Role of Remittance in Bangladesh Economy

Introduction

Remittance means the funds expatriates send to their native countries via different
process such as emails, online transfer and so on. It has been playing a great role in the
economy of the developing countries and an essential source of external funds. About
US$ 435 Billion were remitted to the developing countries and it is expected the rate of
remittance will rise to 4.4 percent during the next year. Statistically the role of remittance
in economy approximately three times larger than official development assistance (ODA)
and much more stable in both private debt and portfolio equity flows. They additionally
help maintain the balance of payment (BOP) by acquiring foreign currency (World Bank,
2014).
Bangladesh is one of the biggest remittance beneficiary nations through the export of its
labor force fundamentally to the Middle East and the Southeast Asian nations since the
mid 1970s. Employment opportunities in the Center east and the foundation of an abroad
labor recruitment program in the mid-1970s opened the way for Bangladeshi laborers to
travel to another country to support their families. With the rising demand for immigrant
workers a large number of Bangladeshi workers (both skilled and less skilled labors)
were sent to abroad as immigrants workers. The movement of Bangladeshis occurred
attributable to a few pull factors (e.g., interest for work abroad, connection with different
Bangladeshis living abroad, and so forth.) and push factors (e.g. destitution,
unemployment, under development in rural areas and so forth ) (ILO, 2014).
Day by day the importance of remittance in our economy is increasing rapidly. Its
contribution to the economy is surpassing the contribution of FDI and ODA. During
recent years which is 2014 to 2015 worker remittance is 9 times higher than FDI and 25
times higher than Portfolio investment and 4 times higher than ODA in Bangladesh
(Annexure-I). Bangladesh is in the 5th position with 7.76 million immigrants according to
World Bank estimation in 2013 and the remittance transfer got from these workers have
achieved a level of 15.31 billion US dollars in 2014-2015, roughly 7.9% of GDP in
Bangladesh which was 14.23 billion US dollars in the year 2013-2014 (Bangladesh Bank,
2015). The contribution of remittance in Bangladesh economy is about 2.6 percentage of
total Global remittance flow. This share is about 3.5 percent in developing countries.
Bangladesh ranked 8th among developing countries and 10th globally as a remittance
receiving country with US$13.86 billion remittance earning [Annexure-II & III]. Every
year 2 million people are going abroad to look for jobs as Bangladesh lacks of creating
job opportunities for it’s own people. As a result this outflow of laborers will continue in
the future. Migration plays a vital role in national income in two ways; 1) by reducing
employment problems in the country and 2) by receiving remittance which helps greatly
in improving country’s total income. These options have a very strong impact in both
poverty reduction and socio-economic advancement of our country. In this paper we are
going to discuss about the past of Bangladesh’s economy and how it changed afterwards.
Later, we are going to check the Bangladesh’s economic situation and discuss how
immigration and remittance is helping to reduce economical problems in Bangladesh.

Remittance Flow in Bangladesh and Overview of Bangladesh economy

Bangladesh has encountered constant surge in internal remittance flow both as far as
volume and in addition as far as proportion to GDP in the course of the most recent thirty
years. According to Bangladesh Bank’s statistics the level of remittance in 1976 was
about USD 24 million which eventually ended up increasing by USD 6584 in 2007.
Bangladesh is the ranked 8th among developing countries and globally 10th in receiving
remittance (IMF’s International Financial Statistics, October 2007).
 Figure 1 : External Flows In Bangladesh

From the graph we can see that remittance flow in Bangladesh economy is much more
stable compared to the other external resources such as ODA and FDI . Moreover, the
impact of remittance has surpassed the other factors after 1996.
As indicated by Chami et al. (2008) there are three primary elements of settlements that
give force to concentrate their macroeconomic effects. These are: i) size of these flows
with respect to the size of the beneficiary economies; ii) the probability that these flows
will proceed unabated due to proceeded with pattern in globalization; and iii) These flows
are very particular from those of authority help or private capital. (Rather than these
remittances are made out of various little exchanges between private people which are
attached to familial relationship in their home country). By researching it is seen that
remittance reduces macro-economic volatility, increases financial condition, appreciates
real exchange rate.
According to World Bank 2014, Bangladesh is now considered as a middle income
country with GDP USD 173.8 Billion (GDP at current US$). We can see the overall view
Bangladesh economy in the table given below.
 Key Macroeconomic Indicators*

