BANGLADESH RESEARCH PUBLICATIONS JOURNAL ISSN: 1998-2003, Volume: 4, Issue: 3, Page: 286-296, September - October, 2010
REMITTANCE AS A TOOL OF ECONOMIC DEVELOPMENT: BANGLADESH PERSPECTIVE Kuntal Roy Chowdhury*1, Fauza Hamid1 and D. D. Chatterjee2 Kuntal Roy Chowdhury Fauza Hamid and D. D. Chatterjee (2010). Remittance as a Tool of Economic Development: Bangladesh Perspective. Bangladesh Res. Pub. J. 4(3): 286-296. Retrieve from http://www.bdresearchpublications.com/admin/journal/upload/09176/09176.pdf
Abstract In Bangladesh, remittance is one of the most important economic variables in recent times as it helps in balancing balance of payments, increasing foreign exchange reserves, enhancing national savings and increasing velocity of money. For about two decades remittance has been contributing around 35% of export earning. Moreover, it is greater than foreign aid and thus helps in lessening dependence on foreign aid. Remittance gets momentum in recent time in Bangladesh and is the second largest sector of foreign exchange earning after the garments sector. If cost of imported raw materials is deducted from the foreign exchange earning of the garments sector, remittance becomes the single largest sector of foreign exchange earning. Remittance earning is increasing day by day but at a lower rate than the increase in emigration from Bangladesh due to the increasing share of unskilled or semi-skilled labours than the professionals in international migration. The share of remittance in GNI (Gross National Income) is increasing day by day. It affects almost all the macro-economic indicators of a country positively. Though there are also negative sides of remittance earning e.g. brain drain, its overall contribution to Bangladesh economy is very much effective. Appropriate and timely government policies and initiatives can boost up the amount of remittance and can rectify the problems related to it. Remittance has created a new dimension in the economic development of Bangladesh. We have to properly unlock the potentialities of remittances and utilize it properly to make it an indispensable tool of the economic development of Bangladesh.
Key words: Remittance, Investment, Balance of payments.
Introduction International migration is a worldwide phenomenon. Though Bangladesh is a labour surplus country, most of the labours are unskilled or semi-skilled. As a developing country Bangladesh can not provide all its labours with job facilities and so unemployment rate is very high here. In this backdrop, international migration started in the part of the globe. Bangladeshi emigrants send a portion of their earning as remittance or foreign exchange from foreign countries to Bangladesh for their family members and relatives. Remittance gets momentum in recent time in Bangladesh and is the second largest sector of foreign exchange earning after garments sector. If cost of imported raw materials is deducted from the foreign exchange earning of garments sector, remittance is the single largest sector of foreign exchange *Corresponding Author, 1. Economics Discipline, Social Science School, Khulna University, Bangladesh. 2. Agriculture Officer, World Vision Bangladesh
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earning. Remittance earning is increasing day by day but at a lower rate than the increase in emigration from Bangladesh. As there is very little research or study carried out in this topic and as remittance is now a day one of the greatest contributing factor in Bangladesh economy, we have chosen to study on this topic only on international inward remittance and its economic impact on Bangladesh economy. To have clear conception about remittance, to know the problems about the concerned activities of remittance and their solution, to know the important determinants etc are some other rational or logic for choosing this type of research topic. Objectives of the study To know about the impact of remittances on economic condition of our country To investigate the problems regarding different aspects of remittances To find out the ways for solving these problems To indicate some important determinants to raise the amount of remittances
Result and Discussion Remittance It is the sum of money that is sent to somebody in order to pay for something or it is the act of sending money to somebody to pay for something. It generally means money sent by migrant workers in foreign countries to their former homes. Actually, remittance is a much broader concept. It has many dimensions and categories. Types of remittance There are mainly two types of remittance: national/domestic remittance and international/foreign remittance. While national/domestic remittance is remittance within countries, international remittance is the remittance from one country to another country. According to its direction international remittance is again of two types: inward remittance and outward remittance. Remittance sending system Formal system Remittance is sent formally through various ways such as demand draft, traveller’s check, telegraphic transfer, postal order, direct transfer, Automatic Teller Machine (ATM) etc. Informal system Hundi or money carrier system is prevalent as informal procedure of remittance sending in most of the cases. Hundi refers to the illegal money exchange not supported by the international or national legal structure. The exchange rate offered by the hundi operators is 1-2% higher than the official exchange rate. They do not charge anything for transaction. It is the fastest method of transaction. In urgent situations this is the quickest method for sending money. The hundi operators provide door to door services. It was interesting to note that there are other social reasons for sending remittance through hundi. Few mentioned they send money to wives, fathers or brothers separately and preferred to keep the amounts sent secret, as it creates tension among the family members. Hundi provides the opportunity to maintain such confidentiality.
