CHAPTER 5 IMPACTS ON THE ECONOMY OF BANGLADESHresearch-system.siam.edu/images/independent/THE... · 5.8. Contribution of Remittance to the National Economy Labor migration plays a

Siam University, Bangkok MBA (International Program)

Monir Ahammad 1 | P a g e Independent Study

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CHAPTER 5

IMPACTS ON THE ECONOMY OF BANGLADESH

5.0. Impact on the Economy

Totally the contribution of foreign remittance rising of living standard cannot be

described so easily. So, the importance of foreign remittance in the economy of

Bangladesh is widely recognized and requires little reiteration. For a large number of

Bangladeshi workers, mostly semi-skilled and unskilled, this external demand opened up

opportunities for earning their livelihood abroad. Many others have also left the country

for different pull and push factors. This migration was, however, a welcome relief for

Bangladesh as its development strategies since independence could not cope with and

accommodate the growing demand for employment from a fast growing population. The

consequence of the multidirectional relocation of people, both temporary and permanent,

was the quick rise in remittances in the economy of Bangladesh.

As a parallel development to this growth in outward movements of workforce, the

volume of inward remittances has accelerated to become a regular and substantial source

of resource transfer in the Bangladesh economy, although this was not the case until 2000

when remittances were seen as trivial in size and had little developmental relevance. In

fact, remittances now stand many folds to its Foreign Direct Investment (FDI) and Official

Development Assistance (ODA) combined. According to the MRF 2011, official

remittances to Bangladesh exceeded US$11 billion in 2010, making it the eighth largest

remittances recipient country in the world (World Bank, 2010, p. 58). Certainly, this was a

significant flow of fund for Bangladesh. Indeed, a regular growth in the flow of

remittances has upended the developmental significance of remittances, both in social and

economic sectors, in the eyes of the policy strategists.

However, linking development impacts of remittances with the socioeconomic

variables in the recipient economy is largely dependent on the pattern of uses by the

beneficiaries. In other words, the development linkages of remittances may be examined

by their uses for consumption, savings, education, health care, businesses, assets holding,

debt redemption, and so on of the recipient households. Although establishing such an

association is acknowledged to be complex, researchers have been giving more attention

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to this aspect in recent times. For a developing country like Bangladesh, the

developmental importance of remittances on economic and social sectors seems to have a

strong basis when we find the argument that in less financially developed countries

remittances promote growth and present an alternative mode of investment financing

(Giuliano & Ruiz-Arranz, 2009).

In most cases, first-round effects of remittances on economic development are felt

at the households of the migrants (Taylor & Wyatt, 1996) when we find remittances move

as person-to-person flows, targeted to the needs of the recipients most of the time (Ratha

& Mohapatra, 2007). In reality, remittances bring additional money to the recipient

households to spend on higher consumption, better access to education and health

services, improved housing and living conditions, and employment of resources in

productive activities. At the end, workers’ remittances complement national saving to

form a bigger pool of resources available for investment (B. Ghosh, 2005; Solimano,

2003). Hugo (2003) argues that remittances represent a substantially greater redistribution

of wealth than FDI and ODA, mainly because of absence of any conditionality (attached

to ODA) and repatriation possibilities (of FDI). At macro level, these culminate in a chain

of increase in aggregate demand-output-income, affecting growth of the economy at the

end. The sustainability of the process could be debated though, as the development effects

cannot be a permanent feature unless the commitment of migrants to remittances is

institutionalized. This is still a problem in Bangladesh as use of unofficial channels for

sending remittances is popular, making the institutionalization process a bit difficult.

5.1. Impact on the GNP

Increases in foreign remittance also increase the national income. As the national

income increase the consumption of goods by the country people also increase. So,

production of goods by the different organizations increases as well. It increases

Bangladeshi’s GNP.

5.2. Increase savings

Foreign remittance that comes from different developed countries is increasing

the level of Bangladesh national savings. The remittance received by Bangladeshi's people

is saving in different banks by making long term or short term deposit.

5.3. Increase capital











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Remittance received from different developed countries which is saving in

different banks a big source of capital. This huge amount of money is investing is

different project by the bank.

5.4. Impact of remittance on investment

Foreign remittance is increasing the investment of Bangladesh. The remittance is

using for small and big investment in different project, establishing firm or industry, small

or big shop which increases the proper utilization of money.

5.5. Increase employment

As the investment increase, the employments of Bangladesh also increase. The

people of Bangladesh are getting jobs in different project, firm or industries.

