road map to transform bangladesh into a progressive country_term paper_economics

7/18/2019 Road map to Transform Bangladesh Into a Progressive Country_Term Paper_Economics

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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 !"# Bangladeshi nationals had migrated to the port cities of $ondon and

$iverpool in the %& '(ahmood !!). 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

%nited &ingdom '%&). It is believed that thousands of Bangladeshis, especially from

*ylhet, took the opportunity and created a flow of migration towards %&. +or certain

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

flow changed in the !-s. /fter the birth of Bangladesh, most Bangladeshi migrants

sought to look 0ob to (iddle 1ast countries as well as selected 1% destinations 'mainly

2ermany). / tendency to find employment in developed countries like %*/, 3anada, Italy

and in some /sian countries like 4apan, (alaysia and *ingapore was observed in the

!!-s 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

ma0or remittance recipient countries in the world.

In recent years, Bangladesh has been receiving remittance inflow close to %*5 billion

and more each month. $ast year, Bangladesh had received %*5 #.6" billion in

remittances and a decade ago the figure was %*5 #.7 billion 'The 5aily *tar, #-#). This

has boosted the central bank8s foreign currency reserve and stabili9ed pressure on B5T

and balance of payment. If the current trend of remittance inflow continues central bankhopes that the remittance will stand at %*5 " billion in the current fiscal year.



Bangladesh8s economy has been growing at rate of over : in recent years. ;owever, 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 ob0ective 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 <uestions=

5oes inward remittance contribute to inflation is a country8s economy> ;ow>

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

Throughout the paper @remittance8 will mean @inward workers8 remittances8 through formal

channels8 unless mentioned otherwise.

1.3 Literature Review

/t present, remittances play a crucial role in the economy of Bangladesh . /t the macro

level, it helps to relieve foreign eAchange constraint, stabili9e the eAchange rate

movement, and improve the balance of payments. / comfortable foreign eAchange

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. /t micro level, remittance has a

beneficial impact on household consumption, poverty reduction and self employment. It

also improves country8s creditworthiness. ;owever, it has been more stable source of

foreign earnings than both +5I and foreign aid.

Remittance grew around -.! percent in !!-! which increased to C." percent in #--!

- and .-C in #--. Remittances as percentage of most key macroeconomic variables

showed upward trend during !6#-. It is observed that the remittance25P ratio

touched -."C percent in #- as compared to .!C percent in !66# 'Begum and

*utradhar #-#).

#



Inward foreign remittance is used for the purposes in Bangladesh 'Bangladesh Bank

Report, #-) such as buying food, repayment of loans, education, medical treatment,

operating business, savings, investing.

Inflation has been a ma0or phenomenon in the economic landscape of Bangladesh in the

recent past. It has started to increase since the second <uarter of +D#-- and continued to

rise throughout +D#- and +D#-#. /s in most years, food inflation was higher than

general inflation. +ood inflation reached to C.7: in *eptember #- as opposed to

!.#: in *eptember #-- 'B*B, #-).

/ccording to the Bangladesh Bureau of *tatistics 'BB*), pointtopoint inflation rose to

.!: in *eptember #- and food inflation increased to a level more than what policy

analysts had forecasted, due to higher food and oil prices. *uch 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. ?hen the general price level rises, each unit of currency

buys fewer goods and services. 3onse<uently, inflation also reflects an erosion in the

purchasing power of money E a loss of real value in the internal medium of eAchange and

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

annuali9ed percentage change in a general price indeA 'normally the 3onsumer Price

IndeA) over time. / number of economic theories have eAplained 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 eAtending credit to the private sector by central

monetary authorities '5ornbusch and +ischer, !!C). On the other hand, according to the

monetarist view pioneered by (ilton +riedman inflation is caused due to an eApansion in

the money supply '+riedman, !-). The third view holds that increase in aggregate

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

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

short of aggregate demand pull '&eynes, !C).

C



In Bangladesh, both economic and noneconomic 'e.g., monetary and nonmonetary)

factors can give rise to inflation '&hatun, and /hamad #-#). To eAplain the inflationary

trend, /hmed '#--!) eAamines the sources of inflation in Bangladesh taking into account

both demandside and supplyside factors. ;e finds that inward remittance, government

debt, inflation inertia, noncompetitive market behavior, food and oil prices affect inflation

to a large eAtent. (a0umdar '#--) also points out some specific supply side factors of

inflation such as wageFlabor cost, import cost, eAchange rate, oil price, market syndication

and supply shortage of agricultural commodities. Raihan and +atema '#--) find that both

demandside and supplyside factors such as price hike of food and nonfood items have

significant influence on the rising trend of inflation in Bangladesh.

