How to prevent the free fall of remittances

On the sidelines of an investment summit in Singapore in 2015, I wanted to act like Caliph Haroon and make a foray into the illegal remittance market to find out why people prefer hundi (used as a form of remittance instrument to transfer money from place to place, as a form of credit instrument or IOU to borrow money and as a bill of exchange in trade transactions) over legal channels. I met the dealer near Serangoon Road, next to the famous Mustafa Centre. Initially, he was hesitant to speak, but he thought I was a factory worker because of how I had dressed, and gave me a quote for the Singaporean dollar - a rate slightly higher than what I could have gotten from the bank. I also found that better rates were not the prime attraction of the hundi. Rather, the remitter-friendly, swift services attracted people to hundi economics.

To send money through the official channel, a Bangladeshi worker has to go to the bank during office hours, accept whatever rate they offer, fill out a form, and pay an additional fee of USD 5. In contrast, if the worker approaches a hundi guru, he enjoys additional services in all respect: the hundi expert has no limited office hours, no forms with tedious details to fill out, no extra fees, and eventually a slightly better exchange rate. We cannot expect the ordinary worker to care about business ethics in a society where millionaires flout laws, nor will they be concerned about current account deficits. Therefore, they enjoy sending money through hundis, emboldening the parallel black economy.

Unfortunately, the typical remittance services of the official banking channel cannot ensure even a tiny bit of the convenience experienced by workers who use hundis. The reason why a migrant worker prefers hundi over the official channel is the same as to why a customer prefers a private mobile service to a government one. Hundi has always maintained a cutting edge in both price incentives and unique services that economists recommend to maximise.

Should we then surrender to the growing threat of this illegal market? Obviously not. Hundis are the parallel conduit of money laundering. Recently, the UNDP warned that developing countries lose more money than they earn from overseas. And Bangladesh will not be an exception, because its money laundering seems to be twenty times higher than Pakistan as reported by the Global Financial Integrity.

The question that arises thus is: how does a hundi work to further facilitate money laundering? Say, a Bangladeshi tycoon wants to buy real estate in Singapore. The central bank will not allow him to take his huge amount of foreign currency overseas. The tycoon contacts a hundi lord who will finance buying of the property in Singapore. In exchange, the tycoon will pay the equivalent taka to the domestic agents the hundi lord nominates.

The other side of money laundering is the growing symptom of bank defaults, which have increased by more than Tk.10,000 crore in the last one year without any convincing reason when considering that the economy is performing at a commendable 7 percent growth rate. Corrupt businessmen previously used the trade channels for trafficking national assets by over-invoicing for exports and under-invoicing for imports. They are now clever enough to use the remittance channel to fulfil their unethical agendas of asset stripping from Bangladesh. There is no conceivable reason to believe that remittance should fall by 18 percent given the figures of the first nine months of the running fiscal when we got 9 billion dollars only. Of course, the economic debility of the Middle East is a reason, but that started almost three years ago, and migration to those nations even went up in most cases.

Not the full part of hundi remittance is sitting overseas. Some part of it is entering the economy and is reflected in consumption and saving — both of which went up in recent years. A recent study finds that despite a continuous drop in the interest rate, deposits have steadily edged up, enabling our national saving rate to exceed the investment rate. But that consolation is not enough to justify the growing culture of hundi economics, which must be reigned in for a healthy level of international reserves whose growth rate is gradually falling through the erosion of current account balance.

Since debilitating conditions in some remittance-originating countries is not the main reason for the falling rate of remittance, there is no alternative to remodelling and strengthening the official channel. Chasing hundi agents would be impractical and impossible. When even Singaporean police officers look at the market without feeling any urge to arrest illicit moneychangers, our efforts to do so from a thousand miles away will be doomed to fail. The only way to defuse the hundi system is to outperform them by ensuring four things: 1) a countrywide network; 2) market based exchange rates; 3) swift services; and 4) social advocacy for using the official channels.

Given the reality, the central bank has to brainstorm on this and redefine the remittance service. Remodelling the remittance programme should first pursue a strategic alliance between all banks and post offices to provide the service across the nation. This idea is similar to having universal ATMs that dispense money to anyone having bank balance in other banks. Remittance accounts should have unique numbers across the nation so that a migrant worker's wife can draw money from different places in the country. All remittance accounts should have an automatic line of credit based on average remittance inflow over the last six months. This will provide huge flexibility and comfort to the beneficiary families, creating comparative advantage for the legal channel, which typical hundi agents will not deliver. The bank can take a slim margin in the exchange rate, but remitters are reluctant to pay any additional fee, so this issue could be dropped.

If we let the free fall in remittances go unchecked, our current account deficit, which is already in the red, will continue to decline and be in the negative. Although capital and financial accounts will help the balance of payment remain positive, it will be lower than it was before. Reserves will begin to deplete. The debt-GDP ratio will also increase significantly, raising our risk and lowering our rating. Rapid decay in remittances must be prevented from worsening before it ruins the macro-stability of our country that took us a long time to achieve.

The writer is visiting fellow at Bangladesh Institute of Development Studies and guest faculty at the Institute of Business Administration at Dhaka University. E-mail: birupakshapaul@gmail.com