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Remittances in Bangladesh: Determinants and 2010 Outlook

Zahid Hussain's picture

Co-authored with FARRIA NAEEM

Remittances have emerged as a key driver of economic growth and poverty reduction in Bangladesh, increasing at an average annual rate of 19 percent in the last 30 years (1979-2008).

Revenues from remittances now exceed various types of foreign exchange inflows, particularly official development assistance and net earnings from exports. The bulk of the remittances are sent by Bangladeshi migrant workers rather than members of the Bangladeshi Diaspora. Currently, 64 percent of annual remittance inflows originate from Middle Eastern nations.

Robust remittance inflows in recent years (annual average growth of 27 percent in FY06-FY08) have been instrumental in maintaining the current account surplus despite widening a trade deficit. This in turn has enabled Bangladesh to maintain a growing level of foreign exchange reserves.

What are the key macroeconomic determinants of remittances in Bangladesh? Based on a simple regression exercise we find that number of workers finding employment abroad every year, oil price, exchange rate and GDP growth are the key determinants of changes in the level of remittance inflow. Our results show that:

• Each additional migrant worker brings in $816 in remittances annually;

• Every dollar increase in oil price increases annual remittance by nearly $15 million;

• Depreciation of exchange rate by one taka increases annual remittance by $18 million and;

• Remittances are higher during periods of low economic growth.

The findings are plausible and consistent with international evidence. In India - another significant remittance recipient county in the South Asia region – migration, oil price, exchange rate and GDP growth has been found to be the salient macroeconomic determinants of remittance inflows as well.

An interesting implication is that the impact of oil price increase on Bangladesh’s balance of payment is unfavorable. A dollar increase in oil price increases oil import payments by about $26 million whereas it increases remittances by $15 million. Thus the impact of a dollar increase in oil price on the balance of payments is a deficit of $11 million.

There is a widespread concern that recent decline in international oil prices and slow down in the global economy, particularly US, Europe and Middle-East are likely to have adverse effects on Bangladesh’s remittance inflows. How bad can it get let’s say next year (FY10)?

Assuming oil prices at around $70 per barrel and GDP growth of 5.5 percent we predict:

• Remittance will grow by 12.4 percent, reaching $10.76 billion, if we are able to export another 610,000 workers (annual average of 2006-2008) in FY10. This is the optimistic case.

• Remittances will grow by 10.2 percent, reaching $10.55 billion, if the outflow of migrant workers in FY10 reverts to levels observed before the recent oil price boom—350,000. This is the base case.

• Remittances will grow by 8.5 percent, reaching $10.38 billion, if the outflow of migrant workers in FY10 is only 50 percent of the base case—150,000.

Not too bad even in the worst case scenario!

Comments

Submitted by Karen on
Hi Zahid, I just have a few questions about your post. I'm not an economist so your anaylsis was a little confusing for me. 1. What is the different between a 'migrant worker' and a 'member of the diaspora'? 2. Why is the rise in oil price correlated to remittances? How does that affect the amount of money people send home? Thanks for your help! I enjoyed reading your article. -Karen

Submitted by Zahid on
Thanks Karen. Members of diaspora are citizens/permanent residents in the country they are living in while migrant workers are Bangladeshi residents temporarily working abroad. Oil price is a major determinant of labor demand and wages in oil exporting countries. They influence the earnings of the migrant workers in those countries. Hope this helps. Zahid

Submitted by Mortaza on
Hi Zahid and Farria, It's good to read your post on an important issue of Bangladesh. It is indeed a nice piece to go through within a short period. Yet, I have a few queries to ask. 1. First of all, is it the economic growth of migrant workers' supplying countries matter for the growth of remittances more than the economic growth of those countries which demand for those workers? In my view, the latter will dominate over the former as a factor of remittance inflows. 2. Second, did you analyse the impact of migrant workers of other countries (such as India and Phillippnies) to the same destinations (such as Middle East) has an impact on the flow of migrant workers of Bangladesh? This factor would be important as workers from those countries are more efficient than Bangladeshis in the respected fields. 3. Did you consider the factor, skill of the worker would be one of the main determinants of remittance inflows? How the result will change if more skilled labour could be sent to those countries? And what your suggestions to the government in this regard? I think these are the basic queries and thanks for a nice post. - Mortaza

