By Ibrahim Kasita

UGANDA’S household poverty levels have reduced and the economy has grown mainly due to money sent by Ugandans in the diaspora.

According to The State of Uganda Population Report 2008, the number of people living below the poverty line decreased to 31% in 2006 from 56% in 1992 and health services improved dramatically.

Economists say the money sent by kyeyos (Ugandans working in the diaspora) contributed to this achievement.

Estimates from the central bank show that from 2000 to 2007, remittances averaged $341.2m per annum, almost equivalent to foreign direct investments that averaged $345.5m during the same period.

“Remittances during the financial year 2007/08 hit sh1.9 trillion,” the central bank’s governor, Emmanuel Tumusiime Mutebile, added.

“Nkuba kyeyos invest heavily in housing, education and health,” he said.

Mutebile says remittances play an important role in poverty reduction, not only through increased household purchasing power for essentials like food, housing, education and health but also as a source of insurance from economic downturns.

According to the World Bank brief: “Migration and Development,” “Despite a sharp deceleration in growth in the third quarter of 2008, recorded remittances to developing countries are estimated to reach $283b in 2008 compared to a revised $265b in 2007.”

The report said the slowdown is expected to deepen further in 2009 in response to the global financial crisis although the exact magnitude of the reduction is hard to predict given the uncertainties about global growth, commodity prices and exchange rates.

“This decline, however, is smaller than that of private or official capital flows, implying that remittances are expected to remain resilient between now and 2010 relative to many other categories of resource flows to developing countries,” observes the report.

“As developing countries face severe fall-offs in financing and investment, remittances are increasingly being viewed as an important source of finance for development,” the brief revealed.

While capital flows tend to rise during favourable economic cycles and decline in bad times, remittances tend to be counter cyclical relative to recipient countries’ economic cycles.

Remittances are also a less volatile source of foreign exchange for developing countries. The report points out that remittances already make up a large share of the gross domestic product (GDP) of several countries like Tajikistan (45%), Moldova (38%), Tonga (35%), Lesotho (29%) and Honduras (25%).

But some sectors and corridors are expected to be more affected by the financial crisis such as construction related remittances moving from the US to Mexico or from the Gulf states to South Asia, Africa or other Middle Eastern countries.

Also, it is still unknown whether countries will shift policies to shut out migrants or force them to return home.

Economic experts suggest that developing countries can tap the wealth of their diaspora natives through bonds or other financing instruments to raise capital.

They say this relatively stable population often has a higher income than their home country’s GDP. Israel has issued diaspora bonds for more than 50 years, raising about $800m in a year. India has issued three such bonds and raised $15b.

“If remittances are a way of tapping into the income stream of the migrants, diaspora bonds are a way of tapping into the considerable wealth of the diaspora overseas,” Dilip Rath, a leading World Bank economist, observed.

“The advantage of such bonds is migrants and diasporas have a different risk perception of the home country than investors.”

Whereas the goal of foreign investors is to make money, migrants generally send money home to help support relatives or for philanthropic reasons.

“There are patriotic, nostalgic reasons the diaspora might buy such bonds. They view the country in a more positive light than others. They also have a need for local currency. The risk of devaluation (of the currency) does not affect them as much as it does other investors,” Ratha explains.

In addition, the Bank of Uganda governor says the growing importance of remittances in the balance of payments calls for urgent mechanisms to resolve the challenges in order to seize the benefits, while minimising the risks to the nkuba kyeyos.

“It is incumbent upon the Government and Bank of Uganda to establish the legal, institutional governance and financial infrastructure to support the safety and effectiveness of remittances,” Mutebile said.