The economics of remittance growth

Most economic indicators on the state of the Bangladesh economy during the first half of FY20 are down with one big exception—remittances. After declining from its peak of $15.3 billion in FY15 to $12.8 billion in FY17, remittances have recovered in the next two years, reaching a historic high of $16.4 billion in FY19. One would have thought that the sheer base effect of such a peak would slow growth subsequently. But no, remittances in the first half of this year grew 25.4 percent exceeding all expectations. If remittances during the second half of the current fiscal year grow at the same rate as it did during the second half of the last fiscal year, it will reach a far greater new height of $18.3 billion. This most likely is a conservative estimate.

What explains this extraordinary performance? 

A strong temptation is to point to the 2 percent cash subsidy on remittances introduced with the FY20 budget. This has effectively raised the exchange rate for remittance dollars by 2 percent. Thus, for the remitters the total increase in the exchange rate in the first half equals the 2 percent subsidy plus the 0.4 percent depreciation in the average exchange rate in the market so far. Can this 2.4 percent increase in the exchange rate explain the 25.4 percent growth in remittance in the first half of FY20?

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 gross stock of Bangladeshi workers abroad increased by 5.6 percent last fiscal year. There is a lag between the time the workers move abroad and when they start remitting money home. This lag varies between 6 and 12 months, according to various surveys. It is, therefore, most likely that a part of the boom this year is the lagged effect of the growth in the stock of workers in the previous fiscal year. 

An increase in earnings per migrant worker may also have contributed.  Most of the increase in remittances this year so far has come from Saudi Arabia, Oman, the UK and the US. Base salaries in Saudi Arabia grew 4.5 percent, reportedly the highest in the region. Wage growth in Oman has remained strong, averaging 11.4 percent. In the UK and the US wages increased by 3.2 and 3.6 percent respectively by the end of October 2019.

The average propensity to save may also have increased because of falling cost of living in the host countries. Inflation in Saudi Arabia and Oman was negative in the range of 1-2 percent in 2019. It declined in the UK by 0.3 percentage points but increased in the US by 0.5 percentage points.  

How much of the total increase in remittances can we attribute to these three factors? Based on the numbers reported above we can only make some guesstimates. If we assume stock growth contributed 5.6 percentage points, earnings growth 3.5 percentage points and saving growth 1 percentage point, we are still left with a residual of 15.3 percentage points that can be attributed to increase in the propensity to remit.

Effective exchange rate received by the remitters is an important, but not the only determinant, of the propensity to remit. This is evident from previous episodes of remittance boom. Remittances grew by 31.3 percent in the first half of FY07 and by 30.9 percent in the first half of FY09. Exchange rate, however, appreciated by 0.5 percent and 0.2 percent during these two periods respectively. 

There is fairly strong evidence in the literature that remittances are motivated by altruism i. e. by caring for the families left behind by the workers. This implies that remittances will rise when bad times hit the domestic economy. Such a relationship is also suggested by the new economics of migration, which argues that migration results from a collective family decision not just to maximise income but also to minimise risks such as crop failures, injuries, job losses or business losses.

Developed countries minimise these risks through welfare state and insurance systems. All such risks have to be faced by the household in developing economies. Migration is a strategy to diversify these risks.

Thus, if the domestic income of the families left behind falls, migrant workers tend to compensate the fall by increasing the amount remitted and vice versa.  GDP growth in FY07 was about 0.38 percentage points higher than in FY06 and 0.96 percentage points lower in FY09 relative to FY08. While the latter is consistent with strong remittance growth, the former is not.  Note, however, that growth in the stock of workers abroad rose sharply in the year preceding FY07 which may have more than offset the decreased motivation to remit due to higher domestic income of recipient households in FY07.

The point of the discussion is to caution that attributing this year’s remittance boom to the 2 percent 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 percent growth.    

All growth-related economic indicators this year are suggesting an economic slowdown. Remittance is the only one that has far outstripped 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.

The author is an economist.