84-573-1-PB

Embed Size (px)

Citation preview

  • 7/29/2019 84-573-1-PB

    1/8

    Journal homepage: www.setscholars.org/index.php/ijarbae 70

    IJAR-BAE (March 2012)Vol. 01. Issue 01. Article No. 07

    www.setscholars.org/index.php/ijarbae

    Full length Original Research Paper

    International Journal

    of Applied Research in

    BUSINESS

    ADMINISTRATION &

    ECONOMICS

    Contribution of Remittance on Current Account of Balance ofPayments in Bangladesh: VECM EstimationMohammad Abdul Hannan Pradhan

    1, Sabiha Afrin

    1*, Mohammad Rafiqul Islam

    2

    1Assistant Professor, Department of Economics, Shahjalal University of Science and Technology, Bangladesh

    2Associate Professor,Department of Economics, Shahjalal University of Science and Technology, Bangladesh

    *Corresponding authors e-mail: [email protected]

    Article History ABSTRACT

    Received: 15-02-2012

    Accepted: 16-03-2012

    Availableonline: 31-03-2012

    Keywords:

    Migrant workers, remittances,

    current account balance,

    balance of payment, VEC.

    JEL Classification:

    C50, F24, F32, G28.

    As a large man power exporting country in the world, Bangladesh earns asubstantial amount of workers remittances. In the past twelve years workers

    remittances have grown continuously starting from $1525 million. Inflow ofremittance has increased nearly fivefold between 1997 - 98 to 2009-10. Theseremittances contribute a significant portion in the current transfer of Balance ofPayment (BOP). It is acknowledged that remittances are less costly as well as lessvolatile inflows of foreign currencies and thus serves as a stable source to reducethe deficit of current account of BOP. It is not possible to overlook the contributionof remittances on the growth process of economy as it is the single largest source offoreign currency and for the last decade it was around 35% of export earnings. Theobjective if this paper was whether remittances play any role to improve the

    current account deficit in Bangladesh. Vector Error Correction (VEC) model wasused to show the relationships between the steady growths of remittance andimprovement of current account deficit and found the significant positive relation.Some policies were suggested for the smooth flow of remittance and transmittingthis resource into productive sector.

    Citation: Pradhan A.H., Afrin S.and Islam R.(2012), Contribution of Remittance on Current Account of Balance of Payments

    in Bangladesh: VECM Estimation. IJAR-BAE 1(1): p. 70 77.

    Copyright: @2012 Pradhan A.H. et al. This is an open access article distributed under the terms of the Creative

    Common Attribution 3.0 License.

    1.0 IntroductionThe state of current account in Bangladesh has shown a remarkable improvement in recent years. Externalresource flows, such as Foreign Direct Investment (FDI), portfolio investment, remittances of migrants couldplay a vital role of offsetting current account deficit. Remittances have become the most powerful means toimprove the economic condition of the country of the migrated people about 6.7 million to more than 140

    countries (Mamun, K.A. and H.K. Nath, 2010, Chowdhury, M.B., 2011). International remittance is thesurplus portion of earnings sent back by nationals or the expatriate population from the country of

    employment, Taylor, J.E., et al., (1996). At present the international migration not only change the destiny ofindividual migrants but also improve the economic development of developing and least developed

    countries (LDCs). It is generally acknowledged that remittances are much less unpredictable than any othertypes of capital flows. It can be a major source of external finance and could help to ease current account

    deficit (Chowdhury, M.B. , 2011). The importance of foreign remittance in the economy of Bangladesh iswidely recognized and requires little iteration. Along with the Ready Made Garments (RMG) sector and non-

    IJAR-BAE ISSN: 1839-8456

    http://www.setscholars.org/index.php/ijarbaehttp://www.setscholars.org/index.php/ijarbaehttp://www.setscholars.org/index.php/ijarbaehttp://www.setscholars.org/index.php/ijarbae
  • 7/29/2019 84-573-1-PB