5.6. Impact of remittance on import

It has a bad impact on Bangladesh economy. By increasing remittance, it also

increases consumption of foreign product. It increasing the import of foreign product day

by day as well, Peoples have enough money to buy foreign product, although government

is trying to save domestic companies by implementing necessary rules and regulation.

5.7. Opportunities of Remittance Income in Bangladesh

Bangladesh has earned a record amount of foreign remittance amounting more

than $14 billion and exported the second highest number of workers to Middle-East

Countries (Ministry of Expatriates’ Welfare and Overseas Employment Report, 2012). It

has been indicated that the demand for blue-collar workers are increasing day-by-day in

Asian countries, especially Middle-East and South-East Asian countries. The World Cup

Football 2022 will be held in Qatar. That is why; the authority of this country wants to

import huge number of labor from Bangladesh. Thus, the government of Bangladesh

should start diplomatic and high profile discussion with the government of Qatar

immediately to catch the labor market of this country so that the government can export

huge number of labor to Qatar and earn ample foreign remittance. Beside this, the

government should take necessary steps to open the labor market of Kuwait for fresh

migrant workers of Bangladesh promptly and should also arrange bilateral and



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multilateral discussion with the other countries of the Middle-East which will help the

government to expand the labor market in the Middle-East countries.

Recently, Malaysia has been agreed to take labor from Bangladesh. Now, the

government is trying to collect required number of qualified labor through mass campaign

from every district of Bangladesh. In this case the government should be very much

careful so that the Malaysian labor market will not be stopped again for Bangladesh

migrants. In addition to Malaysia, the government of Bangladesh should arrange bilateral

and multilateral discussion with the government of other Asian and Middle-East Countries

so that Bangladesh migrants will get more employment facilities in these countries.

Recently, Thailand has been agreed to import labor from Bangladesh in

construction sector. Thailand authority initially decided to import 30,000 Bangladeshi

labors in the construction sector. Necessary government to government corresponding

regarding labor import almost final stage by this time. Now, whole the procedure is

waiting to final contact sign between both the government officials. In this case the

government should be very much careful so that the Thailand labor market will not be

stopped for Bangladesh migrants. In addition to Thailand, the government of Bangladesh

should arrange bilateral and multilateral discussion with the government of Thailand.

The shortage of certain skilled professionals in industrialized countries such as

information technology experts and computer specialists, nurses, medical doctors, etc. is

an important factor behind the increase in demand for skilled manpower. In recent years,

the OECD countries have encouraged immigration of high skill people through

immigration incentive policies such as H-1 professional Visas in the U.S. and special

visas for information technology experts in Germany and other countries. In this regard,

the government of Bangladesh emphasis on developing the skill level of potential

migrants through various training program so that the Bangladeshi migrants will get

migration opportunities in the OECD and other countries in the world.

Still today, the African Continent is under the un-invented condition. Now, the

government of developed countries has been drawn special attention to develop the

various countries in this continent. Thus, the government of Bangladesh should start

bilateral and multilateral discussion immediately so that Bangladesh can export huge labor



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to the various countries of African Continent. In addition to this, the government should

start diplomatic and high profile discussion with the government of Latin American

counties because there are tremendous opportunities to export Bangladeshi labor to these

countries.

5.8. Contribution of Remittance to the National Economy

Labor migration plays a vital role in the economy of Bangladesh. Bangladesh has a

very narrow export base. Readymade garments, frozen fish, jute, leather and tea are the

five groups of items that account for four-fifths of its export earnings. Currently, garments

manufacturing is treated as the highest foreign exchange earning sector of the country.

However, if the cost of import of raw material is adjusted, then the net earnings from

migrant workers’ remittances are higher than that of the garments sector. In fact, since the

1980s, contrary to the popular belief, remittances sent by the migrants played a much

greater role in sustaining the economy of Bangladesh than the garments sector.

For the last two decades, remittances have been at levels of around 35% of export

earnings, making it the single largest source of foreign currency earner for the country.

This has been used in financing the import of capital goods and raw materials for

industrial development. In the year 1998-99, 22 percent of the official import bill was

financed by remittances (Afsar, 2000; Murshed, 2000 and Khan, 2003). The steady flow

of remittances has resolved the foreign exchange constraints, improved the balance of

payments, and helped increase the supply of national savings. Remittances also

constituted a very important source of the country’s development budget. In certain years

in the 2012s remittances’ contribution rose to more than 50 percent of the country’s

development budget. Government of Bangladesh treats Foreign aid (concessional loan and

grants) as an important resource base of the country. However, remittances that

Bangladesh received last year was twice that of foreign aid. Remittances have played a

major role in reducing the extent of the country’s dependence on foreign aid.

