Beruflich Dokumente
Kultur Dokumente
BANGLADESH
ECONOMY
by
Fariha Haque
ID :0210108
by
Fariha Haque
ID: 0210108
April, 2006
Mohammad Imran
Lecturer, Economics
School of Business
Independent University, Bangladesh
Acknowledgement
This report would not have been possible without the support and encouragement of
Mohammad Imran, my supervisor (IUB). His vision played a major role in shaping the
report. He was always there to guide and advice me with my research. His suggestions and
comments have added to the development of the report in every possible way. I appreciate the
A special thanks to Shamim Hamid, my supervisor at UNDP, Bangladesh, for her support
and advice.
I am also greateful to MD. Shahidul Haque (RR, IOM Dhaka), Kareen Dunn (UNDP,
Bangladesh) and Binoy Kishna (UNDP Bangladesh) for providing the book, reports, research
Abstract I
1.0 Introduction 1
2.1 Remittance 3
3.0 Methodology 8
6.0 Conclusion 18
Reference 19
Appendix A 21
Appendix B 27
List of Figures
Page
VII. Figure 6. Time-Trend of Net Factor Income and External Resource Balance 14
VIII. Figure7. Trend of NFI ,Gross Domestic savings and Gross National savings 15
(1986), in his paper “Impact of Workers’ Remittances from Middle East on Pakistan
Economy: Some Selected Issues- the Pakistan Development Review (1986)”. Findings
suggest that the inflow of remittances increased from $0.2 billion in 1980 to $1.7 billion
in 1999 that is about $1.5 billion increase over the 18 years. In the year of 1996-97,
remittances, GNP and remittance as percentage of GNP shows similar trend in growth
(BOP).
1.0 Introduction
Remittances to Bangladesh have been growing steadily over the last decade. Since its
independence in 1971, more than 3 million Bangladeshis have left the country in search of
employment. The central bank estimates their cumulative remittances during 1976-2003 at
round US$22 billion (Azad, 2005). Recognizing their economic importance, the government
for years has had legislation, policies, and an institutional structure in place to facilitate the
Now the question is why sudden importance is put into the perception of remittances? The
fact is that the absolute and the relative volumes of workers’ remittances are increasing. They
have shown a steady increase over the last decade. The amount of remittance flows to
developing countries already surpassed that of official resource inflows. Since 1999, workers’
remittances have been the second largest resource flowing into developing countries after
foreign direct investment (FDI). In addition workers’ remittances are not liabilities but cash
transfers from overseas, which in principle, they do not cost any to recipient countries. As
there has been much debate about external debt and its negative effect on growth, this feature
Despite the growing interest in workers’ remittances, the role of remittance in development
and economic growth in general is not clearly understood. For example, studies based on a
country’s time-series data tend to find positive impacts of remittances on growth, but a cross-
country/panel data study by Chami et al. (2003) shows the opposite outcome. This is still one
Thus, there has been little work on the impact of remittances on the overall
economy.
whether to include remittances from overseas workers as a part of the net factor
income in national income accounts. The resulting GNP estimates (GNP= GDP
+ net factor income from abroad) therefore are not comparable. Amongst the
In this report, an attempt has been made to clarify concepts relating to the
Rashid (1986) has conducted a research on the impact of workers remittance from the
Middle East on Pakistan’s economy. The research is based on the concept that inflow of
remittance can have a profound effect on Pakistan economy. The study reveals that
significant inflow of remittance will add to the societies resources; ease the balance of
payment constraint, positively contribute to the Gross National Product (GNP) and help gross
national savings to increase. There is another study conducted by Bruyn & Kuddus (2005), on
Dynamics of Remittance Utilization in Bangladesh. The study reveals that remittance has
strong impact on the national economy. In the current study, the researcher will use national
In this current research, researcher will try to analyze the effect of remittance on
Bangladesh economy.
The purpose of the study is to develop a theoretical framework to examine the effect of
remittance on the economy of Bangladesh. Therefore, the paper will focus on the affect of
indicators is the main limitation of this study. Unofficial inflow of remittance, which is not
included in the official remittance data, is another shortcoming of the analysis of this report.
