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Economic Growth and Macroeconomic Variables, the Case of Bangladesh

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Debasis Dutta Mallika Saha

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Economic Growth and Macroeconomic Variables, the Case of Bangladesh
Kumar Debasis Dutta1 and Mallika Saha2

Abstract:
This research is attempt to analyze the causal relationship among interest rate, exchange rate,
inflation, export, remittance and foreign direct investment (FDI) with gross domestic product
(GDP) as the growth indicator of Bangladesh for a period of 1981 to 2016. The main objective of
the paper is to investigate existence and nature of the effects of these factors on GDP of
Bangladesh as a developing country perspective. Multivariate regression model is used to
analyze relationship among variables. Findings show that there is significant effect of exchange
rate, inflation, and export on GDP, and insignificant effect of FDI and remittance on GDP.
Therefore, decision makers may take these findings into consideration to make policies to boost
GDP of the country.

Keywords: Bangladesh, Developing Countries, Economic Growth, GDP and Macroeconomic

variables.

Introduction:
Bangladesh is said to be a country with great potentials. Many consider it over burdened with
huge population; many other consider this population as asset. However, Bangladesh is
experiencing a GDP growth rates above 5 percent from the last decade and this reached 7.24
percent this fiscal year, beating all the previous records in the history of the country’s economy,
according to a provisional estimate by BBS.

Economic growth can be expressed as the change of production of goods and services, compared
from one period to another. Traditionally, gross national product (GNP) or gross domestic
product (GDP) is considered as the indicator of economic growth. There are many factors to
accelerate GDP. Any developing country’s economy can be improved by their performance in
exports; this would indicate the strength of industries and international competitiveness as well.
On the other hand, exchange rate would indicate the value of our currency in terms of US
dollars; therefore the value of our currency would indicate the purchasing power of imports, but
also the value of our exported items. Lastly foreign remittance and FDI inflows are very
important for any developing or underdeveloped countries’ economic growth. GDP is a very
strong measure to gauge the economic health of a country. It is used as an indicator by almost all
the governments and economic decision-makers for planning and policy formulation. However,
there has been minimal empirical work that specifically looks into macroeconomic factors that
may accelerate the growth of developing economies in recent years. This study attempted to find
the macroeconomic factors that determine economic growth in developing countries. And it will

1
Chairman & Assistant Professor, Department of Finance & Banking, Patuakhali Science and Technology University, Patuakhali.
2
Assistant Professor, Department of Accounting & Information Systems, University of Barisal. Barisal.

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also help to motivate more research and case studies on developing countries from which other
countries can learn and be benefited. Thus, this study has policy implications.

Literature Review:

Till date a considerable number of researches have been carried out to find out the casual
relationship between FDI inflows and economic growth. The empirically findings of such
researches are mixed. Manuchehr and Ericsson (2001a), Nair-Reichert and Weinhold (2001),
Choe (2003), Chowdhury and Mavrotas (2006), Shaikh (2010), Griffiths and Sapsford (2004),
Chakraborty and Nunnenkamp (2006), Al-Iriani (2007), Shaikh (2010), Faras and Ghali (2009)
and Umoh, Jacob andChuku (2012) found significant Positive relationship between economic
growth and foreign direct investment inflows. Whereas, De Mello (1999) in his study of 32
developed and developing countries during the period of 1970- 1990 found weak evidence for
FDI effects on economic growth. Again, Shaikh (2010) and Khaliq and Noy (2007) found
negative effect of FDI inflows on economic growth.

However, all the researches mentioned above considered only the effect of FDI inflows on
economic growth of countries and there is few studies which considered the effect of other
macro economic variables e.g. export, exchange rate, inflation rate and interest rate on economic
growth.
Jung Wan Lee, Gulzada S, Baimukhamedova, Sharzada & Akhmetova (2009) analyzed the
correlation between FDI inflows, exchange rate, and economic growth of Kazakhstan by a
multivariate regression model with weighted least squares estimates. The results revealed the
minimum significant impact of FDI on GDP growth of Kazakhstan. Muhammad Azam (2010)
examined the impacts of exports and FDI on economic growth of South Asian countries namely
Bangladesh, India, Pakistan and Sri Lanka with simple log linear regression model using
secondary data ranging from 1980 to 2009 and found that due to promotion of exports, economic
growth of each country would increase. He also found FDI as positively significant at 1% level
of significance for Bangladesh and Pakistan, while for India it's insignificant and in case of
Srilanka though it is significant but with unexpected negative sign. Suva and Fiji (2004) states
that inflation and GDP has a negative outcome. At a certain level of inflation there will be
positive outcome towards GDP. However, a low level of inflation will not have a significant
effect on GDP; in fact it might even be a negative effect. On the other hand, a too high level of
inflation, however, will have a negative impact on GDP (Li et. al, 2003). An increase in inflation
will decrease the GDP per capita and investors (Barro, 1995). Looking from the GDP's point of
view, Udoka and Roland (2012) agrees that interest rates are one of the factors indicating
economic growth of a Country; an increase in interest rates also shows a shrinking GDP.
However, their research shows that interest rates do not have a significant impact in economic
growth. An increase in interest rates will cause a decrease in real growth rates, this research is
done in Europe (Giovanni et al., 2009) Rodrik (2008) found that there is a positive relation
between exchange rates with economic growth. Ito, Isard and Symasnsky (1999) found that high
economic growth rates supported by adequate export growth, thus increasing the value of
exchange rates due to increased demand for the national currency. Good deal exchange rate will
help the liquidity of capital markets so that investing world come to move forward, which in turn
achieved the desired economic growth (Wong et.al, 2005)