Inflation in Banglade!

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

price hike. The other ma0or 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 '&ahn and Benolkin, #--).

*ince +D#--#, increasing inflation has generally been associated with the growth rate of

broad money supply in Bangladesh '&hatun, and /hamad #-#).

$astly, monetary policy influences food and nonfood inflation simultaneously.

Bangladesh government gives subsidy for petroleum oil at the enduser level. This causes

huge fiscal burden and conse<uent pressure on the balance of payment 'BoP) of the

country. Rationali9ing 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. ;owever, given the persistent nature of high inflation Bangladesh

Bank increased cash reserve ratio '3RR), repurchase agreement 'repo) and reverse repo a

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

demandled inflation. 2iven 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 '&hatun, and /hamad #-#).

"



1." Sco#e

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

particularly on inflation in the in the last one decade.

1.$ %et!odolog&

The study is based on secondary data that are available in statistical publication, 0ournal

and Bangladesh Bank reports. The data shall be analy9ed based on correlation and

regression analysis of various macro economic factors influencing inflation and economic

growth of Bangladesh.

7



2. 'nal&i and Inter#retation

2.1 Remittance trend

Gumber 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. / total

of ".! lakh Bangladeshi workers went abroad for employment during +D #--.

Remittance during #-- is about %*H .7 billion which is more than percent that

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

amount of remittances in Taka and %* dollar are shown in Table .

(able 1) *umber of +,#atriate Banglade!i and t!eir Remittance

-ical

ear

*o. of em#lo&ment

abroad /000

'mount of remittance Percentage

!ange /(illion %*H Percentage

change ':)

3rore Tk.

#---# !7 #7-."" C#.6 "C!-.! "-.

#--#-C #7 C--.C ##.#7 !.76 #C."

#--C-" # CC#."! -.#- !6#.C! #.#

#--"-7 #7- C6"6.C- ". #C".! 6.!!

#--7- #! "6-.66 #".6 C##".- C."!

#--- 7" 7!6." #".7- "#!6.7- #.!#---6 !6 !".6 C#.C! 7"#!C.#" C."

#--6-! 7- !6. ##."# ".6 ##.6-

#--!- "# -!6."- C."- --.! ".--

#-- "! 7-.C# .-- 6#!!#.6! !.6Source) Bangladesh 1conomic *urvey Report #--.

-igure 1) (rend in %an#ower +,#ort and Remittance Inflow



Bangladesh 1conomic *urvey Report #--.

+igure shows the trends in (anpower 1Aport and Remittance Inflow. +rom the table and

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

manpower eAport from and amount of remittance inflow in Bangladesh.

2.2 Im#ortance of remittance to Banglade! econom&

The ratio of remittances to 25P and eAport earnings also increased over the years. In +D

#---# remittances as percent of 25P and eAport stood at 7.# percent and ".6 percent

respectively. In +D #-- remittances as percent of 25P and eAport were

approAimately -.7C percent and 7-.6# percent respectively. Table # shows remittances in

terms of 25P and eAport earnings for the last.

(able 2) Remittance a #ercent of 45P and +,#ort

-ical ear ' #ercent of 45P ' #ercent of +,#ort

#---# 7.# ".6#--#-C 7.!- ".

#--C-" 7.!6 "".C7

#--"-7 .C "".C

#--7- .7 "7.#

#--- 6.6C "!.-!

#---6 -.-# 7.-!

#--6-! -.! #.#7

#--!- .C .6-

#-- -.7C 7-.6#Bangladesh 1conomic *urvey Report #--.

2.3 Source of remittance



/naly9ing the statistics of the Bureau of (anpower 1mployment and Training 'B(1T), it

is reported in Bangladesh 1conomic *urvey Report #-- that about half of overseas

workers who went abroad are lessskilled. The number of eApatriates classified by skill is

shown in Table C. +rom the table, it is observed that the share of professional workers has

decreased significantly. ;owever, the shares of skilled and semiskilled workers are at the

satisfactory level.

