remittance pattern of bangladesh

1.0 Introduction

1.1 Problem Statement

Remittance generates remarkable benefits for the home country economy, especially for

that of a developing country, in terms of macro and microeconomic impacts. The

remitters, most of whom were once unemployed in the home country, are now getting

employed in the host country, and on the other hand, the inward remittance is causing

employment generation domestically by reinforcing national savings, capital accumulation

and investment. Over and above the employment aspect, many other key macroeconomic

variables in Bangladesh such as growth, poverty reduction, social security, BOP situation

have proven to be significantly positively related to remittances.

Bangladesh has a long history of migration and overseas remittances. It is reported that as

far back as in 1942 Bangladeshi nationals had migrated to the port cities of London and

Liverpool in the UK (Mahmood 1991). The British had a scheme of issuance of

employment voucher to overseas workers seeking work abroad. The scheme, during the

British regime, opened up a great opportunity for Bangladeshi workers to migrate to

United Kingdom (UK). It is believed that thousands of Bangladeshis, especially from

Sylhet, took the opportunity and created a flow of migration towards UK. For certain

reasons, however, this flow had weakened by the 1960s and the direction of the migration

flow changed in the 1970s. After the birth of Bangladesh, most Bangladeshi migrants

sought to look job to Middle East countries as well as selected EU destinations (mainly

Germany). A tendency to find employment in developed countries like USA, Canada, Italy

and in some Asian countries like Japan, Malaysia and Singapore was observed in the

1990s and onward. The process of migrating abroad from Bangladesh is continuing

strongly till now. The huge increase in outward migration makes Bangladesh as one of the

major remittance recipient countries in the world.

In recent years, Bangladesh has been receiving remittance inflow close to USD 1 billion

and more each month. Last year, Bangladesh had received USD 12.84 billion in

remittances and a decade ago the figure was USD 2.5 billion (The Daily Star, 2012). This

has boosted the central bank’s foreign currency reserve and stabilized pressure on BDT

and balance of payment. If the current trend of remittance inflow continues central bank

hopes that the remittance will stand at USD 14 billion in the current fiscal year.

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Bangladesh’s economy has been growing at rate of over 6% in recent years. However, this

growth rate was concomitant with high inflation especially double digit rate and fiscal

pressure coming mainly from financing subsidy payment to power sector of the economy.

1.2 Objective

The main objective of this paper is to find out how remittance contributes to the economic

growth of the country and whether is contributes to inflation. In doing so, the paper will

answer following questions:

Does inward remittance contribute to inflation is a country’s economy? How?

What are the trends, patterns and usage of remittance in Bangladesh?

Throughout the paper ‘remittance’ will mean ‘inward workers’ remittances’ through formal

channels’ unless mentioned otherwise.

1.3 Literature Review

At present, remittances play a crucial role in the economy of

Bangladesh. At the macro level, it helps to relieve foreign exchange

constraint, stabilize the exchange rate movement, and improve the

balance of payments. A comfortable foreign exchange reserves can be

maintained through increasing growth of remittance which can

contribute to overall macroeconomic stability and reduce aid

dependency. Besides, remittances are used to pay for imports bills and

to repay foreign debt. At micro level, remittance has a beneficial impact

on household consumption, poverty reduction and self employment. It

also improves country’s creditworthiness. However, it has been more

stable source of foreign earnings than both FDI and foreign aid.

Remittance grew around 10.9 percent in 1990-91 which increased to

13.4 percent in 2009-10 and 6.03 in 2010-11. Remittances as

percentage of most key macroeconomic variables showed upward trend

during 1981-2011. It is observed that the remittance-GDP ratio touched

10.43 percent in 2011 as compared to 1.93 percent in 1981-82 (Begum

and Sutradhar 2012).2

Inward foreign remittance is used for the purposes in Bangladesh

(Bangladesh Bank Report, 2011) such as buying food, repayment of

loans, education, medical treatment, operating business, savings,

investing.

Inflation has been a major phenomenon in the economic landscape of Bangladesh in the

recent past. It has started to increase since the second quarter of FY2010 and continued to

rise throughout FY2011 and FY2012. As in most years, food inflation was higher than

general inflation. Food inflation reached to 13.75% in September 2011 as opposed to

9.72% in September 2010 (BSB, 2011).

