Impact of migrant workers' remittances on East African economies

Abstract

Migrant workers’ remittances are a large source of external funding to many poor countries and their receipts to developing countries reached United States Dollars (USD) 240 billion in 2007 (Ratha and Mohapatra, 2007). However, harnessing of remittance receipts for development remains a challenge for East African (EA) economies. Besides, there are also concerns over whether remittances have significant and positive impacts on national output and financial sector growth. Therefore, the study was set up with the purpose of examining whether remittance inflows are driven by investment motives and contribute capital for economic development in the East Africa countries. The study sought to achieve the following objectives: determining the major macroeconomic factors influencing remittance inflows in EA, establishing the impact of remittances on national output and establishing the impact of remittances on financial sector growth.

Panel data was compiled over a period of 21 years (1987 – 2007) for Kenya, 13 years (1995 – 2007) for Tanzania and 10 years (1998 – 2007) for Uganda. Data sources included: World Development Indicators for the remittances, while other variables were obtained from the International Financial Statistics database of International Monetary Fund and the United Nations Statistics Division Common Database for the years. Results indicated that per capita GDP, lagged remittances, domestic real interest rates, and economic activity in developed countries were the major determinants of remittance inflows in East Africa. Remittances were also found to positively and significantly affect both output and financial sector growth. It was then concluded that investment motives rather than mere altruism dominate migrants’ decisions to send remittances and these financial inflows could be a source of capital for economic development in East Africa. It was recommended that governments in East African region formulate policies that increase remittance inflows and streamline their formal remittance transfers.