Remittance flows in recent times: Wherefrom is so much money coming?

Remittance flows account for a significant share of national earnings of low and middle-income countries such as Bangladesh.  Given the pandemic scenario, the World Bank, in April 2020, had projected that the remittance flow will face the sharpest decline in recent times. According to the projections made by the Bank, globally the remittance flow would drop by 19.7 per cent to about US$445.0 billion in 2020 compared to about US$ 554.0 billion in 2019. For South Asia, the bank projection for 2020 was a negative growth of 22.1 per cent compared to the previous year. However, in reality, these forecasts have proven way off the mark at least for Bangladesh, and also Pakistan, and, to some extent, Sri Lanka.

ROBUST REMITTANCE FLOWS DURING THE PANDEMIC PERIOD: In general, trends in remittance flows tend to be mostly countercyclical; workers are prone to remit more money back home in times of disasters. However, the low projections of the World Bank for 2020 were underwritten by the fact that both recipient and sourcing countries were adversely affected because of the pandemic. The apprehension was that because the economies of the major destination countries such as the USA, UK, Italy, and countries of the Middle-East and East Asia took a blow in 2020, remittance flows would come down in a significant manner because of the consequent negative impact of the pandemic on worker's earnings. However, Table-1 shows, remittance flows to Bangladesh experienced a robust rise of 18.4 per cent in 2020, belying the World Bank forecasts. In the case of Pakistan, the growth was 16.9 per cent and for Sri Lanka, the figure was 3.9 per cent.

For Bangladesh, the growth rate was particularly high during the July-December, 2020 period when earnings increased by about 38.0 per cent over the corresponding period of pre-pandemic 2019. In the backdrop of the ongoing pandemic, these high flows have significantly contributed to the Bangladesh economy, both at macro and micro households levels, by replenishing foreign exchange reserves and by raising incomes of recipient families at a time of falling income. The increased remittance flows have triggered supply-side response through multiplier effects arising from increased consumer spending.

A point to be noted in connection with the above is that only a small share of remittances is going to households with income levels below the poverty line. Less than 30.0 per cent of remittance receiving households are those with income below the national poverty line. As is seen from Table-2, in divisions with relatively high poverty incidences (e.g., Rangpur with 47.0 per cent and Mymensingh with 33.0 per cent households with below poverty line income) the shares of households receiving remittance tend to be the lowest (0.8 per cent and 2.4 per cent, respectively).

WHEREFROM ARE THE REMITTANCES ORIGINATING:

As Table-3 indicates, there has been no discernable change in terms of the sources of remittances coming to Bangladesh. Neither has there been any tangible change in terms of sources of incremental remittance flows in FY 2021 (July-December, 2020). The list of the top ten source countries has remained the same in recent years. Saudi Arabia, where the highest number of Bangladeshi migrant workers reside (31.8 per cent of the total of 13.2 million who have left for employment since 1976), has the highest share in remittance flows. The only country that shows an interesting anomaly is Malaysia where both share in remittance and incremental remittance are significantly higher in FY 2021 compared to earlier years (9.0 per cent and 14.3 per cent respectively).

THE UNDERLYING DRIVERS OF HIGH REMITTANCE FLOWS: The higher flow of remittances, at a time when the pandemic has caused significant income erosion and employment uncertainties in Bangladesh's major migrant destination countries, calls for a closer look at the underlying factors driving such flows. A key reason, of course, is the higher demands for cash support by remittance-receiving households in Bangladesh many of which had lost income and employment opportunities due to the pandemic induced economic, employment and earnings shocks.

Another plausible reason for robust remittance flows could be on account of the pandemic making it very difficult for people to send money through informal channels such as hundi and hawla. Accordingly, there is a high likelihood of the transfer of remittance flows from informal to formal channels. In July 2020, the Bangladesh Bank had raised the ceiling of sending remittances without supporting documents from US$ 1500 (150 thousand taka) to US$ 5000 (500 thousand taka) which may have made the transfer of money through the formal channels more convenient.

Migrant workers were further encouraged to send money through formal channels since in July 2019 a 2.0 per cent cash incentive was put in place on remittances sent from overseas. Moreover, bKash and some other mobile transfer platforms are paying an additional 1.0 per cent which could have further incentivised remittance senders.

In a subsequent report, the World Bank identified the cancellation of Hajj in 2020 as one of the reasons driving the surge in remittance flows. Many migrant workers tend to keep a certain part of their disposable income aside for Hajj purposes. This money was not spent in 2020 due to pandemic related travel restrictions. There is a possibility that the money saved was sent back home.

There are some concerns as well around high remittance flows. One of the apprehensions is that a part of the remitted money originated from an attempt to recycle Bangladeshi funds to receive incentives and to whiten black money. Though the Bangladesh Bank has procedures in place to forestall such malpractices, it is important that it carefully examines if the safeguard measures are being enforced properly. Any departure in the size of the average remittance flows (the so-called ticket size) and the sources of income of the senders need to be carefully scrutinised.

It is to be noted that the government has allocated TK. 30.60 billion in FY 2020-21 budget for payment of incentives on remittances; this amount is the same as FY 2019-20. In light of the increased remittance flows, the government will need additional money in FY 2021 since 70.0 per cent of the allocated funds are estimated to have been already paid out in the first six months of the fiscal year. The study projects that the government will need an additional amount of about TK. 13.0 billion in FY 2021 to pay the incentives.

Despite the surge in remittance flows, it needs to be kept in mind that the cost of migration in Bangladesh remains very high. This reduces the net welfare benefits enjoyed by remittance-receiving households significantly.  According to the 'Cost of Migration Survey' of July 2020 by the BBS, migrants spend about US$ 5 thousand on average to pay for going abroad. The authors estimate that total migration-related expenditure annually would be about US$ 3.7 billion; this was about 24.0 per cent of the average annual remittance flow during the Seventh Five-Year Plan (US$ 15.5 billion). Measures must be put in place to significantly reduce the cost of migration. Indeed, SDG 10.7.1 urges countries to bring down this cost significantly. In view of the very low number of migrant workers going abroad (only about seven thousand during the first five months of FY 2021 compared to 7.4 lac annually during the 7FYP period), the current robust remittance flows may not be sustained in the near term future. The study urged the policymakers to pursue a proactive policy to safeguard the interests of migrant workers who are staying overseas and who have returned to Bangladesh and to undertake diplomatic initiatives to ensure that more migrant workers are able to go abroad once the situation improves.

Mustafizur Rahman, Distinguished Fellow, Centre for Policy Dialogue (CPD).

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Md Al-Hasan, Senior Research Associate, Centre for Policy Dialogue (CPD).

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[This op-ed provides a summary of the key findings of the study titled "Remittance Flows in Recent Times: wherefrom is so much money coming?" conducted by Citizen's Platform for SDGs, Bangladesh.]