    2/8

    Pradhan A.H. et al. / IJAR-BAE (March 2012) Vol. 1, Issue 1 / Page No: 70-77

    Journal homepage: www.setscholars.org/index.php/ijarbae 71

    farm activities in the agricultural sector, remittance has been identified as one of the three key factors that

    have been responsible for reducing the overall incidence of poverty in Bangladesh, Chowdhury, M.B.(2011) and Osmani, S., (2004). Remittances are one of the vital sources of foreign currency earning i.e.more than half of the export earnings that maintains balance of payment and foreign currency reserve of

    Bangladesh (Mamun, K.A. and H.K. Nath, 2010, Chowdhury, M.B., 2011). The current account of thebalance of payment includes the remittance as income receipts under the net factors income from abroad.The current account balance has been surplus for last decade due to a huge increase in remittance, a large

    part of current transfers (Bangladesh Economic Review(BER), 2011).

    The paper starts with objectives and methodology; part 2 is about contextual background. Part 3 is analysisand findings; and finally part 4 ends with conclusion and policy recommendations.

    2.0 Objectives and methodology of the study

    The main objective of the study is to draw a clear picture about the contribution of foreign remittance onbalance of payment, especially on the current account balances in Bangladesh. The paper is based onsecondary data collected from Bangladesh Economic Review various issues. A critical and exhaustive reviewof literature was also done for the purpose of the study. To analyze the data some statistical tools such as

    summary statistics have been used. And finally we estimate Vector Error Correction (VEC) Model to showthe relation between remittance earning and current account balances.

    Our main two variables are Current Account Balance (Cu) and Remittances Earnings (Re) of a smalleconomy of Bangladesh for the sample period 1997 to 2009. First, we conduct formal unit root tests of theseries to confirm whether they are stationary. To check for cointegration, we will run the followingregression:

    (1)

    Here we can normalize on cu because (Cu) is responding to (Re). Then we can perform a test for stationaryof the residuals:

    = (2)

    Then the unit root test equation for residuals is te^

    = -1 (3)

    Since the cointegration relationship does not contain an intercept term, the 5% critical value is -2.76. Theunit root t-value may be more or less than-2.76. We reject the null of no cointegration if the calculated valueis less than the -2.76. Otherwise, it may not be reject if the value is more than 2.76.If we reject nullhypotheses, then we can conclude that the two variables are cointegrated i.e. the Cu is linked to Re. Then wecan estimate error correction model by least squares. The estimated VEC model for

    ^

    Cu t= 10 t-1 (4)

    ^

    Re t= 0+1t-1 (5)

    The appropriate sign of the error correction coefficient i.e.1

    and1

    will show the desired results.

    3.0 Contextual background3.01 Balance of payments (BOP)

    A balance of payment is an accounting record of all economic transactions between a country and the rest ofthe world. These transactions consist of payments for the countrys export and imports of goods, services,and financial capital, as well as financial transfers. The BOP summarizes international transactions for aspecific period, usually a year, and is prepared in a single currency, typically the domestic currency for thecountry concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments,

    http://en.wikipedia.org/wiki/Good_(economics_and_accounting)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Transfer_Paymentshttp://en.wikipedia.org/wiki/Transfer_Paymentshttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Good_(economics_and_accounting)
  • 7/29/2019 84-573-1-PB

    3/8

    Pradhan A.H. et al. / IJAR-BAE (March 2012) Vol. 1, Issue 1 / Page No: 70-77

    Journal homepage: www.setscholars.org/index.php/ijarbae 72

    are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries,are recorded as a negative or deficit items.

    When all components of the BOP are included it must balance - that is, it must sum to zero. There can be nooverall surplus or deficit. For example, if a country is importing more than it exports, its trade balance willbe in deficit, but the shortfall will have to be counter balanced in other ways - such as by funds earned fromits foreign investments, by running down reserves or by receiving loans from other countries.

