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OP-ED: Driving forces for increasing trend of wage remittances

  • Published at 11:59 pm July 1st, 2021
Remittence
A bank employee counts US dollar notes in this file photo from May 16, 2016 Reuters

It is true that contributors are not being benefitted

It is observed that wage remittance during the current fiscal year of 2020-2021 upto April, 2021 has exceeded $22.84 billion which is more than 39% compared to the correspondent period of immediate past fiscal year 2019-2020.

Economists are of the opinion that the enhancement is due to declaration of cash incentive, remittance of savings by non-residents, panic remittance due to the pandemic and so on.

But they do not highlight the underlying driving forces which enhance remittances at a continuous pace.

Non-residents working abroad are not white colour workers, they do blue colour works requiring physical labour.

Reality is that they merely enjoy civic facilities as needed for leading a standard life. They are just machines operating at sweatshops.

It is true that contributors are not being benefitted.

The wage remitters do not know how their income is supporting the external sector of Bangladesh economy.

They even do not know how their remittances reach their near and dear ones in Bangladesh.

The underlying reason is that they do not have scope to go to banks or exchange houses to send remittance since they are machines as said earlier.

They do not have access to digital wallets.

They are basically dependent on intermediaries to send money to their beneficiaries in their home country.

The intermediaries play a vital role in sending their money.

They are themselves working as markets with whom remittance senders and operators depend.

A part of their activities is under shadow areas, developed on the basis of needs.

As usual, needs require wings to fly. Universal truth works here where no regulation precludes the truth. 

Since fiscal year 2019-2020, the government has started disbursement of incentive against inward wage remittances.

This is one of the driving forces, definitely. It also works as exchange rate support since a separate exchange rate cannot be applied for wage earners as was applied in the last century when the dual exchange rate system prevailed.

Exporters are also being benefitted in such a way in the form of cash subsidy based on inward export payments.

This benefit can be a factor but not a single factor for huge influx of inward remittance.

The foreign exchange regime of Bangladesh is said to be a system under which Taka is convertible on current transactions.

The central bank claims that authorized dealer banks can execute outward remittance within the indicative limit.

But reality is that the indicative limit is very insignificant, on the basis of the authorized limit.

Banks can effect outward remittances on service payments if the transactions are permitted.

List of transactions cannot support payment unless otherwise general instruction is available.

Section 4(5) of the Foreign Exchange Regulation Act of the country states that "Any person resident in Bangladesh may sell or purchase foreign exchange to or from an authorized dealer if such sale or purchase is a current account transaction; provided that the Bangladesh Bank may, in public interest and in consultation with the Government, impose such reasonable restriction on current account transactions as may be needed to respond to current or capital account imbalances."

Under the regulations, payment for current transactions is free.

But reality was different earlier.

The central bank’s approval was also required for current transactions.

It seemed outward remittances were under a controlled regime.

Currently, transactions under the capital account are closed.

Section 4(6) of the Act states that "The Bangladesh Bank, in consultation with the Government, may specify the classes of permissible capital account transactions."

The website of the Financial Institutions Division of the Ministry of Finance shows that the Government is working to formulate a guideline for transactions under capital account.

In addition to the Foreign Exchange Regulation Act, few current transactions like royalty, technical knowledge/technical know-how fee, technical assistance fee and franchise fee are subject to the Bangladesh Investment Development Authority Act.

It is observed that Bangladesh Bank has brought radical changes on foreign exchange regime in 2019 and onwards.

This has resulted in simplification of current transaction flows for which stakeholders need not approach Bangladesh Bank for permission.

Corporates are allowed to effect legitimate remittances up to 1 percent of previous year’s sales or $100,000, whichever is higher.

This benefits a lot to avoid the approval process.

Recently it was found that member firms of e-Commerce Association of Bangladesh have been given annual quotas for outward remittance by banking channel or by international card channel.

On the other hand, Bangladesh Investment Development Authority has recently issued a guideline under which 6% of the value of imported machineries of a new corporate and same percent of the previous year’s sales of an ongoing corporate have been allowed to effect outward remittances without approval on account of royalty, technical knowledge/technical know-how fee and so on.

In addition to current account transactions, the central bank has brought a paradigm shift in repatriation of sales proceeds of investment by foreign investors in respect of capital nature transactions.

Central bank’s regulations in this regard have allowed authorized dealer banks to repatriate sales proceeds of shares regardless of amount if fair value of share is determined by the management of the target companies through net asset value (NAV) approach based on latest audited financial statements submitted together with tax returns.

Most of the foreign investments in Bangladesh are involved in manufacturing activities. Remittance on the basis of NAV without approval from the central bank is really a great deregulatory measure by the central bank on the capital account.

The regulations have also given general permission to repatriate sales proceeds of shares up to Tk10 million equivalent foreign currency without valuation reports from independent valuers.

In addition, remittances of above Tk10 million up to Tk 100 million equivalent foreign currency on account of sales proceeds, fair value of which is determined in terms of prescribed valuation methods, have been allowed through the circular.

The amount up to Tk100 million will help medium ranged investment companies in service sectors for repatriation of disinvestment proceeds.

Central bank permission will now be required for transactions beyond Tk100 million for which valuation other than NAV is applied.

In these cases, the assets will mainly be valued on the basis of discounted cash flow approach.

The company having assets of intellectual nature may require such type of valuation.

Practical cases in these types are expected to be very insignificant since service sectors of Bangladesh with high intellectual properties are in the initial stage.

As a result of simplification of the transaction process, the informal foreign exchange market becomes undersized. This results in insignificant demand in the unofficial market.

Its consequential efficacy is that huge influx of remittance through banking channels.

Central bank adopted a policy for inward wage remittance in 2007 through exchange houses abroad.

It is reported that Bangladeshi banks have more than 1000 drawing arrangements with exchange houses abroad.

This policy might be based on time-need during that period.

If we look for bank to bank transactions, correspondence relations by Bangladeshi banks with banks abroad are enough.

It is observed that Bangladeshi banks work with few banks abroad like Standard Chartered Bank, Citibank NA, HSBC, JP Morgan, Commerzbank, Mashreq Bank, Wells Fargo, Nova Scotia, RBS, few Middle East banks and regional banks.

But banks need to arrange more than a thousand drawing arrangements under the regulatory framework to repatriate wage remittances! Is it necessary?

Just maintaining bank accounts in Bangladesh by exchange houses abroad are enough for prepayment remittance services.

No drawing arrangement is necessary for post payment services in the same way Bangladesh receives export payments, under which banks credit exporters’ accounts after their nostro accounts are credited.

The present payment system framework is guided by foreign exchange regulations, KYC and AML/CFT standards and so on.

During the current payment ecosystem, drawing arrangements on a case to case basis by banks seems to be obsolete.

Bangladesh Bank should review it and guide banks with required safety measures.

The central bank deserves thanks for taking appropriate initiatives for policy support.

The propositions as stated above may improve the inward payment ecosystem to an extended scale.

Bangladesh Bank may revisit its regulatory framework for further smoothness of payment services.

 

The author works in the development sector and can be reached at [email protected]