IMF for productive use of robust remittance

International Monetary Fund (IMF) has suggested Bangladesh to create opportunity for productive use of wage earners remittances instead of consumption.

"Currently, a large part of remittances seems to be used for consumption," it said in an evaluation report released last week on Bangladesh's remittance growth and recommended providing savings instruments for the remittance recipients.

Wage Earners remittance grew 24.5 percent to about US$ 6 billion in the just out fiscal year (2006-07), helping the country's foreign exchange reserve to cross US$ 5 billion as on Thursday last. However, the evaluation on remittance sector prepared by the Staff team was based on the information available at the time when the evaluation was completed in April.

The evaluation report said financial deepening should leverage the impact of remittances on growth. "This increases welfare -and more so the poorer the recipient of remittances - and should not be discouraged."

At the same time, it said the government policies should support financial deepening to provide savings instruments for those who do want to save out of their remittance receipts.

"Abstaining from financial repression, fostering competition in the financial sector, and providing a strong regulatory environment would help in putting more remittances to productive use." IMF said that if remittances have not significantly aggravated economic cycles so far, it does not mean that they will not in the future. "Presently, BB is experiencing upward pressure on the exchange rate owing in large parts to strong remittance inflows." It added that: "This is a welcome opportunity to build up reserves to more comfortable levels, but should be accompanied by sterilization to prevent excessive money and credit growth, non-performing loans, and inflationary pressures down the road."

IMF said remittances are a welcome source of foreign financing and should be promoted. They are larger and less volatile than ODA, they are unrequited transfers which do not create debt service in the future, and they help cushion the economy against oil price shocks. According to various cross-country studies, it said countries could promote remittances through official channels by abstaining from dual exchange rate practices and current account restrictions, by reducing transaction costs through increased competition in the banking sector, and by fostering financial sector development more generally.

"Remittances are no universal remedy and can not substitute for good policies at home. Remittances do not rise in response to economic shocks other than oil price shocks," it said.

On the contrary, the Fund said remittances dwindle when the economy slows and amplify the economic downturn. Cross-country research also found remittances to be strongly correlated with the political and investment climate in the home country.

IMF observed that the spectacular rise of workers remittances has sparked a wide interest in Bangladesh's macroeconomic properties. Remittance receipts in Bangladesh has increased by 17 percent, on average, in each of the last 30 years and meanwhile constitute the largest source of foreign exchange after exports. "Many believe - and some evidence has emerged - that remittances serve as an insurance against economic shocks," it said, adding that this would be good news for Bangladesh which is prone and vulnerable to a number of shocks.

In 2006, IMF said workers remittances amounted to 7.7 percent of GDP, compared to 16.8 percent of GDP for merchandize exports, 1.9 percent of GDP for ODA and 1.1 percent of GDP for FDI. Remittances through informal channels or the so-called 'hundi' system are estimated at about 75 percent of reported remittances, it added. However, it said the rise in remittances is mirrored by a steady increase in emigrant numbers. Gross emigration of overseas workers increased from 6,000 in 1976 to 382,000 in 2006 with a quantum leap in the early nineties.

The current stock of overseas workers is estimated at 3.9 million (2.8 percent of the population) translating into an average annual remittance of $1,230 per worker.

Some 50 percent of overseas workers reside in Saudi Arabia and 95 percent stay in oil exporting countries, suggesting a link between remittance flows and the oil price.

The composition of emigrant workers changed little over time, ruling out a shift towards higher-end employment as a possible cause for rising remittance flows, said the International Monetary Fund.