Tuesday July 15, 2025
Mogadishu (HOL) — A new U.S. tax on money transfers is expected to reduce remittances to Somalia and other developing nations, posing a serious threat to millions of families who rely on these lifelines in the wake of steep foreign aid cuts.
The tax, part of former U.S. President Donald Trump’s “One Big Beautiful Bill,” imposes a 3.5% levy on remittances sent by non-citizens. The measure, which passed the House of Representatives in May and was later amended in the Senate to apply at 1% to all remittance senders, is set to take effect on January 1, 2026.
While the policy is framed as a revenue-raising mechanism to fund a $170 billion immigration enforcement package, experts say the move will likely exacerbate economic hardship in remittance-dependent countries like Somalia, Liberia, and El Salvador, many of which are already facing devastating aid suspensions.
Remittances to Somalia are substantial. In 2023, the Somali diaspora sent home approximately $1.73 billion, surpassing all development and humanitarian aid combined. The World Bank estimates Somalia receives between 30% and 50% of its GDP from these flows, which support expenses such as food, education, water, and medical care.
The timing of the tax coincides with widespread aid cutbacks. In early 2025, the United States suspended a large portion of foreign aid disbursements, including more than 40% of funding allocated to Somalia through USAID. The double blow of shrinking aid and taxed remittances has raised fears among humanitarian groups and economists.
According to the Center for Global Development (CGD), the 3.5% tax could lead to a 5.6% drop in formal remittance flows, reducing household incomes and weakening consumer demand in low- and middle-income countries. In Somalia, where remittances reached $1.73 billion in 2023, the effect could be acute. That amount surpassed the country’s combined humanitarian and development aid for the same year.
Somalia is not alone. World Bank data shows that remittances to Africa totalled over $92 billion in 2024, with at least $12 billion originating from the United States. Countries such as Lesotho, Gambia, and Liberia receive remittances equivalent to more than 20% of GDP, underscoring the vulnerability of their economies to even small disruptions.
The tax follows a broader retrenchment in U.S. foreign aid. In early 2025, the Trump administration announced a near-total suspension of development assistance. According to CGD projections, USAID cuts alone will shrink GNI by over 1% in 23 countries, including Somalia, where nearly 40% of previous U.S. aid has already been withdrawn.
For many households, the dual hit of aid cuts and remittance taxation may be unsustainable.
Experts warn that the tax could also undermine formal financial systems. Research by Ahmed et al. (2021) suggests a direct link between cost and behaviour: for every 1% increase in remittance fees, transfers fall by 1.6%. A Western Union study found that a 5% remittance tax could reduce formal flows by 17.7% and increase informal flows by over 21%.
Migrants are expected to seek alternatives to avoid the remittance tax, including asking U.S. citizens to send money on their behalf, using informal hawala systems or parcel delivery services such as “paqueteros,” and turning to cryptocurrency or interbank transfers.
Somalis have been pioneers in global money transfer networks, evolving from hawala systems to digital platforms like EVC Plus and WAAFI. These innovations allowed Somalia to maintain functional payment systems even during the country’s most unstable periods.
Somali remittance service providers, already operating on tight margins due to high compliance costs, may see lower volumes and higher per-transfer costs, further disadvantaging senders and recipients.
Development economists argue that instead of taxing remittances, the U.S. and other donor nations should focus on lowering transaction costs. As of Q3 2024, sending remittances costs migrants an average of 6.6% per transaction, more than double the 3% target set by the UN Sustainable Development Goals.
Reducing that cost to 3% could offset over 50% of aid losses in 13 low-income countries, including Somalia, according to CGD estimates.
Experts also recommend policy measures such as matching grants to encourage the use of remittances in productive sectors, issuing diaspora bonds to channel capital into national infrastructure, and expanding seasonal work visa programs for residents of low-income countries to increase high-impact remittance flows.
Despite public outcry, the tax is expected to move forward. It is unlikely, however, to generate significant revenue—estimated at just $10 billion over 10 years, or 0.1% of the federal budget—while costing recipient countries an estimated $2.5 billion per year in lost remittance flows and economic spillovers.
For Somalia, where families often rely on $50 to $200 per month from relatives abroad, the policy shift could mean the difference between subsistence and starvation.