Bangladesh has been undergoing a severe economic crisis since the breakout of the Russia-Ukraine war. Many aspects exacerbate the economic situation including the shortage of foreign currency reserves. After the second loan installment by the IMF, the forex reserve of Bangladesh stands over $20 billion. For international trade stability a country should have its foreign reserve such that it can sustain three months of import payments. Bangladesh’s reserves have reached a critical point.
The share of the dollar remains dominant in Bangladesh’s forex reserves. To tackle the rapid depletion of dollar reserves, Bangladesh Bank, the central regulatory bank of Bangladesh, has been taking stringent measures. It curtailed LCs to restrict import, depreciated the taka against the dollar to keep the dollar more expensive, and is offering extra incentives for migrant Bangladeshi workers to use the formal banking channel for remittance transfer.
While some measures are proving effective in conserving forex reserves, measures to boost the inflow of remittances through formal banking channels are not. Remitters opt for alternative hundi/hawala channels to transfer money to their dear ones in Bangladesh. Hundi offers a better exchange rate, hassle-free transactions free of paperwork, reliability and fast transfer of money.
Why opt for hundi and its implications for the Bangladesh economy
Hundi is a cross border off-the-book financial network, with agents in both countries of origin and destination of remittance transfer. When a migrant worker transfers funds to Bangladesh, an agent of hundi collects their foreign currencies. Another agent of hundi in the destination of money transfer provides equivalent taka to their family. Thus, hundi divert the foreign currencies to a third country of their convenience and preference. Bangladesh Bank reserves get deprived of forex accumulation.
Hundi agents in Bangladesh collect takas illegally earned by local political leaders, industrialists, officials, bankers, businesspersons, technical experts through corruption. This group of money launderers enjoy international currencies abroad equivalent to how much taka they illegally smuggle out of Bangladesh through hundi.
Hundi is also associated with under-invoicing and over-invoicing of import and export receipts to further smuggle money out of Bangladesh and evade import-export tariffs, duties. The subverting nature of hundi operations eats away the economic benefits brought about by the migrant workers. Bangladesh heavily depends on foreign remittances sent by expatriates.
Transactions done through hundi require no paperwork, proof of work, or income source and are just as reliable. This lack of accountability makes it an attractive medium of fund transfer for some people. Sometimes migrant workers pull overtime hours and informal jobs for which they do not possess a license or permit. Earnings from such sources cannot be shown on paper without facing repercussions. For many such reasons hundi cannot be dismantled, nor its importance denied.
Which is most popular?
Recently published Household Income and Expenditure Survey (HIES) 2022 by Bangladesh Bureau of Statistics (BBS) shows that migrant workers send home 78% of all remittance amounts through banking channels, implying a small percentage for hundi transactions. This contradicts what the former finance minister once said during his tenure that 49% of all remittances are sent home through hundi and remaining 51% through official banking channels. The BBS data has always been subject to stern criticisms due to its inaccuracy and unrealistic picture. Refugee and Migratory Movements Research Unit (RMMRU) finds in its research that 60% remittance amount is transferred through hundi.
Bangladesh’s Bureau of Manpower and Employment Training (BMET) records 1.2 million migrant workers as of December 2023. Such a high number does not add up with reported remittances of only around $20bn. A major portion of it is diverted to another destination through hundi. Hundi activities are prohibited in Bangladeshi law. Despite that, the hundi market in Bangladesh accounts for roughly $30-34bn each year, reported by different organizations.
Formalizing the hundi
At this point, formal banking authorities should consider adopting the fund transfer model used by the hundi channel and replicate how they function overseas to accrue forex.
To keep the country from suffering an extreme dollar crisis, it should identify and absorb some hundi agents into its formal banking. These newly employed are to work for the official banking channel ie collect forex from expatriates and divert it to the formal banking channel. In such rechanneling, Bangladesh’s Banks would have to pay a higher price for the dollar to cover the effort of the newly recognized hundi agents.
Measures to accumulate forex are important. But maintaining the reserve by efficiently combating money laundering and capital flight is far more crucial. Continuous efforts to build a sustainable hassle-free formal banking channel and spread its reach overseas’ Bangladeshi migrant workers are a prerequisite for a resilient economic structure.
The idea of partly legalizing hundi agents may stir some public sentiments as law enforcement agencies have been vigilante to apprehend the hundi agents. But at the end of the day, comfort, ease of access, and fewer paperwork always won. As the country grapples with its falling reserves resulting in double digits inflation, partly making peace with hundi does not sound like a bad idea, all things considered.
Zulkernain Khandaker is an Economics graduate from DU, Studying MURP at BUET. He can be reached at: zulkernain88@outlook.com