However, the data is standardized but it would have more interesting if exchange rate issue
When migrants send home part of their earnings in the form of either cash or
goods to support their families, these transfers are known as workers’ or migrant
remittances (Ratha, 2005). Remittances have been growing rapidly in the past
few years and now represent the largest source of foreign income for many
Bangladesh refers to the transfer of funds made by migrant workers through the
banking channel (and through post offices) (Mahmud, 1989). The records of
such transfers can be easily separated from other foreign exchange transactions
since these take place under what is known as the Wage Earners’ Scheme
(WES).
According to Ratha (2005), it is hard to estimate the exact size of remittance flows because
many transfers take place through unofficial channels. Worldwide, officially recorded
international migrant remittances are projected to exceed $232 billion in 2005, with $167
billion flowing to developing countries. These flows are recorded in the balance of payments;
an international technical group is reviewing exactly how to record them. Unrecorded flows
through informal channels are believed to be at least 50 percent larger than recorded flows.
Not only are remittances large but they are also more evenly distributed among developing
countries than capital flows, including foreign direct investment, most of which goes to a few
big emerging markets. In fact, remittances are especially important for low-income countries.
another individual or household. They are targeted to meet specific needs of the recipients
and thus, tend to reduce poverty. In fact, World Bank studies, based on household surveys
conducted in the 1990s, suggest that international remittance receipts helped lower poverty
(measured by the proportion of the population below the poverty line) by nearly 11 percentage
In poorer households, remittance may finance the purchase of basic consumption goods,
housing, and children's education and health care. In richer households, they may provide
capital for small businesses and entrepreneurial activities. They also help pay for imports and
external debt service, and in some countries, banks have been able to rise overseas financing
Remittance flows tend to be more stable than capital flows, and they also tend to be
migrants' home countries, when private capital flows tend to decrease. In countries affected
by political conflict, they often provide an economic lifeline to the poor. The World Bank
estimates that in Haiti they represented about 17 percent of GDP in 2001, while in some areas
There are a number of potential costs associated with remittances. Countries receiving
migrants' remittances incur costs if the emigrating workers are highly skilled, or if their
departure creates labor shortages. In addition, if remittances are large, the recipient country
could face an appreciation of the real exchange rate that may make its economy less
competitive internationally. Some argue that remittances can also create dependency,
undercutting recipients' incentives to work, and thus slowing economic growth. But others
argue that the negative relationship between remittances and growth observed in some
empirical studies may simply reflect the counter-cyclical nature of remittances—that is, the
sacrifices—often including separation from family—and incur risks to find work in another
country. And they may have to work extremely hard to save enough to send remittances.
To sum up, we can say that migrants’ families enjoy a higher standard of living and status
It is clear, indeed obvious, that the most important macro-economic impact of financial
flow arising from international labor migration is on the balance –of –payments and through
situation of chronic foreign exchange shortage, remittance inflows could promote investment and capacity utilization if most of the remitted
foreign exchange is used for importing capital goods and essential inputs. Alternatively, increased foreign exchange availability may lead to
a relaxation of controls on luxury imports. It may also lead the government to choose the easier short-run options instead of taking measures
designed to strengthen the economy’s structure and reduce its import dependence in the longer run.