Source: Compiled from Bangladesh Bureau of Statistics (BBS) and Ministry of Finance
(MoF) data

Bangladesh is a densely populated country with the population of 160 million. After lots
of ups and downs it has gained 6 percent economic growth which is stable since 1990.
With the development of our economical condition the population growth rate decreased.
As a result, this lower growth rate increased income per capita up to USD$1,044 in 2013
from only USD$90 in 1973 (BBS, various issues). Both private and public firms and
organizations are working hand in hand to improve import and export condition. These
organizations also contributed greatly to improve the remittance transferring condition in
Bangladesh. Hence, the rise in GDP and remittance receiving are clearly seen since 1990s
(CPD, 2014). The above table basically shows the total economic growth of Bangladesh.

Remittance and the Macroeconomy

By microeconomics theory, we see that the effect of remittance can be divided into 4
parts. Such as saving, consumptions, investment and growth.. A part of remittance
earning goes into consumption and rest of the part goes into savings. As we know, in
consumption expenditure investment is also included as buying household goods,
investing in education and health, buying capitals for businesses etc. Now we will see
some important graphs which show the relation between remittance and the other
macroeconomic variables and how they are moving through out the decades.

Remittance and Fixed investment

In the graph below we see that the relation between the GDP ratio and gross fixed
investment holds a positive relation between them. That means with the increased amount
of fixed investment the GDP ratio also increases over the period 1990-2006.
Remittance and Consumption Expenditure

This graph shows how remittance to GDP and household consumption expenditure
behaved during from 1960 to 2006. We can see that household consumption to GDP has
fallen from 1990 to 2006 whereas remittance to GDP has increased during these years.
So, we can say that these two variables are negatively related.
Remittances and National Savings

Total saving is the sum of domestic savings and foreign savings. Remittance is
component of foreign saving which is a part of foreign savings as well. As the amount of
remittance is increasing day by day, it improves the national savings as well and the
national savings also goes up. Increase in saving leads to more investments in economy.
In recent statistic it is shown that in Bangladesh the two ratios-gross savings/GDP and
remittances/GDP - are positively correlated (Ratha and Mohapatra, 2007).

Emigration Pattern of Bangladesh

International remittances that Bangladesh receives ,come from three types of immigrants.
First, people with high education level who mostly live in USA or UK. Secondly, low-
wage or unemployed people living in USA and UK and other industrialized nations.
Thirdly, a major group of workers living in the middle south east asian, middle eastern
and some industrialized countries for specific period of time (IOM, 2005). During 1950
to 1960 many workers migrated to UK and took the British Citizenship by staying 4 to 5
years in that country. The migration of workers in middle east also started to happen in
1960s.
After the liberation, the pattern of migration has changed rapidly and Bangladesh has
become one of the largest manpower exporters in South Asia during 1990s. The
migration of workers has gradually increased from 6000 (1976) to 200,000 (2014). As
indicated by BMET information up to May of 2015, the total population who migrated is
9.35 million.
An analysis of migration data since 1976 show that Middle Eastern countries are the main
receivers of Bangladeshi labor force. Beside the countries of UAE, some South East
Asian countries such as Korea, Singapore also receive a significant number of labors
from our country. But Malaysia has been one of the main receivers with more than
711,000 million Bangladeshi migrants in their country.

The largest amount of remittance comes from both KSA and UAE. It is seen that even
though most immigrants go to these two countries they do not earn as much as
immigrants of UK and USA. Two reasons may work behind this 1) lack of skilled
workers 2) Lower wage.

Remittance and Financial Development

We saw that the economical condition of a country improves with the increasing amount
of remittance.
With this graph we can see that the relationship is strong between the GDP ratio and the
measures of financial deepening (M2/GDP and Domestic Credit/GDP). This graph shows
a positive relation between the remittances and other two factors which can also
contribute greatly in developing the financial condition of our country.
Moreover, the inflow of remittance causes a appreciation of the real effective exchange
rate and make other markets uncompetitive. Based on Bangladeshi Quarterly the real
exchange rate of Bangladesh has been stable for two years from 2005 to 2007. However,
compared to other South Asian countries Bangladeshi real exchange rate has depreciated.

