Abstract

The study examines the influence of remittances on the economic growth of Cameroon. The model specifies economic growth measured by gross domestic product as dependent on remittances proxy to gross fixed capital formation, exchange rate, foreign aid and foreign direct investment.

Annual time series data from 1985-2017 was the sourced using secondary data and analyzed using Ordinary Least Squared (OLS) estimation technique. It was evidenced that remittances has a significant positive effect on economic growth. Exchange rate and foreign aid have a significant effect on the economy where as gross fixed capital formation and foreign direct investments have no significant economy on economic growth of the country.

The study demonstrates that increasing remittances reaps the static and dynamic benefits, stimulating rapid national economic growth. Thus recommendations that Inflow of remittances should be increased by taking steps to develop the financial sector. Also the authorities responsible for managing Cameroons remittances should adequately keep track of the remittances obligations and the remittance should not be allowed to pass a maximum limit so as to avoid remittance overhang.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Growth of the economy and the sources of growth have been seriously debated upon. Growth is said to be determined by various factors of which remittances happens to be one of them. Remittance is a component of capital flow to a country, which is proposed to have a direct or indirect impact on economic growth. Increased globalization is a major factor that enhances massive remittance flows (Maimbo & Ratha, 2005).

The tradition of migration is largely due to labour surpluses in most developing countries many of whom are trained or skilled and are unable to get a meaningful employment and as a result tried to look for greener pastures (Fagerheim, 2015). The increased outflows of migrants is expected to be correlated with increased inflow of remittances as many of the migrants feel a sense of obligation to provide financial assistance to their family in their country of origin (Fagerheim, 2015).

In recent times, research on the role of remittances in development has surged due to increasing evidence of its positive impacts on the economies of developing countries. Despite the fact that remittances to sub-Saharan Africa have been growing at a far slower pace than those of countries in other regions, research has shown that they contribute equally positive benefits to sub-Saharan African countries.

Remittances are driven by migration. According to Tolentino and Peixoto (2011), sub-Saharan Africa has the most unstable migration flows compared with other regions in the world, although the West African sub-region has been the least volatile within the region, recording positive growth rates recorded in migrant numbers. There are many reasons why West Africans emigrate. Among them are: economic difficulties, political instability and conflicts, and increased poverty (Nyamwange, 2013).

In 2013, inflows of remittances to sub-Saharan Africa increased by 3.5% (World Bank, 2014). The increase was not distributed evenly across the continent, however. East African countries experienced significant gains in remittance inflows while those in the West Africa sub-region experienced only a marginal increase (World Bank, 2014).

Despite this, organizationally, the Economic Community of West African States (ECOWAS) ranks second in terms of the collective value of remittances in-flows by member-states falling behind the Southern African Development Community (SADC).

Research has shown that, despite the West African countries receiving relatively less in remittances, the impact of remittances on the economies of those countries has been positive (UNECA, 2013). Remittances have helped the region reduce poverty – its most pressing challenge –, supplemented household incomes, provided working capital and, above all, created multiplier effects within the economy through increased spending (UNECA, 2013).

International remittances have been recognized as an important driver of the economy of most developing countries. It plays vital roles in poverty reduction, income redistribution and economic growth, especially in rural areas. According to Hernandez- Coss and Bun (2006), Nigeria is the largest recipient of remittances in Sub-Saharan Africa.

They reported that the country receives nearly 65 percent of officially recorded remittance flows to the region and 2 percent of global flows. The Central Bank of Nigeria (CBN) reported approximately US$2.26 billion in remittances for 2004. The phenomenon of Nigerian emigrants, considered as an escape from hardship on the home front and a depletion of human capital is somehow paying off for the country.

This is in view of the revelation that Nigerians abroad grew the economy by a whopping $7billion in the year 2008 and that Nigeria is the sixth highest destination of remittances from its citizens living in the Diaspora (World Bank, 2008; The Nation, 2009).

Remittances reflect the local labour working in the global economy and have been shown to explain partly the connection between growth and integration with the world economy (Addison, 2004). Remittances enhance the integration of countries into the global economy and reflect the local labour working in the globalized economy.

