U.S. Remittance Tax Poses Risk to $1.7 Billion Somali Support System

Remittances to Somalia represent a lifeline in a landscape marred by challenges. In 2023, the Somali diaspora generously sent approximately $1.73 billion back home, a staggering figure that surpasses the total of all development and humanitarian aid received. This essential flow of funds is crucial—it’s estimated that these remittances account for between 30% and 50% of Somalia’s GDP. Families depend on this support for their basic needs, including food, education, healthcare, and even access to clean water.

However, as we stand on the precipice of 2025, this lifeline is threatened by a new tax initiative that comes at a time when aid in general is dwindling. Earlier this year, the United States government announced a substantial cut to foreign aid, beyond just Somalia. More than 40% of the funding that previously flowed to Somalia via USAID has been suspended. The simultaneous occurrence of these two factors—decreasing aid and the imposition of a tax on remittances—has raised significant alarm among humanitarian groups and economists alike.

According to research from the Center for Global Development (CGD), the proposed 3.5% tax on remittances could lead to a 5.6% decrease in formal remittance flows. This could translate into declining household incomes, weakening consumer demand, particularly in low- and middle-income nations. In Somalia, where remittances reached that essential $1.73 billion, any reduction could be devastating. It’s a stark reality to consider: this sum is larger than the combined humanitarian and development aid Somalia received in the same year.

Yet, it is essential to recognize that Somalia isn’t an isolated case. World Bank data reveals a broader trend across the African continent: remittances to Africa totaled over $92 billion in 2024, with a significant portion—around $12 billion—originating from the United States alone. Countries like Lesotho, Gambia, and Liberia rely on remittances that constitute over 20% of their GDP. Imagine the fragility of economies that cannot withstand even the slightest disruption in these vital funds.

This impending tax follows a concerning freeze in U.S. foreign aid. In early 2025, the former Trump administration announced a near-total halt to development assistance, a decision that has far-reaching implications. The CGD estimates indicate that the cuts to USAID could lead to a decline of over 1% in Gross National Income (GNI) across 23 nations, Somalia included. Interestingly, nearly 40% of previous U.S. aid has already been withdrawn, which raises an unsettling question: How many families will be pushed further into hardship?

For many households, the combined impact of slashed aid and the burden of remittance taxation could be insufferable. Experts are not mincing words; the tax could furthermore destabilize formal financial systems. Research led by Ahmed et al. (2021) reveals a troubling link: for every 1% increase in remittance fees, there’s a corresponding 1.6% drop in the amount sent. A study conducted by Western Union illustrated that a 5% remittance tax could reduce formal remittance flows by an alarming 17.7% while concurrently increasing informal flows by over 21%. In this evolution, migrant families will likely seek alternatives, exploring avenues that sidestep both the tax and the complexities of formal transfer systems. These include enlisting U.S. citizens to send money or utilizing informal hawala systems, parcel delivery services like “paqueteros,” or even venturing into cryptocurrency and interbank transfers.

Somalis have historically been pioneers in global money transfer networks. From traditional hawala systems to contemporary digital platforms like EVC Plus and WAAFI, these innovations have allowed Somalia to sustain functional payment systems, even during the most tumultuous times. However, remittance service providers in Somalia, already operating on razor-thin margins due to high compliance costs, are poised to face lower volumes and higher costs per transfer. This only exacerbates the plight of both senders and receivers, transforming a poorly structured system into one that is increasingly unfavorable.

Development economists advocate for a different approach. Rather than taxing remittances, they argue that the United States and other donor nations should prioritize reducing transaction costs. Currently, sending remittances costs migrants an average of 6.6% per transaction—significantly exceeding the 3% target established by the UN Sustainable Development Goals. If that cost could be halved to 3%, it’s projected that over 50% of aid losses could be mitigated in 13 low-income countries, Somalia being one of them. Doesn’t that seem like a more rational strategy?

Many experts recommend innovative policy measures such as matching grants to stimulate productive investment of remittances, issuing diaspora bonds to finance national infrastructure, and expanding seasonal work visa programs for residents of low-income countries in hopes of enhancing high-impact remittance flows.

Despite public discontent, the tax appears set to move forward. Yet the anticipated revenue from this initiative is minimal, projected at just $10 billion over a decade—merely 0.1% of the federal budget. In stark contrast, recipient nations like Somalia could incur estimated losses of $2.5 billion per year in remittance flows and associated economic benefits. For countless Somali families who rely on their relatives abroad, receiving even $50 to $200 monthly can be the difference between living and merely surviving.

As we ponder the implications of these fiscal policies, it’s crucial to understand the human stories behind the statistics. Will policymakers heed these warnings and reconsider their strategies, or will countless families bear the brunt of policy decisions that seem indifferent to their struggles? If there’s one lesson we can draw from this dire situation, it’s that every action has consequences, and the most fragile among us often pay the highest price.

Edited By Ali Musa

Axadle Times international–Monitoring.