Falling hundi demand, dollar rate: Secret behind Aug-Sep remittance boost

Infographic: TBS

Bangladesh received $4.63 billion in remittances during August and September, reflecting a remarkable 58% increase compared to the same period last year. This surge occurs at a critical moment for the country which is grappling with a crisis of foreign currency needed to pay for essential imports such as energy, fertiliser, and goods for the private sector.

So what's driving this significant growth? According to financial experts and bankers, two key factors are at play here.

First, there has been a significant decrease in under-invoicing of import bills, a practice that previously diverted substantial funds but has been controlled in recent months.

Second, money laundering through informal channels, such as hundi, has noticeably slowed down.

They suggest that following the fall of Sheikh Hasina's government on 5 August, political and business activity has slowed down and money laundering has tapered off, leading to a decreased demand for dollars in the informal hundi market and a redirection of funds through official channels.

"Under-Invoicing in imports typically boosts hundi demand, but with imports declining recently, hundi demand has dropped and dollars are flowing through formal channels," Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank (MTB), told TBS.

Syed Mahbub also noted that expatriates are choosing to send remittances through formal channels out of a sense of patriotism following August's regime change.

"Money smugglers" quiet after regime change

Bankers and people involved in foreign remittance business mention reduction of money laundering as another contributing factor to reduced demand for hundi. The country head of a major foreign money exchange firm, who wanted to remain anonymous, said after the Awami League government's fall, many politicians and business figures involved in "smuggling money abroad" have become inoperative.

"As money laundering fell, the demand for hundi dollars dropped by 60-70%, as reported by our foreign branches. Funds previously routed through hundi are now entering formal channels," he added.

MTB CEO Syed Mahbub said, "Money laundering has dropped drastically which has reduced the demand for hundi. We have seen similar trends in the past, such as during Covid-19 when formal remittances increased due to a decline in hundi operations," the banker added.

Strong dollar fuels remittance growth

Central bank data reveals a significant surge in remittance inflows from various countries during September. The highest remittance of $388 million originated from the USA, marking an impressive 175% increase compared to the same month last year.

In addition, remittances from the UAE rose by 41% to $362 million, Saudi Arabia by 60% to $345 million, Malaysia by 275% to $237 million, and the UK by 39% to $206 million.

Sheikh Mohammad Maroof, managing director of Dhaka Bank, said the dollar rate significantly influences remittance trends. The figures for September align with the high number of workers who have gone abroad over the past two years.

He said low dollar rates in 2022 and 2023 adversely affected remittances as the dollar peaked at Tk125 in the open market in 2023.

Moreover, favourable governmental changes often encourage remitters to send funds back home, contributing to the recent uptick, said Maroof, adding that maintaining this momentum will help sustain positive remittance flows in the future.

He praised the interim government's decision to adopt a market-based exchange rate, suggesting it may lessen the need for government incentives on remittance.

MTB CEO Syed Mahbub also said reducing the 2.5% remittance incentive could provide the government with greater control over the dollar rate.

LC openings drop by $1.5b

In the first two months of FY25, import letter of credit (LC) openings and settlements fell by around 13%, due to factors such as political instability and lack of investment.

Central bank data shows that LCs worth $10.03 billion were opened during July-August, marking a nearly $1.5 billion decline compared to the same period last year.

A senior treasury official at a private bank said the Bangladesh Bank's strict oversight, particularly in monitoring LC openings, along with commercial banks' vigilance on the pricing of imported goods, has contributed to the reduced demand in the hundi market.

"Bankers have become more cautious – they are thoroughly checking the prices of imported goods," the official said, on condition of anonymity.

Rate gap narrows between formal and informal channels

The head of a money exchange told TBS that the rise in the dollar's value over the past two weeks has narrowed the rate gap between formal and informal channels, boosting remittances.

"Currently, sending remittances through legal channels yields Tk125-125.50 that includes the government's 2.5% incentive. In contrast, illegal hundi channels offer up to Tk126-127," he explained.

This means the rate difference between the two channels, which has been a significant factor in the increase in remittance inflows, is now only Tk1-2. In 2022 and 2023, the gap was much larger, sometimes reaching Tk7-8, he said.

Dollar rises on overdue external payment pressures

The dollar rate has increased by Tk2 to Tk122 over the past two weeks riding on overdue payment pressure.

To improve the country's financial image, state-owned banks have begun settling these overdue dollar payments owed to foreign countries and institutions.

They are competing to gather remittance dollars to meet rising demand, with private banks also participating to remain competitive.

Despite this competition to garner remittance, the central bank has directed that banks can offer up to Tk120 for buying and selling dollars.

MoneyGram, one of the largest foreign exchange firms, was offering a dollar rate of Tk124.06 on 6 October, while TapTap Send offered Tk120.50.

Additionally, several foreign exchange houses are collecting remittances at higher rates, whereas just two weeks ago, the maximum buying rate was Tk120-121.

On 2 October, Western Union, a leading foreign exchange firm, offered remitters a rate of Tk121.18, and within five days, raised it by over Tk1 to Tk122.21 to stay competitive.

MTB CEO Syed Mahbub said overdue external payments have decreased from over $2 billion two months ago to around $700-800 million. He anticipates that once these payments are cleared, the dollar rate will drop further.

A senior central bank official, seeking anonymity, told TBS that during a meeting on 3 October, treasury heads from state-owned banks were instructed not to exceed a remittance dollar rate of Tk122 and to gradually lower it to Tk120.

He also hinted that once overdue payments are settled, the dollar rate will decline.

How did the dollar rate increase?

Senior bank officials told TBS that the interim government has implemented several measures to stabilise the dollar market since taking office.

One key action, taken on 18 August, was expanding the allowable band for inter-bank foreign exchange transactions from 1% to 2.5% to enhance liquidity. Under the current crawling peg system, with a mid-rate set at Tk117, banks can now add 2.5%, raising the rate up to Tk120. This adjustment allowed banks to offer slightly higher rates.

At a meeting the following day, Bangladesh Bank Governor Ahsan H Mansur instructed state-owned banks to settle nearly $2 billion in overdue foreign payments and encouraged private banks to participate in the interbank market to support these payments.

On 29 August, treasury heads from 47 banks agreed to cap the dollar exchange rate at Tk120 for both buying and selling to prevent further escalation.

However, as state-owned banks continued to offer higher rates, private banks also began doing the same. By mid-September, most banks had started offering elevated rates, pushing remittance rates up to Tk122.

The Bangladesh Bank had previously introduced the crawling peg system on 8 May, resulting in the largest single-day devaluation of the taka, which raised the dollar price from Tk110 to Tk117.

Stronger dollar may increase inflationary pressures

Moinul Islam, a former economics professor at Chittagong University, told TBS that the central bank governor has aimed to keep the dollar rate at Tk120. If the rates increase beyond this, it may indicate that his efforts have not been entirely successful.

Nevertheless, he noted some progress in reducing volatility in the dollar market. But, until this market stabilises fully, expected inflation reductions may not materialise.

He expressed hope that once the pressure on the country's reserves lessens, the strain on the exchange rate will also diminish.

Regarding the rate disparity between official and unofficial channels, Moinul said controlling money laundering through hundi is crucial. And, if effective measures are taken to recover laundered funds, it could lead to greater stability in foreign exchange reserves and exchange rates, which are interlinked.

The economist said in a country reliant on imports, a rising dollar naturally leads to increased inflation. Even with a contractionary monetary policy, persistent increases in the dollar's price could hinder efforts to reduce inflation.