(able 3) *umber of +,#atriate laified b& S6ill

3alender Dear Professional *killed *emiskilled $essskilled Total

#-- !"- "#"# C--# -!76 66!7

#--# ""7- 7#7 C-#7 67 ##7#7

#--C 76# "7C- #!#C C7# #7"!-#--" !- 666 #"7 "C!6 ##!76

#--7 !"7 C!C #"7" #77 #77""-

#-- !#7 7"6 CC!7 #C76 C67

#-- 7CC6 6CC "6#!## 6C#-!

#--6 6" #6"7- C#6#7 "76! 67-77

#--! "# C"#7 "-" #77-- "7#6

#-- C6 !-# #"! #6##7 C!--#

#- !# ##!"! #6#! C-6!!# 76-#

Bangladesh 1conomic *urvey Report #--.

2." Remittance and mone& u##l&

Remittances are inflows of foreign eAchange 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 eAchange received from overseas remains as foreign

eAchange in the balance sheets of the commercial banks. ;owever, BB re<uires

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

local money. ?hen such a re<uirement 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= . Garrow money, #. Broad

money and C. Reserve money or high powered money.

The money supply process primarily depends on highpowered money, which is eApected

to have a positive impact on money supply. ;ighpowered money e<uals currency in

circulation including Bangladesh Bank notes and government notes and coins plus

statutory reserve balances with Bangladesh Bank when highpowered money rises, and

6



other things remain the same, the money supply is eApected to rise. This may be eAplained

with the help of two basic monetary e<uations.

Total Reserve money 'or highpowered money) is e<ual to domestic credit 'or assets) plusinternational reserves held by Bangladesh Bank. The money that we use in our daily

transactions derives from the <uantity of R(. The total supply of money is e<ual to money

multiplier times the highpowered money 'The 5aily *tar, #--!).

(able ")(rend in %onetar& 'ggregate 'Dearonyear percentage change)

Indicator 200$708 2008709 200970: 200:70; 200;710 2010711

Garrow (oney #-." .# 6.#C .!! C#." .6

Broad (oney !.C- .- .C !. ##."" #.C"

Reserve (oney #.# .!- !.6 C."7 .-C #.-!Bangladesh 1conomic *urvey Report #--.

5uring +D#--, yearonyear growth in narrow money '() decreased sharply while

broad money '(#) decreased marginally and reserve money 'R() increased significantly

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

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

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

'Bangladesh 1conomic *urvey Report #--).

(oney multiplier 'i.e., (#FR() increased to ".7 in +D#--!- as compared to ".# in

+D#--6-!. (oney multiplier increased slightly to ".7# at the end of 4une #- from ".7

at the end of 4une #-- 'Bangladesh 1conomic *urvey Report #--). The increase in

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 6,--- crore, and therefore added to the money supply by

Tk C- crore.

The following +igure # shows the trend of (# growth rate, 25P growth, Rate of inflation

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

between (# growth rate and inflation rate from the period +D#---#-. Inflation rate

moved up whenever (# increased in the economy. 25P growth rate has remained

consistently around : over the period +D#---#-. Inflation rate The Income velocity

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

moneti9ation.

!



-igure 2) %ovement of 45P 4rowt!< %2 4rowt!< Rate of Inflation and Income

=elocit& of %one&

*ource= Bangladesh Bank /nnual Report #--

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

sterilisation, i.e. sale of credit 'government bondsFbills) to the public or, what is called in

BB parlance, reverse repo operations. This allows the BB to mop up eAcess li<uidity from

the market.

The other effect of remittances is on the foreign eAchange rate 'in Bangladesh this usually

means taka%* dollar rate). ?hen there is a large inflow of foreign eAchange, the supply

of foreign eAchange increases, and the value of the foreign currency tends to depreciateJ or

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

2.$ onumer Price Inde, and Inflation

Bangladesh Bureau of *tatistics 'BB*) computes Gational 3onsumer Price IndeA '3PI)

using food and nonfood commodities and services consumed by the consumers in their

daytoday life. The current 3PI has been constructed using !!7! as the base year.

(able $ ) onumer Price Inde, and Inflation 'Base year !!7!K--)Inde, 20017

2002

20027

2003

20037

200"

200"7

200$

200$7

2008

20087

2009

20097

200:

200:7

200;

200;7

2010

20107

2011

2eneral ': change) #.! ".C6 7.6C ."6 . .## !.!C . .C 6.6-

Source) Bangladesh 1conomic *urvey Report #--.

-



-igure 3 ) Rate of inflation /*ational)

Source) Bangladesh 1conomic *urvey Report #--.

