Minneapolis, United States – A new U.S. tax on money transfers is raising alarm across Africa, with economists and aid groups warning that it could sharply curtail remittances to countries like Somalia, depriving millions of families of a financial lifeline at a time when foreign aid is also drying up.

The measure, part of former President Donald Trump’s “One Big Beautiful Bill,” imposes a 3.5% levy on remittances sent by non-citizens. Passed by the House of Representatives in May and later amended by the Senate to a 1% flat tax on all remittance senders, the policy is set to take effect on January 1, 2026.

Though pitched as a way to help fund a $170 billion immigration enforcement package, the tax is expected to hit some of the world’s poorest communities hardest—particularly in nations where remittances far outweigh foreign aid.

Somalia’s economy at risk

Few countries stand to lose as much as Somalia, where remittances form the backbone of economic survival. In 2023, the Somali diaspora sent home approximately $1.73 billion, exceeding the combined amount of all humanitarian and development aid. According to the World Bank, these funds account for between 30% and 50% of Somalia’s GDP, helping to cover essential services such as food, education, clean water, and healthcare.

The timing of the new tax coincides with the U.S. scaling back direct assistance. In early 2025, the Biden administration suspended a significant portion of its foreign aid, including over 40% of funding for Somalia previously channeled through USAID. The combined effect of shrinking aid and taxed remittances is what many analysts are calling a “double blow” to vulnerable households.

The Center for Global Development (CGD) estimates that a 3.5% tax could reduce formal remittance flows by 5.6%, cutting household income and weakening consumer demand in low-income countries. For Somalia, this translates into millions in lost revenue—and increased hardship for families who are already struggling.

The impact won’t stop at Somalia’s borders. In 2024, African countries received more than $92 billion in remittances, with $12 billion coming from the U.S. alone. In countries such as Lesotho, The Gambia, and Liberia, remittances account for over 20% of their GDP.

At the same time, the U.S. is pulling back on foreign aid globally. In early 2025, the Trump-led Congress announced a near-total suspension of development assistance. CGD estimates that cuts to USAID alone could shrink Gross National Income (GNI) by more than 1% in 23 countries, including Somalia.

For countries already grappling with inflation, food insecurity, and political instability, the combination of taxed remittances and lost aid may be more than their economies can absorb.

A shift toward informal channels

Economists are also warning that the tax could drive migrants away from formal financial systems and into unregulated channels. A 2021 study by Ahmed et al. found that each 1% increase in remittance costs reduces the volume of formal transfers by 1.6%. Another survey by Western Union found that a 5% tax could reduce formal flows by 17.7% and increase informal transfers by more than 21%.

Migrants may respond by asking U.S. citizens to send money on their behalf, relying on hawala networks, using “paqueteros” (informal parcel delivery services), or turning to cryptocurrencies and digital wallets to avoid official scrutiny.

Somalis are no strangers to innovation in this space. From hawala systems to digital platforms like EVC Plus and WAAFI, the Somali diaspora has long relied on agile, low-cost channels to move money home—even during periods of civil war or financial isolation. However, this tax may strain those systems, especially for remittance operators who are already squeezed by compliance costs and thin profit margins.

Development economists argue that lowering remittance transaction costs—not taxing them—is the more effective approach. As of Q3 2024, migrants paid an average of 6.6% in transfer fees, more than double the 3% target set by the UN Sustainable Development Goals (SDGs).

Bringing costs down to 3% could help offset over 50% of aid losses in 13 low-income countries, including Somalia, according to CGD.

Other recommendations include matching grants to encourage the productive use of remittances, diaspora bonds to fund infrastructure projects, and seasonal work visas for residents of low-income countries to boost high-impact remittances.

Despite public backlash, the tax appears likely to move forward. Yet experts note that it won’t generate much revenue—just $10 billion over 10 years, or 0.1% of the federal budget—while potentially costing recipient countries $2.5 billion annually in lost flows and broader economic ripple effects.

For many Somali families who receive just $50 to $200 a month from relatives abroad, the new tax may represent a tipping point. That small sum often covers food, school fees, and medical care—and without it, the consequences could be dire.

“This could be the difference between getting by and going hungry,” one aid worker in Mogadishu said. “For many families, there’s just no cushion left.”