Accounting for the surge in remittances

One of the biggest surprises this fiscal year has been the boom in remittances from Bangladeshi workers abroad. Monthly remittances rose to $2.6 billion in July, after plummeting to $1.09 billion in April, and hovered around $2 billion per month through the rest of 2020. Remittances during the first half in FY21 grew by 33.7% relative to the same period the previous year.  Note that during the latter period in FY20 remittances grew by 40.2% relative to the same period in FY19. The high growth this year is therefore not an artifact of the base effect. It grew over an already elevated base.

Such a spike in remittances was not anticipated by any economist, including yours' truly. 

What explains the surge?

This question is interesting because the surge happened during a global pandemic which caused a serious disruption in labor exports and the return of a significant number of migrants. The stock of Bangladeshi workers abroad has not increased since the onset of the pandemic. It is plausible to assume that the earnings per migrant worker could not have increased either because of recession in the host markets, particularly US and Europe, and the slump in oil prices which adversely impacted growth in GCC countries. Over $2.7 billion out of the $3.2 billion increase in remittances in July-November came from these regions. Malaysia accounted for over half of the rest.

There certainly was a pent-up remittance effect since June 2020. Lockdowns world over disrupted international money transfers, especially during March-April. Remittances plunged to as low as $1.09 billion in April. The remittances pent up due to lockdowns returned as formal money transfer processes reopened from June onwards. Pent up remittances since May could at best account for probably around $600-$700 million increase in remittances. Money not sent in February-May probably was transferred in the next few months.

Transfer of accumulated savings by those who have already returned and those expecting to return played a role as well. According to data available from the expatriate welfare desk at the Shahjalal International airport, about 3.6 lakh workers returned between April 1 to December 12. The number expecting to return are probably in thousands, not tens of thousands. Bangladeshi migrant workers are mostly unskilled and semi-skilled. According to an ILO report published on December 14, 2020 Bangladeshi migrant workers earn 30% less than natives within the same occupational category.

So, the actual and prospective returnees together could have repatriated only a small part of the $3.5 billion increase in remittances in the first half of FY21 relative to the same period the previous year.

Migrants may have sent more money to support families distressed by the pandemic and natural calamities. Low interest rates abroad may also have induced remittances into National Saving Certificates which still offer double digit rates with zero default risk. However, migrants no longer get bonuses, overtime and other benefits given during normal times, thus limiting the capacity to increase altruistic remittances and take advantage of higher returns on investments.

Pent up remittances, savings repatriation, altruistic transfers, and investment portfolio adjustments are essentially temporary. The surge in remittances has continued longer than these would make one expect. There surely is more to it than meets the eye.

Diversion from informal channels

Diversion of remittances from informal to formal channels appears to have made a significant contribution.

There is no authentic estimate on the size of annual remittances through informal channels in Bangladesh in normal times. Studies based on international data suggest informal remittances amount to about 35-75% of official remittances to developing countries. Even the lower bound is sizable. Migrant household survey data in Bangladesh show 39% of families of migrant workers received more in remittance compared to the total sum formally remitted by the entire expatriate workforce in previous years, according to the Refugee and Migration Movement Research Unit (RMMRU).

Part of the diversion from informal to formal channels may have been caused by the 2% subsidy introduced since July 2019. Many bankers are reportedly paying extra 1% or so to attract remittances through their banks. Agent banking has gained popularity among expatriates, which may be playing a role in the growth of remittances. The total number of agent banking accounts in October 2020 nearly doubled relative to October 2019. However, total deposits mobilized through agent banking increased by $850 million during the same period of which external remittances constituted just one part.

Expatriate Bangladeshis are relying on online-to-wallet money transfer service to send remittances. MFS providers are offering international remittance services via partnership with international money transfer companies and local commercial banks. Although rising, the total remitted through MFS is unlikely to account for more than 1% of the total remittances. Nor are these likely to explain the surge this year because they were present during the same period last year as well. 

The decline of the hundi option

A significant inducement to remit through formal channels is likely to have resulted from the collapse of demand for remittances dollars in the hundi market caused by the pandemic.

Hundi is a system of transferring value without actual movement of money across the borders. It works when one person wants to send money to another person, at another place. Imports, visa trade, and travel are sources of demand for remittance dollars in the hundi market.

Under invoicing of imports to evade duties gives rise to demand for remittance dollars to pay the difference to suppliers abroad as do payments for work visas obtained through intermediaries. Foreign nationals working in Bangladesh use the hundi market to transfer money home. Bangladeshi travelers abroad often supplement the foreign exchange they are officially allowed to carry by purchasing remittance dollars from the hundi market as do traders who go abroad to buy high value merchandise brought under baggage rules for selling in local markets.

The pandemic has reduced imports, thus reducing demand for remittance dollars needed to cover the under-invoiced part of imports. According to RMMRU, recruiting agencies every year manage visas, each costing between $1,500 and $2,000, via different companies and agencies from receiving countries. If 50,000 workers move abroad every month, it creates demand for at least $75 million per month in the hundi market. The disruption in labor exports has dried this source almost entirely. Transactions related to import of high value merchandise under baggage rules and international travel-based consumption of services have also disappeared with disruption in air travel caused by the pandemic.

The hundi market is in a severe recession, making migrant workers turn to formal channels to remit money home.

So what?

Whether the surge in remittances is largely a diversion from informal to formal channels induced by a sharp narrowing of the hundi option or other factors has implications for the sustainability of the current +$2 billion per month level and its impact on the economy. 

The current elevated level of monthly remittances is likely to continue if the disrupted international trade, travel, and migration continues. It will not be surprising to see monthly remittances sustained at around $2 billion a month a few more months in 2021 if Covid-19 transmission is not sufficiently tamed globally. Growth, however, will peter out even under this rather pessimistic (from a virus control viewpoint) scenario once the spike works its way through the year.

Remittances may further ebb as remitters return to their established hundi network. The demand for remittance dollars in the hundi market is derived from transactions related to merchandise and visa trades; international payments for health and education; and illicit money transfers. These will resurge with the lifting of direct and indirect restrictions on mobility as countries attain herd immunity through vaccination.

Revival of hundi transactions may not fully reverse the diversion as some remitters may have gotten used to the conveniences offered by the expansion and diversification of money transfer services through offshore units or partners of domestic commercial banks, their local agents, and MFS providers. The 2% subsidy and premium rates offered by the banks are also unlikely to go away as long as domestic interest rates remain repressed.

The impact of diversion from the informal channel on domestic demand is limited to the extent of its additionality.  The families used to receive the money anyway.

What is different is the transfer of foreign exchange across borders. This increases foreign exchange liquidity in the domestic markets and contributes to augmenting official reserves as well as taka liquidity as Bangladesh Bank buys the excess supply of dollars. Increased foreign exchange reserves and taka liquidity strengthens investor confidence and expands space for domestic demand growth without destabilising financial markets.