Weakening exchange rate driving down remittance flow: Debapriya
The inflow of remittance has been shrinking since the last several months as the number of people, going abroad, is decreasing and money transfers through informal channels like hundi are increasing with the ease of pandemic restrictions.
Amid the steady decline of the inflow, expatriate Bangladeshis sent $1.65 billion in October, down 4.6 per cent from the previous month and 21.7 per cent year-on-year, according to data from Bangladesh Bank.
Talking about the reasons behind the sharp decline of remittance flow, eminent economist Dr Debapriya Bhattacharya said the first thing is that the number of people going abroad has decreased over time and did not pick up substantially in the recent months. Moreover, as the international movement has started again, the incidence of hand carry of money is increasing.
More importantly, the earlier surge in the inflow was largely induced by the 2 per cent premium on the exchange rate, which incentivised the senders to use the formal channels of money transfer.
The recent weakening of the exchange rate has neutralised this exchange rate incentive, pointed out Bhattacharya.
In the recent months, the divergence between the official rate and kerb market rate has grown to almost Tk 5, he added. As a result, more money is coming through the informal channel. While the official exchange rate is around Tk 85 for a US Dollar, the corresponding rate in the open market is about Tk 90.30.
This downward pressure on the exchange rate is driving down the remittance flows, the economist pointed out.
The sterilising operation by Bangladesh Bank did not fully stabilise the situation. Bangladesh Bank sold about $1.38 billion during July-September 2021, mentioned Bhattacharya.
The remittance, which plays a major role in strengthening the country's foreign exchange reserves, fell 20 per cent year-on-year to $7.05 billion in the first four months of the current fiscal year.
Remittance income plays a critical role in supporting consumption expenditures and post-Covid-19 recovery across countries.
If there is an aggregate fall in the inflow – formal and informal together – then it will negatively impact poverty alleviation as well as on post-Covid-19 recovery, observed Bhattacharya, also the convenor of the Citizen's Platform for SDGs, Bangladesh.
Bhattacharya, also a distinguished fellow at the Centre for Policy Dialogue (CPD), said, "We should not only look at the immediate reasons for the decline in remittances, we also need to pay attention to the basic structural factors that are impeding greater remittance flow to Bangladesh."
He said the incremental remittance inflow is being sourced from the non-traditional markets, i.e., beyond that of Saudi Arabia or Emirates.
"So, it is time to concentrate on the new markets."
However, new markets will demand new skills. Currently, per capita inflow for the country is very low in comparison to even Sri Lanka and the Philippines, Bhattacharya added.
"We should concentrate on the skills. So that would resolve the fundamental point, due to concentration on low-skill jobs by the Bangladeshi migrant workers. Providing the special 2 per cent is a band-aid, but we need fundamental treatment of the issue which is more highly skilled workers and market diversification."
Remittance has started to decline since July, which was a five-month low of $1.87 billion. Remittance inflow soared in the last fiscal year even as the pandemic wreaked havoc on the global economy. The expats sent home a record $24.7 billion contributing to the country's economic recovery.
Earlier on August 8, Bhattacharya said the magic of the recent high remittance flow may be wearing off for Bangladesh.
He made the remarks at an event organised by the Citizen's Platform for SDGs, Bangladesh where a report titled "Delivery of the National Budget 2021- in the Context of the Pandemic, Ensuring Interests of the Disadvantaged People".
The economist said remittances had gone down by 28 per cent in July from the same month of FY 2020-21, which was a cause of grave concern.
"In this situation, it remains to be seen whether the magic will end or not. It is doubtful whether exports will be able to return to its previous place or not," he also said.
However, amid falling remittance earnings in recent months, Finance Minister AHM Mustafa Kamal, on October 6, said remittance flow will return to normal in three months.
"…Remittance basically comes from the expatriates; they are now going abroad and hopefully the situation will return to normalcy within the next three months," he added at that time.