Remittances: An incipient scissors crisis

Published : 12 Dec 2016, 04:26 PM
Updated : 12 Dec 2016, 04:26 PM

There is much concern that one of the mainstays of our balance of payments, remittances, is on an alarming downward slide since the last fiscal year. Remittances declined by 2.52 percent in 2015-16 and the data for the first five months of this fiscal year suggest a much worse trend. This has happened at a time when the number of workers going overseas has risen steeply. The development of a scissors crisis in this sector (rising migration with falling remittances) has puzzled many a person who has looked for an explanation.

Two hypotheses have been advanced to resolve the puzzle. The first is that there has been actually no significant reduction in the quantum of remittances. For some reasons the hundi exchange rates have become more attractive which have enticed remitters to switch to hundi in preference to the formal banking or other channels. Since hundi transactions are not recorded, these are not shown in the official remittance figures which are the sum of the remittances received by individual banks. Consequently the official remittance figures understate the actual amounts sent home. Thus this hypothesis explains the puzzle by denying that it actually exists.

The second hypothesis claims that the current glut in the oil market has badly affected the revenues of the gulf countries which are the principal sources of the remittances received by Bangladesh. The revenue shortfall has forced these countries to cut back on their spending. Remittances to Bangladesh have been a victim of this fall-out of the oil glut.

Both the hypotheses are plausible except for the fact that no evidence has been advanced in their support. The first hypothesis is by its nature non-refutable. The hundi transactions are illegal and no records are available. Consequently no claims made on their magnitudes are directly verifiable. One indirect method of 'proof' advanced in support of the hypothesis is that the hundi price of dollar has shot up. This increase has been implicitly or explicitly attributed to an increase in demand for unaccounted dollars. The increase is thought to be due to an increase in illegal trading activities of smugglers. Illicit transfer of funds out of the country is also mentioned as a reason for the increase in demand. The large margin over the formal exchange rate now offered by the hundi traders is intended to lure a larger number of remitters to this market. Again there are no data on the unofficial hundi market rates, although it should not be very difficult to gather these through periodic surveys. No such surveys are known to have been carried out, or if they have been carried out the results are not available in the public domain. The volume of smuggling is also undocumented. Consequently, it becomes a matter of faith whether one believes the claim.

Both smuggling and illicit transfer of funds are very long term phenomena; they have been going on at least from the time of the partition of India. Global Integrity Fund estimates the magnitudes of more recent illicit fund transfers based largely on trade data, while wild guesses are relied upon for estimates of smuggling. The claim above raises the question why these activities have shot up suddenly. Have stricter restrictions been imposed on the formal channels or the law enforcing agencies acquired greater vigour and skill in recording illicit activities? Furthermore, since illicit transfer of funds occurs mostly through trade misinvoicing these should not impact on the hundi market. An abnormally large spike in the import value of machinery during July-October 2016 is a pointer.

It may be noted that the rise in the price of the dollar in the hundi market could be equally well explained by a shortage of supply of dollars due to a reduction in remittances rather than an increase in demand as claimed above. The shortage would force the hundi people to raise their rates to bid away remitters from the formal channels. Hence, the official and hundi dollar price differential does not unambiguously support the assumption of an increase in dollar demand. Also the supply-based explanation fits the Occam's Law better than the hypotheses above.

The second hypothesis is empirically testable. There has been a prolonged glut in the oil market and the Gulf States are in some difficulty. Hence, the hypothesis does appear promising. However, it must be understood that remittance outflows from these states may not depend, at least in the short to medium term, on oil revenue. Even if they did, it need not impact on the remittances sent by Bangladeshi workers, which depend only on continued employment of such workers in the Gulf States at regular wages. Only if the total employment of Bangladeshi workers in the Gulf States declined or the average wages fell could there be a decline in the remittance from these states (assuming no change in the consumption and remittance habits of the workers). Unfortunately, there are no reliable estimates of the stock of our workers overseas. However, some relevant information is available in the public domain, which could be utilised to get an idea of what happened.

Remittance outflows in recent years from countries from which Bangladesh receives most of its remittances are shown in Table 1 below.