The contribution of remittance to GDP has also grown from a meager 1 percent in

1977-1978 to 5.2 percent in 1982-83. During the 1990s the ratio hovered around 4

percent. However if one takes into account the unofficial flow of remittances, its

contribution to GDP would certainly be much higher. Murshed (2000) finds that an



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increase in remittance by Taka 1 would result in an increase in national income by Tk

3.33.

Following the expiry of Multi-Fiber Agreement (MFA), Bangladesh will face

steep competition in export of RMG. The country will cease to enjoy any special quota. It

is apprehended that Bangladesh’s RMG export will decline sharply. This will result in loss

of job of many workers and shortfall in foreign exchange earnings. Potential of retaining

employment and export earnings through export of frozen fish, jute, leather and tea seems

rather bleak. It is in this context labor migration has become key sector for earning foreign

exchange and creating opportunities for employment. Therefore, the importance of

migrant remittance to the economy of Bangladesh can hardly be over emphasized.

5.9. Sources of remittance

Countries from which most of Bangladesh wage earners remittance comes like

Bahrain, Australia, Kuwait, Hongkong, Oman, Italy, Qatar, Malaysia, K.S.A., Singapore,

U.A.E., U.K., Libya, U.S.A, Germany, Iran, South Korea.

5.10. Uses of Foreign Remittances and Impacts on Socioeconomic Factors in

Bangladesh

In analyzing the transfer and utilization dynamics of remittances, De Bruyn and

Kuddus (2005) find that remittances inflows in Bangladesh happen mostly in the forms of

(a) transfer to family and friends and (b) transfer to save or invest, and not much in the

forms of (c) transfer to charity or community development and (d) collective transfer to

charity or community development. So the impact assessment mainly centers on the first

two types of transfers. Sensibly, in those two types of transfers, the recipients are often the

father, mother, spouse, other family members or even relatives of near and far.

But how do recipient households in Bangladesh use the remittances they receive?

Most of the studies that explored the dynamics of remittances utilization have divided

various uses of remittances into two categories, for example, productive and non-

productive expenditures. The terminologies used are instructive of their meaning. Those

uses of remittances are considered productive that have been used on assets that increase

productive capacity and bring income to the households. On the contrary, the other uses

are non-productive as they do not help accumulate capital or generate further income for





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them. In this study, we have, instead, grouped the uses of remittances under two separate

categories, for example; consumption and investment to mean non-productive and

productive expenditures, respectively. This has been done to use their aggregate values to

calculate the remittance for Bangladesh.

To have a better picture of the uses of remittances in Bangladesh summarized the

findings (Siddiqui and Abrar, 2003) in Table 7. Here also included the results of De Bruyn

and Kuddus (2005) in the same table to offer a comparative position on some of the uses.

It has to be noted that the study of De Bruyn and Kuddus compiles remittance uses data

from 21 studies including that of Siddiqui and Abrar. Column 3 in Table 7 has averaged

out the range of minimum and maximum percentages of uses for respective heads from

the study of De Bruyn and Kuddus. Technically, the figures in Column 3 give a view on

the central tendency of the uses of remittances in those studies and amplify the fact that,

as a whole, their findings on consumption and investment uses remittances draw nearly a

similar picture as has been found by Siddiqui and Abrar (2003).

Table-7: Patterns of Utilization of Remittances in Bangladesh

Purposes Study I (%) Study II (average, %)

Food and cloths (consumption) 20.45 28

Medical treatment 3.22 2

Children education 2.75 2.5

Agricultural land purchase 11.24 21.5

Homestead land purchase 0.96 -

Home construction/repair 15.02 16

Release of mortgage land 2.24 -

Taking mortgage of land 1.99 -

Repayment of loan (for migration) 10.55 14.5

Repayment of loan (other purpose) 3.47 -

Investment in business 4.76 2.5

Savings/fixed deposit 3.07 5

Insurance 0.33 -

Social ceremonies 9.07 5

Gift/donation to relatives 0.94 -

Send relatives for pilgrimage 0.92 -

Community development activities 0.09 -

Sending family members abroad 7.19 3.5

Furniture 0.69 -

Others 1.05 -

Note: Study I: Consumption Total = 66%; Investment Total = 34%.

Source: Munim K. Barai (2012); Study I, Siddiqui and Abrar (2003); Study II, De Bruyn

and Kuddus (2005).


