Impending U.S. Remittance Tax jeopardizes African economies and established formal transfer systems
The impending 1% tax on money transfers, set to take effect on July 4, 2026, is expected to have significant negative impacts on African economies. This tax, a part of the "One Big Beautiful Bill" signed by President Donald Trump, adds a new cost on top of existing fees charged by remittance services like Western Union, making formal transfers more expensive for senders, particularly those sending money from the US—Africa's primary remittance source.
In 2023, Africa received about $100 billion in remittances from the US, accounting for nearly 6% of its GDP. These remittances are crucial for household consumption and economic stability. The added cost threatens to reduce the volume of formal remittances and may push funds toward informal channels that are unregulated, riskier, and harder to track.
A report by the Center for Global Development projects that the proposed tax could reduce remittance volumes by 1.6%. The informal channel shift occurs because informal remittances—often delivered in cash by hand or trusted couriers—are not subject to this tax or regulatory costs, making them attractive alternatives. However, informal transfers increase risks such as loss, fraud, and potential misuse for illicit activities.
The consequences for African economies include reduced official remittance inflows, which are vital for families’ basic needs like food, healthcare, and school fees. Lower foreign currency reserves affect the ability to import goods and service debt. There may be disruption in the formal financial sector that benefits from remittance flows and associated financial inclusion efforts. The tax undermines potential development opportunities that arise from leveraging remittances for broader economic purposes, such as diaspora bonds or investment channels.
In sub-Saharan Africa, the average fee for sending $200 increased from 7.4% in Q3 2023 to 7.9% in Q4 2023. The tax on money transfers may push funds toward informal and risk-prone channels, potentially posing a threat to formal money transfers in African economies.
Notably, 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. Remittances remain an important source of private external finance projected to grow in the years ahead.
Dilip Ratha, Senior Economist at the World Bank, stated that remittances should be more actively leveraged to support development. Despite the US federal government generating only limited revenue from the tax, the broader impact on African economies could be severe.
[1] Center for Global Development. (2024). The Impact of the US Remittance Tax on African Economies. [3] World Bank. (2024). Remittances and Development: Leveraging Private External Finance for Growth.
The proposed 1% tax on money transfers could lead to a shift from formal remittance channels to informal ones in African economies, as these channels are not subject to the tax or regulatory costs. This shift could negatively impact development opportunities, such as diaspora bonds or investment channels, that leverage remittances for broader economic purposes.
The reduction in formal remittance volumes, due to the added cost and potential shift toward informal channels, could have severe consequences for African economies, affecting families' basic needs, foreign currency reserves, and the formal financial sector.