    BOP= Current account (Cu) - Financial account (Fi)Capital account (Ca) (-or+ balancing item)

    The overall BOP always balances when all types of payments are included; imbalances are possible onindividual elements of the BOP, such as the current account. This can result in surplus countriesaccumulating hoards of wealth, while deficit nations become increasingly indebted. Historically there havebeen different approaches to the question of how to correct imbalances and debate on whether they aresomething governments should be concerned about. With record imbalances held up as one of thecontributing factors to the recentfinancial crisis, plans to address global imbalances as well as Bangladeshare now high on the agenda of policy makers for future.3.02 The current Account

    In economics, the current account is one of the two primary components of the balance of payments; andanother is the capital account. It is the sum of the balance of trade (exports - imports of goods and services),netfactor income (such as interest and dividends) and net unilateral transfer payments (such as foreignaid).

    Current account Balance (CAB) = Balance of trade(X-M) + Net factor income from abroad (Income Receipts-

    Income Payments) + Net unilateral transfers from abroad (- or + balancing item)

    Here, X=Export, and M=Import, Income=money received from investments made abroad, remittances etc.

    Net Unilateral Transfers consists of gifts that we receive minus gifts that we offer. Unilateral transfers aregifts by residents on one country to residents of another country. A current account surplus increases acountry's net foreign assets by the corresponding amount, and a current account deficit does the overturn.Both government and private payments are included in the calculation. It is called current account becausegoods and services are generally consumed in the current period.

    The balance of trade is the difference between a nation's exports of goods and services and its imports ofgoods and services, if all financial transfers, investments and other components are ignored (Stern, R.M.,2007). A nation is said to have a trade surplus if it export more than its import. Positive net sales overseasgenerally add to a current account surplus; negative net sales abroad generally contribute to a currentaccount deficit. Because exports generate positive net sales, and because the trade balance is typically the

    biggest component of the current account, a current account surplus is usually associated with positive netexports. So a surplus is indicative of an economy that is a net creditor to the rest of the world. It shows howmuch a country is saving as opposed to investing.

    The netfactor income or income account, a sub-account of the current account, is usually presented underthe headings income paymentsas outflows, and income receiptsas inflows. Income refers not only to themoney received from investments made abroad1 but also to the money sent by individuals working abroad,known as remittances, to their families back home. If the income account is negative, the country is payingmore than it is taking in interest, dividends, etc.The various subcategories in the income account are relatedto specific respective subcategories in the capital account, as income is often composed of factor paymentsfrom the ownership of capital (assets) or the negative capital (debts) abroad. From the capital account,economists and central banks determine implied rates of return on the different types of capital.

    1Investments are recorded in the capital account but income from investments is recorded in the current account.

    http://en.wikipedia.org/wiki/Current_accounthttp://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010http://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Capital_accounthttp://en.wikipedia.org/wiki/Balance_of_tradehttp://en.wikipedia.org/wiki/Factor_incomehttp://en.wikipedia.org/wiki/Transfer_paymentshttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Balance_of_tradehttp://en.wikipedia.org/wiki/Factor_incomehttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Factor_incomehttp://en.wikipedia.org/wiki/Balance_of_tradehttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Transfer_paymentshttp://en.wikipedia.org/wiki/Factor_incomehttp://en.wikipedia.org/wiki/Balance_of_tradehttp://en.wikipedia.org/wiki/Capital_accounthttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010http://en.wikipedia.org/wiki/Current_account
  • 7/29/2019 84-573-1-PB

    4/8

    Pradhan A.H. et al. / IJAR-BAE (March 2012) Vol. 1, Issue 1 / Page No: 70-77

    Journal homepage: www.setscholars.org/index.php/ijarbae 73

    In the traditional accounting of balance of payments, the current account equals the change in net foreignassets. A current account deficit implies a paralleled reduction of the net foreign assets.

    Current account = changes in net foreign assets

    Theoretically, the balance should be zero, but in the real world this is implausible, so if the current accounthas a deficit or surplus, this tells something about the state of the economy, both of its own and in

    comparison to other world markets.

    3.03 Interrelationships in the balance of payment

    If there are no changes in official reserves, the current account is the mirror image of the sum of the capitaland financial accounts. The established response is that the current account is the main causal factor, withcapital and financial accounts simply reflecting financing of a deficit or investment of funds arising as aresult of a surplus. However, more recently some observers have suggested that the opposite causalrelationship may be important in some cases. In particular, it has controversially been suggested thatthe United States current account deficit is driven by the desire of international investors to acquire U.S.assets, Bernanke, B., (2005). However, the main viewpoint undoubtedly remains that the causative factor isthe current account and that the positive financial account reflects the need to finance the country's currentaccount deficit.

