How ‘remittance through the informal channels’ hurts all of us

Workers often go abroad to find better economic opportunities and higher-paying jobs and send money to their home countries. However, they often send their hard-earned money through 'illegal' or unofficial channels. 

Unofficial channels refer to the movement of funds outside the formal banking system. This may include cash transfers by friends and family, using unlicensed or unregulated money transfer companies, and using the hundi system. 

Workers' motivations for using illegal channels often include lower transfer costs, faster transactions, tax-free status and a desire for anonymity. The government is becoming increasingly concerned about the prevalence of illegal remittance channels. And rightfully so, as this harms the economy and the workers' families in various ways. Here's how. 

Pushing up inflation 

According to a seminar titled "Measures to Increase Remittance Flow Through Legal Ways, Easily and Securely via Digital Medium," organised by the Economic Reporters Forum (ERF), about 49% of remittances are transferred through illegal channels.  

Since the money is sent through an illegal channel, it is not counted in the official statistics. 

According to the ERF report, it can be estimated that nearly $20 billion in remittance annually comes through illegal channels. This means there is more money in the informal economy than the formal one. 

When there is a higher money supply in the informal economy, it is called shadow money. This increased money supply can lead to increased demand for goods and services. And in effect, this increase in demand can cause inflation – and this can negatively impact the economy by reducing the purchasing power of consumers and increasing the cost of living. 

On the other hand, this informal channel reduces the monetary policy effectiveness as it becomes difficult for the central bank to regulate the money supply and control inflation.  

Over the last 20 years, we are yet to see any year with less than 5% inflation. Hence, the high inflationary environment causes migrant workers' families to pay extra for their expenses and the chance of little savings. Ultimately, sending remittances through illegal channels hurts their families and the economy.

Unstable FX reserve and foreign exchange rate 

When Bangladeshi immigrants transfer their hard-earned money through banks or legal channels, the bank deposits the foreign currency, and the recipient receives an equivalent amount in Bangladeshi taka. 

In that process, the balance of payments is credited to the country's foreign exchange reserves after covering the trade deficit created by import and export activities. Hence, it gives some cushion to FX (forex) Reserve and stability to the foreign exchange rate. 

On the other hand, money sent through illegal channels avoids official banking channels and is therefore not subject to the same rules and fees as money sent through legal channels. This can reduce FX reserves and destabilise the foreign exchange market, leading to higher costs of goods and, eventually, inflation. 

Additionally, illegal transfers can erode trust in Bangladesh's banking sector and discourage foreign investment, negatively affecting businesses and economic growth. 

Undermining government policy

The government has to take prudent decisions on fiscal policy based on official economic data, such as remittance volumes and income levels. This is necessary to support employment generation, meet budget deficit targets and prevent inflation from increasing. 

Policymakers must negotiate with international donors or lenders to create a balanced budget. However, these decisions may need to be made more informed, as a significant portion of the economy operates informally due to informal remittance. 

When remittances are transferred through unofficial channels, the government loses out on taxing remittance income because black and untaxed money is laundered to other countries. This loss of tax base could have been used to pay for social programmes, infrastructure and public services. 

If the money is deposited in a bank or non-banking channel, the government can take necessary funds from the bank or non-bank to support a balanced budget. However, when the money is transferred through illegal channels, this hampers the economic multiplier effect.

This leads to suboptimal economic outcomes and policy decisions, as the government needs to have accurate data on the actual size and flows of the economy. Policies aimed at employment generation and balanced budgets may fall short of their targets, and remittance-receiving families may miss out on potential benefits if the government policy fails to achieve its true potential.

Putting social benefits and status in danger 

Informal channels may not provide the same degree of consumer protection as official channels, exposing migrant workers' families to financial loss. Sometimes, informal channels also contribute to a lack of financial inclusion. Families may be excluded from official financial services and lose out on advantages such as credit, savings and insurance. 

Additionally, families who get money sent from abroad may be able to get social benefits like incentives. If the money is sent through an unofficial route, the family might not be able to get these social benefits, which could lower their standard of living.

When sending money, it is essential to look at the security of your chosen method. While informal procedures are sometimes more convenient, they may not provide the same security as official methods. 

Using informal channels might make it easier for criminals and fraudsters to intercept or steal remittances. This might result in the sender's family losing money and disclosing sensitive financial and personal data. At the same time, they may face legal consequences if a family member is exposed to the enforcement authority. This could also risk their security since police authorities or other criminal groups may target them.

Dr Mohammad Enamul Hoque is an Assistant Professor at Brac Business School, Brac University. Email: enamul.hoque@bracu.ac.bd.

Ashfaque Reza is an MBA student at Brac Business School, Brac University. Email: ashfaque.reza@g.bracu.ac.bd.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.