According to the Bangladesh Bureau of Statistics (BBS), point-to-point inflation rose to

11.97% in September 2011 and food inflation increased to a level more than what policy

analysts had forecasted, due to higher food and oil prices. Such high food inflation

contributed more to the overall national inflation.

In economics, inflation is a rise in the general level of prices of goods and services in an

economy over a period of time. When the general price level rises, each unit of currency

buys fewer goods and services. Consequently, inflation also reflects an erosion in the

purchasing power of money – a loss of real value in the internal medium of exchange and

unit of account in the economy. A chief measure of price inflation is the inflation rate, the

annualized percentage change in a general price index (normally the Consumer Price

Index) over time. A number of economic theories have explained the factors associated

with supply and demand which contributes to inflation. The rate of change in the money

supply is positively correlated with inflation, and negatively correlated with the growth in

real income. Inflation can arise due to demand pull and cost push factors.

Inflation is reviewed as a domestic monetary phenomenon which arises due to the

monetary financing of fiscal deficits, or by extending credit to the private sector by central

monetary authorities (Dornbusch and Fischer, 1993). On the other hand, according to the

monetarist view pioneered by Milton Friedman inflation is caused due to an expansion in

the money supply (Friedman, 1970). The third view holds that increase in aggregate

demand in the source of demandpull inflation. This is Keynesian theory of inflation which

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occurs in a situation when at an optimum or employment of output aggregate supply falls

short of aggregate demand pull (Keynes, 1936).

In Bangladesh, both economic and non-economic (e.g., monetary and non-monetary)

factors can give rise to inflation (Khatun, and Ahamad 2012). To explain the inflationary

trend, Ahmed (2009) examines the sources of inflation in Bangladesh taking into account

both demand-side and supply-side factors. He finds that inward remittance, government

debt, inflation inertia, non-competitive market behavior, food and oil prices affect inflation

to a large extent. Majumdar (2006) also points out some specific supply side factors of

inflation such as wage/labor cost, import cost, exchange rate, oil price, market syndication

and supply shortage of agricultural commodities. Raihan and Fatema (2007) find that both

demand-side and supply-side factors such as price hike of food and non-food items have

significant influence on the rising trend of inflation in Bangladesh.

Inflation in Bangladesh

A widely discussed plausible cause of high inflation in Bangladesh is the impact of global

price hike. The other major source of high inflation in Bangladesh is high food inflation in

the domestic market. The rise in food inflation affects the overall inflation significantly.

Broad money supply shows positive and increasing trend in growth. The response of broad

money supply to inflation is an indicator of future inflation (Kahn and Benolkin, 2007).

Since FY2002, increasing inflation has generally been associated with the growth rate of

broad money supply in Bangladesh (Khatun, and Ahamad 2012).

Lastly, monetary policy influences food and non-food inflation simultaneously.

Bangladesh government gives subsidy for petroleum oil at the end-user level. This causes

huge fiscal burden and consequent pressure on the balance of payment (BoP) of the

country. Rationalizing fuel oil price and power tariff in line with the actual buying or

production price could reduce the unfavorable BoP position.

The central bank of Bangladesh has been pursuing a monetary policy to achieve growth

and reduce price level. However, given the persistent nature of high inflation Bangladesh

Bank increased cash reserve ratio (CRR), repurchase agreement (repo) and reverse repo a

number of timers. However, such contradictory policy has not been effective to curb the

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demand-led inflation. Given the nature of inflation in Bangladesh it is important that

policy makers integrate monetary and fiscal policies to reduce inflationary pressure so that

economic growth can be sustained (Khatun, and Ahamad 2012).

1.4 Scope

The study will cover remittance inflows and their effect on Bangladesh economy,

particularly on inflation in the in the last one decade.

1.5 Methodology

The study is based on secondary data that are available in statistical publication, journal

and Bangladesh Bank reports. The data shall be analyzed based on correlation and

regression analysis of various macro economic factors influencing inflation and economic

growth of Bangladesh.

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2. Analysis and Interpretation

2.1 Remittance trend

Number of Bangladeshis leaving the country for employment abroad has been increasing

in the last decade. The remittance received from abroad has been growing as well. A total

of 4.19 lakh Bangladeshi workers went abroad for employment during FY 2010-11.

