top of page
  • Charles J.

The Role of Remittances in Liberia's Economy



Liberia's balance of payments, which includes the flow of remittances, provides significant information on the country's financial reliance on external support. According to data from the World Bank, remittance inflows to Liberia reached USD 424 million in 2020, accounting for approximately 12.3% of the country's GDP (World Bank, 2021). The importance of these inflows cannot be understated, as they contribute to economic stability and have a noticeable impact on household income, poverty alleviation, and investment.


One way to better comprehend Liberia's dependence on external financial support is to compare remittance inflows with other sources of external financing, such as foreign direct investment (FDI) and official development assistance (ODA). In 2020, Liberia received USD 225 million in FDI and USD 579 million in ODA (World Bank, 2021). While remittances constituted a smaller share of total external financing compared to ODA, they surpassed FDI by a considerable margin.


The economic impact of remittances in Liberia is multifaceted. On the micro level, remittances improve the quality of life for recipient households by supplementing their income. A study by Adams and Cuecuecha (2013) found that a 10% increase in remittances led to a 3.5% decrease in the poverty headcount ratio. Moreover, households receiving remittances were found to have higher levels of investment in education, health, and small businesses.


On the macro level, remittances contribute to Liberia's foreign exchange reserves, improving the country's balance of payments and potentially stabilizing the exchange rate. However, overreliance on remittances may expose the economy to external shocks, such as economic downturns or political instability in remittance-sending countries (Ratha et al., 2020). In addition, remittance inflows can lead to appreciation of the real exchange rate, which might hurt the competitiveness of Liberia's exports.


Remittances play a critical role in Liberia's economy, particularly in terms of poverty alleviation and investment. While they provide a valuable source of external financing, Liberia's dependence on remittances also exposes the economy to potential external risks. Policymakers should consider strategies to diversify the country's sources of income and promote sustainable economic growth, while also leveraging the benefits of remittance inflows.


Remittances are a significant source of foreign exchange for Liberia. In 2022, remittances inflows reached $1.2 billion, according to the World Bank. This was up from $900 million in 2021.


The main drivers of remittances in Liberia are the country's large diaspora population. Liberians living abroad send money back to their families and friends in Liberia on a regular basis. The main reasons for sending remittances are to support family members, to invest in businesses, and to save for the future.


Remittances have a positive impact on the Liberian economy. They help to boost economic growth, create jobs, and reduce poverty. Remittances also help to stabilize the Liberian currency, the Liberian dollar.


The government of Liberia is aware of the importance of remittances. The government is taking steps to encourage more remittances to flow into the country, such as by making it easier for Liberians living abroad to send money back home.


Impact of Remittances on the Balance of Payments

The impact of remittances on the balance of payments can be positive or negative. On the positive side, remittances can help to boost the current account balance. This is because remittances are a form of income that comes into the country from abroad.


On the negative side, remittances can lead to a decline in the value of the domestic currency. This is because when more money comes into the country, it can put upward pressure on the exchange rate. This can make it more expensive for domestic businesses to import goods and services, which can hurt the balance of payments.


The impact of remittances on the balance of payments will depend on a number of factors, including the size of the remittance flows, the economic conditions in the host country, and the policies of the host government.


Remittances can be a valuable tool for economic development. However, it is important to carefully consider the potential impact of remittances on the balance of payments. The government of Liberia is taking steps to encourage more remittances to flow into the country. However, it will take time for these measures to have an impact.


References:


Adams, R. H., & Cuecuecha, A. (2013). The Impact of Remittances on Investment and Poverty in Ghana. World Development, 50, 24-40.


Ratha, D., De, S., Kim, E. J., Plaza, S., Seshan, G. K., & Yameogo, N. D. (2020). COVID-19 crisis through a migration lens. World Bank.


World Bank. (2021). World Development Indicators. Retrieved from World Bank Data website: https://databank.worldbank.org/source/world-development-indicators

 

Get Involved

Do you have additional facts to add to this insight or have an opinion that you would like to express?


Email Us

analysis@insightsliberia.com

46 views0 comments

Comments


bottom of page