Remittance at Risk: What a U.S Levy Means for The Gambia

1. The Context 

According to the United Nations Network on migration, an estimated 10 percent of The Gambia’s total population were living abroad in 2023 in search of better opportunities[1]. Over the past decade, private remittance inflows to the country have more than doubled. Data from the Central Bank of The Gambia (CBG) show that official remittance inflows rose from US$174.1 million in 2009 to US$329.8 million in 2019 (Joof and Touray, 2021)[2]. To put this in context, these figures respectively represent 12 percent and 18 percent of the country’s GDP in 2009 and 2019. This placed the country among the highest recipients of remittances in sub-Saharan Africa when compared to the size of the economy. It is important to emphasize that data reported by the authorities only represent inflows that pass through the official channel which hugely understates total remittance figures. It is evident that a substantial amount of unreported diaspora money flows through the unofficial channel that is not captured and difficult to estimate.

This upward trend was initially expected to be disrupted following the COVID-19 pandemic, which brought severe economic consequences—particularly in wealthier nations that serve as the primary sources of remittances. Consequently in 2020, the World Bank projected a dramatic 20 percent decline in global remittance flows as a direct result of the crisis, attributing the drop mainly to falling wages and rising unemployment among migrant workers during the pandemic.

However, several months into the pandemic, data revealed a surprising trend: The Gambia, like many developing countries, experienced a remarkable surge in remittance inflows. Gambians in the diaspora sent a record US$589.8 million in 2020—representing a staggering 78.8 percent increase from US$329.8 million in the previous year (Joof and Touray, 2021). This unprecedented growth in officially statistics remittances is attributed to several factors. Notably, the improvement in data collection by the Central Bank, both in terms of methodology and coverage as more money transfer agents get registered. Additionally, international travel restrictions imposed during the pandemic disrupted informal transfer channels, redirecting remittance flows through formal systems.

Few years after the pandemic, private remittances continue to be The Gambia’s largest source of foreign currency, with total inflows reaching US$775.4 million in 2024. These funds not only provide a critical lifeline for household consumption but also serve as a crucial source of foreign exchange, stabilizing the country’s balance of payments. Thus, any policy change affecting remittance flows could have profound implications for The Gambia. What will the recent propose 5% levy on private remittances by the United State of America mean for The Gambia?

2. The 3.5% Levy on Remittances: A Game Changer?

The United States, a significant source of remittance inflows to The Gambia, has passed a 3.5% levy on remittance outflows, this policy could have far-reaching effects on The Gambia’s economy. The immediate impact would likely be a decline in the volume of remittances sent through formal channels, as the cost of remitting funds would increase. This, in turn, could push more remitters to seek informal, unregulated channels to avoid the levy, leading to greater informality and reduced foreign exchange inflows through the official financial system.

3. Potentials Implications
   1. Reduced Foreign Exchange Inflows: Funds sent through informal channels are less likely to enter the formal banking system, reducing foreign currency availability and potentially exacerbating exchange rate volatility. Furthermore, given that The Gambia is an import-dependent economy, the decline in foreign currency inflows could exacerbate trade currency depreciation and intensify inflationary pressures.
   2. Surge in Informal Channels and Potential Risks

As the cost of formal remittances increases, many Gambians in the diaspora may turn to informal channels, such as hawala systems, personal couriers, or unregulated digital platforms, to bypass the levy. While these channels may offer lower costs, they present several risks:

• Data Gaps: Transactions through informal channels are difficult to track, leading to underreporting of remittance inflows and reduced transparency in financial flows.

4. Strategic Responses for The Gambia

To mitigate the potential fallout from the US remittance levy, the Gambian government and CBG could consider several strategic measures:

• Leverage Fintech Solutions: Partner with fintech companies to develop cost-effective, accessible remittance platforms that can compete with informal channels.
• Diversify FX Sources: Expand export-oriented sectors such as agriculture and tourism to reduce overreliance on remittances as a primary source of foreign exchange.

• 5. Conclusion

The 3.5% levy on remittances poses a significant threat to The Gambia’s economic stability, with potential ramifications for foreign exchange inflows, exchange rate stability, and poverty levels. Proactive measures by the Gambian authorities, including financial inclusion initiatives, enhanced regulation of informal channels, but also promote the growth of export-oriented sector like agriculture and tourism. This will be critical in mitigating these adverse effects and ensuring the continued flow of remittance funds into the formal financial system.