A precarious balance of payments has always been a major constraint to development efforts in Bangladesh. The country became heavily
dependent on foreign aid immediately after Independence, Particularly because of the disastrous fall in terms of trade in the early seventies
and the sluggish growth in exports ever since. However, since the beginning of the eighties, the external aid inflow in real terms has
stagnated or even declined. Against his background, the huge upsurge in the floe of remittances inevitably had a salutary effect on the
country’s capacity to import. The role of remittances in compensating for the sluggish growth in real export earnings particularly since the
Turning to the balance-of payments (BOP) issue, while it is widely recognized that the
remittance flows from the migrants provided a dramatic boost to the BOP, the precise position
is not clear (Saith, 1989). In part, this is on account of the absence of appropriately and
accurately recorded data and some other problems, like the leakage or diversion of the
balance of payments of all the labor exporting countries. At a time when massive increase in
oil imports and international recession put severe pressure on the country’s balance of
Hyun (1984) estimated that during the late 1970s a 10 per cent increase in remittances led
to a 0.32 per cent increase in private consumption in the long run and fixed investment by
.053 per cent. GDP increased by 0.22 per cent and GNP by 0.24 per cent. Hyun also estimates
that a 10 per cent increase in remittance leads to a decrease in the ratio on the current account
deficit to GNP by 0.40 percent in the long run. He however argues that the immediate effect
of increase in remittances is to adversely affect exports due to increase in prices and wages
The important point to grasp is that the increase in income attributable to remittances
enables the economy to realize an excess of investment over domestic savings through a
corresponding excess of imports over exports with a smaller withdrawal on external resources
be paradoxical – but it is gross national savings rather than gross domestic savings that would
rise and the economy would be able to realize a excess of investment over the latter.” What
this means is that the effective savings constraint on investment is not domestic savings but
According to Nayyar (1984) In a situation where the departure of migrants does not reduce
domestic output, remittance inflows should increase national income. He also stated in his
research paper that, the increase in income attributable to remittances might enable the
imports over exports, with a smaller drawl on external resources than would otherwise be the
case. Unless the marginal propensity to absorb out foreign incomes exceeds unity, remittance
inflows should always improve the balance of payments position or prevent it from
position of Pakistan’s economy during the second half of the seventies and early eighties. The
foreign exchange made available because of workers’ remittances also reduced the external
debt, improved debt servicing ability, and decreased the nee for additional foreign loans
(Burney, 1989).
3.0 Methodology
Keynes National Income Accounting framework is used to determine the effect of
remittance on the economy of Bangladesh. This will provide an important insight how
workers remittances affect the economy. To illustrate the effect of remittance, this paper uses
the same national income accounting framework that was used by Amjad R. (1986), in his
paper “Impact of Workers’ Remittances from Middle East on Pakistan Economy: Some
To analyze the significance of migrant workers’ earning at the aggregate level we will
review data on imports, exports, workers’ remittances, national and domestic savings, GNP,
GDP, Net Income, Net Current Transfers, Trade Balance, debt payment and investment.
These data accompanied with some other related data will be inserted in the MS Excel
The data for the study is obtained from World Development Indicator (CD ROM-2000).
Gross National Product (GNP), Gross Domestic Product (GDP), Workers’ Remittance,
Domestic and National Savings, Capital Investment, Export and import of goods and services
are collected in current US$. The GDP Deflator (1995=100) is also obtained from the WDI
CD-ROM. All the variables are expressed in real terms by deflating the data using GDP
deflator (1995=100). The GNP figures are expressed in real terms by deflating them by the
GDP deflator. Deflating them by GDP deflators eliminates the effects of exchange rate
fluctuations.
remittances in net factor income from abroad the basic relationships that this
NFI---2
of GDP)---4
(as % of GDP)
Gross National savings ≡ Gross Domestic Savings + Net Factor Income (NFI)---
(as % of GDP)
Now, by using the Keynes national accounting this paper will try to examine
investment, savings (nationally). For the above analysis, this paper uses two
important identities: Net Factor Income (NFI) and External Resource Balance
(ERB).
Remittance to Bangladesh has increased from $0.2 billion in the 1980 to $1.7
billion in 1999(Appendix A, Table 1). That is about $1.5 billion has increased
over 18 years of time. This is a significant increase for Bangladesh, and is one of
the largest sources of foreign exchange earnings for it. The growth rate of
workers’ remittance is also quite interesting to observe. From Figure 1 & Table
1 it is evident that the growth rate of remittance significantly increased from the
year 1980 to 1990. On the other hand, it has drastically decreased in the year
1990 and onwards. Than from the year 1996 it again started to increase. The
1.2
1
0.8
0.6
0.4
0.2
0
1980 1985 1990 1995 1996 1997 1998 1999
than two fold for Bangladesh from 1980 to 1999(Appendix A, Table 2). From
Figure 2 it quite evident that the trend of growth rate of GNP (Gross National
Product) and the contribution of remittance to GNP is quite similar. Thus, it can
1.2
1
0.8
0.6
0.4
0.2
0
-0.2 1980 1985 1990 1995 1996 1997 1998 1999
percentage of GNP
balance of payments and for debt and services payments for Bangladesh. The
of trade balance has increased for Bangladesh from 33.737 in 1980 to 57.668 in
the trade imbalance of the country (Appendix A, Table 3). For the peak year
1996-97, remittances contributed almost 53.34% to overall balance of payment
for Bangladesh. This continued to increase as the year passed. For example,
remittance contributed the highest of 62.12% in the year 1998. From table 3 it is
also evident that remittance has quite significant role in the export earnings.