Submitted by Zahid on
Hello Mortaza, Thanks for your questions. 1. We estimated the impact of GDP growth in Bangladesh and found a significant negative relationship. Economic growth in host countries shuold also matter. Oil price actually serves as a proxy in our equation since the vast majority of Bangladeshi workers are employed in oil exporting countries. 2. Impact of competing countries on our manpower exports is an interesting issue. There are major data availability problems however. 3. I wish we had a reliable time series on the skill composition. Suggestion to government is fairly straightforwad--create an enabling environment for market demand driven provision of technical education. We realioze however that this is easier said than done as the experience of the last decade and a half shows. Zahid

Submitted by Mortaza on
Mr. Zahid, Thanks for your reply. Just for your information, you may find the data on skilled and unskilled migrant laborers in BMET as it distinguishes migrant labor while processing papers before sending abroad. You may see their trend for last of couple of years and relate with the recent remittance soaring. Further answer to a earlier question raised by someone that, probably, increasing trend of higher skilled migrant labor explain higher growth of remittances through higher remittance earned per unit of labor in recent periods even though the host countries are suffering from global economic recession. Regards, Mortaza

Submitted by Tapas on
Considering current economic crisis, remittance is a burning issue for Bangladesh now. I appreciate your contribution to focus this issue. Your regression result is not so clear to me. I would like to acknowledge three points in this regard. Firstly, international oil price is an explanatory variable to define remittances inflow. Your result correlates a rise in oil price with a large inflow in remittances. But in the FY2008-09 when oil prices reduced about USD 82 and remittances inflow increased by USD 1.8 billion compared to last fiscal year. Which contradicts with your findings. Secondly, regarding depreciation in exchange rate, Bangladesh calculate remittances inflow in dollar terms under the current account. And when an individual collects money in Bangladesh that is converted to taka. But depreciation in domestic currency (Tk.) has no effect in remittance inflow (USD). Thirdly, remittances inflow always depend on a time lag. Like each additional migrant worker contributes after a certain period or a migrant worker permanantly moves to his home country with all his earnings. I would be grateful to you if you consider my questions.

Submitted by Farria on
Thank you for your comments Tapas. The regression exercise was carried out on change in the level of remittance. In FY2008-09, although the change in the level of remittance inflow was around US$ 1.8 billion, there was a slowdown in the growth in remittance earning. Regarding your second comment, Taka per US$ received by remittance recipient increases with depreciation. Depreciation of the Taka/US$ exchange rate is therefore expected to provide incentive to the migrant workers to remit more. Your third point is well taken. Best Regards, Farria

Submitted by Saaq on
Hi, Thanks Mr. Zahid for a good article. It was very informative. But I am also little bit confused over the relationship between oil prices & remittances. Why they are directly proportional to each other ? Does increase in oil prices indicate more economic activity in US, West and Middle East which in turn create more demand for migrants ? Howver you analysis shows 11 million USD Net loss in dollars reserves due to increase in oil prices which contradicts the relationship between the two entitities. Thanks SAAQ Karachi, Pakistan

Submitted by Zahid on
Hi SAAQ, This is an aggregate level relationship between annual change in remittance inflows and oil price -- a dollar increase in oil price increases annual remittance inflows by $15 million, other things equal. Nearly two-third of Bangladesh's remittance come from GCC member countries. Their economic prosperity depends very much on oil prices. In measuring the impact of oil price increase on current account, we also need to take into account the impact on import payments. Bangladesh is a net importer of oil. A dollar increase in oil prices increases oil import bills by about $26 million while increasing remittance inflows by $15 million. Hence the $11 million net loss. Regards, Zahid

Submitted by Manzoor-E-Khoda on
Mr. Zahid, I am interested to read the full report as I am working on this issue currently. Can you please send me a soft version of the report?

Submitted by Jim T on
One would expect remittances to remain relatively stable because the money isn't usually used for investments, but I guess unemployment is going to hurt just about everyone! Here is an interesting article on why remittances might fall in the next couple of years: https://www.mindreign.com/en/mindshare/Global-Economics/Remittances/sl35291137bp484cpp10pn1.html

Submitted by Angela Kenginston on
Hi Zahid and Farria, I am an Economist myself and I was wondering if there is any fleshed out report that you both prepared (or someone else) on Remittance in Bangladesh? I am predominantly interested to know some trends and impacts of remittances in Bangladesh. Thank you! Angela

Is it possible to send more skill manpower from Bangladesh ? ( I don't like say worker or labor ). As my experiences, the South Asian citizen, particularly Bangladeshi citizen under treat in aboard for language, professional as well as cultural barriers. Bangladeshi particularly less educated or illustrate , experience-less manpower made many suffering both his own and family life. Most of case they can not returned their investment.....Now I am making a radio story for an INGO on Migration on the eve of Migration Day. I will post the link in this forum just after publish the URL in online

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