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In this study, tend to focus more on the findings of Siddiqui and Abrar (2003)

because here accepted their results as the base for grouping the uses of remittances into

consumption and investment and further analysis. They surveyed a total of 100 remittance

receiving households in two administrative blocks in two districts of Bangladesh. The

survey also included another 20 remittance sending labor respondents in Ajman and Dubai

in the UAE. But for the analysis, these also have formed the basis for calculations of the

values of MPCR, MPSR, and rm.

To get the consumption estimate of remittances, now add the recipients’ expenses

on items like food and clothes, medical treatment, home construction/repair, repayment of

loans, insurance, social ceremonies, gift or donation, sending relative for pilgrimage,

furniture, and others. Broadly, these uses in Table 7 together constitute the percentage of

remittances used for consumption by the surveyed households. However, all uses in

business investment, savings/fixed deposit, purchase of agricultural and homestead land,

release of mortgaged land or taking mortgage of land, education cost, community

development investment, and sending family members abroad have been added together

to calculate the percentage of remittances used for investment. Differences in opinions

may exist on the reasoning for grouping the various uses with either one of the two, but

here explained own kind of reasons for clubbing the uses into the groups of consumption

and investment. However, by adding all the values into two groups, find about 66%t of the

remittances in Bangladesh are used for consumption and the rest 34% are for investment

from the study of Siddiqui and Abrar (2003).

As mentioned, various consumption and investment uses of remittances have short

and long-term socioeconomic benefits at the household level in particular. They ultimately

go beyond to affect the community and national economy as a whole. In this regard, Table

8 lists some major social and economic indicators and impacts of remittances on them at

household and community levels in Bangladesh. It can be seen that indicators like

nutrition, living condition and housing, education, health care, social security, and

investment of the recipient households have been positively affected by remittances. The

correlation between these benefits and remittances needs a bit explanation. The poverty

profile of the migrants is important for the social benefits appraisal of remittances because

the impact of remittance income on poverty reduction is expected to be more on the

poorer households. In Bangladesh, most of the short-term migrant workers are from the








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poor families of rural areas. So, in most of the cases, remittances form an important part

of the household earnings of the recipients and could constitute 51% to 70% of the

households’ earnings on an average (Mahmood, 1991; Siddiqui & Abrar, 2003). Afsar,

Yunus, and Islam (2002) in their survey find that household income of the migrants

increases by 55% once they start sending remittances.

Table -8: Impacts of Remittances at Household and Community Levels.

Major indicators Positive impact of remittances

Nutrition Allow families of migrants to meet basic nutritional

needs

Living condition and housing Living condition and housing improved

Education More investment for education of children

Health care Increased investment for health care

Social security Social security for elderly people increased

Investment Increased investment in business or income generating

activities

Source: Munim K. Barai (2012); Hasan (2006), modified from De Bruyn and Kuddus

(2005).

So this enhanced income helps loosen the financial constraints of the recipient

families, allowing them to spend more on consumer durables, nondurables, health care,

physical living condition, and so on. Investment in education, income generating assets,

and social security measures also gets increased. So remittance income in the short and

long term not only protects the recipients from negative income shock but also contributes

to poverty reduction and economic growth (Hasan, 2006). This is corroborated by the

GEPs 2006, which suggests that remittances in Bangladesh have helped the poverty

headcount ratio decline by 6 percentage points during 1990 to 2006 (Word Bank, 2006).

5.11. Wage earners remittance

Wage earners remittance was not good after the first time of Bangladesh

independence. Then year after year it was changing and it going up and up. Now the entire

scenario has been changed. Now big amount of skilled workers working in different

developed countries and their sending huge amount of foreign remittance to Bangladesh.

That changes their family condition as well as Bangladesh economy.








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5.12. Export remittance

Increase in export remittance is going higher than in every year as well as every

decade. In the last decade export increases about twice. Export earning is increasing

gradually and it increasing highly after 2000 when garments industries are emerged. But

Bangladesh also earns a massive amount of money by exporting jute, frozen

food, vegetable, fish, chicken, tea etc.

5.13. Comparison and interpretation

Bangladesh’s export earning is going highly up day by day. It indicates that, the

products of Bangladesh have a good demand in foreign countries. It is helping to boost

country’s industries and helps in economic development as well as employment.

Workers who work outside the country send huge amount of remittance and have a

good contribution in Bangladesh’s economy. It also increases day by day as increasing

competent workers.

Export remittance is increasing highly than wage earners remittance though both

were very close in previous few years.