    3.04 Reducing or increasing current account deficits

    A deficit in current account reflects an economy that is a net debtor to the rest of the world. That is, acountry is investing more than it is saving and is using resources from other economies to meet its domesticconsumption and investment requirements. So action to reduce a substantial current account deficit usuallyinvolves increasing exports (goods going out of a country and entering abroad countries) or decreasingimports (goods coming from a foreign country into a country). This is generally accomplished directlythrough import restrictions, quotas, or duties (though these may indirectly limit exports as well), orsubsidizing exports. Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly

    increase the balance of payments. This is primarily accomplished by devaluing the domestic currency.Adjusting government spending to favor domestic suppliers is also effective. Less obvious but more effectivemethods to reduce a current account deficit include measures that increase domestic savings (or reduceddomestic borrowing), including a reduction in borrowing by the national government.

    It should be noted that a current account deficit is not necessarily bad for an economy, especially for aneconomy in the developing stages or under reform. The Pitchford Thesis states that a current account deficitdoes not matter if it is driven by the private sector (Cashin, P. and C. McDermott, 1998). Some feels that thistheory has held true where a current account deficit persists. This has been attributed to persistent drawingon foreign investment generating a significant income deficit (Karunaratne, N.D., 2010). A deficit in thecurrent account also implies that a country is a net capital importer, if foreign aid is a part of currentaccount.The volume of a countrys current account is a good sign of economic activity (Gupta, S., C.A. Pattillo, and S.Wagh, (2009). By scrutinizing the four components of it, we can get a clear picture of the extent of activity ofa countrys industries, capital market, services and the money entering the country from other governmentsor through remittances. When analyzing a current account deficit or surplus, it is vital to know what isfueling the extra credit or debit.

    4.0 Analysis and findings of the studyIn accounting sense the balance of payment is always balances. To understand weakness or strong side ofthe BOP, we have to analyze the main influencing factors or items. Since the independence, our trade balance

    is deficit. Net services and income are also in deficit. Only current transfer is the surplus factor due toremittances. For this contribution, current account balances becomes deficit to surplus.

    http://en.wikipedia.org/wiki/Net_foreign_assetshttp://en.wikipedia.org/wiki/Net_foreign_assetshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Net_foreign_assetshttp://en.wikipedia.org/wiki/Net_foreign_assets
  • 7/29/2019 84-573-1-PB

    5/8

    Pradhan A.H. et al. / IJAR-BAE (March 2012) Vol. 1, Issue 1 / Page No: 70-77

    Journal homepage: www.setscholars.org/index.php/ijarbae 74

    4.01 Scenario of remittances in Bangladesh

    Theoretical and empirical literature on remittances is rich, as many studies on the motives, causes, andeffects of workers remittances in the growth and development process have been conducted. According to

    Elbadawi and Rocha (1992) the determinants of remittances can be divided into two main categories-endogenous migration and portfolio approaches. The key determinants and the motivating factors behindthe endogenous migration approach are economic situations facing the migrant and their family as well as

    demographic information describing the nature of family ties or the existence of other family arrangements(Chami, R., C. Fullenkamp, and S. Jahjah, 2005).The main determinants of the portfolio approaches toremittances include interest rate differentials on deposits between the host and home countries, rate ofreturn on real estate in the home country, black market premium, inflation rates, political risk and

    uncertainty (Salisu, M., 2005). On the basis of these approaches, remittances can be divided into what(Wahba, S., 1991)describes as fixed and discretionary remittances. The fixed remittances support thefamily leaving behind the home country while the discretionary remittances go to investment purposes.Remittances are sometime difficult to measure, because it is calculated from the balance of payment dataunder the lines workers remittances and compensation to employees. But these are likely to understate

    the extent of remittances, as some remittance flows occur through informal (non-market) channels, and areexcluded from the official records. It should be mention here that although various strategies to transfer

    remittance have taken over last one decade even the choice of remittance channel is 46% formal and 54%informal (Siddiqui, T. 2003). Bangladesh is considered as one of the major manpower exporting country ofthe world. The outward migration of labor and the remittances that are generated as a result have been afeature after the liberation of Bangladesh. The flow of migration to other countries increased during mid1970 due to oil exploration of Middle East countries as there was tremendous demand for unskilled

    workers. On an average the country exports 140,000 people annually (Gupta, P., 2005). The main source ofremittance of Bangladesh is migrant workers living in Kingdom of Saudi Arabia (KSA), which contributed

