There is a surge in remittances through formal channels, a surge that has belied all projections of a severe downturn due to the pandemic.
Remittances in July-January grew 33 per cent (year-on-year) in Bangladesh this fiscal year.
The World Bank projected a 20 per cent decline in global remittances in 2020 due to the economic downturn induced by the pandemic.
This apparently did not happen and not just in Bangladesh.
Remittances through formal channels surged in Nepal, Pakistan and Sri Lanka as well.
A micro-macro paradox
The story unfortunately does not end there. At the micro-level, the facts on remittance appear quite different.
A survey released in January by the South Asia Network on Economic Modelling (SANEM) finds the loss of this crucial financing lifeline for many households.
They interviewed 5,577 households, distributed across 8 divisions and 64 districts, between November-December 2020.
Over 82 per cent of households who receive remittance from abroad reported receiving less than what they used to receive before the pandemic.
Earlier in July, a survey by the Refugee Movement and Migration Research Unit (RMMRU) covering 200 families of expatriate workers from 21 districts found about 61 per cent of the families did not receive any remittance over the preceding three months.
The amount of remittance the remaining 39 per cent of the families received declined from an average of Tk 47,000 per quarter in normal times to Tk 30,000.
Information collected from the households reflect better the total amount of remittances received irrespective of whether these came through formal or informal channels.
Based on this evidence, it is reasonable to assume that the size of remittance inflow to the households has declined.
The apparent disconnect between the macro and micro level are not “alternative facts”. They can both be correct at the same time. The missing link is a major shift in channels migrant workers use to send remittances.
Weaker remittance fundamentals
Consider the fundamentals first. Total remittances depend on the capacity and willingness to remit on the part of individual migrant workers and the total number of such workers abroad.
The capacity to remit at the level of the individual workers depends on their savings, which, in turn, depends on their earnings and costs of living.
The willingness depends on the strength of altruistic linkage, family needs and incentives such as the exchange rate and interest rates.
The number of workers abroad depends on job opportunities in host countries vis-à-vis the home economy and the costs of migration.
What changed among these fundamentals and in which direction?
Migrant workers tend to be more vulnerable to loss of employment and wages during an economic crisis in a host country.
The Persian Gulf hosts 70 per cent of Bangladeshi migrants.
As Covid-19 began spreading across the Gulf, working conditions of migrants deteriorated.
Millions of migrant workers found themselves abruptly deprived of income, and in many cases, trapped in crowded accommodations with little access to health care or even food.
In general, their economic, legal and social lives were disrupted.
Many migrants retreated from supporting families back home to feed themselves and keep off the streets.
The vulnerabilities of the migrant communities remained even as the GCC nations transitioned toward reopening.
Several regained employments on a contingent or contractual basis, with even less security than the pre-pandemic arrangements.
Many migrant workers were in construction planned in accordance with high oil prices that were no more. Many projects were postponed.
More than 18 million full-time jobs were lost in this region between March and September of last year.
Migrant workers mostly faced a decline in working hours, wages and business opportunities globally.
Costs of living at best remained stable. Hence, saving at the individual level is unlikely to have increased for most migrant workers since the virus raged in early 2020.
Some migrant workers may have prospered benefitting from the increase in demand for workers in e-commerce and other industries because of the pandemic.
Business closures due to lockdowns led to a boom in online shopping and home delivery.
Migrant workers stepped in to fill the void left by locals reluctant to work in logistics and distribution due to fear of infection.
But these were of the order of magnitude smaller than the jobs and income losses caused by the restrictive effect of the pandemic on economic activities in the host countries.
The number of workers abroad declined.
About 4.8 lakh migrants returned in 2020, according to data provided to the parliament by the minister of expatriate welfare and overseas employment.
Manpower export faced a sudden stop since March and is yet to recover. Bangladesh is used to exporting 40,000-50,000 workers per month in normal times.
Decline in the number working abroad and the increased fragility of incomes of those who remained can explain the decline in total remittances reported by the households.
Indeed, remittances through the formal channel in March-April plummeted to $1.2 billion a month from $1.6 billion per month in the preceding eight months.
A surprisingly sharp recovery
From a recent low of $1.1 billion in April, remittances through the formal channels rose sharply, peaking at $2.6 billion in July and subsequently averaging about an unprecedented $2 billion per month through January 2021.