5.14. Utilization and Development Dynamics of Remittances

The development impacts of remittances may be assessed by the effects

remittances have on various short and long-term micro and macro socioeconomic

variables. Again, these impacts are considered to be more in the developing countries with

higher poverty incidence and lower financial development density (Giuliano & Ruiz-

Arranz, 2009; Jongwanich, 2007). The remitters, who were mostly unemployed in their

home countries, have now jobs in overseas places. This may create limited employment

opportunities for the others in the home country. Likewise, the remittances they are

sending back may help employment generation domestically as well. The latter happens

through the reinforcement of remittances-induced national savings, capital accumulation,

and investment (Barua et al., 2007). So the direct, trickle down, and indirect benefits of

remittances could be significant in aggregate for many of the developing countries.

The Study argues that the development impacts of remittances on the economy and

society are affected by the manner remittances are put to use. The study may, however,







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examine the linkage between remittances and development following the flow paths

in Figure 16. The figure lines up the present uses of remittances and links the

consequential social and economic effects in the medium to long term. Once received,

remittances are put to use in the forms of consumption, saving, and investment by the

recipients individually and collectively. Yet, the savings out of remittances can promote

them to initiate some entrepreneurial activities for further accumulation of capital. In the

process, remittances also help develop soft power of the individual beneficiaries. So what

essentially begins as short-term micro-level benefits to individuals and households

ultimately becomes a macro-level influencer of economic forces in the medium to long

term to benefit the whole economy.

Figure-16: Socioeconomic development linkages of remittances.

Source : Munim K. Barai (2012)

5.15. Remittance and Its Impact on Macroeconomic Performance

Remittances now represent an important external source of finance for

Bangladesh, and the tentative impacts on macroeconomic development cannot be

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ignored. Figure 17 gives a clear view on the growing importance of remittances while

compared with GDP, external debt, imports, exports, and FDI flows in the economy, all

figures presented at the current price. Evidently, the importance is growing rapidly since

2000.

Figure-17: Remittances and Major Macroeconomic Indicators, 1980–2009

Note: Figure of External Debt Stocks of 2008 has also been used for 2009.

Source : Munim K. Barai (2012).

Let take some comparative figures in perspective. In 2000, workers’ remittances

amounted to 4.2 percent of GDP, 29.7 percent of exports, 12.4 percent of external debt,

699.3 percent of FDI, 23.4 percent of gross domestic savings and 21.6 percent of imports.

The critical factor is the relative rise of remittances against external debt and imports.

Bangladesh has remained a trade deficit country in most of the years since independence,

but in the years onward from 2000, it has been continuously posting current account

surplus (the gap between exports and imports of goods, services, and unrequited

transfers), mainly because of remittance income. Notably, remittances have emerged to be

the single largest source of net factor income from abroad, contributing to offset the

pressure of deficit of merchandise trade and to service external debt. As a corollary of the

surplus of current account, regular debt servicing, GDP growth, and so on, Bangladesh

has bettered its international credit rating. In 2010, the Standard & Poor’s (S&P) assigned

Bangladesh its first BB- for long term international credit and a B for short term credit

(Wikipedia, 2011).

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This brings to the important task of assessing the contribution of remittances to

GDP creation in Bangladesh. In doing so, need to know the MPC for Bangladesh B.

K. Ghosh (2010) identifies that MPC on an average is higher in rural areas than in urban

areas, and their average figures were 0.74 and 0.65, respectively, in 2005. Siddiqui and

Abrar (2003) estimated that 66% of remittances received have been used for consumption,

whereas the rest 34% are invested. So we consider the “marginal propensity to consume”

of remittance and “marginal propensity to save” of remittance values of remittances as

0.66 and 0.34, respectively. Thus, the estimated MPCR looks to be close to the national

average of MPC for Bangladesh. Moreover, the MPC of the remittance recipient

households may be a bit lower even in the rural areas, given the kind of “elitism” they

attain because of higher average income and exposure to cross-border culture.

Table - 9: GDP Creation by Remittance, 1976-2010 (US$ mn)

Year

GDP

(Current

US$)

Remittance

(Current

US$)

Investment out of

Remittance (When MPCR

= 0.66 and MPSR = 0.34)

