The title of this piece – remittance and black money – seems awkward.
Remittance is something that we all want; the Bangladesh Bank celebrates its increased flows; the World Bank regards it as an important source of foreign private capital flows. Remittance is, thus, good for development.
Black money is mostly ill-gotten; even if earned through hard work, no tax is paid on the amount. Black money is, thus, bad for development.
So, one should logically think that they are at two opposite poles and linking them would be an oxymoron. But in recent years, it seems both are getting linked in Bangladesh. Like in many cases, we Bangladeshis have found some ingenious ways of linking the two seeming opposites.
The suspicion arises from a number of recently reported facts. First, a significant fall in manpower exports. The number of manpower exports dropped from 378,837 in January-June 2012 to 207,957 in January-June 2014. That is, in three years, the number of people going abroad for work declined by 170,880.
Second, an acceleration of remittance flows from $1.17 billion in February to $1.48 billion in July 2014. This was the highest inflow of remittance in a single month in Bangladesh's history and represented over 19% increase in one year. As a result, total remittance flows stood at $8.93 billion during the first 7 months of the year – up by 7.71% year-on-year.
How could remittance flow go up when the number sending them declines significantly? Newspaper reports also tell us that the number of workers who managed overseas jobs declined by 33% during 2012-2013. This decline was accompanied by a large number of migrant workers returning home due to deportation or loss of jobs.
One possible reason the reports present is the appreciation of taka vis-à-vis dollar. However, this is a chicken and egg problem. The increased inflow of remittance itself leads to appreciation of local currency as the supply of the dollar increases.
So, what could be a plausible answer to the puzzle?
Let us go back a few years to 2011 when the value of the dollar rose from Tk. 71 in January to Tk 81.9 in December (Figure 1). This sharp depreciation of taka happened despite the fact that remittance inflows increased from $11 billion in 2010 to $12.17 billion in 2011 (Figure 2).
When the supply of the dollar rose due to increased remittance inflows, the price of the dollar in taka should have fallen, according to the first principle of economic theory. But since the price of dollar rose, it is clear that the overall demand for the dollar exceeded its supply.
However, from the official figures on foreign reserves (Figure 3), this does not seem to be the case. Reserve rose sharply from around $7.4 billion in 2008-2009 to over $10.7 billion in 2009-2010 and to more than $10.9 billion in 2010-2011. This means that the net demand for the dollar to fund imports did not rise to cause the rise in the price of the dollar. So, the rise in demand for the dollar must have come from other sources.
Figure 1: Dollar-taka exchange rate in 2011
Figure 2: Remittance inflows to Bangladesh (in million USD)
Figure 3: Foreign exchange reserve (in million USD)
Source: Figures 1-3; Bangldesh Bank
As a matter of fact, dollar appreciation against taka during this period in the wake of the 2008-2009 global economic crisis was an exception to the worldwide trend. Contrary to the weakening of the dollar against most currencies, it strengthened against taka. This is another puzzle that needs to be understood to find some plausible explanations of the rise in remittances even when there has been a significant drop in the number of migrant workers.
Both puzzles can be explained with one more finding. Bangladesh ranked number one among the least-developed countries in illicit transfer of funds in a 2011 UNDP report. According to the Global Financial Integrity Report, more than $16 billion was illicitly taken out of the country during 2002-2011. The illicit transfer of funds jumped from $630 million in 2002 to $2.8 billion in 2011.
This sudden jump can be explained by the sharp drop in property prices in places like Dubai following the 2008-2009 global economic crisis. Ill-gotten money was transferred through informal channels to buy up properties at a rock-bottom price in countries with lax financial transaction regulation or anti-money laundering laws. This is the most plausible explanation of the rise in net demand for the dollar and hence its appreciation vis-à-vis taka during 2011.
It is possible that some of the illicit money is coming back through formal channels – this is a safe method of whitening the black money. Not only do you not have to pay any tax to whiten your black money, but also it is now welcomed. It is also possible that rent earned on properties acquired abroad in the first place through illicit transfer of funds during 2011 is also being remitted back to Bangladesh through formal channels.
Thus, we have a conceivable explanation of the first puzzle – the rise in remittance inflows despite falling number of migrant workers. If this explanation is accepted as credible then we have a reason to celebrate the ingenuity of Bangladeshis who can turn a bad into a good!
Anis Chowdhury, former Professor of Economics, University of Western Sydney, Australia.