consumption, affect labour supply, provide working capital and can have multiplier effects through increased spending.

 

The questions are: 1) Are remittances a buffer and stable for the Ugandan economy? 2) Do remittances have a stabilizing impact for the Ugandan economy? and 3) Can remittances propel the economy in the direction of its overall development goal?

 

From the macroeconomic perspective, international remittances constitute a major source of foreign exchange, influence the national balance of payments, and represent a substantial share of the gross domestic product in many countries hence Uganda too.

 

The remittances help Uganda to narrow the gap of economic standing and disparities between its economy and that of other countries. According to the African Development Bank, remittances have been known to exceed official aid transfers in some regions and act as a buffer from economic shocks.

 

However, international remittances, in general, can render the citizens vulnerable to changes in global economic shocks if spent on unproductive investment and short-term consumption gains.

 

There are three broad sectoral areas of potential investment are 1) agriculture, forestry and fisheries 2) industry; and 3) services

Under stable world prices, remittances will serve as a macroeconomic stabilizer to smooth out large fluctuations in the national income observed over different phases of the business cycles. The stability of these inflows also opens up an opportunity for developing countries to lower borrowing costs in international capital markets by securitizing future flows of remittances.

 

For the majority of the larger economies examined by the African Development Bank, the investment motive of remittances is stronger than the altruistic motive. By this motive, a more stable economic environment is created.

 

Civil conflicts, high levels of unemployment, poor governance, weak regulatory frameworks and institutions are some of the factors together among others that have resulted in high levels of poverty and general economic deprivation leading to regular and consistent migration of both skilled and unskilled labour to other regions of the world in search of better working and living conditions.

Uganda is one of those countries in Sub-Saharan Africa graded as 60-90% of their labour force is employed in agriculture, with most of its activities still at the subsistence level and thus vulnerable to climate change and global warming.

Bank of Uganda is currently reviewing and assessing the informal remittances and the figures are expected to be higher than the known amount. According to the Word Bank, informal remittances to sub-Saharan Africa are relatively high, at 45-65 per cent of the amount of formal remittances. Relative to GDP, remittances were approximately 34% of GDP in Lesotho, approximately 5% in Uganda, the Gambia, Togo, Senegal, Cape Verde, Kenya, Guinea-Bissau, Nigeria and Mali.

 

The conclusion here is that even though remittances may be generally small as a share of GDP, in majority cases it may amount to a large share of the income of recipient households and may therefore have a substantial impact on the stability of these households’ income and play a role in insuring the families against transitory shocks to income in the economy and the households.

 

 

Aid

While official development assistance (ODA) to developing countries is expected to be adversely affected by any reversals in economic fortunes, there is little evidence to suggest that this has been the case in Uganda. According to the World Bank report, there was a declining trend in ODA to Uganda since 2006/07, and in particular the report revealed that ODA declined from $426.60 million in 2007/08 to $401.96 million in 2008/09 (5.8%), and ODA reached its lowest level in 2008/09. Whether this can be attributed to the global financial crisis during the global financial crisis has not been established.

The World Bank reported that inflows to NGOs declined from $547.23 million in 2007/08 to $453.64 million in 2008/09, representing a year-on-year reduction of 17.1%. However, calls to and commitments by Western countries to increase aid to developing countries have continued.

In the Report of the African Development Bank (2008), Uganda has a longstanding migratory tradition associated with its political history and geography. Yet little is known of how large the size of the emigrant population or diaspora is or about the extent of the economic activities migrants have with Uganda. Using available Albeit Limited survey data, expert interviews and data collected from the Central Bank, commercial banks, microfinance institutions and foreign exchange bureaus, there may be as many as 3 million Ugandans living abroad, much larger than what official records show. More importantly, just over 800,000 Ugandan migrants may be remitting a total of US$700 million, a figure similar to earlier Uganda Central Bank statistics. The top destinations for Ugandan emigrants are the United Kingdom, Tanzania, the United States, Canada, Rwanda, Sweden, and Kenya, among others. The UK in particular is home to a large Ugandan diaspora community, due in part, to colonial ties between the countries and the fact that prior to 1990, Ugandans did not need a visa to travel to the UK.

