Potential U.S. Remittance Tax Impacts Informal and Formal African Money Transfer Systems and Stirs Economic Concerns
The United States has introduced a new tax on money transfers to other countries, effective from January 1, 2026. This 1% tax on remittances is expected to reduce formal money transfer volumes, potentially diverting funds to informal channels.
This tax could have significant impacts on African economies, which rely heavily on remittances. In 2023, Africa received $100 billion in remittance inflows, accounting for nearly 6% of its GDP. The tax may reduce these inflows by hundreds of millions of dollars yearly, worsening poverty and weakening resilience, especially as official aid declines globally.
One key impact of the new tax is a decline in formal remittance volumes. The additional 1% fee raises transfer costs, which research indicates leads to reduced formal remittance flows since senders seek cheaper alternatives or reduce amounts sent. Informal channels, which are riskier and less transparent, could increase as a consequence, undermining formal financial systems.
The economic effects on African countries could be severe. Remittances in Africa are critical for household consumption, education, and health. The tax may reduce these inflows, threatening development and economic stability. Experts warn that the tax could hinder progress toward sustainable development goals by diminishing a vital financial lifeline. Lower remittance inflows affect recipient households and can depress broader economic activity in low- and middle-income countries dependent on diaspora funds.
There is uncertainty about whether the 1% tax will primarily be absorbed by senders or spur significant shifts away from formal channels. This uncertainty creates challenges for recipient countries' planning and could encourage alternative informal transfer methods, which typically mean higher costs and risks.
The World Bank's Senior Economist, Dilip Ratha, suggests using tools like diaspora bonds to leverage remittances for development. The Center for Global Development (CGD) projects that the proposed tax could reduce remittance volumes by 1.6%. The US President, Donald Trump, signed a comprehensive budget law named "One Big Beautiful Bill" on July 4, 2024, which includes the tax on money transfers as part of a broader deal to finance immigration and homeland security initiatives.
The potential impact includes diminished foreign exchange, weaker consumer spending, and a decline in household investments that could worsen existing economic challenges. In sub-Saharan Africa, the average fee for sending $200 was 7.9% in Q4 2023, a rise from 7.4% the previous year. The proposed 1% tax on money transfers would be an additional burden on top of existing charges by remittance services such as Western Union and MoneyGram.
The US is a primary origin of remittances to many African nations, including Kenya and Nigeria. Nigeria faces the largest potential loss at $168.2 million, followed by Egypt with $54.15 million, Kenya with $38.11 million, and Ghana with $33.63 million.
In conclusion, the new US remittance tax is poised to threaten formal money transfer systems and reduce total remittance volumes flowing to Africa. This could harm development and economic stability by forcing some funds into informal, riskier transfer mechanisms and shrinking crucial financial inflows at a time when African economies heavily rely on these funds.
The new US remittance tax, scheduled to be implemented in 2026, could lead to a shift from formal to informal financial channels in Africa, as senders seek cheaper alternatives to cover the additional costs. This shift could potentially weaken business operations and impact politics in Africa, as the reduced remittance inflows might hinder progress towards sustainable development goals and exacerbate economic instability.
The tax might also have a profound impact on the general news landscape, as Africa's reliance on remittances, which account for nearly 6% of its GDP, could be significantly affected, with potential consequences for household consumption, education, and health. Consequently, the tax could lead to increased poverty and weaken resilience, particularly in regions where official aid is declining.
