Financial remittances from Somalis living outside the country are an outstanding feature of the Somali economy, and have for long been crucial to the economy. Today, the new diaspora in the West has assumed a very important role as a source of remittances to family members in Somalia or in refugee camps. The first migrant workers who went to the Arabian Gulf during the 1970s began to send back remittances, using the so-called franco-valuta system. People from the Isaaq clan in particular utilized this system, in which foreign exchange was transferred to traders who would import commodities for the Somali markets, and then give the cash to the families of the migrants. This system worked only because the traders had strong linkages to their clan lineages inside Somalia.

This, together with the practice of migrants settling close to fellow clans-people, contributed to a strengthening of clan identity. The system was crucial for the provision of foreign exchange, and enabled families in Somalia to import consumer goods. Rough estimates suggest that around US$300 million was remitted annually from the late 1970s and during the 1980s, equivalent to about 40 per cent of GNP (Marchal, 1996).

The franco-valuta system was officially banned in 1982 because it increased the misuse of much needed foreign exchange, but also because it potentially undermined the power of the regime’s own patron-client mechanisms (Marchal, 1996). Yet, the ban had little effect as it only led to a new system. Thus, the direct Xawilaad system developed which did not involve a trader. The significance of these remittances grew as part of the emerging parallel economy in the 1980s, when they were estimated to be worth US$370 million annually, of which 75 per cent came from workers in the Gulf countries (UNDP Somalia, 2001). The Xawilaad system evolved into the 1990s, where remittances were transferred to the armed guerrillas who eventually overthrew the Siyad Barre  regime.

The early use of mobile radio systems used by the rebel groups such as SNM, combined with satellite telecommunication facilities, turned out to be very useful means for the Xawilaad companies, and later lead to the spread of efficient telecommunication companies in post-collapse Somalia. Today, there are several Xawilaad companies with branches wherever in the world Somalis live, and scattered all over Somalia. Through this network, a Somali can transfer money to a family member inside Somalia within 24 hours. Today, Xawilaad is the most efficient, and safest, way of transferring money to, and inside Somalia. Even the international NGOs use it extensively. The system became a strategic asset in the civil war economy, and is still the most important means for the clan-based social safety net for most Somalis.

Who remits?

Diaspora Somalis in the West is believed to be the most significant source of remittances after the labour market tightened in the Gulf and the refugee crisis occurred in the 1990s. Hence, the source of remittances changed during the civil-war. In the 1980s, it was primarily migrant workers in the Gulf States and Saudi Arabia who remitted about 60 per cent of the total estimated money transfers to Somalia (Gundel 2003). Outside the Arab states, it was only in the UK and Italy that a Somali diaspora of any significance in terms of remittances could be found. After the outbreak of civil war, conflict-related refugee flows to Western Europe and Northern America changed the remittance pattern. Thus, a result of the civil war was the growth of the diaspora and the volume of remittances.

One difference between the civil war related migrations and the previous labour migrants is that the former most often were families settling in host countries including women and children, while the migrant workers almost always were males seeking work who would usually return home (Ahmed, 2000). Somali exiles in the West lived mostly off welfare allowances that were intended to meet only their most basic needs. Hence, these families would not transfer as much of their income as would the lone males who went to the Middle East for work.

Another difference is that with the civil conflict, the elite had fled the country, leaving the market to other social strata. A reflection of this change is that during the 1980s, two-thirds of the funds from the Somali communities abroad were used for trade, and the other third to assist families. Today these proportions are probably reversed (Gundel 2003).

How much is remitted?

Problems with measuring the scale of remittances to Somalia include the frequent lack of reliable survey data on income, savings and remittance behaviour, leading researchers to rely on more anecdotal evidence regarding average transfers. In part of Somalia, security issues complicate household surveys, and local fears of reductions in aid may discourage declaring remittance income. According to old surveys made by the International Labour Organization (ILO) in 1985, the 165,000 to 200,000 Somalis living in the Middle East earned $700 million dollars a year, of which approximately 30 per cent – $280 to $370 million dollars – was sent back to their native country. Annual remittances to Somalia in 1987 were estimated to be between US$478 to $540 million.