Remittance has become an important source of revenue both for government through tax and fees and for households. At households’ levels, it helps increase income and consumption smoothing (Kannan and Hari, 2002; International Monetary Fund (2005), and Jongwanich, 2007); increase saving and asset accumulation (Hadi, 1999); and improve access to health services and better nutrition (Yang, 2003) and to better education (Edward and Ureta, 2001). Likewise, at village/community level, remittance income can help stimulate local commodity markets and local employment opportunities.

Remittances have proved to be less volatile, less procyclical, and therefore a more reliable source of income (for agricultural production and other household uses) than other capital flows to developing countries, such as foreign direct investment (FDI) and development aid (Gammeltoft, 2002; Ratha, 2003).

The publication of World Bank (Migration and Development Brief, 2013) reveals Nigeria as the top-remittance receiving country in Africa [Fifth in the world following India ($71 billion), China ($60 billion) Philippines ($26 billion) and Mexico ($22 billion)]. The World Bank reported that $21 billion was remitted into the country in 2013 fiscal year and predicted future increment of remittances inflow into the country. Similarly, it is noteworthy that Nigerians abroad were recorded to have remitted US$10 billion in 2010 which has put the country ahead of other African countries as the biggest recipient of remittances (World Bank 2011).

Although the World Bank has predicted increase in remittances inflow into Nigeria, the country has no extant policy to regulate its use for national development apart from the usual consumption behaviour of remittances recipient households. It is imperative to mention that in spite of the position of Nigeria as top remittance recipient country in Africa and fifth in the world in 2013 financial year, the Central Bank of Nigeria was uncertain about the actual amount of money remitted to the country due to its lack of methods to measure informal/unofficial ways through which remittances enter the country.

This suggests that remittances enter the country through informal ways and this could make the official figures a less than accurate reflection of the reality as people prefer to send remittances home at low cost, mostly through friends who are visiting their home country.

Remittances to Senegal trebled from 2002 to 2008, rising from US$ 344 million to US$ 1288 million within that period (Cisse, 2011). This growth has seen Senegal become the fourth largest recipient of remittances in sub-Saharan Africa. Further to this success, studies show that remittances entering the country through informal channels could make the figures even higher. Remittances play a key role in the economy of Senegal, contributing between 6% and 11% to its GDP, sometimes surpassing other export products and certain sectors (Cisse, 2011).

In Cameroon, international migration is known as ‘bush falling’ and this phenomenon is triggered by a number of factors including: falls in the price of primary goods in the 1980s and ‘90s, structural adjustment programmes and corruption (Atekmangoh, 2011). These factors tend to serve as a motivation for Cameroonians to travel outside their country in order to seek ‘greener pastures’. In Cameroon, the total inflow of remittances has been relatively stable and despite this financial contribution to the economy over the years, the people who usually migrate are the educated and active populace and this can have negative repercussions on the economy (Atekmangoh, 2011).

However, despite the high remittances inflow into Cameroon, the country is still struggling economically, and is yet to make judicious use of remittances like other developing countries of the world (for example, India, Bangladesh, Philippine, and Mexico).

The remittances to the Diasporas, despite being a show of attachment to the country of origin, serve as a vehicle towards the economic growth of such country. In a study carried out on the impact of migrants’ remittances on economic growth in sub-Saharan Africa with special reference to Cameroon, Nigeria, Ghana and South Africa. Ikechi and Anayochukwu (2013) state that migrants’ remittances were found to have impacted positively on the economic growth of the economies studied, though with varying degree.

In fact the main objective of the paper is that diasporas remittances has an impact on economic growth of their country of origin. Diasporas remittances not only represent a source of relief for households in meeting basic needs but also facilitate the building of resources for increased human capital through both education and health care, increased physical and financial investments in residential real estate and starting up small businesses.

From 1960 up to 1985, Cameroon experience a period of sustained economic growth. During this period, the annual rate of economic growth was around 10 per cent. From 1986 to 1994, however, the country witnessed a serious economic crisis which led to a fall of 50 per cent in GDP per head. After 1994, the year in which the CFA Franc was devalued relative to the French Franc, Cameroon recovered economic growth at the rate of about 4.5 per cent per year. (African Development Bank, 2007).

Given the growth rate of the country’s population, the growth rate of the economy in recent years has hardly been higher than 3 per cent, and it has led to a stagnation of GDP per capita.

