Africa received an estimated US$91.1 billion in remittances in 2023, more than it attracted in official development assistance or foreign direct investment. Yet those flows have not automatically translated into stronger domestic revenue. The reason, according to research by Dr Torcia Chanelle Banengai Koyama, is that remittances work only as well as the institutions and financial systems around them.
Dr Koyama, a researcher at the United Nations Economic Commission for Africa in Ethiopia, examined the relationship between institutional quality, remittances and domestic resource mobilisation in 49 African countries. Her central finding is straightforward: remittances can support domestic revenue, but stronger institutions determine whether that potential is realised.
The financing problem
African governments face a difficult combination of high debt, rising development needs and less reliable external finance. Official development assistance, foreign investment, trade flows and borrowing are either declining, insufficient or too unpredictable to support long-term priorities such as national development plans, the African Union’s Agenda 2063 and the Sustainable Development Goals. That has made domestic resource mobilisation a strategic priority, confirms her research.
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The paper notes that domestic revenue increased from about 86% of total government revenue in Africa in 2005 to 93% in 2022, largely because of higher tax revenue. But Africa still mobilises less domestic revenue than several other regions. Tax revenue accounts for roughly 75% of domestically generated public revenue in Africa. That makes the quality of tax administrations, not merely tax rates, central to the continent’s fiscal future.
Remittances are not automatic tax revenue
Remittances support household consumption, savings and investment. They also help families withstand economic shocks. But the money sent home by migrants does not automatically expand the tax base. Its fiscal effect depends on what happens after the money arrives, according to the study.
Remittances used for consumption may contribute indirectly to value-added tax collection. Funds invested in businesses can generate employment, taxable income and new economic activity. Money held outside formal financial channels, however, is less likely to contribute to investment, business growth or a broader revenue base.
Dr Koyama’s analysis found that remittances had a positive effect on domestic resource mobilisation where consumption and investment levels were higher. The same effect was not observed where both remained low. The institutional environment was even more decisive. In countries with stronger institutions, remittances had a positive and significant effect on total revenue, tax revenue and non-tax revenue. In countries with weaker institutions, that relationship was not evident. “For countries to really benefit from remittances, the quality of institutions should be improved,” Dr Koyama said.
Four policy moves
The study points to four practical priorities for African governments. First, institutional reform should become part of revenue policy. Governments should stop treating governance reform as a separate, long-term aspiration and recognise it as a direct condition for better tax collection. That means improving the credibility, independence and effectiveness of revenue institutions. Taxpayers are more likely to comply when tax rules are administered fairly, public agencies are competent and collected revenue is managed responsibly.
Second, governments should improve the quality of tax administration. Reform should focus on taxpayer services, compliance systems, enforcement and the ability to use data effectively. Stronger administration can reduce leakages, make compliance easier and increase confidence in the tax system.
Third, remittance transfers should become cheaper and more formal. High transfer costs reduce the amount received by families and discourage the use of regulated financial channels. Governments should expand competition among remittance providers, improve digital payment systems and widen access to formal banking and other financial services.
Fourth, policies should encourage productive use of remittances. This does not mean directing household money by force. It means creating credible opportunities for savings, small-business finance, investment and entrepreneurship. Financial literacy, accessible credit and suitable investment products could help recipients move some remittance income from short-term consumption into productive activity.
The institutional test
The research used revenue data from the World Revenue Longitudinal Database, remittance data from the World Bank’s World Development Indicators and governance indicators from the World Bank’s Worldwide Governance Indicators. It examined total revenue, tax revenue and non-tax revenue, using statistical methods designed to address the possibility that the relationship may run in both directions: stronger institutions may improve revenue, while stronger revenue may also help governments build better institutions.
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The results support the view that remittances alone are not a fiscal strategy. They become a broader development asset when they operate within an environment of reliable institutions, formal finance and productive investment. The study also cites African Development Bank estimates that Africa could mobilise as much as US$1.4 trillion from fiscal, natural, financial, business and human capital if institutional capacity were significantly strengthened.
That figure illustrates the scale of the opportunity, but also the risk of focusing on money flows without fixing the systems that govern them. Africa’s remittances are already large. The policy question is whether governments can build the trust, financial access and institutional capacity needed to turn those private transfers into wider economic growth and more sustainable public finance. The conclusion from Dr Koyama’s research is clear: the path from remittances to domestic revenue runs through institutions.