Potential Tax on US Remittances Could Impact African Economies and Established Transfer Methods
In a significant development, a 1% tax on money transfers from the United States to other countries, set to take effect from January 1, 2026, is projected to have a substantial impact on African economies. This tax, part of the "One Big Beautiful Bill" signed by US President Donald Trump on July 4, 2021, comes as remittances play a crucial role in many African countries, accounting for nearly 6% of the continent's GDP in 2023[1].
The proposed tax is expected to reduce the volume of money sent, as analyses show that a 1% increase in remittance costs typically leads to a 1.6% drop in remittances sent[2]. The hardest hit countries are likely to be major remittance recipients such as Nigeria, which faces a potential loss of $168.2 million, followed by Egypt with $54.15 million, Kenya with $38.11 million, and Ghana with $33.63 million[1].
The reduction in remittances could lead to reduced income for households in these countries, which rely heavily on remittance inflows for consumption and investment. The tax may also increase the likelihood of remittance senders and recipients turning to informal, less secure channels to avoid the tax, raising risks of fraud and loss, and reducing financial transparency and formal credit-building opportunities[1][3].
Moreover, remittances often surpass foreign aid and investment in their importance, so losses here are more damaging than equivalent cuts in aid[2][4]. This could exacerbate economic vulnerability in African countries, potentially leading to diminished foreign exchange, weaker consumer spending, and a decline in household investments.
The tax also poses a threat to formal money transfers in African economies, potentially pushing funds toward informal and risk-prone channels. This could slow economic development in African countries, particularly as remittances have been seen as a critical and growing form of private external finance that could be leveraged for economic growth and poverty reduction (e.g., through diaspora bonds)[1].
It's important to note that the tax disproportionately harms the poorest populations who depend on these funds for basic needs[3]. The tax also contradicts the United Nations’ goal to reduce remittance costs to 3% by 2030 to foster development in low-income countries[4].
In conclusion, the new US tax on outbound remittances is expected to reduce remittance volumes, decrease household incomes, push money transfers toward risky informal channels, and slow economic development in African countries. The hardest hit are likely to be major remittance recipients such as Nigeria, Kenya, Egypt, and Ghana. The broader impact on African economies could be severe, and it's crucial to consider these potential consequences when evaluating the implications of such policies.
References:
[1] Dilip Ratha, Senior Economist at the World Bank, in a statement on remittances and development. [2] A report by the Center for Global Development on the impact of remittance taxes. [3] Ibid. [4] The United Nations Sustainable Development Goal 10.c on reducing remittance costs.
The new US tax on outbound remittances may lead to increased usage of informal, less secure channels, potentially raising risks of fraud and loss, and reducing financial transparency. This tax could also have a detrimental effect on household incomes in African countries, particularly in major remittance recipients like Nigeria, Kenya, Egypt, and Ghana.
The proposed tax contrasts with the United Nations' goal to reduce remittance costs, potentially exacerbating economic vulnerability in African countries and hindering economic development, particularly as remittances serve as a critical form of private external finance for economic growth and poverty reduction.