Remittance during 2010-11 is about US$ 11.65 billion which is more than 6 percent that

of the average of the last year. The number of expatriate Bangladeshi workers and the

amount of remittances in Taka and US dollar are shown in Table 1.

Table 1: Number of Expatriate Bangladeshis and their Remittances

Fiscal

Year

No. of employment

abroad (000)

Amount of remittance Percentage

Change (%)Million US$ Percentage

change (%)

Crore Tk.

2001-02 195 2501.44 32.81 14390.19 40.17

2002-03 251 3060.31 22.25 17719.58 23.14

2003-04 277 3372.49 10.20 19872.39 12.12

2004-05 250 3848.30 14.11 23646.97 18.99

2005-06 291 4801.88 24.78 32274.60 36.49

2006-07 564 5978.47 24.50 41298.50 27.96

2007-08 981 7914.78 32.39 54293.24 31.47

2008-09 650 9678.16 22.42 66674.87 22.80

2009-10 427 10987.40 13.40 76010.96 14.00

2010-11 419 11650.32 6.00 82992.89 9.18

Source: Bangladesh Economic Survey Report 2010-11.

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Figure 1: Trends in Manpower Export and Remittance Inflow

Bangladesh Economic Survey Report 2010-11.

Figure 1shows the trends in Manpower Export and Remittance Inflow. From the table and

graph it appears that in the recent past, there is a declining trend in both the number of

manpower export from and amount of remittance inflow in Bangladesh.

2.2 Importance of remittance to Bangladesh’s economy

The ratio of remittances to GDP and export earnings also increased over the years. In FY

2001-02 remittances as percent of GDP and export stood at 5.26 percent and 41.78 percent

respectively. In FY 2010-11 remittances as percent of GDP and export were

approximately 10.53 percent and 50.82 percent respectively. Table 2 shows remittances in

terms of GDP and export earnings for the last.

Table 2: Remittances as percent of GDP and Export

Fiscal Year As percent of GDP As percent of Export

2001-02 5.26 41.78

2002-03 5.90 46.76

2003-04 5.98 44.35

2004-05 6.37 44.37

2005-06 7.75 45.62

2006-07 8.83 49.097

2007-08 10.02 56.09

2008-09 10.96 62.25

2009-10 11.13 67.80

2010-11 10.53 50.82


2.3 Sources of remittance

Analyzing the statistics of the Bureau of Manpower Employment and Training (BMET), it

is reported in Bangladesh Economic Survey Report 2010-11 that about half of overseas

workers who went abroad are less-skilled. The number of expatriates classified by skill is

shown in Table 3. From the table, it is observed that the share of professional workers has

decreased significantly. However, the shares of skilled and semi-skilled workers are at the

satisfactory level.

Table 3: Number of Expatriates Classified by SkillCalender Year Professional Skilled Semi-skilled Less-skilled Total

2001 6940 42742 30702 109581 188965

2002 14450 56265 36025 118516 225256

2003 15862 74530 29236 136562 254190

2004 19107 81887 24566 147398 272958

2005 1945 116393 24546 112556 255440

2006 925 115468 33965 231158 381516

2007 676 165338 183673 482922 832609

2008 1864 281450 132825 458916 875055

2009 1426 134265 74604 255070 475278

2010 387 90621 12469 287225 390702

2011 1192 229149 28729 308992 568062


2.4 Remittance and money supply

Remittances are inflows of foreign exchange into the country from workers overseas. If

the central bank, Bangladesh Bank (BB), does not interfere with the operations of the

commercial banks then the foreign exchange received from overseas remains as foreign

exchange in the balance sheets of the commercial banks. However, BB requires

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commercial banks to surrender most of their foreign exchange receipts to it in exchange of

local money. When such a requirement is in force, remittance is reported in the balance

sheet of Bangladesh Bank as an increase in international reserves, which has immediate

implications for the supply of domestic money.

There are three types of monetary aggregates in Bangladesh: 1. Narrow money, 2. Broad

money and 3. Reserve money or high powered money.

The money supply process primarily depends on high-powered money, which is expected

to have a positive impact on money supply. High-powered money equals currency in

circulation including Bangladesh Bank notes and government notes and coins plus

statutory reserve balances with Bangladesh Bank when high-powered money rises, and

other things remain the same, the money supply is expected to rise. This may be explained

with the help of two basic monetary equations.