Economic Growth with Remittance

For the economic growth of a country a lot of factors work simultaneously. Such as the
number of working population, educated population, export and imports , infrastructure,
investment in the economy , a proper budget sheet, government spending political
stability etc. If one of these variables goes missing the whole economy become weak and
unstable.
Remittance reduces poverty

Remittances are one of the most important sources of foreign exchange earnings for
Bangladesh. There have been conclusive studies by World Bank to show that remittance
stands as a means of contributing to socio-economic development and lowering poverty.
The 2005 IOM report also backs that remittances produce higher income, lead to a
consumption and investment multiplier effect, generate more job opportunities for the
youth, and reduce economic inequality in the society. According to statistics by
Bangladesh Bank, Bangladesh received more than $15 billion in remittance in the fiscal
year 2014-15 from expatriate workers, with the majority of the money being remitted
from the Gulf States and the Middle East.
be seen that incoming foreign exchange help to pay import liabilities, make the balance
of payments more favorable, repay foreign debt, counterbalance the exchange rate of
fluctuation, and bolster foreign exchange reserves. The diagram below further reinforces
the important role remittances play in this country. The critical factor is the relative rise
of remittances against external debts and imports. Bangladesh has been experiencing a
regular current account surplus after 2000s in comparison to its near constant trade-deficit
situation prior to that. The table below also shows how remittance compares to other
sources of external funds. In Bangladesh, FDI is the largest source of external finance
with remittance The money sent back to Remittance Receiving Households (RRHs)
constitute on average 78% of total income and non-remittance income coming from
agriculture and services add up to 21.4% according to surveys conducted by Bangladesh
Bureau of Statistics. This furthers the fact that tools such as remittances and transfer of
social capital prove beneficial to the migrants and their families and overall migration can
lead to reduced poverty (IOM, 2009).

Remittance as Important Source of External Funds

The remittance market of Bangladesh has been showing a steady growth in terms of
incoming remittance volume. It has been a more secure source of earnings than both FDI
and foreign aid (Bangladesh Bank, 2014). At the micro-level, remittances raise standard
of living by positively affecting household consumption level, encouraging self-
employment and it is also a key driver of poverty reduction. However, there are yet to be
more concrete studies on the microeconomic impact of remittances on households or per
capita incomes. Taking macro-level indicators into account, it canes coming in second.

Fig: Comparison of Source of External Funds with Remittance

 Source: Bangladesh Bank Annual Report and Bangladesh Economic Review Data

Source: Bangladesh Bank Annual Report and Bangladesh Economic Review Data

Table: Comparison of Source of External Funds of Bangladesh

Source: Constructed from Bangladesh Bank Annual Report, BOP Data different years
Strong External Liquidity Position
Bangladesh’s economic growth is obstructed by weak infrastructure, widespread
corruption and stubborn budget deficits. However, over the years Bangladesh has greatly
benefited from its garment sector, strong domestic demand on the back of high domestic
credit growth and remittance inflows to propel the economy. The latter factor has
contributed to improved creditworthiness and continuous current account surpluses.
Various credit rating agencies have highlighted the big role of remittances in their
assessments (WB, 2014). In April 2014, Bangladesh’s government received a Moody’s
rating of Ba3 for long term bond rating. According to Moody’s statement- country’s
external liquidity position is satisfactory and foreign reserves are adequate to meet any
debt obligations (Moody’s report, 2014). In May 30, 2014, the Standard & Poor’s (S&P)
assigned a rating of BB- for long term international credit and a B for short term credit.
These ratings are backed by the country’s strong external liquidity position and declining
external leverage. Foreign exchange reserves at the end of April accounted to US$20.4
billion which is equal to about 5.5 months of current account payments (Standard &
Poors’ Report, 2014).

Conclusion
For economic Growth of a country many factors work hand in hand and there is doubt
that remittance is one of them. The role of remittance in Bangladesh economy has
recently increased a lot and it’s contribution to the growth of GDP is no joke and it is an
important source of private capital flow However, recently Bangladesh is receiving less
remittance due to some issues that are constantly occurring in our country. such as
political instability , lower wage of less skilled workers in abroad etc. It is also seen that
large part of remittances are not also directly invested like other incomes. So, now
Government is trying find more ways of investing the remittance in different
development sectors.

References:
http://blogs.worldbank.org/endpovertyinsouthasia/bangladesh-remittance-story-
reaffirmed
http://www.nzae.org.nz/wp-content/uploads/2012/06/Remit_HassanShakur.docx
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact
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2Fdspace.lib.niigata-
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HZ9RmwAk172WAQCw
 Role of Remittance In
Bangladesh Economy

Submitted by :
Maisunath Maliha
15105036
Samara Chaudhury
15305022