Not yet Uhuru! Leakages and the Limitations of Remittances as an Alternative to Conventional Sources of Development Finance in Nigeria

As the search for alternative financing for development continues, attention has recently been paid to remittances as a potential substitute (or at least significant complement) to conventional official and private flows. However, its ability to fit into this role depends a lot not only its size (which is acknowledged to have grown significantly in recent years), but also to what use it is put. Unlike many other sources of external financing, remittances come in small packs and their use depends critically on decisions by micro agents. Consequently, to understand its impact and its potential for filling the financing need of developing countries as hoped by many analysts, there is need to evaluate how it interacts with the rest of the economy. This study sets out to do that; by evaluating the relationship between remittances flows and the rest of the economy. To do so, it specifies and estimates a four-sector medium scale macro model with 49 variables comprising of 18 endogenous variables, 31 exogenous variables and 14 identities. It found very weak link between remittances and the real sector as well as components of aggregate demand with the exception of private consumption for which impact is marginally significant. Estimates indicate significant leakages for remittance proceeds through imports, possibly accounting for the weak relationship between remittances and the rest of the domestic economy. This also implies that relative spill-over effects of remittances on domestic output and employment might remain weak if not redirected using specific policies. There are indications that non-subsistent remittances are channelled into the stock market, further entrenching the financial supermarket tendencies in the Nigerian economy. Interestingly, such relationships do not seem to impact prices. In turn, however, it could not be confirmed that any major domestic macroeconomic variables drive remittances. Overall, the study finds that the impact of remittances on domestic indices is weak on account of high leakages through imports. Consequently, it is largely unable to serve as a sustainable source of development finance. The study recommends use of specific and directed incentives to both reduce the leakages and encourage investments of remittance proceeds in other (preferably real sector) alternatives as a specific developmental programme.