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A number of reasons have been attached to the growth of Hundi market. These include:
Financing smuggling of various items, including gold;
Existing tax regime leading to under- invoicing of imports;
Unholy alliance between officials of financial institutions and hundi elements;
Financing recruitment charges of the recruiters;
Difference between official and unofficial exchange rates;
Quality and speed of service;
Ability to reach clients both in destination countries and in the source countries.
Impact analysis of remittance in Bangladesh economy Remittance and balance of trade & balance of payment Remittance and international trade We know that a country has to trade with other countries. Trading means exchange of goods and services among countries. Trading is occurred through export and import system. A country exports something and imports something. Normally, some currencies play important role in exchange of these goods and services. From economic point of view trade is one of the primary needs of a country. We need foreign currency to run trading activities. But, we have deficit balance of trade because our import is more than export. So, the amount of our foreign currency is very negligible and its earning sources are limited. In this case, remittance plays a vital role to make up the deficit in foreign earning. From the table 1 it is evident that exports and remittances from workers abroad increased highly in the FY ‘06 in comparison to the previous year, while import fell by a substantial amount. That is exports (fob) increased by 21.6 percent from US$ 8,573 million in FY ‘05 to US$ 10,422 million in FY ‘06 and remittances from workers abroad recorded 24.8 percent growth from US$ 3,848 million in FY ‘05 to USD 4,802 million in FY ‘06; while imports (fob) increased by 12.1 percent from US$ 11,870 million in FY ‘05 to US$ 13,301 million in FY ‘06.
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Table 1. International trade and remittance (million US$) Fiscal Year (end June) 2000 2001 2002 2003 2004 2005 2006 Total Average
Export (X)
5, 701.00 6, 419.00 5, 929.00 6, 492.00 7, 521.00 8, 573.00 10, 422.00 51, 057.00 7, 293.86
Increase/ Decrease %
12.59 -7.63 9.50 15.85 13.99 21.57 65.86 9.41
Import (M)
Increase/ Decrease %
7, 566.00 8, 430.00 7, 697.00 8, 707.00 9, 840.00 11, 870.00 13, 301.00 67, 411.00 9, 630.14
Trade Balance (X-M)
Remittance
-1, 865
1, 949.00
11.42
-2, 011
1, 882.00
-3.44
-8.70
-1, 768
2, 501.00
32.89
13.12
-2, 215
3, 062.00
22.43
13.01
-2, 319
3, 372.00
10.12
20.63
-3, 297
3, 848.00
14.12
12.06
-2, 879
4, 802.00
24.79
61.54
-16, 354.00 -2, 336.29
21, 416.00
100.92
3, 059.43
14.42
8.79
Increase/ Decrease %
Source: Statistics Department, Bangladesh Bank and Bureau of Manpower and Training. Table 1 shows that there occurred deficit in trade balance from the year 2000 to 2006. On average it is -2,336.29 million US$, though the average rate of growth of export earning (9.41%) was more than the average rate of growth of import payment (8.79%), during the said period. The increasing rate of remittance is quite satisfactory in the face of this deficit. This definitely played a positive role regarding trade balance by financing excess imports payments. Remittance and balance of payment “The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and the residents of foreign countries during a given period of time”. The balance of payment is usually composed of two accounts: (I) the current account; (ii) the capital account Symbolically we can write, B = Rf-Pf Where, B = the balance of payments Rf = receipts from foreigners Pf = payments made to foreigners
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Table 2. Balance of payments Items
1 Trade Balance Export fob (Including EPZ) Of which, Ready Made Garments (RMG) Import fob (Including EPZ) Services Receipts Payments Income Receipts Payments Of which, official interest payments Current transfers Official Private Of which: worker’s remittance Current account balance Capital account Capital transfers Financial account Foreign direct investment (net)
FY 1999‘00 2 -1, 865 5, 701 4, 252
FY 2000’01 3 -2, 011 6, 419 4, 860
FY 2001‘02 4 -1, 768 5, 929 4, 584
FY 2002‘03 5 -2, 215 6, 492 4, 912
(Million US Dollar) FY FY FY 20032004-‘05 2005‘04 ‘06 6 7 8 -2, 319 -3, 297 -2, 879 7, 521 8, 573 10, 422 5, 686 6, 418 7, 901
-7, 566
-8, 430
