Macroeconomic Policy Challenges of Large Remittance Inflows

1. Macroeconomic Policy Challenges of Large Remittance Inflows -Dr. Atiur Rahman, Governor, Bangladesh Bank Conference on: Strengthening Remittance Flows and Impact: Policies, Practice, Prospects Organized by: WB/IMF 04 October, 2009 Istanbul Congress Center

2. Trends • Beneficial Consequences of Large Remittance Inflows • Macroeconomic Challenges of Large Remittance Inflows • Near Term Responses to These Challenges • Medium and Longer Term Market Development Agenda • Concluding Remarks…

3. Trends • For some years now, remittance inflows from migrant workers abroad have been underpinning external sector viability in Bangladesh. • Annual inflows have grown nearly four-fold between FY 02 and FY 09 (from USD 2.5 billion in FY 02 to USD 9.7 billion in FY 09). • During this period, ODA inflows net of amortization have stagnated around an average of about USD 1.0 billion annually.

4. Trends…(Cont’d) • Remittance inflows grew buoyantly even during the global financial turmoil (by 32.4% and 22.4% respectively in FY 08 and FY 09). • Bangladeshi migrant workers largely in low-skilled jobs did not suffer an extensive job losses in host markets abroad. • Much of the increased inflows during the crisis period are presumably transfers from host country markets in turmoil to stable financial environment prevailing in Bangladesh.

5. Beneficial Consequences • The growing remittance inflows have been highly beneficial for Bangladesh in: • upholding domestic demand in the recessionary global environment; • enhancing availability of borrowing resources for both government and private sector; • augmenting FX reserve cushion for coping with the uncertainties of the fragile, unstable external environment.

6. Macroeconomic Challenges of Large Remittance Inflows • Liquidity overhang in the domestic financial markets. • Inflows only partially absorbed in immediate use for productive investments in the recessionary global environment. • The remainder spilling over into speculative outlays in real estate and other asset markets resulting in excessive asset price pressures. • Extensive recourse to sterilization with issues of treasury/central bank securities is problematic, in that the consequent interest rate hike may dampen the already tepid investment initiatives.

7. Macroeconomic Challenges…(Cont’d) • Large remittance inflows creating appreciation pressure on Taka, adversely impacting: • exporters • remittance recipients • Growing FX reserves (USD 9.3 billion as of 24 Sept 2009) are heightening to balance sheet risks for Bangladesh Bank (BB) from appreciation of Taka.

8. Near Term Responses of the Government of Bangladesh (GOB) • The GOB has taken various fiscal measures to stimulate real sector investments including: • Specific supports to sectors affected by the global downturn; • Public-Private Partnership (PPP) initiatives in infrastructure investments; • Support for microfinance self-employment initiatives; • Treasury bonds in Taka and USD targeted at non-resident Bangladeshis absorbing part of the increased remittance inflows.

9. Near Term Responses of the BB • BB has also adopted various financial sector policy measures including: • Limited recourse to mopping up excess liquidity by auctioning of 30 day BB Bills; • Buying up USD funds from the inter bank market to maintain exchange rate of Taka on a slight undervaluation bias; • Supporting and promoting lending to under-served productive real sectors (agriculture, SMEs, renewable energy and environmental protection); • Allowing banks larger open exchange positions to permit wider engagement in lending in foreign exchange.

10. Longer Term Market Development Agenda • Strengthening the capacity of domestic financial markets for handling and absorbing large inflows by: • Deepening of secondary markets in treasury and corporate securities; • Creating new secondary markets in asset-backed securities; • Supporting growth of new capital market institutions (venture capital and private equity institutions);

11. Longer Term Responses…(Cont’d) • Deepening of local inter bank foreign exchange market with adequate access to hedging tools which will require: • Allowing some extent access of non-residential institutional investors to domestic money market in Taka, at some appropriate stage over the medium terms. • Some easing of restrictions on investment/placement of funds abroad by Bangladeshi residents will be needed in coping effectively with the appreciation pressures on Taka. This is to be considered over the medium term as external sector viability strengthens further.

12. Concluding Remarks.. • Labour migration has not created shortage in domestic labour market. • Domestic shortage of manpower, and Dutch disease in remittance beneficiaries typically associated with manpower exports and remittance inflows have not been major concerns for Bangladesh. • Current demographics and the country’s institutions for general, professional and technical education are providing steady streams of new entrants into the labor market well in excess of local requirement; leaving ample room for manpower export.

13. Concluding Remarks.. • Sample surveys/studies about utilization patterns of workers’ remittance inflows indicate that a substantial part (around 40%) of the remittances is utilized for acquisition of capital assets and/or for financing migration costs. • To sum up, GOB and BB are responding flexibly and creatively to challenges for macroeconomic policies posed by high inflows of migrant workers’ remittances; • These challenges will be regarded as opportunities for phasing in appropriate regulatory and market development reforms towards bringing about a deeper, broader and more inclusive financial sector in Bangladesh.

14. Many thanks