Will remittances remain low for long?
So it looks like growth in remittances will be negative two years on the trot. This was inevitable. Our national strategy on remittances has long stood on two fault lines: excessive reliance on few oil-exporting economies and a thriving informal currency market (Hundi). Things may have worked while oil prices soared and exchange-rate differential between Hundi and the official currency market remained relatively low. But now this approach has run its course.
Even while the going was good, an acute observer would look at commodity-centric export models of these Middle East economies with a bit of trepidation. One protracted shock to oil prices would decimate the pillars of their towering fiscal surpluses and foreign reserves, leaving little option but to drastically cut back government spending. Lower subsidies in essential items like food and electricity, if combined with subdued public investment in sectors like construction would squeeze real income of migrant Bangladeshis (and others of course).
This is pretty much what happened. Data from the IMF shows that capital investment in the public sector declined by 16.5, 11.2 and 23.4 percent in Oman, Saudi Arabia and UAE, respectively, in 2015 compared to the previous year, as these economies walked the path of fiscal consolidation. Anecdotal evidence suggests that firms in countries like Oman and Saudi Arabia have failed to pay migrants their due salaries for months on end (for details, see Migrant-rights.org).
And unless the tension-fraught geopolitics between major oil-producers gives way to some sort of an agreement on production cuts, supply will continue to outstrip demand and keep prices depressed for the foreseeable future.
If studies by Columbia University's Jagdish Bhagwatiand and IMF's Pierre-Richard Agenorare are to be believed, restrictions on foreign trade and capital flows gave birth to generations of these illegal markets across the world.
Meanwhile, we are also reminded that remittance is increasingly gushing in through the unofficial exchange market lured by more attractive rates, consequently knocking off a sizeable share of officially recorded inflows. This begs the question why is the differential between official exchange rate and its unofficial counterpart rising, which is denying us valuable dollar reserves?
Perhaps it's best to take a step back and recognise what gave rise to this market in the first place. If studies by Columbia University's Jagdish Bhagwatiand and IMF's Pierre-Richard Agenorare are to be believed, restrictions on foreign trade and capital flows gave birth to generations of these illegal markets across the world.
For instance, imposing high tariffs creates an incentive to smuggle and fake invoices (in order to decrease tariff duties) by raising demand for goods at illegal prices. That effectively lays out the red carpet for an unofficial currency market if the central bank restricts access to foreign currency. So it's hardly surprising that Hundi has persisted for so many decades in Bangladesh. Trade, apart from RMG, has long been barricaded by high tariffs while the central bank lets foreign currency flow out with an eyedropper!
By extension, the recent spike in demand for foreign exchange in Hundi that pushed up its spread with official rates must have stemmed from: (i) a resurgence in legal or illegal imports, (ii) need for portfolio diversification and capital transfer perhaps because of rising concerns over terrorist activities and (iii) rise in the number of residents travelling abroad, most likely driven by the recent increase in manpower export to Middle East countries.
So where does all this leave the Bangladesh economy that relied on stable inflow of remittances to alleviate the hardships of millions of low-income families, increase consumption, sustain small household businesses and, on a more macro level, hedge our not-so-small trade deficit?
As noted earlier, remittance has long skated on thin ice by relying heavily on a handful of undiversified economies. Over the medium-term, we need to lower country-risk by sending a share of our migrants to other, more stable, economies.
Those of us tracking economic data felt great when Saudi Arabia lifted its ban on recruiting Bangladeshi workers. All we saw was double-digit growth in remittances. What we remained oblivious to was the possibility of labour shortage in the oil-exporting powerhouse, as other Asian nations pulled their own workers out in light of the horrendous working conditions that migrants have to endure. According to Reuters, several migrants sleep in one tiny room "with stray cats and cockroaches lingering on torn bedsheets". Words cannot do justice to this sort of hardship and we can only hope that something is done to change this.
To be sure, that's a lot easier said than done. But surely enhancing our national migration framework with policies that incorporate skill upgradation, streamline recruitment process, outline fair terms of employment especially in the event of a company refusing to pay wages and ensure decent working conditions will get the ball rolling.
On the trade policy front, there would be no issue if protection was slapped only to keep out illegal, harmful and unproductive items. But not all products and sectors are protected on such motives and trade analysts in Bangladesh have long run up against formidable lobbyists who prefer to protect their inefficient enterprises rather than relinquish control to the forces of free trade.
And of course, at the mere mention of capital account liberalisation, detractors will rant and rave about capital flow volatility, reserve depletion and even foreboding recollections of the Asian financial crisis!
Make no mistake; these risks will remain contained if foreign exchange controls are relaxed on a limited and gradual basis in an economy with a large tank of reserves, easing inflation, growth-supportive macroeconomic policies and virtually no short-term external debt. All of which is neatly backed by continued dollar inflows through exports, foreign direct investment, foreign aid and remittance itself.
Allowing markets little more freedom to decide external financial flows will most likely put just enough pressure to depreciate the exchange rate and kill off the spread between the official and Hundi market. Otherwise, dollars will keep flowing in rapidly with no room for official outflows, forcing the central bank to intervene just to prevent the exchange rate from appreciating. Financial media will tell us that our foreign reserves have reached a record new level of XYZ billion dollars every other month. That will feel good as long as we turn our backs to the costs that come hand-in-hand with high foreign exchange intervention, sterilisation and rising spread with illegal currency market.
And so the immediate outlook for remittances is bleak. Capital spending in Middle East economies will not pick up anytime soon, depressing wages of our migrants. Hundi rates might remain more attractive, stymieing official inflows. Unless decisive and bold policy actions shine some light at the end of the tunnel, we might well see subdued remittances for some time to come.
The writer is a macroeconomic Research Analyst for an organisation in Washington D.C. and Research Fellow for the Asian Centre for Development in Dhaka.