GENERAL OVERVIEW OF INFLOW OF REMITTANCE IN BANGLADESH ECONOMY by Fariha Haque ID :0210108 An Internship Report Presented in Partial Fulfillment of the Requirements for the Degree Bachelor of Business Administration INDEPENDENT UNIVERSITY, BANGLADESH April 2006
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GENERAL OVERVIEW OF INFLOW OF REMITTANCE IN BANGLADESH
ECONOMY
by
Fariha Haque ID :0210108
An Internship Report Presented in Partial Fulfillment of the Requirements for the Degree
Bachelor of Business Administration
INDEPENDENT UNIVERSITY, BANGLADESH April 2006
GENERAL OVERVIEW OF INFLOW OF REMITTANCE IN BANGLADESH ECONOMY
by
Fariha Haque ID: 0210108
has been approved
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
time and effort he spent in helping me with this report.
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
papers and information on remittance that I needed for this report.
TABLE OF CONTENTS Page
Abstract I
1.0 Introduction 1
1.1 Statement of the problem 2
1.2 Purpose of the Study 3
1.3 Research Timeline 3
1.4 Limitations of the study 3
2.0 Review of the Literature 3
2.1 Remittance 3
2.2 Impact of Remittance on balance of payment, 6 investment, and national savings
3.0 Methodology 8
3.1 The Data 8
3.2 Survey Period 9
4.0 Analysis and Discussion on findings 9
5.0 Significance of the study 17
6.0 Conclusion 18
Reference 19
Appendix A 21
Appendix B 27
List of Figures
Page
I. Figure 1. Growth rate of workers’ remittances in Bangladesh 10
II. Figure 2. Growth Rate of Remittance(%), GNP (%) and 11
III. Remittance as percentage of GNP
IV. Figure 3.Growth rate of debt payments as percentage of remittance 12
V. Figure 4. Growth Rate of Import and workers’ remittance (%) 13
VI. Figure 5. Growth Rate of Capital Investment 13
and Investment as percentage of GNP
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
IX Figure 8. Growth Rate of Gross National Savings (GNS),
Gross Domestic Savings (GDS) and Net Factor Income (NFI) 16
X Figure 9. Comparing remittance with some selected economic indicators. 16
Abstract
This paper develops a theoretical framework to examine the effect of workers’
remittance on Bangladesh economy. To illustrate the effect of remittance, this paper
uses the same national income accounting framework as considered by Amjad R.
(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 contributed almost 53.34% to overall balance of payment for Bangladesh.
Moreover, remittance contributed the highest of 62.12% in the year 1998. As
remittances, GNP and remittance as percentage of GNP shows similar trend in growth
rate, this indicates that inflow of remittances positively contributes to GNP.
Furthermore, remittance earnings also positively contribute to the Balance of Payments
(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
migration of its citizens.
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
is very attractive force.
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
of the least studied areas of research in migration literature.
Despite the expanding literature on the subject, there remains an inadequate
understanding of a number of issues related to the flow and use of remittances.
Thus, there has been little work on the impact of remittances on the overall
economy.
The major labour exporting countries follow different conventions on
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
major Asian labour exporting countries, GNP estimates published by
governments in India, Sri Lanka, Thailand exclude workers remittances while
Bangladesh, Pakistan and Philippines include them.
In this report, an attempt has been made to clarify concepts relating to the
affect of workers’ remittances on the overall economy of Bangladesh. As
Bangladesh is among the few countries that include workers’ remittances
separately in their gross national income estimates, it is important to identify the
impact of remittance on the national economy. In order to understand the effect,
this paper integrates remittance in the national income accounting framework.
1.1 Statement of the Problem
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
income accounting identity to analyze such effects of remittance on Bangladesh economy.
In this current research, researcher will try to analyze the effect of remittance on
Bangladesh economy.
1.2 Purpose of the study
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
remittance on balance of payment, investment and national savings.
1.3 Research Timeline 2006 February Research proposal writing
2006 February Literature writing
2006 March Data collection procedure
2006 March Data Analysis and interpretation of findings
2006 April Final redraft of complete manuscript
2006 April Submission of research paper
1.4 Limitations of the study Unavailability of accurate and quality data on remittance and some other economic
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
were also added and analyzed.
2.0 Review of Literature
2.1 Remittance
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
developing countries. The official data on the inflow of remittances into
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.
Remittances are typically transfers from a well-meaning individual or family member to
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
points in Uganda, 6 percentage points in Bangladesh, and 5 percentage points in Ghana.
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
using future remittances as collateral.
Remittance flows tend to be more stable than capital flows, and they also tend to be
counter-cyclical—increasing during economic downturns or after a natural disaster in the
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
of Somalia, they accounted for up to 40 percent of GDP in the late 1990s.
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
influence of growth on remittances rather than vice-versa.
Remittances may also have human costs. Migrants sometimes make significant
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.
According to Rahman (2001), substantial proportion of remittances are utilized by the
migrants on the consumer durable items.
To sum up, we can say that migrants’ families enjoy a higher standard of living and status
than what it was before migration (Rahman, 2001).
2.2 Impact of Remittance on balance of payment, investment, and national savings
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
that on the economy as a whole.
A major benefit of labor export is the balance of payments support provided by remittance (Mahmud, 1989). He also stated that, in a
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
beginning of the eighties, is quite evident.
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
remittances into imports.
The financial flows triggered by international migration have had a dominant impact on 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
payments, remittances offered much needed relief (Amjad, 1989).
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
but the net effect in the long run would be positive.
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
than would otherwise be the case. (Amjad, 1989).
Nayyar (1984) explains, as a result of remittance financed investments it “ may appear to
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
national savings, which take into account remittances.
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
economy to realize an excess of investment over savings, through a corresponding excess of
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
deteriorating as much as it otherwise would.
The increased inflow of remittances significantly improved the balance of payment
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
Selected Issues- the Pakistan Development Review (1986)”.
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
software to run the analysis.
3.1 The Data
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.
3.2 Survey period The period for this, study is from 1980 to 1999. The years were chosen due to the non-
availability of consistent data outside this period.
4.0 Analysis and Discussion on findings:
In terms of national income accounting identities after including workers
remittances in net factor income from abroad the basic relationships that this
paper is using are:
Net Factor Income ≡Net income + Net Current Transfer---1
Table 8 Comparing remittance with some selected economid indicators 1980 1985 1990 1995 1996 1997 1998 1999Remittances 0.20 0.36 0.76 1.20 1.22 1.48 1.52 1.70 Foreign Direct Investment 0.00 0.00 0.00 0.00 0.01 0.14 0.19 0.18 International Foreign Aid 0.45 0.62 1.71 1.28 1.29 1.09 1.42 1.42 Current Account -0.30 -0.34 -1.28 -0.66 -1.35 -0.57 -0.29 -0.47Trade Balance -0.59 -0.94 -1.84 -2.45 -3.30 -2.76 -2.45 -2.95Source: World Development Indicator CD-ROM 2000
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