-7, 697
-8, 707
-9, 840
-11, 870
-645 849 -1, 494 -302 97 -399 -160
-914 759 -1, 673 -344 97 -441 -168
-499 865 -1, 364 -402 50 -452 -161
-691 887 -1, 578 -358 64 -422 -167
-874 924 -1, 798 -374 63 -437 -175
-870 1, 177 -2, 047 -680 116 -796 -203
-13, 301 -1, 110 1, 296 -2, 406 -786 134 -920 -201
2, 394 165 2, 229 1, 949 -418 561 561 -116 383
2, 171 72 2, 099 1, 882 -1, 098 432 432 682 550
2, 826 69 2, 757 2, 501 157 410 410 391 391
3, 440 82 3, 358 3, 062 176 428 428 413 376
3, 743 61 3, 682 3, 372 176 196 196 78 385
4, 290 37 4, 253 3, 848 -557 163 163 760 776
5, 347 34 5, 313 4, 802 572 242 242 -24 675
0 -499 806
0 132 790
-6 6 733
2 35 918
6 -313 544
0 -16 940
32 -731 921
-396
-416
-435
-452
-397
-449
-489
127
-13
-42
-20
-41
-46
-58
71
31
63
142
13
241
-256
-190 -641 -276 -161 -115 152 179 -179 -179 -79 -100
-114 -260 114 147 -33 -297 -281 281 281 302 -21
-87 -253 27 -90 117 -550 408 -408 -408 -276 -132
-125 -499 71 217 -146 -202 815 -815 -815 -887 72
-125 -321 14 86 -72 -279 171 -171 -171 -235 64
-182 -320 -200 -91 -109 -299 67 -67 -67 -225 158
-245 -805 201 56 145 -425 365 -365 -365 -554 189
1/
Portfolio investment Other investment MLT loans (excluding suppliers credit) MLT amortization payments Other long term loans (net) Other short term loans (net) Other capital Trade credit (net) Commercial Bank Assets Liabilities Errors and omissions Overall balance Reserve assets Bangladesh Bank Assets Liabilities
Source: Statistics Department, Bangladesh Bank From table 2, we find that in the FY 2005-‘06, remittances from non-resident Bangladeshi nationals increased substantially by 24.8 percent. The country’s current account balance turned to a significant surplus with robust growth in exports and remittances and a slower growth in import payments. A significant surplus in current account balance as well as capital account led to a sizeable
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surplus in the overall balance, which helped improve the countries foreign exchange reserve position. Despite larger services deficit of US$ 1,110 million in FY 2005-‘06, up from US$ 870 million in FY 2004-‘05, the country’s external current account balance was in a significant surplus due to smaller trade deficit and steady growth in workers’ remittances during the year. The overall balance of payments recorded a significant surplus of US$ 365 million in FY 2005-‘06, which was much higher than the surplus of US$ 67 million of FY 2004-‘05, reflecting a notable improvement in current account balance and a larger surplus in capital account, despite of large net outflows in trade credit and other short term loans, the financial account sank into a deficit from a large surplus of FY 2004-‘05.
Remittance and reserves Satisfactory level of reserves of foreign currencies has positive impact on the macro economic condition of a country. We have limited sources of earning of foreign currencies. Our import is high but export is low. Every year we have to take loan and to wait for it to make up BOT deficit. But now remittances help a great to have the reserves at satisfactory level. In recent times, it is recorded that our reserve is at the maximum level where remittance is the largest contributing sector. Hence there is no doubt that remittances and reserves have a positive correlation. Moreover, reserves and remittance are rising over time.
6000.00
Million US$
5000.00 4000.00 Total Reserves
3000.00
Total Remittances
2000.00 1000.00 0.00 1990
1995
2000
2005
2010
Financial Year
Figure 1. Trend lines of remittance and foreign reserves Upward sloping shape of the line means that remittance as percent of GNI is on the increase. Figure 1 shows trend lines of remittance, balance of trade and balance of payments. The trend line of remittance is in the positive quadrant and is upward sloping, while that of balance of trade is in the negative quadrant and is downward sloping and the trend line of balance of payment has ups and downs around the horizontal axis. This implies that remittance greatly helps to reduce the deficit in the balance of trade and some times make the balance of payment surplus. Moreover, remittance is increasing at an increasing rate. Since in case of Bangladesh balance of trade is almost in all years negative, therefore amount of remittances has significant influence on the balance of payments. It is the amount of remittance which makes BOP either deficit or surplus.