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

inflation from +D #---# to +D #---6. In +D #--6-! the rate of inflation came down

but in +D #--!- the rate increased again and continued in #--.

2.8 Relation!i# among variable

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

percentage change in remittance and percentage change in 3PI is eAamined. Table

shows the percentage change in remittance and 3PI.

(able 8) Percentage !ange in remittance and PI

Period

c!ange in

remittance

Remittance flow in

rore (6.

Broad

%one& in

ore (6

+,c!ange

Rate

c!ange

PI

#---# "-. ",C!-.! #.!

#--#-C #C." ,!.76 ",--7.- 7.! ".C6

#--C-" #.# !,6#.C! #!,7.- 76.! 7.6C

#--"-7 6.!! #C,".! 7,""!.- .C! ."6

#--7- C."! C#,#".- ,#6.#- .-6 .

#--- #.! ",#!6.7- #,!!.- !.-C .##

#---6 C." 7",#!C.#" #"6,!.!- 6. !.!C

#--6-! ##.6- ,".6 #!,7#6.-- 6.6 .

#--!- ".-- ,--.! CC,-C#.C- !."" .C#-- !.6 6#,!!#.6! "C!,#!".7- .# 6.6

3ompiled by authors from +B33I



Relation!i# between #ercentage c!ange in PI and #ercentage c!ange in remittance

The relationship between percentage change in 3PI and percentage change in remittance

for the period from #---# to #-- can be eAplained by the following e<uation=

: change in 3PI K .76 L -.-#C6 M : change in remittance

r s<uareK -.-67

/s r s<uare is close to - there is hardly any relationship between percent change in

remittance and change in 3PI. It shows that there are other factors both internal and

eAternal which causes percentage of inflation to change.

Relation!i# between #ercentage c!ange in PI and total remittance inflow

The relationship between percentage change in 3PI and total in remittance inflow for the

period from #--#-C to #-- can be eAplained by the following e<uation=

: change in 3PI K 7. L 0.000042 M total inflow of remittance

r s<uare K -."7

/s r s<uare is -."7 there is some relationship between total remittance inflow and

change in 3PI. It shows that there are other factors both internal and eAternal which causes

percentage of inflation to change.

Relation!i# between remittance inflow and %2

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

#--#-C to #-- can be eAplained by the following e<uation=

(# K C"#-.6# L ".C6" M total inflow of remittance

r s<uare K -.!

/s r s<uare is -.! there is strong relationship between total remittance inflow and (# in

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

percentage of inflation to change.

2.9 >age of remittance

#



/ccording to a survey conducted by Bangladesh Bank in #-# 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 +5Rs and other savings instrument

• To invest in savings certificate

• To invest in capital market.

(ost 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 -inding

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

migrating to abroad has been increasing. In #---# amount of remittance was Tk. "C!-

crore which grew to Tk. 6#!!#.6! crore in #--.

Remittance accounted for 7.#: of 25P of Bangladesh in #---# and in #-- it

accounts for -.7C: of the 25P and 7-.6#: of 1Aports. This shows remittance is crucial

for Bangladesh8s economy.

Remittance is coming mainly from lessskilled workers as their number has been growing

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

(oney supply in Bangladesh depends on . narrow money, #. broad money '(#), and

C. reserve money 'high power money). The foreign eAchange received from overseas in

C



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

banks. This increases (# in the economy. (oney supply depends on reserve money and

money multiplier. (# and money multiplier have been increasing over the last decade.

?henever money supply (# increases there is upward trend movement of inflation rate.

3onsumer price indeA '3PI) depends on food and nonfood inflation. This inflation rate in

#---# was #.!: and in the year year #---6 to #-- the rate was above .7:.

Regression and correlation analysis between percentage change in 3PI and percentage

change in remittance flow is positive and very week 'r s<ure K -.-67) respectively.

3orrelation between percentage change in 3PI and total remittance inflow in not strong as

r s<ure K -."7.

3orrelation between total remittance and (# in the economy is very strong as r s<uare K

-.!.

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

the remitters.

0". oncluion

Remittance inflow to Bangladesh has been growing over the years. /s 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 0ust caused by money supply

in the economy there are other factors and government monetary policy which also affectinflation. Remittance plays an important role in the economy as it counts a significant

portion of the 25P. People have been using the remittance flow for various purposes

which can improve their lives.

"

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