Overview of Ethiopia’s Remittance Market

Ethiopia’s [formal] remittance inflow was estimated at 2.5 billion dollars by the NBE in 2020 and US$504 million by World Bank’s 2020 in the same year. Despite their discrepancies, both data sources show that the United States and Saudi Arabia are among Ethiopia’s top five send markets.

Ethiopia Country diagnostic by International Fund for Agricultural Development (IFAD) assesses the country’s remittance market based on research conducted between April 2021 and July 2021.

Remittance, the money migrants send to their family members in low- and middle-income countries, increased globally by 8.6% in 2021. More than 200 million migrant workers are estimated to have sent home 630 billion dollars in 2022, sustaining more than 800 million family members.

By 2030, total family remittance flows to low- and middle-income families are anticipated to exceed 5.4 trillion dollars, almost double the GDP of Africa in 2021.

The size of the global remittance market, which was estimated to be worth 701.93 billion dollars in 2020, is expected to grow at an annual growth rate of 5.7% from 2021 to 2030 to reach 1.2 trillion dollars.

Remittances are an important source of income for households in low-income countries. The main importance is poverty reduction and increasing the resilience of households. Furthermore, remittance also plays a part in improving nutrition and increasing school enrollment rates for children in disadvantaged households. Families are able to finance better housing and cope with losses and hardship better.

Ethiopia has a sizable diaspora community, with some estimates putting the figure at over 870,000. Other sources estimate that approximately 2.5 million Ethiopians live in North America, Europe, the Middle East, Australia, and Africa.

While this presents an opportunity for the country, the proliferation of informal transfer channels as a result of the exchange rate imbalance is reducing inflows.

Ethiopia’s [formal] remittance inflow was estimated at 2.5 billion dollars by the NBE in 2020 and 504 million dollars by World Bank in the same year. Despite their discrepancies, both data sources show that the United States and Saudi Arabia are among Ethiopia’s top five send markets.

Between 29% and 78 % of inbound remittances in Ethiopia are estimated to flow via informal channels. Reasons for the use of informal remittance services are:

  • favorable parallel market exchange rates;
  • lack of access to (formal) services in the send and receive markets;
  • high direct and indirect costs associated with formal channels, irregular migration; and
  • regulatory barriers for undocumented migrants.

According to the report, the penetration of formal financial access points is low, and many financial access points do not provide cross-border remittance services. MFIs have good rural reach but must partner with banks for international remittances.  Most banks and MFIs have not taken advantage of this, and no known MFIs are acting as bank sub-agents.

Post offices could be included in the international remittances ecosystem as they have wide national coverage and are already used for local remittances. In addition, Informal and semi-formal services could be leveraged to improve formal financial access.

There is an embryonic opportunity to use mobile money for remittance access and financial inclusion. However, there is a need for more operators. Further, the regulatory environment does not allow mobile money players that are not partnered with a bank to facilitate international remittances.

Ethiopia has had one of the most highly controlled financial sectors in sub-Saharan Africa with a complex regulatory framework. The NBE regulates the remittances sector through a series of directives issued by its Foreign Exchange Monitoring and Reserve Management Directorate.

“The NBE stringently regulates the foreign exchange market in the formal sector with remittances only cashed out in birr and outbound cross-border remittances not permitted. Informal operators however allow foreign exchange payments, including outbound, at favourable rates than the formal market.” Reads the report.

Out of cross-border remittances sent to Ethiopia via formal channels, over 90% are collected as cash pickups. A few are transferred into bank accounts and via mobile money.

Remittance-linked products are few and sender focused. There is limited innovation in remittance cash-out options. High demand for foreign currency favors diaspora-focused products.

“Recent developments in the market, including regulations that are opening up the financial environment and some promising partnerships, are anticipated to bring more innovation to the Ethiopian remittance market.”

Ethiopia is outside the seven Platform for Remittances, Investments and Migrants’ Entrepreneurship in Africa (PRIME Africa) target countries, an initiative to reduce remittance transfer costs and enhance financial inclusion. The publication has identified several priority policy actions to help Ethiopia achieve the PRIME Africa goals. These include:

  • Updating data available on both formal and informal remittances and sharing them in a more accessible manner. 
  • Sustaining gains made during the COVID-19 pandemic toward the adoption of digital channels to reduce cash dependency.
  • Incorporating use cases to the National Financial Inclusion Strategy (NFIS) Phase II and the National Digital Payments strategy, such as supporting remittance-based savings and loans that are attractive to new entrants into formal financial services.
  • Supporting payment service providers in capacity-building, especially smaller ones that are closer to rural populations. 
  • Reducing costs by supporting non-bank remittance service providers (RSPs) and through targeted customer awareness. 
  • Leveraging opportunities to offer services targeting remittance beneficiaries and capitalize on the work done on diaspora accounts.
  • Increasing stakeholder coordination across the country. 

Read the full publication here.

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