 

According to a household survey on migration and remittances in Uganda, conducted by Bendixen and Associates, 42% of Ugandans have a relative abroad, amounting to 2.9 million Ugandans, 30% of which are living in the United Kingdom. This 2.9 million figure may be more suggestive than other figures of the population abroad, given the three generational migration groups recognized by the literature on political history and migration from Uganda.

 

The mobility of labor abroad has been accompanied by a series of economic relationships that migrants establish with their home country. These relationships include exchanges such as phone calls, importation of home country goods, remittance transfers to their families, or investment in real estate or small businesses. In the case of Uganda, data, statistical records, or evidence of these types of relationships is unknown.

 

Although the validity of the statistics is still under consideration the inbound remittances to Uganda tripled from 2005 to 2007 to nearly US$900 million, representing 10% of the country’s GDP and approximately 800,000 person to person transfers. As a result the 2007 Bank of Uganda estimate yielded US$476 million. Using data from money transfer companies, the average remitted is US$350 at a frequency of 9 times a year (for a total of US$3150 per year), a situation that may yield a lower number of person to person transfers.

 

The money transfer business to facilitate easy transfer of remittances from abroad was addressed by liberalization of the foreign exchange transactions in the later years of 1980s. Diaspora Ugandans may wish to participate and establish this business in our country.

 

Marketplace dynamics for remittance transfers in Uganda

Uganda’s licensed marketplace for money transfers is predominantly dominated by the two largest money transfer operators (MTOs), Western Union and MoneyGram, and distributed by banks as agents in collaboration with microfinance institutions as subagents, as well as foreign exchange bureaus (both as agents and subagents). On the remittance origination side, the remittance landscape is not competitive, and in the payout destination, there are more players participating but there is room for more competition.

 

Money Transfer Regulatory Framework:

The regulatory environment governing money transfers in Uganda is led by foreign exchange laws. The Exchange Control Act of 1964, which established controls on foreign exchange inflows and outflows, has been progressively amended. It allowed foreign exchange bureaus to operate and, after 1997, allowed liberalized funds transfers. Currently, the Foreign Exchange regulation of 2006 established who is allowed to obtain a money transfer license. The regulation establishes various classes of licensed institutions and requirements. In section 15 (3) the law stipulates the classes:

(a) Class A—International Money Transfer Agency Licence; (b) Class B—Forex Bureau and Money Remittance Licence; (c) Class C—Direct Entrants Licence; or (d) Class D—Sub‐Agency Licence.

 

To obtain a license, a company must exhibit:

(i)a clear license to operate in the base country; (ii) a good track record of conducting money remittance business; (iii) a recommendation from the regulatory authority in the base country; (iv) a minimum paid ‐up share capital of two thousand and five hundred currency points; (v) the ability to comply with all applicable anti‐money laundering and combating of financing of terrorism standards and measures; (vi) acceptable Agency Agreements.

 

To date, in addition to the main banks there are 35 licensed companies paying remittances. The large majority of businesses are paying for Western Union and MoneyGram. There are also other MTOs operating in the country such as Coinstar, Salabed International, and DahabShill.

 

According to a 2010 Bendixen’s survey, remittances through MTOs and banks are 70% of the total market. Diasporas need to know the following facts to build confidence and realize the strength of the financial remittances and transactions in the Ugandan economy:

 

  • Twelve percent of Ugandan households receive remittances in amounts of over US$200 per transfer;
  • At least US$700 million per year, or a little over 800,000 transfers per month, are going into the country;
  • Money transfers from the main MTOs may be originating some 200,000 person to person transfers from the United States and the United Kingdom each month;
  • Banks and foreign exchange bureaus are the main licensed payers of remittances, followed by a network of microfinance institutions together conducting around 80% of the payments;
  • Financial intermediation is an important factor considered among banks while performing money transfers, yet practical knowledge or metrics of how many remittance recipients are being benefited are missing;
  • More than 50% of remittance recipients are saving, but they are more likely to be doing so outside of financial institutions.
  • Sensitization is ongoing by tehUganda Communications Commission for communities to learn about outbound transfers with focus on rural areas and cross‐border flows.

