The declining Foreign Exchange Reserve (Forex) has become a common phenomenon in the Global South. The particular cases of South Asian reserves are also attracting media coverage. The impacts of the global pandemic translated into supply chain disruption, rising inflation, increasing poverty and commodity shock are contributing to this problem.
The ongoing Ukraine crisis since last February is also contributing by increasing energy costs and the disruption of production in the East European region. Subsequently, South Asian countries are facing difficulties in maintaining their forex reserves. Sri Lanka has already declared bankruptcy. Declining forex reserves have become alarming in Nepal and Pakistan. India is also experiencing depletion as its reserves have fallen by $89 billion in the last ten months. Yet the country is not facing any alarming situation thanks to its large reserve of $553 billion- adequate for 9 months’ imports.
Similarly, Bangladesh is also facing the same depletion issues for a while now. The country’s reserves have dropped to $36.4 billion from $48 billion within a year. The overall economy is also facing immense pressure due to this decline. The country’s primary sources of foreign currency are export, remittance and foreign investments, loans, or aid. But export and remittance are the major sources. While the export sector is performing according to expectation, the remittance sector also contributes a lot but is affected by the notorious illegal money transfer business. Due to this, the country is being deprived of billions of dollars each year that would help the reserve to stay afloat. Bangladesh must address this detrimental practice to keep its reserve safe.
Declining foreign reserves
Since August 2021, Bangladesh’s forex reserve has been falling continuously. It has become a recurring event in the last fourteen months. The reserve has fallen by $12 billion in the meantime. In August 2021, the reserve stood at $48 billion, currently at $36.4 billion. This depletion is decreasing Bangladesh’s import ability. It is also a reason behind soaring inflation.
The primary reason behind the declining foreign reserve is the negative Balance of Payment. To address this depletion, the country needs more dollars in its reserve. Remittance could be a speedy solution, but the challenge is money being siphoned out, which devours almost half of it.
Remittance and money transfers
For the past few years, Bangladesh has been earning a good amount of remittance, such as $21 billion in FY 2021-2022, while earning a record $24 billion in the previous year. The informal networks were not active during the pandemic, so the country could secure these record amounts. But this year, the networks became active again and the reserves faced a decline of $21 billion.
However, the amount Bangladesh receives yearly is only half of what the migrants generate each year. According to the Finance Minister of Bangladesh, the country only receives 51% of total remittances through banking channels. The remaining 49% comes through illegal transfer channels from which the country is deprived yearly. Simple calculations suggest that the country is losing $20 billion each year. Crime Investigation Department’s partial (only Mobile Financial Service) estimation also suggests that Bangladesh lost $7.8 billion last year.
Why are irregular money transfers so popular?
Irregular financial transfers are popular among migrants due to their convenience. The system is more accessible and a hassle-free service for them. For instance, migrants have to allocate time and transport costs to avail of banking services which is tough for them. Moreover, the money traders also pay higher exchange rates than formal banks. Migrant families in rural areas can also collect the funds easily.
Additionally, as a formal banking channel is only available for legal migrants, illegal migrants cannot access it. A large number of Bangladeshi migrants are working illegally abroad and illegal money transfers are their last resort to send money back home.
One interesting observation is that the system is widely considered a regular service within society. Even though it is an illegal activity in the eyes of the law, it is still not considered a crime due to its century-long practice.
Measures to be taken
To address forex reserve depletion, Bangladesh must address the illegal money transfer business. If Bangladesh could earn the dollars lost due to this detrimental business, it would easily reduce the existing gap in its balance of payment. But years of business and practice have created a strong network of money traders worldwide and within society, the awareness level is still low.
However, the government must raise awareness about the business and its detrimental impacts. Awareness about reserve depletion and its adverse effects on the people is also required in the mass level. Furthermore, stricter laws with zero tolerance need to be introduced against money transfer traders. Currently, the government is paying 2.5% on remittance, but it seems it is still not sufficient due to the higher exchange rate offered by the traders. The government should consider increasing the incentive for remittance.
Most importantly, the official banking system must address convenience issues that drive migrants to resort to this form of financial transfers. Agent banking in migrant areas needs to be introduced and banks should provide service during odd hours so that the migrants can access the service anytime. Moreover, unnecessary documents and fees should be reduced to make banking easier for both migrants and their families at home.
Apart from these measures, the government should also pursue psychological persuasion to attract the migrants towards formal banking channels. The migrant workers have had some concerns for decades now. They demand civil behavior at the airport to ensure their dignity, quick solutions to mistreatments, etc. The government should address these concerns, ensure good behavior, dignity, and eradicate mistreatment at the airport. The government should also hold workshops for outgoing workers to ignite a sense of nationalism. Several welfare initiatives, such as rehabilitation upon return, and provident funds upon retirement should be introduced. Introducing such psychological persuasions and welfare initiatives may play a crucial role in persuading migrants to use banking channels.
Amid soaring inflation and declining forex reserves, Bangladesh needs every dollar its nationals earn abroad. Illegal money transfers pose a strong challenge in this regard. The formal banking system in the last decade tried to overcome this challenge but could not find a viable solution. Moreover, the transfers itself are criminal activities. Amid economic turbulence, it is time for Bangladesh to address this issue seriously and practically to secure every dollar earned abroad.
*The writer is a Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA). He has a Master’s degree in International Relations with a special focus on International Political Economy from the University of Dhaka, Bangladesh. He occasionally contributes to Asia Times, The Diplomat, Pacific Forum, East Asia Forum, Modern Diplomacy and the Eurasia Review.
October 26, 2022
The viewpoints expressed by the authors do not necessarily reflect the opinions, viewpoints and editorial policies of Aequitas Review.