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Remittance and investment Bangladesh is a slowly developing country with a huge population. It is also characterized by political unrest. Due to political unrest, level of direct foreign investment and future prospects of the same in our country is not very hopeful. Besides, in our country micro level investment is not flourished due to lack of sufficient financial support. A vast number of people are poor. According to Economic Review of Bangladesh-2005 almost 42 percent of total population live in poverty. If they are provided some financial support then they can build up micro-enterprises to reduce their poverty. In case of remittance, it can be assumed that financial support provided by remittance may help the poor people to make micro-investment. But it is observed in various studies that maximum amount of remittance is used to meet primary needs and to buy luxury goods. Some portion of remittance is used for investment purposes also. Macro-investment is possible if the emigrants invest in joint ventures. Besides, individual investment also plays an important role in economic development of the country. Devaluation of taka against US$ over time We have observed devaluation of Taka against US$ from fiscal year (End June) 1991 -2006 as shown in the figure 2. In this figure we see that Bangladesh has to pay more money per US$ over time. It shows that the value of R2 is equal to approximately 0.96 which is very high and shows strong positive correlation between year (End June) and Taka per US$. 75.00
R-Square = 0.96
Taka per US Dollar
50.00
25.00
0.00 1990
1992
1994
1996
1999
2001
2003
2005
2007
Year (End June) Figure 2. Period Averaged Taka – US Dollar Exchange Rates In the following table, we see that value of R is equal to 0.980 having a message that the correlation is significant at the 0.01 level (2-tailed). So, it is statistically proved that there is devaluation of taka against US dollar over time.
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Remittance as a Tool of Economic Development Correlations
Year (End June)
Year (End Taka per June) US Dollar 1.000 .980** . .000 16 16 .980** 1.000 .000 . 16 16
Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N
Taka per US Dollar
**. Correlation is significant at the 0.01 level (2-tailed).
Total reserves (million US$) From the graph given below, we see rising trend of total reserves (million US$) from financial year (end June) 1991-2006. The value of R2 is 0.19.
Total reserves (Million US Dollar)
4000.0
3000.0
R-Square = 0.19
2000.0
1000.0
0.0 1990
1992
1994
1996
1999
2001
2003
2005
2007
Year (End June) Figure 3. Trend of Total Reserves (Million US$) Over Time From the table given below we see that the value of R is positive but not significant. In other words total reserves (million US$) is rising at a negligible rate over time. Correlations
Year (End June)
Total reserves (Million US Dollar)
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Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N
Year (End June) 1.000 . 16 .434 .093 16
Total reserves (Million US Dollar) .434 .093 16 1.000 . 16
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Findings Our research findings are summarized here as follows –
Remittance is the second largest sector of foreign exchange earning after garments sector. If cost of imported raw materials is deducted from the foreign exchange earning of garments sector, remittance is the single largest sector of foreign exchange earning.
Remittance earning is increasing day by day but at a lower rate than the increase in emigration from Bangladesh.
There is a linkage between remittances at present and ‘development and consumption in the future’.
The available pool of resources from which emigrants remit depends mainly on number of emigrants, characteristics of the migrants and the country of employment and on salary levels and costs of living. On the other hand amount of remittances sent depends on available pool of resources, characteristics of the migrants, country of origin and employment and propensity to remit.
There is high probability of supremacy of yearly growth rate of remittance over that of RMG sector for fiscal years (end June) 2010, 2015 & 2020.
There is high probability of supremacy of remittance over foreign assistance for fiscal years (End June) 2010, 2015 & 2020.
It is statistically proved that there is devaluation of taka over time.
Total reserve (million US$) is rising at a negligible rate over time.
Total reserve (million taka) is rising at a significant rate over time.
Bangladeshi emigration is rising at a significant rate over time.
Bangladeshi inward remittance is rising at a very significant rate over time.
Remittances of Bangladesh (million US$) have negligible positive impacts on foreign reserves.
Remittance helps in balancing Balance of Payments (BOP).
Remittance helps in reducing dependence on foreign assistance.
Remittance increases national savings and national investment.
Problems of remittance Problems created by remittance Problems created by remittance are as follows:
Brain drain: Brain drain is the most significant negative side of enjoying remittance for any developing country like Bangladesh. Though we get an important portion of remittance from our educated skilled person after all it is not favourable because educated people are very important for our economy.
Income inequality: In a specific community, relative income inequality may be found where there are both emigrants’ families and non-emigrants families due to the variation in their income levels.
