Remittances and the rural economy in Bangladesh

Remittance has become a major contributor to the Bangladeshi economy. It is also the single largest source of foreign currency earnings in Bangladesh. However, until recently most of the literature on economic development via remittance has mainly been focused on the end-user (microeconomic) aspects of remittance by the recipient households. Little has been observed in the macroeconomic aspects. Data had been collected from secondary sources and mostly reports published by government agencies and international organizations. A number of recommendations have been given as a way to increase remittance to uphold the overall socio-economic development of Bangladesh. As the number of emigrant workers from Bangladesh gradually increased over the years, the amount of annual remittance to the country significantly rose. Remittance is sent formally through various ways such as demand draft, traveler’s check, telegraphic transfer, postal order, direct transfer, Automatic Teller Machine. etc. Hundi or money carrier system is prevalent as informal process of remittance sending in most cases. The most popular reasons behind the preference towards Hundi system is the absence of any transaction charges, its fast delivery and the opportunity to maintain confidentiality. This article is designed to provide an illustrated account of what kind of research has been done on these remittances at home and abroad over the past fifty years. Remittances have multipurpose positive effects on rural economies, which enhances Bangladesh’s inclusive growth, according to economists.

Primarily, it boosts the consumption-driven economy, which ultimately improves the rural non-farm economic activities. Therefore areas that successfully earn more remittances improve in economic and non-economic activities too, they focused. Since the money goes directly to rural households, this boosts the rural economy through injection of increased liquidity, increased consumption, and savings and macroeconomic impacts of remittances are also substantial through support provided to the balance of payments. Bangladesh is featured in the list of top 50 recipients of remittance inflows in the world. The country retained its position as the seventh highest recipient of money transferred by migrant workers in the world; India remains at the top. The hike in remittances from more skilled Bangladeshi migrants could bring a windfall for Bangladesh and its migrants said a World Bank report on remittance that was published recently. Remittance is important for low-income countries as a dominant source of foreign exchange. The significance of remittances in its economies ranged from 6 to 8 per cent of GDP for Bangladesh. Although remittances rose above pre-Covid-19 and 2020 levels by almost 6 per cent to reach USD 23 billion in response to the government’s tax cuts and other incentives in 2021, slowdown in growth is distinct. Now, rural demand depends on good harvesting and remittances, and if one of them is impacted then it has impacts on economic activities. With better harvesting and remittances, non-farm economic activities have boosted in rural areas. If non-farming activities are strong in an area then its internal migration is lower.

Though, sometimes, it raises inequality as all people don’t get the chance to go abroad. That situation has changed as many lower income people are now going abroad and earning foreign currency. And women are also taking part in agricultural entrepreneurship. If they are given loans and advised to get more technology, then the utilisation of remittance will be higher. In particular, the rural economy has been benefiting a lot in terms of increased consumption and investment in micro, small and medium enterprises. More than 60 per cent of our growth originates from consumption which has been kept buoyant by robust financial inclusion aided by remittance. The phenomenal growth in rural non-farm income owes a lot to consistent inflow of remittance. The macroeconomic impact of remittance has been even more important. Along with export, the remittance has been balancing the external payments and supporting robust imports, at times it has helped create surplus in current account balance. The growth in foreign exchange reserve could be attributed to remittance, which has been helping Bangladesh in undertaking larger investment in infrastructure until recently the exchange rate of dollar against taka remained stable for many years. Due to a sudden spurt in post-pandemic imports opening up of the economy, and enhanced foreign visits by our people, the balance of payment has been under pressure with gradual depreciation of taka. This is a transitory development which will improve as more remitters go back to their work places. Inflation might show its ugly face for some time. However, oil prices are being stabilised and I am sure we will regain our strength in external economy shortly.

The central bank will have to remain engaged to bring back the balance with prudent interventions. In theory, remittance growth can come from four sources: increase in the number of migrant workers abroad, increase in earnings per migrant worker, increase in their average saving rate and increase in their average propensity to remit. The point of the discussion is to caution that attributing this year’s remittance boom to the 2 per cent cash subsidy is an oversimplification that underestimates the role of other factors such as growth of the stock of workers abroad and in their earnings as well as savings. This is not to suggest that the subsidy made no difference at all. But it cannot account for the entire 25 per cent growth. All growth-related economic indicators this year are suggesting an economic slowdown. Remittance is the only one that has far outstripped the performance in the previous year. Domestic economic slowdown may have motivated workers abroad to remit more than they usually do. For instance, nearly 30,000 workers reportedly lost jobs in 2019 in the garment sector alone. Members of their families working abroad could have increased the amount they remit because of the income loss suffered by their families in Bangladesh. Such remittances from abroad play the role of insurance either because of altruistic linkages between the remitters and the recipients or because of migration being driven by households’ strategy to diversify risks. Since independence, Bangladesh has achieved impressive economic growth and social development. Building on this success, while addressing structural issues and modernizing policy frameworks would be needed to reach the upper-middle income status by 2031.

Growth is expected to pick up to 6.6 per cent in FY22. Supporting recovery, while addressing vulnerabilities remains a vital concern. Subsequently, priorities should shift to creating greater fiscal space, reducing fiscal risks, preserving the stability of the financial system, and modernizing policy frameworks. To maintain competitiveness in a post-pandemic world, structural policies should focus on accelerating growth, attracting private investment, and enhancing productivity to lift growth potential. Building climate resilience remains critical. Increasing revenue and enhancing fiscal policy frameworks are necessary to scale up inclusive and productivity enhancing investments, while safeguarding fiscal sustainability. Modernizing revenue administration, streamlining tax expenditure, separating National Savings Certificates from direct budget financing, and adopting a pragmatic fuel pricing mechanism will help accommodate additional social, developmental and climate related spending. With the economy rebounding, the central bank should closely monitor inflationary pressures and stand ready to normalize. Caps on the lending and borrowing rates limit the policy space and should be phased out to strengthen market-based pricing, improve credit allocation and monetary transmission. Greater exchange rate flexibility, together with safeguarding foreign exchange reserves, will help buffer external
shocks.

An orderly exit from Covid-19 related financial policies is crucial to reduce the offset financial sector vulnerabilities. Addressing structural weaknesses in corporate governance, regulatory, supervisory, and the legal framework are important to stem growth of non performing loans.

 Absence of reforms and financial sector risks could be a drag on medium-term growth prospects. Ensuring that classification and provisioning requirements are in line with Basel standards is an important first step towards NPL resolution.

Recent NSC price changes are welcome, but efforts to reform the NSC scheme and to develop the bond market remain important for developing capital markets. More decisive reforms are needed to meet the challenges after Bangladesh’s transition out of the LDC status and to maintain competitiveness in a post-pandemic world. To support private sector-led growth, underpinned by exports and investments, structural reforms should focus on improving governance, diversifying exports, increasing productivity, and building climate resilience to lift growth potential.

The writer is a researcher based in the UK. He can be contacted at raihan567@yahoo.co.uk