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Why is Bangladesh’s remittance inflow declining?

by tbhdesk

Remittance drops 21.57% in August
Increasing labor exports, but decreasing remittance
Hundi becoming popular
Bank rate: Tk109/dollar; hundi rate: Tk117-Tk119/dollar
Political instability, money laundering affecting remittance

Despite most economic indicators of Bangladesh showing a downward trend, the country’s remittance inflow, in previous years, had remained comparatively resilient.

However, Bangladesh Bank recently showed a concerning picture of a 21.57% remittance drop in August, the lowest six months, whereas the country received nearly $2.04 billion in remittances through official channels in August last year.

Not only that, this August saw the lowest remittance inflow in comparison to any August in the last four years.

This decrease might put additional pressure on the already dwindling foreign currency reserves, some experts fear.

The remittance inflow vs labour exports
Although the country’s labour exports have increased over previous times, with 618,000 workers going abroad in the first six months of this year and a record 1.136 million last year, one would naturally expect an increase in remittances.

However, Bangladesh is struggling to escape this declining trend in remittance inflow.

Bangladesh Bank data indicate that expatriates sent $2.199 billion in June, followed by $1.973 billion in July, and $1.599 billion in August.

This represents a decline of 18.78% in remittances in August compared to July.

Hundi – illegal, yet becoming a popular choice
Bankers suggest this decline is due to banks offering expatriates a lower rate for remittance dollars than market dealers, causing a reduced flow through banking channels and an increase in the use of the unofficial and illegal remittance system known as “hundi”.

In August, the bank rate for the dollar was Tk109, while hundi dealers offered between Tk117-Tk119 per dollar, delivering this equivalent amount in Bangladeshi taka to expatriates’ families in the country.

Due to the nearly Tk8 difference between bank and open market dollar rates, most bank officials believe expatriates prefer the hundi system, causing a decline in formal remittances.

Especially among migrant workers with lower monthly incomes and those working illegally, there is a greater preference to send money through hundi, resulting in a decline in banking channel remittances.

A recent study conducted by the Refugee and Migratory Movements Research Unit (RMMRU) found that 66% of Bangladeshi expatriates from the Maldives send money through hundi, and 64% of them do not have bank accounts.

The Maldives, a small South Asian country, hosts around 200,000 Bangladeshi expatriate workers. The estimated total number of Bangladeshi workers abroad is over ten million.

Given this, it can be easily inferred how much remittance from other countries might be coming in through hundi.

Towfiqul Islam Khan, senior research fellow at the Centre for Policy Dialogue (CPD), said: “Where the spread of hundi system was supposed to decrease, its demand is increasing due to the dollar rate difference, causing it to be a popular trend of sending money from abroad to country.”

A few days ago, Finance Minister AHM Mustafa Kamal said that almost half of the remittance now enters the country through hundi.

Unregulated market at fault
BRAC Bank’s former chairman and Policy Research Institute Executive Director Dr Ahsan H Mansur stated that formal remittance would increase with a market-based dollar rate.

“Currently, the families of expatriates are getting Tk118 for each dollar. While Bangladesh Bank tries to regulate the market at Tk109, it is not a good strategy,” he said.

“If the market could be controlled, remittance would have naturally increased through legitimate channels. But they do not want to regulate it, leading to a decline in remittance flow,” he added.

Zahid Hussain, former lead economist of the World Bank, also mentioned that remittance is not increasing because the dollar rate is not market-based.

An analysis by the World Bank showed that if the rate is even 1% higher in informal channels, it diverts around 3% of remittance there, he said.

“Though banks declared a rate under the central bank’s direction, hundi operators deliver dollars at a higher rate. This is making the hundi channel more popular than the banking channel,” he added.

Officials from the central bank believe this downward trend might continue in the coming months.

Political unrest, govt policy, money laundering other factors
Senior officials, speaking anonymously, said that unless political instability in the country is addressed, remittance flow might not pick up.

Multiple commercial bank CEOs believe there might be a connection between political instability and the rise of the hundi system.

They also attribute the increase in hundi to under-invoicing and money laundering.

An anonymous CEO of a private bank mentioned that commercial banks’ previous efforts in remittance collection have slowed down.

“Earlier, banks used to send their officials to countries like Saudi Arabia and Oman for remittance collection. They used to stay in these Middle Eastern countries year after year, but now those officials have been brought back,” he said.

Many are suggesting that the government’s restrictive monetary policy and money laundering are primarily to blame for the hundi issue.

According to many, the government is trying to control the exchange rate of the local currency against the dollar, rather than letting the market decide, resulting in adverse effects.

Before and aftermath of controlling hundi operations
During the financial year 2020-21, remittance inflow reached a historic high of $24.77 billion following the hundi shutdown, with reserves also peaking at $48.06 billion.

The primary reason for this surge was the near-complete halt of the hundi system during the Covid-19 pandemic.

After the pandemic subsided, remittance sent through hundi saw a revival. Consequently, the legal remittance inflow saw a 15% drop to $21.03 billion in the subsequent financial year.

According to the central bank’s data, in the first two months of the current financial year (July-August), remittances received through banking channels amounted to just $3.57 billion.

This is a decrease of $0.56 billion or 13.56% compared to the same period last year. However, during the height of the Corona pandemic in the 2020-21 financial year, remittances had reached a record $24.78 billion.

Mutual Trust Bank Limited (MTB) Managing Director and CEO Syed Mahbubur Rahman said that hundi operations must be controlled.

“Until this is done, no matter how many initiatives are taken, remittance flow through formal channels will be affected,” he added.

Current actions and future plans
Bangladesh Bank spokesperson Md Mezbaul Haque said that the central bank is investigating the reasons behind the recent decline in remittances.

He also highlighted the fact that efforts are being made to thoroughly examine the sudden drop in remittance flows.

“The relevant department of Bangladesh Bank is probing why remittances have decreased. They are also investigating if there is any correlation between the decrease in remittances and dollar buying-selling activities,” he said.

“Several banks have been asked for explanations regarding this issue,” he added.

Mezbaul Haque further mentioned that numerous initiatives have been taken by Bangladesh Bank to prevent a decline in remittances.

“Several banks have been put under scrutiny. Some money exchange institutions have been fined, and the licenses of a few have been suspended,” he said.

“Meanwhile, the central bank is encouraging remittances in various ways. They have relaxed the conditions for filling C-Form to bring in remittance income in exchange for services. Moreover, service providers and freight forwarders can now bring in up to $20,000 or its equivalent in foreign currency without declaration,” Mezbaul said.

“In addition, a 2.5% cash incentive against wage earner’s remittances through legitimate channels, commercially important person (CIP) awards to remittance senders, expansion and simplification of remittance disbursement process and investment and housing finance facilities for non-resident Bangladeshis have been provided,” he added.

Source: Dhaka Tribune.

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