Cash incentives & remittances in Bangladesh

Bangladesh's tremendous progress on some economic fronts has been attracting global attention for a couple of years. Notably, the recent news regarding Bangladesh's agreement to swap currency with Sri Lanka of US$200 million impressed countries around the world. The deal, which was the first of its type for Bangladesh, was largely explained by international media as the country's demonstration of its economic success as well as the attitude to be a good neighbour.

The credit of such a positive appearance in global media, which is rare, goes to the country's success in building a large foreign exchange reserve. On Jun 2, 2020, the foreign exchange reserve of  the country was US$33.5 billion. Exactly one year later, it stands at 45.1 billion, recording about 35 per cent growth over one year. At the same time, the exchange rate of the Bangladeshi Taka remained constant against the US Dollar  as well as other major foreign currencies (which also helped to keep the Consumer Price Index or CPI inflation reasonably stable over the same period).

The progress in the foreign exchange reserve occurred even with an increased current account deficit, thanks to the inward remittances the country received in recent periods. The Wage Earners' Remittances towards the country was US$18.20 billion in the fiscal year 2019-20 (FY20) which raised by 36 per cent to $24.74 billion in in FY21. The phenomenal growth of remittances had been considered as one of the government's policy successes. Indeed, in the budget speech this year, the country's finance minister argued that the initiation of cash incentives (of 2.0 per cent ) on expatriate income and the simplification of the process of channelling remittances did the job.

The finance minister is more likely to be correct. Economics teaches us that exchange rates directly affect households and individuals through two primary channels -- the prices of traded goods and services and the inflow or outflow of foreign remittances. Historical changes in exchange rates indicated the fact. For example, a sudden depreciation of the Filipino Peso during the 1997 Asian financial crisis increased international remittances to the Philippines. Unfortunately, the relevant literature did not clearly explain the reasons for the stylised fact.

A recent investigation by the researchers of Massey University (New Zealand) and the Australian National University (ANU) focused on the mechanism of how exchange rates can affect the expenditure of migrants.  The research paper is titled Exchange rates and expenditure of households with foreign-born members: Evidence from Australia. Prepared by Syed Hasan, Shamim Shakur and Robert Breunig, it is published this year in the Journal of Economic Behavior & Organization. The research found that when the Australian dollar depreciated, the migrant households increased their food (and overall) consumption/ expenditure in Australia compared to the natives. The demonstrated pattern of changes in expenditure is due to the fact that natives are unlikely to change their consumption pattern when the exchange rate changes (except for the impact of depreciation/ appreciation on the prices of domestic consumption items). In contrast, immigrants are likely to increase their consumption/expenditure after the currency depreciation at the destination country as remittances become relatively costly in immigrants' countries of origin. As a consequence, migrants may send lower remittances to their country of origin. The opposite can be expected when the currency in their home country depreciates, or conversely, the currency in their host country appreciates.

While a cash incentive on expatriate income is not a uniform depreciation of the local currency, the investigation sheds some light on how cash incentives on expatriate income can raise foreign remittances. In particular, for the migrants, cash incentive will work as a depreciation of the home country currency, which is likely to induce them to send more remittances to their home country.  Thus the investigation indicates that providing cash incentives (or raising the rate) on expatriate income is likely to boost the inflow of foreign remittances into the country. The study is helpful for countries with a large number of migrant workers, as the clear-cut mechanism demonstrates the trick to build/maintain their foreign exchange reserve through a convenient fiscal policy tool.

Cash incentive on expatriate income thus can be considered as an evidence-based policy that is likely to be beneficial for Bangladesh, India, Pakistan, Nepal, the Philippines, Mexico, and many other developing economies.

Globally, evidence-based policy formulation is becoming increasingly popular for both the public and the private sector. To facilitate the formulation of evidence-based policy for boosting remittances, several limitations of the research conducted by Syed, Shakur and Breunig (2021) are worth mentioning. First, the study focused on (mostly) permanent migrants living in a developed country, while remittances in many countries come from the migrants living temporarily in oil-rich Middle Eastern countries. It can be the case that the temporary migrants can be constrained by their financial situation in the host country, and therefore, depreciation may not affect their remittances behaviour. Thus, more research needs to be conducted using the consumption pattern of temporary migrants.

Second, Syed, Shakur and Breunig (2021) did not directly focus on the remittances received by the households in the recipient countries. Research focusing on the recipient households, while valuable, is limited by the unavailability of appropriate data. Quality research focusing on remittances received from various countries will require high-quality, preferably panel data. Unfortunately, Bangladesh does not conduct any regular, high-frequency, and large panel survey that focuses on remittances.

Thus, we urge the Bangladesh Bureau of Statistics (BBS) to initiate a survey to generate multi-issue-focused, high-quality, high-frequency, large panel data. A survey fulfilling those criteria can be beneficial to examine, among other issues, the effectiveness of cash incentives (on expatriate income) in raising the inflow of foreign remittances. Some other examples include the effectiveness of the social safety net, education and health-related policies, changes in the poverty rates and the factors behind it, etc.

The availability of such data will allow the government to formulate evidence-based policy by evaluating the effectiveness of its policies and programs. The government can also find it helpful to routinely report the country's progress (backed by high-quality data) to the citizens, domestic and foreign investors, development agencies, and international media and thus improve its' global image.

Dr Syed Abul Hasan is Senior Lecturer at School of Economics and Finance, Massey University, New Zealand and a former Senior Assistant Chief at the General Economics Division, Bangladesh Planning Commission. [email protected]