Use remittance to promote growth: ADB

Improving financial education of remittance recipients, expanding digital finance and promoting remittance-linked capital market instruments could promote growth and cut poverty in developing countries including Bangladesh, according to a forum organised by the Asian Development Bank.   

Over the past decade, many developing countries have made substantial progress towards reducing poverty, and remittances sent by migrant workers have hugely contributed to this progress.

In ADB's developing member countries, remittances nearly tripled from $92 billion in 2005 to $246 billion in 2013.

This huge flow of remittances helped reduce poverty levels, mostly through increased spending on food and other essential items such as housing and education.

It is estimated that remittances helped reduce the poverty level in Bangladesh by 1.5 percent, according to an article published on the blog of ADB Institute.

But little is known how the remittances are transmitted and the money spent by the receiving households.

Questions also came up on whether remittances really contributed to inclusive and sustainable economic growth in receiving countries, and how governments can make use of remittances to create more domestic job opportunities.

The ADB recently hosted the Forum on Promoting Remittances for Development Finance to find answers to the questions.

One of the recommendations made during the forum is that remittances can contribute to economic growth if the receiving household saves or puts the money into the formal financial system, which would then channel the money into public and private investments.

Studies around the world found that households spend most of the remittances they receive.

For example, in Bangladesh, 84 percent of the remittances are consumed.

Only 14 percent is saved, mainly due to transaction costs such as fees to open a bank account, a lack of trust in financial institutions, regulatory barriers like official identification documents that many poor people lack, and a dearth of information and financial literacy.

Studies suggest more financial education helps households to save more, according to the ADB Institute article.

To channel remittances for investments, it is essential to expand access to formal financial services. Digital finance has an enormous potential to capture remittances in the formal financial system.

In Bangladesh, only 15 percent of the population has access to banks, but 60 percent have mobile phones.

Digital finance can help include poor people in the formal financial sector and enable them to save and invest in financial assets, said the forum.

It also said capital market instruments such as diaspora bonds and securitisation of future flow of remittances are available to capture remittances for investments at a national level.

In Africa, Ethiopia, Ghana and Kenya raised $400 million, $20 million and $154 million respectively through sovereign bond issuances targeting non-resident nationals willing to contribute part of their savings to their home countries.

"To tap diaspora investments, though, countries should develop the right structure, marketing and distribution channels, and build long-term relationships with the target investors," it said.

Both the public and the private sectors, including donors, must think about concerted assistance in these areas. For example, the governments can promote financial education for migrant workers before they go abroad.

The forum also said the donors can support developing financial sector infrastructure IT systems such as core banking system, e-payment and networks to promote digital finance.

They can also help develop enabling legal and regulatory frameworks for remittance securitisation and diaspora bonds.

More essentially, governments and donors must have a vision to leverage remittances to develop viable local industries to generate local employment opportunities, so in the long run workers can find good jobs at home rather than migrate out of necessity, it said.

Bangladesh logged in $14.23 billion in remittance in fiscal 2013-14 to make it the seventh highest remittance receiving country, according to the World Bank.

The country is expected to receive about $15 billion in remittance in the current fiscal year, Bangladesh Bank Governor Atiur Rahman said.

There are nearly 1 crore Bangladeshis living abroad. Their contribution accounts for about 66 percent of the country's foreign currency reserves, providing Bangladesh a strong external stability.

The channelling of remittance through informal avenues to Bangladesh has also gone down to single digit now, from 60 percent in the last five years, according to the central bank chief.

fazlur.rahman@thedailystar.net