    39.3% remittance during 2005 fiscal year (Al Hasan, R. 2006. Formal remittance contributed 6% of GDP ofBangladesh in the year 2004.If informal channel were included this contribution, it would have reached to 9-

    10% of GDP (Al Hasan, R. 2006). Just two years after 2004, in the year 2006 the contribution of formalremittances increased from 6% to 9% of GDP. The following table presents the estimated amount of

    remittance of Bangladeshi migrants. It provides estimates of total remittances during fiscal year 1997-98 to2009-2010 (Bangladesh Economic Review(BER), 2011).Table 1: Country wise Remittances Earnings ($millions)

    Source: Bangladesh Economic Review Various Issues. Ministry of Finance, Government of Bangladesh.

    The official records on remittances indicate that the country received about total US$1525 million overseasremittances in 1997-98.Since then foreign remittance receipts have grown at an exponential rate. The trendof remittance flow to Bangladesh has exhibited a steady growth pattern rising from US $ 1525 million in

    1997 to US $7033.9 million by 2009. Inflow of remittances has increased nearly five-fold between 1997 -98to 2008-09 (Bangladesh Economic Review (BER), 2011).

    Year KSA UAE Qatar Oman Bahrain Kuwait USA UK Malaysia Singapore Others Total

    1997-98 589.29 106.86 57.81 87.61 32.42 213 203.13 65.80 78.09 7.69 83.59 1525.44

    1998-99 685.49 125.34 63.94 91.93 38.94 230 239.43 54.04 67.52 13.07 95.82 1705

    1999-00 916.01 129.86 63.73 93.01 41.80 245.0 241.30 71.79 54.04 11.63 81.14 19492000-01 919.61 144.28 63.44 83.66 44.05 247 225.62 55.70 30.60 7.84 59.91 1882.102001-02 1147 233.49 90.60 103 54.12 285.7 356.24 103.3 46.85 14.26 65.29 2501.132002-03 1254.3 327.40 113.5 114.0 63.72 338.59 458.05 220.2 41.40 31.06 99.61 3061.97

    2003-04 1386.0 373.46 113.6 118.6 61.11 361.24 467.81 397.5 37.06 32.37 123.18 3371.97

    2004-05 1510.4 442.24 136.4 131.3 67.18 406.80 557.31 375.7 25.51 47.69 147.60 3848.292005-06 1696.9 561.44 175.6 165.2 67.33 494.39 760.69 555.7 20.82 684.84 238.81 4801.88

    2006-07 1734.7 804.84 233.1 196.4 79.96 680.70 930.33 886.9 11.84 80.24 339.32 5978.47

    2007-08 2324.2 1135.1 289.8 220.6 138.20 863.7 1380.1 896.1 82.40 130.10 444.50 79142008-09 2121.4 209.70 253.2 216.2 121.8 726.40 1213.7 577.9 168.60 115.40 309.60 7033

    2009-10 2552.6 1424.0 278.4 266.8 126.75 767.80 1084.1 638.7 430.67 145.45 154.57 8270

  • 7/29/2019 84-573-1-PB

    6/8

    Pradhan A.H. et al. / IJAR-BAE (March 2012) Vol. 1, Issue 1 / Page No: 70-77

    Journal homepage: www.setscholars.org/index.php/ijarbae 75

    Figure 01: Flow of Remittances Earnings ($millions)4.02 The current account and remittances of Bangladesh

    Bangladesh current account has been improving remarkably over the past year as lower imports havediminished the trade deficit while remittances have continued to grow at a rapid rate. Remittance has

    become an important aspect for the developing countries because of its economic benefit both at micro andmacro level. It is viewed as a very stable source of foreign exchange [18]. Bangladesh has been enjoying asizeable current account surplus as an increasing amount of the inflow of remittances help to pay importliabilities and hence improve balance of payment position, strengthen foreign exchange reserves and financeexternal debt.

