Remittance: Where are the missing billions?

The human tide flowing out of Bangladesh for foreign jobs saw a threefold rise over the past decade. Yet, remittance inflow, the financial lifeline stretched across continents to home, has experienced poor growth, edging from $15 billion to $22 billion.

The gap between dreams sown abroad and dollars trickling back home widened, raising an unsettling question: where are the missing billions in remittance?

The answer can be found in last year's World Bank study, which stated that a 1% deviation between the formal and informal exchange rates in Bangladesh is estimated to shift 3.6% of remittances from the formal to the informal financial sector.

If so, considering the 2023 formal remittance inflow value of $22 billion, such a 1% deviation between the exchange rates would create a shift of about $792 million outside of the formal financial sector. Again, if that deviation was increased just to 5%, the shift would be nearly $4 billion.

However, currently, a remittance receiver can get a maximum of Tk114.50 per dollar from banks or the formal financial sector, whereas the kerb market in Bangladesh offers an exchange rate ranging from Tk124 to Tk125, indicating a deviation of at least 9%.

In a twist to the narrative, former finance minister AHM Mustafa Kamal's revelation in 2022 adds another layer. It states that just 51% of remittances to Bangladesh use formal channels and the remaining 49% flow through hundi.

According to the Bureau of Manpower, Employment and Training (BMET) data, more than 1.60 crore Bangladeshi have been employed overseas since 1976. However, there is no official record of how many migrants have returned home so far, claims the BMET. There are in fact more than 1 crore Bangladeshis working abroad, according to unofficial sources of the BMET.

Bangladeshis working abroad continue to send money through informal channels, popularly known as hundi, enticed by the lure of higher exchange rates and convenience. Even the government's 2.5% cash incentives on remittance proves lacking any pull power, failing to boost the inflow.

Rather, the cash incentive has widened the gap between the official and informal rates of the dollar, as the kerb market sets its rate on top of incentive-adjusted official rate. It appears that the exchange rate in the informal market could be lower by 2.5% if there was no incentive for remittance channelled through banks.

The conventional view of the hundi business portrays migrant workers abroad as the primary drivers of demand. They seek hundi services to transfer their earnings back to their home country. Meanwhile, hundi agents abroad and within the home country are believed to control the supply side.

In this model, remitters exchange their foreign currency (US dollars in this case) with the hundi agent abroad, who then instructs their agent in Bangladesh to pay the equivalent amount in Bangladeshi Taka to the remitter's family.

Consequently, the dollars remain in the foreign market rather than entering the formal channels in Bangladesh.

A closer look at policies on remittance

Ten public policies are currently being implemented by the Bangladesh government and the Bangladesh Bank to boost the influx of remittances. However, the effectiveness of these policies in attracting remitters amid the prevalence of hundi raises pertinent questions.

Key initiatives such as the dual incentive scheme and increased remittance limits sweeten the deal for official channels, while expanded remittance channels and streamlined banking regulations aim to smooth the transfer process.

The central bank has issued instructions to banks, mandating remittance disbursement to beneficiaries within two days without imposing additional fees and fair pricing for remittances prioritising swift, cost-effective delivery for recipients.

To combat unofficial channels, the Bangladesh Bank's recent Monetary Policy Statement report outlines collaborative efforts involving the Bangladesh Financial Intelligence Unit (BFIU) and other law enforcement agencies are underway to identify individuals engaged in hundi activities and curb unofficial remittance channels.

Meanwhile, it said observation of the annual celebration of the "International Day of Family Remittances (IDFR)" to raise awareness among wage earner remitters about the advantages of transferring their remittances through official channels.

On the flip side, the Probash pension scheme, designed to provide financial security for expatriates through long-term contributions, is in a decline in popularity. Factors such as low interest rates, the absence of a one-time payment facility, and the weakening value of the taka against the dollar contributed to the scheme's waning appeal.

Conversely, a noteworthy policy is the tax remission on IT freelancers, who do not have to pay tax at source on remittances from IT freelancing jobs, encouraging growth in the digital economy.

It cannot be denied that while the government's initiatives exhibit positive steps towards enhancing the remittance landscape, addressing challenges such as hundi businesses and refining pension schemes will be crucial for sustaining long-term economic benefits.

Moreover, the efficacy of these policies may go in vain if Bangladesh fails to promptly stabilise the currency exchange rate through closing the gap between formal and informal market exchange rates.

Could the crawling peg help boost remittance? 

To mitigate exchange rate instability and allow more flexibility, the Bangladesh Bank has unveiled plans to implement a crawling peg exchange rate management system, in the interim, based on a currency basket, initially featuring a band corridor, before moving to a free-floating exchange rate regime.

The crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates.

This approach allows the exchange rate to move freely within the corridor while permitting intervention in foreign exchange markets to prevent rates from exceeding the set limits, aiming to mitigate unusual fluctuations.

In truth, the competitiveness of the system with the informal market rate is a must to bring dollars into the formal channel.

For instance, if the price range is fixed at a maximum of Tk115 per dollar, and the market rate exceeds Tk125, this new mechanism will fail again to reduce market volatility and enhance stability in the foreign exchange market. This loophole may entice remittance-receiving families to resort to hundi, pursuing better rates and potentially compromising efforts to stabilise the foreign exchange market.

Alongside a rational exchange rate policy, whether floating or otherwise, and the rational behaviour of migrant workers, a strict mechanism to track money transfers from abroad is needed to check remittance leakage through hundi.

A migrant worker in Malaysia, who stopped sending his hard-earned money to his wife's account to check misuse, cannot send money home as he does not have a bank account. A female worker in Lebanon was heard telling a get-together of fellow Bangladeshis that they need bank accounts.

It raises the question of why bank accounts cannot be opened online. Why does the Expatriate Welfare Ministry's desk in Bangladesh's missions abroad do not help Bangladeshis open bank accounts? If banks are kept off-limits to remittance earners, It cannot be expected that remittance earners would "behave rationally" and move from one city to another to find a bank outlet abroad, spending a whole day and a lot on travel.

A former official of an international agency, who invested in a dollar bond, found his FC account in a private bank dormant every six months. Every time he comes to Dhaka from Geneva, he has to visit the Banani branch of the bank to get his account opened and make transactions.

In conclusion, if banking services remain so cumbersome when you are aggressively looking for dollars in all possible ways, Bangladeshis living abroad will look for easier and faster ways to send money home. It would be unfair to blame them if they turn to hundi.