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Objectives of the study:
This study is aimed to explore the factors that are affecting growth of Bangladesh. Following
such a context this research is conducted to examine the impact of interest rate, exchange rate,
inflation, export, remittance and FDI on GDP

Data and Methods:

To accomplish the above mentioned objectives, data has been collected for a period of 1981 to
2016 from secondary source -the website of Bangladesh Bank, World Bank and Bangladesh
Bureau of Statistics. Multivariate regression model is used to analyze relationship among
dependent and independent variables.

Formulation of Model:
Dependent Variable: To measure the economic growth of the country Gross Domestic Product
(GDP) is used.
Independent Variable: To analyze impact on economic growth (GDP), following
macroeconomic variables were selected: Interest rate, exchange rate, inflation, export,
remittance and foreign direct investment (FDI).

Regression Model: Y= a + β1X1 + β2X2 + β3X3+ β4X4+ β5X5+ β6X6

Here,
Y = Gross Domestic Product (GDP) in million USD,
a = constant term,
X1 = Interest rate
X2 = Exchange rate
X3 = Inflation
X4 = Export
X5 = Remittance
X6 = Foreign direct investment (FDI) and
B = Regression co-efficient for the independent variable.
This test has been used to find out whether there is a relationship between dependent variable
and the independent variable.

Hypothesis of the study:

Hypothesis 1: H01: There is no significant relationship between Interest rate and GDP
Hypothesis 2: H02: There is no significant relationship between exchange rate and GDP
Hypothesis 3: H03: There is no significant relationship between Inflation and GDP
Hypothesis 4: H04: There is no significant relationship between Export and GDP
Hypothesis 5: H05: There is no significant relationship between Remittance and GDP
Hypothesis 6: H06: There is no significant relationship between FDI and GDP

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Result and Discussion

Descriptive Analysis
Maximum, minimum, mean, and standard deviation of variables are shown in the table below:

Table 1: Descriptive Statistics

Variables Mean Std. Deviation Minimum Maximum
GDP 65376 51879.45 17159.30 197554.92
FDI 630.31 446.12 223.57 1800.56
Interest rate 7.7097 1.98 4.50 10.60
Inflation 7.6150 3.04 2.00 14.5
Remittance 4368.7 5042.15 325.67 15316.91
Export 9897.2 10854.30 626.00 36878.00
Exchange rate 51.3006 19.04 20.07 79.93
.
The Minimum and the maximum GDP were 17159.30 and 197554.92 respectively. Because of
this wide dispersion of the GDP, the standard deviation is 51879.44748 from the mean value of
GDP 65376 which is very high. Such high dispersion of the data gives only weak correlation and
regression coefficients (Appendix). In case of interest rate the data is less scattered. The
minimum and maximum interest rate is 4.50 and 10.60 respectively. However, the mean
was7.7097 and the standard deviation was 1.97975 which is lower than other independent
variable. In case of exchange rate the data is also less scattered. The minimum exchange rate was
and 20.07 the maximum exchange rate was 79.93, mean was 51.3009 and standard deviation was
19.04289. The Minimum and the maximum rate of inflation is 2.00 and 14.5 respectively and
the mean was 7.6150 and the standard deviation was only 3.04198, which is consistent
(Appendix). In the case of export the data is the highest scattered. The minimum and maximum
export value is 626.00 and 36878.00 respectively. The mean value is 9897.02 which is more than
other independent variables values and the standard deviation is 10854.30264 which is the
highest among independent variables. In the case of remittance the data is also scattered. The
minimum and maximum remittance value is 325.67 and 15316.91. The mean was 4368.7 and
standard deviation was 5042.15288. In the case of FDI the data is also scattered. The minimum
FDI value is 223.57 and maximum FDI value is 1800.56. The mean was 630.31 and the standard
deviation was 446.12252.

Table 2: Model Summary and ANOVA

Adjusted R Std. Error of
Model R R Square F Sig.
Square the Estimate
1 .994a .988 .985 6277.93883 393.524 .000a
a. Predictors: (Constant), ER, INF, IR, REM, FDI, EXP
b. Dependent Variable: GDP

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In this table, the value of R = 99.4% expresses that there is a high degree of positive relationship
between the dependent variable i.e. GDP and the independent variables. If the independent
variables increase, dependent variable will also increase accordingly.