Total Reserve money (or high-powered money) is equal to domestic credit (or assets) plus

international reserves held by Bangladesh Bank. The money that we use in our daily

transactions derives from the quantity of RM. The total supply of money is equal to money

multiplier times the high-powered money (The Daily Star, 2009).

Table 4:Trends in Monetary Aggregates (Year-on-year percentage change)Indicator 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Narrow Money 20.47 17.62 18.23 11.99 32.46 17.18

Broad Money 19.30 17.06 17.63 19.17 22.44 21.34

Reserve Money 27.12 17.90 19.78 31.45 16.03 21.09


During FY2010-11, year-on-year growth in narrow money (M1) decreased sharply while

broad money (M2) decreased marginally and reserve money (RM) increased significantly

as compared to the preceding fiscal year. However, moderate increase in time deposit has

resulted slight decrease in broad money. Moreover, the increase in reserve money was

largely attributed to the increase in net domestic asset instead of net foreign asset

(Bangladesh Economic Survey Report 2010-11).

Money multiplier (i.e., M2/RM) increased to 4.51 in FY2009-10 as compared to 4.72 in

FY2008-09. Money multiplier increased slightly to 4.52 at the end of June 2011 from 4.51

at the end of June 2010 (Bangladesh Economic Survey Report 2010-11). The increase in 9

international reserves increases the money supply of the economy by the money

multiplier. If Bangladesh Bank had mopped up, say, one billion dollar, it would have

increased reserve money by Tk 8,000 crore, and therefore added to the money supply by

Tk 36160 crore.

The following Figure 2 shows the trend of M2 growth rate, GDP growth, Rate of inflation

and income velocity of money. It shows that there is an overall positive correlation

between M2 growth rate and inflation rate from the period FY2000-2011. Inflation rate

moved up whenever M2 increased in the economy. GDP growth rate has remained

consistently around 6% over the period FY2000-2011. Inflation rate The Income velocity

of money was on a declining trend over the past several years indicating increased

monetization.

Figure 2: Movement of GDP Growth, M2 Growth, Rate of Inflation and Income

Velocity of Money

Source: Bangladesh Bank Annual Report 2010-11

The central bank has instruments to prevent money supply from increasing. One of these is

sterilisation, i.e. sale of credit (government bonds/bills) to the public or, what is called in

BB parlance, 'reverse repo' operations. This allows the BB to mop up excess liquidity from

the market.

The other effect of remittances is on the foreign exchange rate (in Bangladesh this usually

means taka-US dollar rate). When there is a large inflow of foreign exchange, the supply

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of foreign exchange increases, and the value of the foreign currency tends to depreciate; or

what is the same thing, the local currency, taka, appreciates.

2.5 Consumer Price Index and Inflation

Bangladesh Bureau of Statistics (BBS) computes National Consumer Price Index (CPI)

using food and non-food commodities and services consumed by the consumers in their

day-to-day life. The current CPI has been constructed using 1995-96 as the base year.

Table 5 : Consumer Price Index and Inflation (Base year 1995-96=100)Index 2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

2010-

2011

General (% change) 2.79 4.38 5.83 6.48 7.17 7.22 9.93 6.66 7.31 8.80


Figure 3 : Rate of inflation (National)


From the above table and graph, it is observed that there has been an increasing trend of

inflation from FY 2001-02 to FY 2007-08. In FY 2008-09 the rate of inflation came down

but in FY 2009-10 the rate increased again and continued in 2010-11.

2.6 Relationship among variables

As the study is on remittance and its effect on inflation, the relationship between

percentage change in remittance and percentage change in CPI is examined. Table 6

shows the percentage change in remittance and CPI.

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Table 6: Percentage Change in remittance and CPI

Period% change in

remittance

Remittance flow in

Crore Tk.