Remittances consist on average about 20% of the export earnings, during the
survey period. The more impressive picture is that over the years, debt service
3.1). During the same period, remittance was not much as it was in the years of
1995 and onwards. Still remittance contributed a significant amount. When the
debt payment started to decline after 1995 the contribution of remittance also
declined, at the same time the inflow of remittance were increasing. Thus it
3) shows that after 1997 the remittance started to contribute more on the debt
payment. If this trend continues than it can be inferred that as years passes
and services for Bangladesh (Appendix A, Table 4). The aggregate import of
goods and services has gone up for Bangladesh almost twice over between 1980
and 1999; also, remittance earnings have also increased for Bangladesh during
the period under study. Here one can argue that the remittance earnings have
forced the demand for imported consumer goods. However, for Bangladesh, this
Bangladesh for the period under review. This would suggest that income from
The growth rate of the Figures 4 and 5 indicates that the import and investment
has quite similar pattern. In the year between 1985-1990, the growth rate was
the highest. Import grew from 18% to 61%. At the same time, investment also
shows an impressive growth. Investment also grew from about 5% to 16%.
1.20
1.00
0.80
0.60
0.40
0.20
0.00
1980 1985 1990 1995 1996 1997 1998 1999
-0.20
50
40
30
20
10
0
-10 1980 1985 1990 1995 1996 1997 1998 1999
-20
-30
GNP
It has been stated by Brown (1994): When NFI is not significant and the
economy is running into large deficit, “foreign loans and grants are considered
to finance the excess of import over export and along with the domestic savings,
foreign grants and loans, finance the total investment (equation 3). On the other
hand, when the NFI is significant, “the external resource balance reflects
financing the deficit, both foreign loan and grants and workers remittance which
According to Amjad.R (1986), the earlier identity states that when the NFI
foreign loans and grants to finance the investment decreases as national savings
significant (Appendix A, Table 6 and Figure 6). Thus, it can be said that the
in terms of financing the deficit, both foreign loans and grants and workers
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1980 1985 1990 1995 1996 1997 1998 1999
To know how much ERB is being financed by NFI, take the difference
NFI). Table 7 shows gross national savings has gone up for Bangladesh;
dependence on sources like foreign loans and grants to finance the investment.
percentage of GDP, did not change much between 1990 and 1999. Gross
national savings has increased substantially during the survey period for
investment. The stable pattern of domestic savings for the economy illustrates
foreign remittance earnings. For example in the peak year of 1996 to 1997
remittance increased from 1.22 (billion US$) to 1.48 (billion US $) and at the
(billion US $), which is quiet significant. On the other hand, domestic savings
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1980 1985 1990 1995 1996 1997 1998 1999
Figure7. Trend of NFI ,Gross Domestic savings and Gross National savings
2.50
2.00
1.50
1.00
0.50
0.00
1980 1985 1990 1995 1996 1997 1998 1999
-0.50
-1.00
The growth rate of NFI is quite impressive comparing to the GDS (Figure 8).
Thus, the high growth rate of GNS is due to NFI rather than GDS. Thus
1.00
0.00
1980 1985 1990 1995 1996 1997 1998 1999
-1.00
-2.00
-3.00
-4.00
significantly exceed foreign direct investment and foreign aid for Bangladesh.
From 1996 onwards, remittance earnings outweigh foreign aid for Bangladesh.