    The following table shows to what extent the current account movements are related to workers

    remittances. The average contribution of remittances in the current transfer was 80.09% over the period1997 to 2009.The contribution of remittances in the current transfer shows a steady growing trend from81.41% in 1999 to 94.99% in 2008. Remittances provide an important resource for mitigating currentaccount deficits over these years. There appears to be a positive linkage between remittances and currentaccount balance and hence the economic growth, but this relationship does not show any systematicpattern. Figure 1 indicates the contribution of workers remittances in current transfers and in the currentaccount balance.

    Table2: Flow of Remittances, Current Transfer, and Current Account Balances ($m).Year Current Transfers Workers remittances % of current transfers Current account balance1997-98 1876 1525 81.30 -4631998-99 2195 1706 77.72 -477

    1999-00 2394 1949 81.41 -418

    2000-01 2171 1882 86.69 -10982001-02 2826 2501 88.50 1572002-03 3440 3062 89.01 176

    2003-04 3743 3372 90.1 1762004-05 4290 3848 89.70 -557

    2005-06 5348 4802 89.80 824

    2006-07 6554 5978 91.21 952

    2007-08 8743 7915 90.53 680

    2008-09 10226 9689 94.75 2536

    2009-10 11613 10987 94.60 2618

    Source: Bangladesh Economic Review Various Issues. Ministry of Finance, GOB.

    By conducting formal unit root tests (Dickey-Fuller Test with no constant) of the series to confirm whetherthey are stationary, we have =0.9299 for cu and =0.9848 for Re. They indicate that both series are

    stationary. To check for cointegration, the estimated result of equation (1) is cu t=0.342 tRe , R2=0.7314

    intercept term is omitted because it has no economic meaning. Then we perform a test of stationary of the

    residuals = - 0.342t

    Re

  • 7/29/2019 84-573-1-PB

    7/8

    Pradhan A.H. et al. / IJAR-BAE (March 2012) Vol. 1, Issue 1 / Page No: 70-77

    Journal homepage: www.setscholars.org/index.php/ijarbae 76

    Figure2: Flow ofRemittance, Current Transfer, and Current Account Balance.The estimated unit root test for residuals is te

    ^

    =-1.247t-1. The unit root t-value is -3.37. It is statistically

    highly significant even at 1% level. This result implies that remittance is linked to current account balances.If Ret were to increase by one unit, cutwould increase by 0.342. But cu may not respond fully by this change.To ascertain how much it will respond, we estimate VEC model by least squares. The estimated VEC model

    for (Cutand Ret) is^

    Cu t= -1072.327-1.098t-1 Estimated equation of (4)(t) (-1.97) (-2.59)

    and

    ^

    Ret= 1078.931+0.446t-1 Estimated equation of (5)(t) (1.70) (0.87)

    The results show that both error correction coefficients are of the appropriate sign. The negative errorcorrection coefficient in the equation (4) (-1.098) indicate that cu falls, while the positive error correctioncoefficient in equation (5) (+0.446) indicates that Re rises, when there is appositive cointegrating error

    (t-1>0 or cut-1>0.342Ret-1). This outcome is consistent with the view that the current account balance islikely to significantly responsive with remittance earning in Bangladesh.

    5.0 Conclusions and policy recommendationsIn line with the intense migration flows from developing to advance countries, the transfers of funds by

    migrants back to their country has become increasingly significant. Increasing attention to migrantstransfer of funds is not due to the size, but also to their good features. This good property makes it a good

    candidate to reduce macroeconomic stability in the receiving country. This paper has focused on thetheoretical literature on remittances and investigated its link with current account situation. In terms ofremittances the trend in Bangladesh has been steady and positive. It shows an increasing trend in the last 13years. The contribution of remittances in current transfers is not less than 80% in this time period.