m = (∆YR)/(∆IR) = 1/

(1−MPCR) = 2.94

and GDP Creation

% of

GDP

1976 10,083 19 6.5 19.0 0.19

1980 18,115 339 115.3 338.9 1.87

1985 21,613 502 170.7 501.8 2.32

1986 21,160 576 195.8 575.8 2.72

1987 23,781 748 254.3 747.7 3.14

1988 25,639 764 259.8 763.7 2.98

1989 26,825 758 257.7 757.7 2.82

1990 30,129 779 264.9 778.7 2.58

1991 30,957 769 261.5 768.7 2.48

1992 31,709 912 310.1 911.6 2.88

1993 33,167 1,007 342.4 1,006.6 3.03

1994 33,769 1,151 391.3 1,150.5 3.41

1995 37,990 1,202 408.7 1,201.5 3.16

1996 40,666 1,345 457.3 1,344.5 3.31

1997 42,319 1,526 518.8 1,525.4 3.60

1998 44,092 1,600 544.0 1,599.4 3.63

1999 45,694 1,797 611.0 1,796.3 3.93

2000 47,097 1,958 665.7 1,957.2 4.16

2001 46,988 2,094 712.0 2,093.2 4.45

2002 47,571 2,848 968.3 2,846.9 5.98

2003 51,914 3,180 1,081.2 3,178.7 6.12

2004 56,561 3,572 1,214.5 3,570.6 6.31

2005 60,317 4,302 1,462.7 4,300.3 7.13

2006 61,899 5,418 1,842.1 5,415.8 8.75

2007 68,418 6,553 2,228.0 6,550.4 9.57

2008 79,551 8,925 3,034.5 8,921.4 11.21

2009 89,378 10,510 3,573.4 10,505.8 11.75

2010 100,375 10,852 3,689.7 10,847.7 10.81

Note: MPCR = marginal propensity to consume value of remittances; MPSR = marginal

propensity to save of remittances.

Source: Constructed. Munim K. Barai (2012).

Table 9 has been prepared to estimate the GDP creation of remittances income by

using rm value as 2.94, calculated on the MPCR value of 0.66. The MPCR value of 0.66,







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which has been derived from the consumption uses of remittances from Siddiqui and

Abrar (2003). The standard multiplier equation, m = (ΔY)/(ΔI) = 1/(1−MPC), has been

applied with modification in MPC to make it MPCR and MPS to MPSR. By any measure,

this was a substantial contribution. Had all transfers to Bangladesh been done through

official channels, the GDP impact would have been calculated at a much higher value.

Table 9 shows that remittances created merely US$19 million (or 0.19%) of GDP in 1976.

But with a rapid increase of remittances, the figures went up to US$ 6.5 billion (7.13%) in

2005 and then further up to US$10.5 billion (or 11.75%) to GDP in 2009. A marginal

decline in the GDP creation by remittances (US$10.9 billion or 10.81%) has been

followed in 2010 when growth in inward transfer slowed down considerably.

Have remittances adversely affected the external competitiveness of export trade

by putting appreciating pressure on Bangladeshi taka (BDT), the local currency? It has

indeed not as the economy has so far been able to avoid the “Dutch Disease” effects of

remittances at macro level due to a continuous depreciation of BDT against the major

international currencies over time. For example, whereas US$1 could buy BDT 34.57 in

1990, it could trade against BDT 75.00 in 2011. Interestingly, the depreciation has

accelerated since 2003 when Bangladesh adopted fully floated exchange rate. In other

words, BDT has lost substantial exchange power during this time. Moreover, the export

basket of Bangladesh is still small and is absolutely dominated by the ready-made-

garment (RMG) products. To substantiate, the contribution of the RMG sector alone

hovers around 77% to 80% of total exports in every year. Importantly, the sector employs

a workforce that has huge local pool of labor supply, and a very few of them are remotely

linked to the direct benefits of remittances. Furthermore, the domestic value addition in

the sector is also increasing through backward and forward linkages of internal resources,

and the utilization of import components is declining. All these together have an

insulating effect on the most important export sector to remain internationally competitive

even during the recession in 2008-2009.

But there are “quasi” Dutch Disease effects present in the remittance-related

segments of the economy. It is apprehended that remittances may have contributed to the

creation of dependency syndrome among a section of the recipients (De Bruyn & Kuddus,

2005). Such a syndrome usually inspires intentional unemployment, which could affect

the allocation of human resources necessary to the development of domestic industries.

This may be one of the important reasons that some of the zones that have the most







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remittance inflows within Bangladesh have less industrial activities. Moreover, superficial

signs of inflation are visible in those “pockets of remittances” as prices of housing, land

and properties, some food items, and so on are relatively higher than the national average.

This robs part of the transferred resources that could have otherwise been used for

productive purposes.

5.16. Remittance, Foreign Aid and Foreign Direct Investment; A comparison of

major capital cash flow

The flows of remittance to Bangladesh demonstrate a similar trend to that of the

global trend. In case of Bangladesh, between 1976 and 2010 remittance flows grew from

$18.76 million to a substantial $10.85 billion in 2010, equivalent to 10.81 percent of GDP.

