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TUESDAY, JULY 22, 2025
Who is benefitting from the subsidy on remittances?

Economy

Zahid Hussain
04 December, 2019, 05:00 pm
Last modified: 05 December, 2019, 12:32 pm

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Who is benefitting from the subsidy on remittances?

The impact of the remittance subsidy is on the recipient families in the sense that they are receiving 2 percent more per dollar over the formal market rate than without the subsidy

Zahid Hussain
04 December, 2019, 05:00 pm
Last modified: 05 December, 2019, 12:32 pm
Who is benefitting from the subsidy on remittances?

Public policies are intended to achieve certain objectives.  Many a times, they do not work as intended or have unintended consequences which reinforce or negate the intended ones. Often these unintended consequences are not even considered a possibility at the time the policy is crafted. Even the most careful analyst is unlikely to think of every possible incentive that could emanate from a policy. Thus, it is important to analyze policies in retrospect, so that the impact of unforeseen consequences can be factored into future policies.

The government introduced a 2 percent cash subsidy on remittance from abroad with the FY20 Budget. It made a provision of over Tk 30 billion in the budget for this purpose.  Figuring out how the subsidy will be delivered took a few months. The delivery mechanism apparently has now been sorted out and subsidy disbursement with retrospective effect from July 1, 2019 has already begun. 

The central issue I would like to focus here is whether the remittance subsidy is augmenting the income of the recipient families relative to the income they otherwise would have had in the absence of the subsidy. Consider this a randomized thought experiment!

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At first sight the answer may appear obvious.  Remittances have boomed in the first five months of the current fiscal year, increasing by 22.6 percent.  The increase is popularly attributed to the 2 percent cash subsidy although surely other factors such as the lagged effects of 8.3 and 5.6 percent increases in the (gross) stock of Bangladeshi workers abroad in FY18 and FY19 respectively and the 3.2 percent depreciation of the interbank exchange rate in last 17 months have also played a role, apart from other factors such as increase in the amount of monthly savings of the Bangladeshi workers abroad.  Assuming that the cash subsidy made some contribution to the remittance boom, the question is could we have had the same result without the cash subsidy?

Some recent evidence shows the answer most probably is affirmative.  

According to media reports, private banks are offering to remittance houses an exchange rate that is one percent higher than the remittance subsidy inclusive exchange rate.  The way I understand, the arithmetic is as follows:  Suppose the interbank buying rate is Tk 84.7 per US dollar (USD).  This means if you remit one dollar you will get Tk 84.7 plus 2 percent cash subsidy, which makes it Tk 86.39 per USD.  The current state of the supply demand imbalance in the foreign exchange market is such that the banks are willing to pay a rate one percent higher than this subsidy inclusive rate i.e. Tk 87.25 per USD.

Arguably, had the Bangladesh Bank (BB) stopped selling dollars in the foreign exchange market and refrained from "moral suasion" to keep the exchange rate within the prescribed ceiling for LC settlements, the market rate would have creeped up towards the rate that will clear the supply-demand imbalance. Since the banks are willing to pay one percent over and above the 2 percent cash subsidy, this rate is most probably something around Tk 87.25 under current conditions and may be much higher if you look at the exchange rate needed to keep the real effective rate unchanged at its 2015/16 level.  

Thus, allowing the exchange rate to float freely in accordance with supply-demand balance would have achieved the same remittance result as achieved with a policy package of cash subsidy and BB intervention in the foreign exchange market. The latter not only involves additional pressure on the government budget and some unnecessary transaction costs, but also has different distributional implications.

This brings us to the distinction between "impact" and "incidence" that is critical in any assessment of policy. Impact refers to the immediate result of policy. For example, the impact of a tax is on the person who signs the check to pay the tax. Incidence refers to the location of the ultimate result of the policy. Continuing the tax example, the incidence of a tax is upon the person who cannot shift the burden any further. Impact is at the point of imposition, incidence occurs at the point of settlement. Impact may be shifted but incidence cannot. Sometimes, when no shifting is possible, the impact coincides with incidence on the same person.

The impact of the remittance subsidy is on the recipient families in the sense that they are receiving 2 percent more per dollar over the formal market rate than without the subsidy.  However, the formal market clearing rate is at least 3 percent higher than the officially recommended rate.  This is the case irrespective of the remittance subsidy.  What the remittance subsidy has done is to allow the bankers to recover from the government two thirds of the increase in the exchange rate they would have been paying any way. 

Thus, the incidence of the subsidy is on the bankers!  No wonder they did not make any noise when the subsidy was announced even though the delivery of the subsidy has added to their work load.

The author is an economist.

Analysis / Top News

remittance / Remittance inflow

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