    The findings in the paper can be summarized as follows:

    1. The positive link between remittances and current account situation, suggest that remittances couldplay an important role to mitigate current account deficit.

    2.

    Workers remittance and current transfer is positively correlated are which about 0.82.3. The positive association between remittances and economic growth suggest the crucial role ofremittances in the economic growth and development process.

  • 7/29/2019 84-573-1-PB

    8/8

    Pradhan A.H. et al. / IJAR-BAE (March 2012) Vol. 1, Issue 1 / Page No: 70-77

    Journal homepage: www.setscholars.org/index.php/ijarbae 77

    4. These results have important implications for policy makers. At present these remittances are largelyused to meeting the consumption needs of the family members left in the country rather than channeledtowards the directly productive activities. Significant percentage of these remittances transmitted viainformal channels thereby escaping the official records. Attempts should be taken by the policy makersfor transmission remittances through less costly and hassle free methods and bring these remittances tomainstream remittances. Besides efforts, we should take steps to encourage both remitters andrecipients on the value adding nature of their remittances through different initiatives, including

    microfinance, small & medium size enterprise projects, special interest rate on remittance deposits.Along these, the government should take some strategic objectives, such as, expansion anddiversification of the countries of employment, improving the skill component of the emigrantworkforce, reducing the cost of emigration by curbing recruitment abuses, provision of safety nets formigrants and their families etc. However, the success of these initiatives depends again on the existenceof macroeconomic and political environment.

    ReferencesMamun, K.A. and H.K. Nath (2010) Workers Migration and Remittances in Bangladesh, Journal of Business

    Strategy. Vol.27, No.1.Chowdhury, M.B. (2011) Remittances flow and financial development in Bangladesh, Econ omic Modelling.

    Vol.28, No.6, pp. 2600-2608.Taylor, J.E., et al., (1996) International migration and national development, Population Index. pp. 181-

    212.Osmani, S., (2004) The Impact of globalization on poverty in Bangladesh, ILO, Geneva and Dhaka.Bangladesh Economic Review (BER), (2011), Ministry of Finance, The Government of the People's Republic

    of Bangladesh (GOB), Dhaka.Stern, R.M., (2007) Balance of payments: theory & economic policy. Aldine.Bernanke, B., (2005)The global saving glut and the US current account deficit, Sandridge Lecture speech,

    Issue March.Cashin, P. and C. McDermott, (1998) Are Australia's current account deficits excessive?, Economic Record.

    Vol. 74, No. 227: pp. 346-361.Karunaratne, N.D., (2010) The sustainability of Australia's current account deficits--A reappraisal after the

    global financial crisis, Journal of Policy Modeling. Vol. 32, No.1:pp. 81-97.Gupta, S., C.A. Pattillo, and S. Wagh, (2009) Effect of remittances on poverty and financial development in

    Sub-Saharan Africa, World Development. Vol. 37, No.1: pp. 104-115.Elbadawi, I. and R.R. Rocha, (1992) Determinants of expatriate workers' remittances in North Africa and

    Europe, Country Economics Dept. World Bank.Chami, R., C. Fullenkamp, and S. Jahjah, (2005) Are immigrant remittance flows a source of capital for

    development?. IMF Staff papers, pp. 55-81.Salisu, M., (2005) The Role of Capital Flight and Remittances in Current Account Sustainability in Sub

    Saharan Africa, African Development Review. Vol.17, No.3, pp. 382-404.Wahba, S., (1991) What determines workers remittances?, Finance and development. Vol.28, No.4, pp. 41

    44.Siddiqui, T. (2003) Migration as a livelihood strategy of the poor: the Bangladesh case, 2003. Citeseer.Gupta, P., (2005) Macroeconomic determinants of remittances: evidence from India. International

    Monetary Fund.Al Hasan, R. (2006) Harnessing Remittances for Economic Development of Bangladesh, INAFI, Bangladesh

    Working Paper Series No.1.Maimbo, S.M. and D. Ratha, (2005) Remittances: Development impact and future prospects. World Bank

    Publications.