Incase of Bangladesh, remittance earnings partially cover its trade deficit. One
thing the reader should keep in mind that remittance may finance consumer
durable goods, but this will never worsen the trade deficit. For example, if the
remittance earning is $5, import of goods cannot exceed $5, which is covered by
the foreign earnings the remittent sends. Now the only concern is if total
this heavily depends on the elasticity of the goods, which are in high demand. If
(A micro level study is required to investigate this; a micro level study can
provide deeper insight into this problem. Considering viable evidence from the
countries under review, it is quite clear that remittance earnings do not lead to
inflation. As we already saw in our earlier discussion, a fall in domestic savings
is quite insignificant for Bangladesh for the period under review). Consider the
national income accounts, GNP = GDP + NFI. From the above discussion, it
has been found that NFI (which includes workers remittance) is significant for
Bangladesh in the survey timeframe. Thus, it indicates that it also has quiet a
A major advantage of this study is that it alerts the economic planner to expected changes
in the economy as a result of a downturn in labor and remittance flows and measures needed
to counteract, to the extent possible, the resulting adverse effects on the economy.
Inclusion of remittances in GNP would help in focusing attention on the import and
changing contribution migration makes to the total resources available to the national
economy. It would enable countries to more vigorously pursue the objective of maximizing
This is independent whether remittances in GNP are included or not, the movement and
interpretation of key variables has to be carefully qualified when the economy is passing
through a period of large changes in remittance flows. This is especially true for the gross
domestic savings.
6.0 Conclusion
Remittances to Bangladesh have been growing steadily over the past decade. The study
shows that the inflow of remittance in Bangladesh has worked as a catalyst to restore the
balance of payments deficits. The inflow of remittances uniformly proved to be invaluable for
Bangladesh, by reducing the burden of debt payment, providing scarce foreign exchange and
finally boosting the national savings. From the analysis, the economic benefits of inflow of
The finding of this study, where remittance was integrated in the national income
accounting framework, brings out the importance of inflow of remittance in the economy.
The positive impact of remittances in economy would be much clear, if further empirical
Table 1
Table 2
Growth Rate of Remittance(%), GNP(%) and Remittance as percentage of GNP and time-trend
of Remittance as percentage of GNP(in billion US $)
Remit % of
Trade Remit % of Remit% of
Year Balance Export Import
1980 33.737 16.78 8.55
1985 38.856 8.18 5.10
1990 41.427 18.11 14.02
1995 48.898 27.58 20.76
1996 36.866 25.96 18.57
1997 53.369 18.49 15.27
1998 62.123 22.29 19.42
1999 57.668 - -
Source: World Development Indicator CD-ROM 2000
Table 3.1
Trend and Growth rate of Debt Payment as percentage of remittance(in billion US$)
Table 5
Aggregate amount of Investment and investment as percentage of GNP(in billion US$)
Growth Rate of Capital Investment and Investment as percentage of GNP(in billion US$)
Table 6
Time-Trend of Net Factor Income (NFI) and External Resource Balance (ERB)(in billion US$)
Net
Factor
Year Domestic savings National savings Income
1980 1.44 2.92 0.81
1985 1.49 4.11 1.09
1990 2.91 4.94 3.30
1995 4.95 7.88 1.79
1996 5.03 8.25 1.88
1997 6.20 9.56 3.91
1998 7.37 9.29 1.92
1999 7.69 11.71 4.02
Source: World Development Indicator CD-ROM 2000
Table 7.1
Growth Rate of Gross National Savings (GNS), Gross Domestic Savings (GDS), and
Net Factor Income(NFI)
Growth
Growth rate of Rate of
Year Growth Rate of GDS(%) NFI(%) GNS(%)
1980 0.56 0.25 0.06
1985 0.03 0.35 0.27
1990 0.95 2.02 0.28
1995 0.70 -0.45 0.25
1996 0.02 0.05 0.05
1997 0.23 1.08 0.06
1998 0.19 -0.50 0.05
1999 0.04 1.10 0.05
Source: World Development Indicator CD-Rom 2001
Table 8
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