Broad

Money in

Core Tk

Exchange

Rate

% change

CPI

2001-02 40.17 14,390.19 2.79

2002-03 23.14 17,719.58 114,005.10 57.9 4.38

2003-04 12.12 19,872.39 129,756.70 58.9 5.83

2004-05 18.99 23,646.97 151,449.10 61.39 6.48

2005-06 36.49 32,274.60 176,286.20 67.08 7.17

2006-07 27.96 41,298.50 211,991.10 69.03 7.22

2007-08 31.47 54,293.24 248,779.90 68.61 9.93

2008-09 22.80 66,674.87 296,528.00 68.8 6.66

2009-10 14.00 76,010.96 363,032.30 69.44 7.31

2010-11 9.18 82,992.89 439,294.50 71.21 8.8

Compiled by authors from FBCCI

Relationship between percentage change in CPI and percentage change in remittance

The relationship between percentage change in CPI and percentage change in remittance

for the period from 2001-02 to 2010-11 can be explained by the following equation:

% change in CPI = 6.5678 + 0.0238 * % change in remittance

r square= 0.0185

As r square is close to 0 there is hardly any relationship between percent change in

remittance and change in CPI. It shows that there are other factors both internal and

external which causes percentage of inflation to change.

Relationship between percentage change in CPI and total remittance inflow

The relationship between percentage change in CPI and total in remittance inflow for the

period from 2002-03 to 2010-11 can be explained by the following equation:

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% change in CPI = 5.1716 + 0.000042 * total inflow of remittance

r square = 0.4165

As r square is 0.4165 there is some relationship between total remittance inflow and

change in CPI. It shows that there are other factors both internal and external which causes

percentage of inflation to change.

Relationship between remittance inflow and M2

The relationship between remittance inflow and M2 in the economy for the period from

2002-03 to 2010-11 can be explained by the following equation:

M2 = 34720.82 + 4.384 * total inflow of remittance

r square = 0.96

As r square is 0.96 there is strong relationship between total remittance inflow and M2 in

the economy. It shows that there are other factors both internal and external which causes

percentage of inflation to change.

2.7 Usages of remittance

According to a survey conducted by Bangladesh Bank in 2012 remittance in Bangladesh is

used for the following purposes:

To buy food

To repay loan

To build and renovate homes

To buy land and flat

To pay for education

To send member of family abroad

To start a business

To spend for marriage

To invest in FDRs and other savings instrument

To invest in savings certificate

To invest in capital market.

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Most of the people use the money to buy food, repay loans, construct and renovate home,

educate members of family, pay for medical bills and buy land and flat.

3.0 Findings

Remittance has been growing steadily over the last decade as the number of people

migrating to abroad has been increasing. In 2001-02 amount of remittance was Tk. 14390

crore which grew to Tk. 82992.89 crore in 2010-11.

Remittance accounted for 5.26% of GDP of Bangladesh in 2001-02 and in 2010-11 it

accounts for 10.53% of the GDP and 50.82% of Exports. This shows remittance is crucial

for Bangladesh’s economy.

Remittance is coming mainly from less-skilled workers as their number has been growing

each year. Number of professional people growing abroad shrunk in recent years.

Money supply in Bangladesh depends on 1. narrow money, 2. broad money (M2), and

3. reserve money (high power money). The foreign exchange received from overseas in

form of remittance remains as foreign exchange in the balance sheets of the commercial

banks. This increases M2 in the economy. Money supply depends on reserve money and

money multiplier. M2 and money multiplier have been increasing over the last decade.

Whenever money supply M2 increases there is upward trend movement of inflation rate.

Consumer price index (CPI) depends on food and non-food inflation. This inflation rate in

2001-02 was 2.79% and in the year year 2007-08 to 2010-11 the rate was above 7.5%.

Regression and correlation analysis between percentage change in CPI and percentage

change in remittance flow is positive and very week (r squre = 0.0185) respectively.

Correlation between percentage change in CPI and total remittance inflow in not strong as

r squre = 0.4165.

Correlation between total remittance and M2 in the economy is very strong as r square =

0.96.

Remittance is used for several purposes by its beneficiary, mainly the family members of

the remitters.

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04. Conclusion

Remittance inflow to Bangladesh has been growing over the years. As there is strong

correlation between remittance and money supply in the economy, increase of remittance

increases money supply as it has been found. Inflation is not just caused by money supply

in the economy there are other factors and government monetary policy which also affect

inflation. Remittance plays an important role in the economy as it counts a significant

portion of the GDP. People have been using the remittance flow for various purposes

which can improve their lives.

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remittance pattern of bangladesh

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