This, however does not include the sizeable flows of informal remittances to Bangladesh

although remittances are being transmitted through commercial banks and other financial

institutions like Western Union, it is estimated that unrecorded remittances are around

50% of the official recorded remittances, which if captured in the formal statistics could

increase total remittances.

Growth in Remittances has been far more substantial with regard to ODA and

Foreign Direct Investment (FDI). In the period 1990 to 2010, remittances as a share of

GDP averaged around 6 percent while ODA and FDI averaged around 3 percent and 1.5

percent, respectively (see Figure 18). This demonstrates the stable nature of remittance

flows in Bangladesh.

Figure-18: Remittances, Foreign Aid and FDI (% of GDP), Bangladesh, 1990-2010

Source: World Bank & A. N. M. Ferdous Alam (May 2012)



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Foreign direct investment, on the other hand has also been crucial in the

development process of Bangladesh. FDI inflows, as a non-debt creating flow, not only

supplement domestic savings, but also contribute to fostering domestic managerial skills

and transfer of technology. Bangladesh has many attractions for foreign investors such as

preferential market access to America, EU and other markets, easy repatriation of capital

and profits, a well-balanced package of financial and other incentives and good air and sea

links with overseas markets.

Whilst foreign aid and FDI flows are subject to economic and political

environment, migrant remittances exhibit a countercyclical nature. The flows of migrant

remittances rise in times of shocks created by natural disasters and other economic crises

have been driven by an altruistic motive of migrant remittances. Given that remittances

are more resilient and stable in nature, it serves as a fundamental source of development

fund for Bangladesh. The importance of international migrant remittances as a valuable

source of foreign exchange has been increasingly noted.

5.17. Remittance as Percentage of GDP

As per “Unnayan Onneshan” research (October, 2012), the share of remittance to

gross domestic product (GDP) has been increasing over the years but the incremental rate

of growth is following a downward trend after FY 2004-05. In FY 2011-12, the GDP was

BDT 914,780 million and remittance as percentage of GDP was 11.14 percent which was

0.72 percent higher than that of FY 2010-11. Since FY 2006-07, the incremental rate of

growth of remittance as percentage of GDP has been decreasing. The incremental rate of

growth of remittance as percentage of GDP was -0.53 percent and 0.10 percent

respectively in FY 2010-11 and FY 2009-10, from 1.38 percent in 2005-06.



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Figure-19: Remittance as a percentage share of GDP

Source: Bangladesh Bank and Ministry of Finance, 2012 and Unnayan Onneshan, October

2012.

5.18. Comparison between the rate of growth in remittance, inflation and GDP

In FY 2011-12, the rate of growth in remittance was 22.74 percent while the rate

of growth in GDP remained at 6.32 percent and the rate of inflation increased to 10.62

percent. In FY 2003-04, the rate of growth in remittance and GDP were respectively 12.08

percent and 6.27 percent whereas, the rate of growth in inflation was only 5.83 percent.

Figure-20: Comparison between growth rate of remittance, inflation and GDP

Source: Bangladesh Bank; Ministry of Finance, 2012 and Unnayan Onneshan, 2012.



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5.19. Remittance as a Percentage of Export Earning

In FY 2011-12, export and remittance as a percentage of export earnings were

respectively USD 12843.43 million and 52.84 percent which was only 2.04 percent more

than that of FY 2010-11. On the other hand, merchandise export, remittance and service

invisible receipt as a percentage of total exports of goods and services were 61.72, 31.36

and 6.92 percent in FY 2010-11. In FY 2010-11, remittance and service invisible receipt

as a percentage of total exports of goods and services were 5.67 and 1.43 percent

respectively less than those of FY 2009-10. An upward trend of remittance as percentage

of export earning was observed after FY 2000-01. In FY 2000-01, remittance as

percentage of export earning was only 20.64 percent whereas it stood at 37.03 percent in

FY 2009-10.

Figure-21: Remittance as a percentage of export earning

Source: Economic Relation Division, 2012 and Unnayan Onneshan, October 2012

5.20. Comparison among the External Sectors

Considering the external sources, the relative share of foreign aid and Foreign

Direct Investment (FDI) is very low compared to the percentage share of remittance. In

terms of foreign currency inflow, the contribution of foreign aid and Foreign Direct

Investment (FDI) are very negligible compared to the contribution of export earnings as

well as remittance. Moreover, about half of the amount of total disbursement of loan and

grants goes for the payment of interest and principal payment over the years. On the other

hand, export is highly dependent upon the import of raw materials. As a consequence,

remittance might be the most secured source of foreign exchange in the economy of

Bangladesh.