 

Way Forward:

 

Government formed a Diaspora office in the Ministry of Foreign Affairs that is to coordinate activities of the Ministry with those of the Ministries of Trade, and Finance.

 

Diaspora Bond: Bank of Uganda (BOU) finalized a feasibility study for the Diaspora bond and it could be auctioned later this year. This is a method to ensure secure investment by purchase of Bank of Uganda Bonds or Treasury Bills. The investment compendium and the Diaspora bond will be important for the Diaspora to start investing locally. This arrangement will address most of the constraints that Ugandans abroad face when investing home

 

Ugandans abroad should use the compendium to earmark areas of investment back home. Foreign missions will supplement downloadable copies on the Ministries of Trade, Foreign Affairs and the Uganda Investment Authority (UIA)

 

Ugandans abroad remit close to $767m (sh1.99 trillion) back home each year. Top sources are Kenya at $326m, the UK at $176m, and the US with $87.4m accounting for over 70% of all remittances.

 

Ugandans abroad should use the compendium to earmark areas of investment back home. Foreign missions will supplement downloadable copies on the Ministries of Trade, Foreign Affairs and the Uganda Investment Authority (UIA)

 

SUMMARY – REMITTANCES FROM ABROAD

  1. Diaspora remittances are critical to the livelihoods of recipient families back home because they help in meeting basic needs. The reduction in remittances, therefore, means that a sizeable portion of Ugandans could be driven into financial difficulty.
  2. In addition, as the report notes, remittances into the country have been key to seeing the shilling rebound against the dollar – although the decline in imports can contribute immensely to this trend.
  3. Until last year, remittances from abroad had been increasing. It had been projected that Ugandans living abroad could transfer as much as $1billion in 2014. The World Bank, indeed, forecasts that as the European economies rebound, we are likely to see an increase in the remittances.
  4. The bank wishes to see financial institutions help the beneficiaries to use the money wisely. The primary impact of remittances is on the living standards of the direct remittance beneficiaries.
  5. With a saving culture promoted by financial institutions and adopted by beneficiary families for small loans for microenterprises, it is likely that the portion of remittances saved and invested would grow from current levels.
  6. BoU has strengthened its monitoring surveillance of the risks that could affect the banking system although there are no major risks to the banking system at the moment as a result of the “strong financial conditions of the banks.
  7. Arising from the assurances of a stable financial system in Uganda bigger, stronger and long-term investments should be focused by the Uganda Diaspora in the near future.

Other Issues

  1. The Brain Drain Phenomenon
  2. Human Resources as critical capital to development
  3. Diaspora Human Resource strength
  4. Diaspora Investment in the Human Resource Development in Uganda
  5. Way Forward
  • Government strategy to attract high skilled citizens in Diaspora to come to strengthen the home workforce:
  • Dual Citizenship
  • Motivation
  • Tourism – Marketing & participation in promotion of Uganda as No. 1 tourist destination

 

TOURISM

  1. Tourism has for the first time became Uganda’s biggest export earner after it fetched $1.4bn in financial year 2013/2014, up from $1.1bn the year before, according to the Central Bank’s monetary policy statement for August 2014.
  2. Diaspora workers’ remittances, long the dominant sector when it came to calculating export receipts, registered the second position, with coffee in third. Remittances from Ugandans living abroad was roughly $800m during FY 2013/2014, although the African Development Bank expects this figure to reach $1bn this financial year
  3. Uganda is regarded Africa’s best destination for birders. The country boasts of more than 1,058 bird species, accounting for 11 per cent of the globe’s total, and half of Africa’s.
  4. There are many cultures in Uganda that could be developed to become tourism attractions. Key attractions include the celebrations to mark Martyrs day every third day of June that continue to attract thousands of people. There are plans by the Uganda Tourism Board (UTB) to market it as a tourism attraction. Cultural activities such as dances, for example, akoogo and ajos dances in Teso; the circumcision ceremony (imbalu) in Mbale and others attract thousands of people.
  5. Tourism is not only about wildlife and nature. Uganda has 56 tribes and all have different cultures and heritages and all are unique. In Kenya, the Maasai are used as a tourist attraction.

Challenges

UTB has insufficient funds to effectively promote the industry. Diaspora can play a significant role in promoting Uganda as a tourist destination of choice.

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