The recovery in May-July benefited from several enhancements through formal channels.
The sharp drop in remittances in March and April 2020 was partly due to restrictions on mobility.
Many remitters rely on physically visiting remittance service providers.
International money transfer was disrupted during the peak of lockdowns in March-April.
Easing of restrictions unlocked these pent-up remittances leading to catch up subsequently.
In addition, those already returned or in the returnee pipeline, estimated at 1.4 million by Brac, DataSense and Unnoyon Shmonnoy, are likely to have brought back the accumulated savings they did not remit home while working abroad.
Infrequent remitters who transfer counter-cyclically during a crisis for altruistic reasons may also have contributed.
The more secure Bangladeshi diaspora abroad were better placed to send funds to relatives in Bangladesh in response to the decline in family income at home due to the pandemic and floods.
Migrants may also have remitted home funds that could not have been spent on pilgrimage last year. May-July spanned the two biggest Muslim festivals as well.
Transfer of accumulated savings, unlocking of pent-up remittances, domestic economic distress, the Hajj and festival effects cannot endure.
With the completion of the return process, exhaustion of the pent-up stock and easing of domestic distress, the inflows induced by these forces dissipated.
Yet, remittances from July through January have remained elevated at around an unprecedented $2 billion a month level, $400 million larger than the elevated pre-pandemic monthly average in fiscal 2019-20.
The enhancement that seems to have persisted is the diversion from informal channels as international trade and travel, the backbone of demand for remittance dollars in the informal market, struggled to get back to the pre-pandemic normal.
These continued to overwhelm any decrease in remittances through formal channels by regular remitters with the weaker capacity to save due to the pandemic.
The diversion accelerators
The rise in remittances through formal channels had been remarkable in months preceding the pandemic.
The average monthly remittances in fiscal 2018-19 were $1.4 billion.
This rose to $1.6 billion during July-February in fiscal 2019-20.
The increase prior to the pandemic was driven not just by the fundamental drivers such as growth in the number of remitting workers but as importantly by substitution between channels.
A 2 per cent subsidy on remittances through banking channels introduced with the fiscal 2019-20 budget made formal channels more attractive.
The entry of fintech services in the remittance market expanded the reach of the formal channels.
Strengthening of the anti-money laundering efforts by the government to comply with the Financial Action Task Force (FATF) requirements made informal transfers riskier.
The pandemic pivoted the diversion to formal channels further.
Informal channels include Hundi networks as well as hand carrying.
Hundi networks transfer money without any cash physically moving from one place to another.
Instead of going through the traditional banking systems, these rely on retail establishments to collect remittances overseas for paying out locally through money already in the country.
The need for such transactions evaporated as visa trade, under-invoicing imports and travel-based trade went downhill due to the pandemic.
Limited travel during the pandemic also made physical carry of cash difficult.
Drying out of informal channel options forced sending money through banks, money transfer operators or mobile platforms.
A correction likely, not inevitable
The decline in the total remittances (formal plus informal) is sobering from a growth point of view.
It drags private consumption, the key driver of domestic demand.
Private consumption expenditure depends on how much the households receive irrespective of the channels through which they receive their money.
The increase in formal remittances is an accounting artifact as the actual funds transferred are lower.
However, the economic stability metrics consider only official and formal flows which makes a redirection into formal channels an important shift that does have an impact on macro-financial stability.
The $2 billion level may persist for a few more months. The underlying fundamentals supporting remittances are currently weak.
Lower level of economic activity, unstable oil prices, and suppressed demand for migrant workers in the GCC region are likely to strain flows.
With the restoration in trade and travel, the informal channels may swing back into action leading to a reversal of the diversion from informal channels.
In that case, the monthly level may regress towards the pre-pandemic $1.6 billion level.
This by no means is inevitable partly because of the stickiness of change and largely due to changing outlook over the longer term for migrant labour due to ageing in developed and emerging markets.
GCC governments’ efforts to reduce their dependence on migrants are limited by their population size, the talent pool of locals and the availability of local young labour.
Reliance on migrant workers might even increase with an expected rebound in economic growth globally as vaccine role out approach herd immunity levels.
The author is an economist