Inward wage remittance is an important factor to keep the BOP favorable and the exchange rate stable Explain.
Role of Inward Wage Remittance in BOP
Inward wage remittance refers to money sent home by Bangladeshi workers employed abroad. These workers are in countries such as Saudi Arabia, UAE, Qatar, Kuwait, Malaysia, and the USA.
These remittances are recorded as Secondary Income under the Current Account of Bangladesh’s Balance of Payments (BOP). They represent an unrequited transfer. This means money flows into Bangladesh without a corresponding outflow of goods or services in return.
Bangladesh is one of the top remittance-receiving countries in the world. In FY2021, remittance inflows reached a historic high of USD 24.78 billion.
In FY2022, remittances were USD 21.03 billion. This made them the second largest source of foreign exchange after readymade garment exports. This scale of inflow makes remittances a critical pillar of Bangladesh’s external sector.
How Remittances Keep BOP Favourable
Bangladesh has a persistent trade deficit. Its goods imports consistently exceed its goods exports in value. In FY2022, Bangladesh’s trade balance was negative USD 33.25 billion. Without any offsetting inflows, the BOP would be deeply in deficit. Foreign exchange reserves would deplete rapidly.
Remittances provide a large and relatively stable offsetting credit in the Current Account. They appear as Secondary Income. They are not tied to any import obligation. So they directly improve the Current Account Balance.
Even in years when the trade deficit widens sharply, strong remittance inflows keep the Current Account deficit at a manageable level. In FY2021, remittances were so large that Bangladesh’s overall BOP recorded a surplus of USD 9.27 billion. This happened despite a significant trade deficit. As a result, reserves reached a historic high of approximately USD 46 billion.
How Remittances Help Stabilize the Exchange Rate
The exchange rate of BDT against USD is determined by the demand and supply of USD in Bangladesh’s foreign exchange market. When remittance inflows are strong, the supply of USD in the domestic market increases. This excess supply of USD puts upward pressure on BDT. It helps the currency maintain or appreciate in value.
When remittances decline, the supply of USD in the formal banking system drops. This happened partially in FY2022 when formal channel remittances fell while hundi (informal) channels gained. Demand for USD from importers then exceeded formal supply. This exerted depreciation pressure on BDT. Bangladesh Bank had to sell USD from its reserves to stabilize the rate. This depleted reserves over time.
Strong remittance inflows reduce Bangladesh Bank’s need to intervene in the foreign exchange market. They allow the exchange rate to remain stable without excessive reserve drawdown. They also support import capacity. Bangladesh can continue to afford imports of fuel, food, and capital goods even when export earnings fluctuate.
Policy Implications
Bangladesh Bank and the government have taken several measures to encourage formal channel remittances. A 2.5% cash incentive is offered on remittances sent through banking channels. Account opening procedures for wage earners abroad have been simplified. Mobile financial services and online remittance platforms have also been introduced.
These measures aim to shift remittance flows from informal hundi channels to formal banking channels. This ensures that the BOP and exchange rate benefits of remittances are fully captured in Bangladesh’s official statistics and foreign exchange reserves.