Remittance statistics of all gulf countries are not easily available beyond 2014, the year when oil price crashed. Remittance outflows in these countries show an upward trend during the 5-year period 2010-14. In particular, remittances from Saudi Arabia and UAE increased very robustly. Local sources, including news media, report robust growth of remittances in both these countries as well as in the gulf region as a whole in 2015. For example, the CEO of UAE Exchange recently noted: "Despite economic pressures, remittance outflows from oil-exporting GCC countries continued to rise in 2015 due to maintenance of fiscal spending, and the peg to a strong US dollar by most economies in the GCC." (Gulf News, December 4, 2016). This suggests that the large reduction in oil prices has not affected remittance outflows from gulf countries in either 2014 or 2015, and the available information indicates it is unlikely to do so also in 2016. The import of workers from overseas has also increased markedly in the Gulf countries (Saudi Gazette, November 28, 2016). Thus, the evidence we have on hand does not lend any support to the claim that the oil market slump has adversely impacted on remittance outflows from, and the hiring of foreign workers in, the gulf countries.

The largest employer of our workers is Saudi Arabia followed by UAE. Oman, Qatar and Bahrain are also important destinations of the job-seekers. Together the gulf countries accounted for more than two-thirds of the total workforce who migrated overseas in 2015. More than three-quarters of the workers who migrated overseas since 1976 went to these countries. It seems plausible to assume that about the same fraction of the current stock of migrants from Bangladesh working overseas are in these gulf countries. Therefore, the importance of these countries for employment of Bangladeshi workers and remittance flows cannot be overstated.

The flow of temporary migration of workers to these countries from Bangladesh increased massively in both 2015 (47.5 percent) and 2016 (36.9 percent till November). And yet remittances from these countries declined by 9.6 percent between January-November 2015 and 2016; and by 5.2 percent between the fiscal years 2014-15 and 2015-16. During July-November 2016-17 period remittances declined by 15.0 percent from the corresponding period in 2015-16. The trend of remittances and migrant labour movement into these countries are shown in the Table 2 and Table 3 below. The incipient scissors crisis during the last two years is evident.

It is not the case that the flow of remittances from the gulf countries only have declined; actually all major sources of remittances to Bangladesh, including USA, Malaysia and UK, are showing the same slowing trend. Actually, the declining trend of remittances from the gulf countries is about the same as that from the rest of the remitting countries. Globally both remittance inflow and outflow data of the World Bank also show a decline since 2014, but the decline is more pronounced in the case of outflows suggesting differences in the accuracy of estimates.

In view of the global slowdown the decline in remittance inflow into Bangladesh should be expected. What is puzzling is that the flow of migrant workers during this period has increased enormously which should normally suggest an increase in demand for Bangladeshi workers and consequently an increase in total wage income. Since the opposite has happened we must conclude that either total employment has declined despite the increase in migration or that the wages have declined markedly. Both these have dire implications for the workers. The first would imply a large part of our workforce overseas is actually unemployed, while the second implies there has been a significant deterioration in the work conditions, which were poor to begin with.

If the decline in remittances is believed to be temporary, then no fundamental changes in policies are called for, the situation will autocorrect. If this situation persists, some policy actions may be necessary. However, policy implications will differ in an essential manner depending on what really is the cause of the decline in the remittance inflows. The cause cannot be established convincingly without some serious research into the matter. Conjectures or apparently plausible answers, which many people are addicted to, could lead to policy blunders that could create worse problems in future. It is unfortunate that neither Bureau of Manpower Employment and Training nor Bangladesh Bureau of Statistics nor Bangladesh Bank has regarded it necessary to estimate the stock of our workers in various countries and the spread of hundi. Without credible information on them it is not possible to say if the large increase in the number of workers who have gone overseas during the last two years has actually increased the stock of our workers there and if informal transfers have increased. Also we do not have information on their employment status or the terms of employment. Since the external labour market is the principal source of non-agricultural employment and a stout pillar of support of the balance of payments, it is advisable to look into the various facets of this adverse development with some seriousness.