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Figure-22: Comparison between remittance and foreign aid

Source: Economic Relation Division, 2012 and Unnayan Onneshan, October, 2012.

In FY 2011-12, the amount of export, remittance and net foreign aid were USD

24,301.90 million, USD 12,843.43 million and USD 1,247.82 million respectively

whereas Foreign Direct Investment (FDI) might be USD 806.52 million. Remittance

earnings were 929.27 percent and 1492.45 percent more than those of the amount of

foreign aid and FDI.

5.21. Current Account Balance and Remittance

Increase in the remittance helped the current account balance to remain positive,

despite the increase in the trade deficit and deficit in services over the years. In FY 2011-

12, current account balance showed a positive trend after observing a declining trend in

the previous fiscal year which increased by 84.18 percent. The main reason behind this

increase in current account balance was the slower rate of trade deficit, service deficit and

higher rate of remittance inflow as various measures are taken by the government to

decrease the import payments.

In the meantime, trade deficit and service deficit increased by only 2.38 and 8.02

percent respectively whereas remittance increased by 10.24 percent in FY 2011-12. The

current account balance suddenly dropped by 76.38 percent in FY 2010-11 than that of

FY 2009-10 due to increase in the trade deficit and interest payments at 50.32 and 60.47

percent respectively as well as the slower rate of remittances at only 6.03 percent. The

current account balance started to increase significantly from FY 2005-06 while it reached

at the highest in FY 2009-10 at USD 3737 million which increased by 56.68 percent



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because of the increase in remittance and secondary income by 13.40 and 13.56 percent

respectively and decline in interest payment by 9.66 percent.

Figure-23: State of current account balance with remittance

Source: Statistics Department; Bangladesh Bank, 2012 and Unnayan Onneshan, October

2012.

Capital transfer is one of the helping hands to make the overall balance positive.

To resolve the problem in Balance of Payment (BOP), the government has taken loan

from the International Monetary Fund. In FY 2011-12, capital transfer was only USD 469

million which decreased by 26.95 percent than that of the previous fiscal year. However,

the share of capital transfer and current account balance on overall balance were 94.94

and 329.96 percent respectively in FY 2011-12 than those of the previous fiscal year.

5.22. Foreign Exchange Reserve

In spite of increase of remittance over the years, reserves are increasing at a

decreasing rate due to the increase in import bills for quick rental power plants. In FY

2011-12, foreign exchange reserve was USD 10,364.4 million which was 5.01 percent

lower than that of the previous fiscal year. The foreign exchange reserve declined because

of the increase in the import bills for the quick rental power plants, despite the rate of

growth on remittance increased by 10.24 percent. Remittance mainly used to pay the



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import payments after export earnings. Its contribution in financing the import payment

rose from 25.90 percent in FY 2001-02 to 36.24 percent in FY 2011-12.

Figure-24: Situation of Remittance, reserve and import payments over the years

Source: Foreign Exchange Policy, Bangladesh Bank, 2012 and Unnayan Onneshan,

October 2012.

At the end of October 2012, reserves have reached at the record of USD 12.31

billion because of surge in inflow of remittance coinciding Eid-ul-Adha, purchase of US

dollar by the Bangladesh Bank in the last few months and drop in import of capital

machineries due to tightened monetary policy. During July-August 2012, the growth in

settlement of letters of credit (LCs) or actual import payments for capital machinery and

petroleum registered a negative growth of 17.45 and 5.73 percent, compared to those of

44.23 and 130.48 percent in the same period of the previous fiscal year (i.e. July and

August of 2011). The settlements of LCs in these months for capital machinery were

worth USD 334.19 million against USD 404.72 million in the corresponding period of

2011. The expatriates send more money for the biggest occasion of Eid-ul-Azha. During

July-October 2012, expatriates remitted USD 5,005.30 million which was nearly 24.75

percent higher than of the same period of the previous fiscal year.



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5.23. Remittance and Depreciation

Remittance inflow was also following an increasing trend over the months of FY

2011-12 due to the depreciation of Taka against US dollar. In FY 2011-12, depreciation of

BDT against dollar was 6.48 percent, which was 6.34 percent in FY 2010-11. In the

meantime, remittance increased by 10.34 percent. Remittance in terms of dollar increased

by 10.24 percent while remittance in terms of BDT increased by 23.74 percent.

Depreciation of BDT against dollar encourages the expatriates to send more money in the

home country.

Figure-25: Remittance in terms of depreciation of BDT against USD

Source: Statistics Department; Foreign Exchange policy, Bangladesh Bank, 2012; and

Unnayan Onneshan, October 2012.

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