The magnitude of the informal remittances flow to Kenya: an augmented gravity model approach
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Date
2025-03
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Kenyatta University
Abstract
Global remittances reached an estimated $860 billion, with Low and Middle-Income Countries receiving over $669 billion in 2023. Despite being outdone by Official Development Assistance, remittances are a much larger financial boost for developing countries compared to Foreign Direct Investments. However, high transfer costs and the use of informal channels hinder the full impact. In Kenya remittances are now a proper source of external finances. Kenya received $4.19 billion in form of diaspora remittances. Over the years, remittances are proving to be more stable, well diversified and are promising more growth relative to Foreign Direct Investments, Official Development Assistance, private capital and exports. On the micro scale the remittances are helping achieve Kenya’s developmental goals of having a globally competitive human resource and an adequately and decently housed population as outlined in the country’s development blueprint - The Kenya Vision 2030. Though the remittances are these important, official remittance data in Kenya, as well as in many African countries, only include remittances sent through formal channel, that is, banks and Money Transfer Operators. Remittances through the informal channels such as hawalas and hundis are not recorded. This means that the recorded remittances are grossly understated impeding the capacity of policy makers to design appropriate policies aimed at encouraging remittances. This study therefore, is seeking to establish the magnitude of informal remittances in Kenya and to examine how economic conditions influence remittances to Kenya. To achieve this objective, the study employed panel data analysis and a thought experiment on remittance data between 2013Q1 and 2022Q4. Through a thought experiment, the study asks what impact a reduction of the costs of sending remittances would have on remittances if the transaction costs were reduced to that of the informal channels of sending remittances. The analysis revealed that the size of the informal remittances in Kenya is between 20% and 26% of the formal remittances. On the determinants of remittance flows to Kenya, the study establishes that Kenyans in diaspora remit more when the economic freedoms and economic conditions improve in their host nations but send less when economic freedoms back at home improve.
Description
A research project submitted to the department of economic theory in the school of business, economics, and tourism in partial fulfillment of the requirement for the award of the degree of Master of Economics (Policy and Management) of Kenyatta University, March 2025
Supervision:
Dr. Jackson i. Mdoe