Behavior of Remittance Inflows and Its Determinants in Bangladesh

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Working Paper Series: WP1202

Behavior of Remittance Inflows and its Determinants in Bangladesh

Mst. Nurnaher Begum• Rama Rani Sutradhar

March 2012

Research Department Bangladesh Bank Head Office, Dhaka

                                                              The authors' are Joint Director and Assistant Director, Research Department, Bangladesh Bank respectively. The authors' would like to thank Dr. Ahsan Mansur, Executive Director, PRI, Dr.Md. Akhtaruzzaman, Economic Adviser, Bangladesh Bank and Dr. Hassan Zaman, Senior Economic Adviser to the Governor, Bangladesh Bank for their valuable suggestions and comments for improving the paper. The views expressed in this paper are authors’ own and do not reflect that of the Bangladesh Bank.       


Introduction Remittance is a steadily growing external financial source for developing countries. It can generate substantial welfare gains for migrants and thereby could play an important role in reducing poverty1. In comparison of remittance flow and overseas development assistance (ODA), it appears that remittances are larger than ODA, foreign direct investment, and portfolio investment flows in many developing countries (Ratha and Mohapatra, 2007)2. A study of World Bank (2008) finds that migrant remittances impact positively on the balance of payments in many developing countries. It impacts on saving, investment, and consumption which propel economic growth. Recently, the joint World BankIMF low-income country debt sustainability framework takes remittances into account in evaluating the ability of countries to repay external obligations and their ability to receive non-concessional borrowing from private creditors. The IMF Article IV assessments also include remittance as a variable along with FDI and portfolio flows (ADB Bangladesh Quarterly Economic Update, March, 2010). At present, remittances play a crucial role in the economy of Bangladesh. At the macro level, it helps to relieve our foreign exchange constraint, stabilize the exchange rate movement, and improve the balance of payments. A comfortable foreign exchange reserves can be maintained through increasing growth of remittance which can contribute to overall macroeconomic stability and reduce aid dependency. Besides, remittances are used to pay for imports bills and to repay foreign debt. At micro level, remittance has a beneficial impact on household consumption, reducing poverty reduction and self employment. It also improves country’s creditworthiness. However, it has been more stable source of foreign earnings than both FDI and foreign aid. Available data indicate that remittance flows to Bangladesh have grown rapidly over the last twenty years. It grew around 10.9 percent in 1990-91 which increased to 13.4 percent in 2009-10 and 6.03 in 2010-11. Remittances as percentage of most key macroeconomic variables (table-1) showed upward trend during 1981-2011. It is observed that the remittance-GDP ratio touched 10.43 percent in 2011 as compared to 1.93 percent in 1981-82 (Table 1). The trends in share of remittance to macroeconomic variable points to the growing importance of remittance in the Bangladesh economy and testify to the popular view that remittances are gradually providing more and more important contribution in our                                                              1

 Between 1995 and 2003, whereas migrant remittances to developing countries grew from US$58 billion to US$160 billion, FDI grew from US$107billion to just US$166 billion, with ODA increasing from US$59 billion to a mere US$79 billion.  


 According to Global Economic Prospect 2006, in a model that relates national poverty levels to mean income and the Gini measure of inequality for 71 developing countries, a 10 percent increase in per capita official international remittances leads to a 3.5 percent decline in share of people living in poverty (Adams and Page 2005). 


GDP over time....
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