At a time when remittances are a key source of external financing for African economies, a new US tax threatens to slow down formal money transfers and redirect funds into informal and riskier channels.

On July 4, US President Donald Trump signed the "One Big Beautiful Bill", a sweeping budget law that includes a 1 percent tax on remittances sent from the United States to other countries. 

The measure, which will take effect on January 1, 2026, was approved by Congress as part of a compromise to fund immigration and homeland security programs. It was initially proposed at 3.5 percent in the House of Representatives before being scaled back to 1 percent.

The US is the top source of remittance flows to several African countries, including Kenya and Nigeria, making the continent particularly vulnerable to such a tax. 

In 2023, Africa received $100 billion in remittances — around 6 percent of its GDP — according to United Nations data. This sum surpassed both official development assistance ($42 billion) and foreign direct investment ($48 billion) for the same period.

“Remittances are one of the few sources of private external financing whose growth is expected to continue in the coming years. They must be mobilized to a greater extent to finance development, notably via instruments such as diaspora bonds,” said Dilip Ratha, Senior Economist at the World Bank.

While large economies like Nigeria, Egypt, Kenya, and Morocco receive the bulk of these funds, smaller nations are even more reliant. In 2023, remittances made up over 20 percent of GDP in both Lesotho and the Comoros, according to World Bank data.

The 1 [percent tax would add to existing fees already charged by transfer providers like Western Union and MoneyGram. In sub-Saharan Africa, remittance costs are the highest globally: sending $200 cost an average of 7.9 percent in the fourth quarter of 2023, up from 7.4 percent a year earlier.

These increasing costs could push more senders toward informal channels, which are cheaper but come with greater security and transparency risks.

A study by the Center for Global Development (CGD) estimates that the new tax could lead to a 1.6 percent drop in remittance volumes. The impact would be most severe in Nigeria, which could lose $168.2 million in remittances. Egypt would see a drop of $54.15 million, Kenya $38.11 million, and Ghana $33.63 million.

While the US federal government may collect only modest revenues from the tax, the economic consequences for African nations could be substantial — with less foreign exchange, reduced consumption, and lower household investment potentially deepening existing vulnerabilities.