The term R Square is the multiple coefficient of determination interpreted as the proportion of
variability in the dependent variable that can be explained by the estimated multiple regression
equation. Hence, when multiplied by the 100, it can be interpreted as the percentage of the
variability in total that can be explained by the estimated regression equation. Here R2 is equal to
.988 (98.8% expressed in percentage) indicates 98.8% of the variability in obtained GDP can be
explained by the independent variables interest rate, exchange rate, inflation, export, remittance
and FDI.
If a variable is added to the model, R Square becomes larger even if the added variable is not
statistically significant. The Adjusted R Square compensates for the number of independent
variables in this model.
Standard Error of Estimate shows how much error or variability stands between the estimated
result and actual forecasted result. Here the value is 6278.93883 that show the amount of
variability of our estimated result and the actual result of the observation. Here, the value of F
(393.524) is greater than the significant value (.000). So the model is accepted. The model is
much sufficient to describe the relationship we are going to justify.

Table 3: Regression Co-efficient

Standardized
Unstandardized Coefficients
Model Coefficients t Sig.
B Std. Error Beta
1 (Constant) 37889.794 12679.584 2.988 .006
FDI 10.024 9.920 .086 1.011 .321
IR 616.330 907.193 .024 .679 .502
INF -1579.294 485.938 -.093 -3.250 .003
REM .106 .469 .010 .225 .823
EXP 4.915 .497 1.028 9.886 .000
ER -402.889 183.126 -.148 -2.200 .036
a. Dependent Variable: GDP

The above table presents regression coefficients that are obtained from the regression Model.
This is observed that the significance level of foreign direct investment (FDI) is 0.321 which is
greater than 0.05 (5%) and so we can accept our null hypothesis that say that the impact of
foreign direct investment (FDI) on GDP is not significant. Like foreign direct investment (FDI),
the significance level of the interest rate (0.502) and the remittance (.823) are also greater than
our significance level.
Foreign direct investment (FDI) and remittance may have significant relationship; however, here
the study shows it is insignificant. Theoretically, foreign direct investment (FDI) and remittance

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have great impact on gross national income (GNI) because gross national income (GNI) is the
total domestic and foreign output claimed by residents of a country, consisting of gross domestic
product (GDP) plus factor incomes earned by foreign residents minus income earned in the
domestic economy by non-residents. Comparing the GNI and GDP shows whether a nation’s
resources are put to capital creation or declining toward abroad. The significance value of
exchange rate is 0.036 which is less than 5% level of significance and it is negative value. It
indicates that exchange rate has a significant negative impact on GDP. If exchange rate changes
for one taka, GDP will decrease by 402.889 taka because of negative value. It is said that the
higher the exchange rate, the poorer will be the condition of the importing country and vice
versa. In such a case, there is no doubt to say that exchange rate has a direct impact on the
economic growth of any country. The significance value of inflation is 0.003 which is less than
5% level of significance and it is negative value. It indicates that inflation has a significant
negative impact on GDP. If inflation changes for one taka, GDP will decrease by 840.285 taka.
The significance value of export is 0.000 which is less than 5% level of significance and it is
positive. It indicates that export has a significant positive impact on GDP. If export changes for
one taka, GDP will increase by 4.864 taka.

Findings of the study:

After analyzing all of the data we have tested the hypothesis formulated before. Considering 5%
level of significance we accepted the null hypothesis which significance value is greater than 5%
(0.05) and rejected the null hypothesis which significance value is less than 5% (0.05).
The study found a significant effect of exchange rate, inflation, and export on GDP; these
variables may tag as the components of economic growth. But a significant effect of interest rate
on GDP could not be established. And it was also found that there was insignificant effect of FDI
and remittance on GDP. Exchange rate and inflation have a negative relationship with GDP but
export affects GDP positively.
Findings of this study suggest that regression model should be-
GDP = 37889.794 – 402.889 ER – 1579.294 INF + 4.915 EXP

Conclusion:
Though recent statistics showed that Bangladesh GDP growth rate is 6.5 and the recent global
recession did not have any negative impact on Bangladesh’s exports; Bangladesh economy is at a
critical juncture, where the policymakers will have to tackle the ongoing and emerging
macroeconomic pressures head-on. GDP is used as an indicator by almost all the governments
and economic decision-makers for planning and policy formulation. It enables one to judge
whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a
threat such as a recession or inflation looms on the horizon. In our study we found that exchange
rate and inflation rate have a significant negative impact on GDP; which means exchange rate
and inflation rate changes for one taka, GDP will decrease by certain amount because of negative
value. Central Bank may establish a strict control over the foreign exchange business financial
institutions and money supply of the country. Fake import, over invoicing and under invoicing
as well as hundi business may be seriously checked. And, export has a significant role in
economic growth according to study and theoretically we know lower exchange rate, interest rate
may have positive impact on export; Therefore, exchange rate and interest rate may be monitored
to boost export. A decision maker may take these findings into consideration to make policies to

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boost GDP of the country. Though our study is confined to only Bangladesh economy; however,
it may be applicable to countries with similar economic condition.

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