This growth rate remains far below the targeted 6 per cent which was set in the poverty reduction strategy paper (PRSP) in 2003, and was supposed to reduce the incidence of poverty in Cameroon by 50 per cent by 2015. Source: Author’s computations based on data from Africa Development Indicators of the World Bank. It is against this backdrop that this research investigates the impact of remittance on economic growth of Cameroon.

1.2 Statement of the Problem

There is significant increase in remittances in Africa but the economic growth achieved by many African countries has not been impressive. Thus, the actual role of remittances has been an area of controversy. Cameroon has been one of the major recipients of international financial assistance. It is evident that despite this foreign financial intervention in the country‘s economy, less economic growth and poverty remain inherent for many years.

Despite this, very little work has been done to assess the effectiveness of external finance in Cameroon in order to find out whether foreign finance has been effective, or whether, in fact, the persistent poverty in such a country is not the result of the ineffectiveness of foreign financing.

The gap between domestic savings and investment is wide in developing countries. Though savings has risen steadily in real terms from (CBN Statistical Bulletin, 2015), domestic savings still fall short of investments The dearth of capital for financing developmental policies and project has been a major problem plaguing the country and has forestalled projected growth in Cameroon (Ihimodu, 2005).

Furthermore, the inability of government in Cameroon to generate sufficient foreign exchange due to heavy reliance on a mono-product export which is prone to negative price shock in the case of oil at the international market has led to many years of instability in government revenue and consequently served as checks on import demand and a constraint to effective implementation of national development plans (Adewuyi and Adeoye 2003).

This problem of inadequate capital for development financing has led the government into huge deficit financing through borrowing both domestic and external debt with domestic debt more than tripling (Migration and Development Brief, 2015).

Also, since 1990 total Overseas Development Assistance (ODA) has dropped by more than half (Sims & Lake, 2010) and foreign direct investments are dwindling. Given the above scenario greater importance is now being placed on alternative sources of finance such as remittances for national development (ECOSOC (2000); Ratha, (2003).

Remittances now represent a major part of international capital flows, surpassing foreign direct investment (FDI), export revenues, and foreign aid for many developing countries (Giuliano and Ruiz-Arranz (2005) in Bichaka and Christian (2008). The assertion by Nightingale (2003) indicates that a well-articulated remittance management regime will aid economic growth and development as an alternative source of foreign exchange earnings and as a source of liquidity and palliative for balance of payment deficit.

It is also possible that the increases in remittances is an illusion resulting from changes in measurements and may not reflect the real financial inflow. Even if the increases are accurately measured cross country regression would not be able to detect the true effects of remittances on economic growth, hence a country specific study is appropriate (Clemens & McKenzie, 2014).

The impact could be negative or positive; his impact varies from country to country. The direct and indirect impact of remittances on economic growth needs to be properly flogged. Although, the direct and indirect impact have been investigated upon to a reasonable extent. But, because remittances have its component parts too Remittances need to be disaggregated into its component parts in order to know the component that contributes effectively to economic growth

However previous studies show a lot of controversies on the impact of external finance in a developing country. The study by Abeba (2002) in Ethipia for example shows that foreign finance like aid has negative impact on economic growth while the study by Tasew (2010) and Yohannes (2011) found that aid has positive impact on economic growth.

Most developing countries especially Cameroon, are faced with low savings. This problem is intensified by low export earnings as a result of unfavorable terms of trade. Thus, the necessary funds to accelerate GDP growth are inadequate. This leads to dependence on external assistance in the hope that these external resources would fill the domestic savings and foreign exchange gaps. In this regard, foreign capital is considered as an engine for growth.

Over the years, Cameroon has been a major recipient of foreign finance from both multilateral and bilateral agencies and as such, these resources were meant to help the country build the necessary economic and physical infrastructure for take-off. But the impact of foreign finance seems to be far from being felt in Cameroon as evidenced by unimpressive GDP growth rates and poverty. There is therefore need to evaluate how remittances like foreign aid, foreign direct investment and exchange rate  impact economic growth in Cameroon.

1.3 Research Questions:

1.3.1 Main Question

What is the impact of remittances on economic growth of Cameroon?

1.3.2 Specific Questions

1. To what extent does gross fixed capital formation affect economic growth in Cameroon?
2. To what extent does the exchange rate affect economic growth in Cameroon?
3. To what extent does foreign aid affect economic growth in Cameroon?
4. To what extent does foreign direct investment affect economic growth in Cameroon?

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