The latest estimates on the scale of remittances suggest that the annual transfer through Xawilaad companies may be more than US$1 billion (WB 2006). This is a considerable amount when set in relation the official development assistance (ODA) and humanitarian aid combined, which in 2004 amounted to US$272 million (WB 2006). One survey finds an average household receipt of remittances per annum in Somaliland was about US$4,170 and its share of household income was 64 per cent (Ahmed, 2000). If these estimates are correct, and there are about 120,000 recipient households throughout Somaliland, then the total value of the annual remittances is about US$500 million, which would be about four times the value of livestock exports from Somaliland in a normal year.

Remittances to Southern Somalia are not documented. Factors affecting remittance transfer are as yet poorly understood. Some migrants send remittances, some do not. There is no systematic research evidence on the incidence of remittance sending in the Somali diaspora or on comparative incidences of remitting among different migration cohorts and in the first and second generation. Migrants mainly send remittances to family members only, but sometimes also to friends and business partners (Omer 2002).

A survey of 166 remittance-receiving households in Hargeysa in 1998 found that most remitters lived in Europe or North America, 40 per cent of remitters were women, roughly as many wives support husbands as husbands support wives, and that 35 per cent of remittance-receiving households received money from two to eight migrants (Ahmed 2000).  Transfers to cover family needs appear to range from US$ 50 to US$ 500 per month (Omer 2002; UNDP 2001). According to interviews with Somali families in Denmark, relatives in Somalia receive between US$100 and US$200 per month on average.

The links between Diaspora transfers and development

Remittances are transferred in different forms and through different channels, as cash or goods in kind, through remittance companies, through merchants, or through relatives. But, what are the remittances used for and what is their real potential impact on development?

What are the remittances used for?

Historically, remittances have been used to finance consumption and as such are crucial for household livelihoods. Consumption has only little developmental effect, but does contribute to the existence of trade, markets and import businesses. The latter is unfortunate, as much of the money is being spent on expensive imports, with no local developmental effects. The same thing goes for the use of khat as the plant is all imported from Kenya or Ethiopia. But recent observations show a new trend where remittance money increasingly is being invested in small businesses or real estate, an increasingly dominant feature of the Somali economy.

Furthermore, some Somalis do their utmost to manage their income properly by, for instance, investing in the education of their children, although primarily through school fees and less so through concerted pooling of their money to run schools. In a few cases, as will be described further in section 3, there are examples of Diaspora Somalis organising themselves for broader community development projects in their places of origin. But, mostly, larger scale investments from Somalis abroad are based on private basis and not collective or associative basis. A fact that is reflecting one of the main causes of the State Collapse, namely the collapse of trust in state, public and collective arrangements of any kind.

There are also a few examples where Diaspora uses their collected remittances for charity and peace. For instance, during the summer of 2005, Somalis in Sweden collected and transferred funds aimed at assisting the national reconciliation by removing roadblocks in Mogadishu. Other, examples include financing of hospitals (i.e. Edna Maternity Hospital in Hargeysa , private individual based) and successful higher education institutions (i.e. Amoud University in Somaliland, collective diaspora support). The main challenges confronting diaspora assistance and involvement in Somalia is their fragmentation, and private orientation towards own family or community only.

The structural effects on development of remittances are limited. The flow of remittances increases in times of economic stress, during droughts, or in response to inter-clan warfare. The positive aspect of increasing consumption through remittances in Somalia in the 1980s was that this did improve the real balance of payments and enabled imports of capital goods and raw materials for industrial production. The high level of consumption and imported goods, however, left only little surplus for capital-generating investments, while the demand on consumer goods increased inflation and pushed up wage levels.

So, the immediate positive effects in terms of easing the effects of rising oil prices and increasing living standards turned into negative effects in the long run as they were spent on “non-productive” investments, which increased dependency and eroded incentives for production. Some positive effects did come out of increases in trade, but these did not have the same long-term effects, such as investment in a productive sector. On the other hand, remittances in Somaliland in recent years have been used less for consumption and unproductive investments, but instead contributed significantly to the growth of a vibrant private sector (Ahmed, 2000). This process, however, is associated with loss of educated and skilled labour, and increased income inequality. The booming sectors are also limited by the lack of credit schemes and saving facilities.

By Abdulkadir Osman Farah

Aalborg University  -  Denmark

© 2009 Abdulkadir Osman Farah