How Brexit will hurt one of Somalia’s most reliable financial lifelines

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By Abdikariim Jama Barre

Britain’s exit from the European Union (EU) will cause a contraction of the Diaspora remittances from Britain, shaking one of Somalia’s most dependable sources of funds for both livelihood and economic development.

The United Kingdom made a dramatic exit from the Union it joined for decades, on June 23 through a referendum.

Many Somalis who live and work in the United Kingdom will definitely feel the pinch (also felt by other foreigners) as the British economy undergoes a regime change limiting cash flow for Somalia hence a ripple effect on the remittances home.

A historic 52 per cent vote in favour of exit from Britain has caused a plunge in the pound value by to its weakest level since 1985. The pound lost nine per cent against the US dollar in the first two days after Brexit and while it has recovered slightly since then, the pound is predicted to fall further before the end of the year.

This drop will reduce the value in local currencies of the remittances sent by UK remitters. Further, any long-term damage to the UK economy will be bad for migrants’ earning potential hence narrowing what they can send home. If the UK economy grows much slower than previously forecasted or enters a recession, this will also hit the value of remittances. Unfortunately, it is likely that the UK economy will at best stagnate over the next two years.

Another threat to the remittances that Somali in the diaspora will send home arises from the risk that the system of ‘passporting’ for financial services between the UK and the rest of the EU might break down.

Passporting is a means by which banks, remittance companies and other financial firms based in one country in the European Economic Area (EEA) are automatically cleared to offer their services to clients in another country. The EEA is the economic union among all countries in the EU, though there are some EEA countries that haven’t opted for the deeper level of integration of the EU.

Since the UK has chosen to leave the EEA, then, it is high likely that UK-based financial firms will lose their right to passport their services to the rest of the continent. A rough estimate shows that UK-based remittance companies manage a network of over 40,000 remittance agents across the European continent as well as provide more than half of all remittance services listed in the World Bank’s remittance prices worldwide database.

Without passporting rights, many UK companies will be not be capable of offering these services in European countries. This would be bad for competition: Somalis would have fewer choices of services and perhaps, at the margin, have to face more expensive and/or lower quality products.

In order to keep passporting for financial services, Britain could stay in the EEA despite leaving the EU. That outcome seems unlikely. It is said that the French are seeking an ‘EEA-’ deal that offers Britain migration restrictions in return for access to the single market without passporting.

Without this service in the UK, this could mean that the services to send money home from Britain become limited and or more expensive hence the slowdown in the amounts the diaspora community will send home.

Reducing the funds from relatives abroad will also hurt Somalia’s effort to narrow the huge trade deficit of more than 50 per cent of Gross Domestic Product (GDP), as remittances pay for about 40 per cent of total imports.

The country’s per capita income is 20–40 percent higher than GDP per capita, because massive inflows of remittances allow households to top up own-generated income (used to measure GDP per capita).

Household consumption, financed by remittances, was equivalent to more than 100 percent of Somalia’s nominal GDP in 2014, with food and beverages accounting for about 60 percent of the total.