Remittance inflows and financial development: evidence from the top recipient countries in Sub-Saharan Africa

ABSTRACT

This paper utilizes a panel cointegration approach to investigate the relationship between remittances and financial development in the top remittance recipient countries in Sub-Saharan Africa. Our results point to a significant and positive long-run relationship. More specifically, the pooled-mean group estimates indicate that a one-percentage point increase in remittance inflows promotes financial development by more than one percentage point. In addition, the results support the existence of bidirectional causality between remittances and financial development in the long-run. We also find some evidence that remittance pricing has a negative impact on the long-run relationship between remittances and financial development. While the results suggest that remittance inflows promote financial development, migrant workers may be timing the foreign exchange market to remit.

KEYWORDS:

• Remittances
• financial development
• foreign exchange
• cointegration
• sub-Saharan Africa

JEL CLASSIFICATION:

• F24
• F31
• G20
• O16

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For instance, Woodruff and Zenteno (2007), Yang (2008), Bansak and Chezum (2009), and Alcaraz, Chiquiar, and Salcedo (2012) report a positive impact of remittances on investment, whereas Durand et al. (1996), Brown and Ahlburg (1999), Acosta, Lartey, and Mandelman (2009), Combes and Ebeke (2011), and Donou-Adonsou and Lim (2016) find a positive effect on consumption and no significant effect on investment. Regarding the effects on income and growth, Ramirez and Sharma (2008), Catrinescu et al. (2006), Mundaca (2009), Pradhan, Upadhyay, and Upadhyaya (2009), and Lim and Basnet (2017) find that remittances have positive influences on economic growth. Other studies, including those by Chami, Fullenkamp, and Jahjah (2005), Gupta (2005), Faini (2007), Barajas et al. (2009), Singh et al. (2011), and Donou-Adonsou and Lim (2016) indicate that remittances have insignificant or even negative impacts on growth. Gupta, Pattillo, and Wagh (2009) find evidence that remittances have poverty reduction effects in Sub-Saharan Africa. Still, other research suggests that the beneficial effects of remittances depend on the strength of the financial system (Giuliano and Ruiz-Arranz 2005; Bettin and Zazzaro 2012) or the quality of institutions (Ramirez and Sharma 2008; Singh et al. 2011).

² The real exchange rate is defined as the official exchange rate multiplied by the US CPI divided by the domestic CPI. Data for the official exchange rate, the US CPI, and the local CPI come from the World Development Indicators.