Regional disparities: In the same line of above reasoning regional disparities may be found among emigrants’ intensive regions or districts like
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Sylhet, Chittagong, Comilla, Noakhali, Dhaka etc. and less emigrants’ intensive regions or districts of the country.
Increased demand for imported luxury goods: There is a tendency of remittance earning families to purchase foreign luxury goods which creates unfavourable condition in the balance of payments.
Misuse of remittance: Some times the young people of remittance earning family easily get huge money on their hand and misuse that money creating various types of immoral and illegal activities.
Social insecurity: Some times remittance earning families feel insecurity from hijackers. They are sometimes compelled to pay to the bad section of the society.
Exploitation by the dalals: Sometimes remittance earning families have to pay unreasonable amount of money or a portion of their income to the dalals for helping to send a person abroad. Sometimes emigrants are caught red-handed abroad with illegal documents and some of the emigrants are deceived by different concerned agencies.
Recommendations Bangladesh is one of the important remittance earning countries in the world. Moreover it is increasing persistently. No doubt, we want to solve our unemployment problem and working of Bangladeshi residents in different countries is a great opportunity to reduce the prevailing unemployment rate. But actual impact of remittance on the economy of migrant sending countries depends on how the remittance is being used. We have seen that various policies and activities have been undertaken to increase remittance flow in formal way. But, lesser effort has been taken for the development of effective utilization of remittance. So it is recommended that proper policy measures be formulated to manage this sector considering the following issues carefully. The issues are: 1. Proper information about job opportunities in the overseas countries has to be spread all over the country timely and job security should be ensured in the foreign countries. 2. Remittance concerned information centers have to be setup and arrangement be made for provision of proper knowledge regarding administrative activities, passport and visa processing etc. 3. Training centers are to be setup for the people who want to go overseas countries for employment opportunities. 4. Moreover, all types of migration related activities should be completely free from corruption. Quick processing system of issuing passport and visa should be developed and bureaucratic problems should be solved within very short time. 5. Reasonable costs should be ensured by the concerned authority. 6. Influence of the middlemen and their interest should be controlled and problems created by them should be checked. 7. Inspirations to go abroad and other favourable influences have to be provided to the migrant workers and employees.
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8. It should be ensured by the embassies in the overseas countries that any problem faced by the migrant workers will be taken care of as early as possible and MEWOE and Ministry of Foreign Affairs will have to take every responsibility to take care of the native manpower. The Bangladeshi embassies in foreign countries should also help the native migrants in searching for new job opportunities in the overseas countries. 9. Government has to make a close relationship with the concerned overseas countries to search job opportunities in those countries. 10. Remittance sending procedure should be developed to make it secured, quick and effective. Available formal channels for sending money to the native country have to be reorganized to take as short time as possible. Moreover the remittance sending process should be liberalized so that irregular emigrants can also send remittance through regular channels. 11. Charges on sending money should be very favourable for the migrant workers. 12. All information regarding migration should be preserved by the concerned authority. Conclusion Remittance is one of those important instruments, which helps to solve our problem by strengthening the economy. Migration is such a process, which helps to reduce unemployment, increases reserves and helps to make the balance of payment favourable and also helps immensely in other socio-economic aspects. Unemployment situation is one of the most alarming economic indicators of a country; migration and consequent remittance is mainly related with employment and earning of foreign currency. So, remittance is a vital issue for over-populated countries like Bangladesh. Therefore, we need to give proper attention this issue. It also helps to increase foreign reserves, national savings and investments. From socio-economic point of view it uplifts living standard, social status and help ensuring basic needs. Therefore, it is very vital for the acceleration of economic growth in Bangladesh. Remittance has some problems also but they are very negligible in comparison to its overall benefit. So, government, concerned authorities and the people of Bangladesh have to take proper care about remittance considering its importance in our economy. References Bangladesh Bank (BB), Annual Report 2005-06, 2005-‘06(a, Bangladesh bank Dhaka, Bangladesh, www.bangladesh.org.bd, www.bangladesh-bank.org Bangladesh Bank (BB), (2005-06’ b), Balance of payments Bangladesh bank (BB), (2006a) Economic trends, Statistics Department, Volume XXXI, No. 11 Bangladesh Bank (BB), (2006 b), Bangladesh bank Bulletin, Volume XXXIV Number1 Black, Jone, (2002-’03). OxfordDictionary of Economics, Oxford University Press (OUP), Oxford, New York, USA Gujarati, Damodarn., (1998). Basic Econometrics, 3rd Edition, Economic Series, McGraw- Hill International Editions
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