Impact of remittance on the country's macroeconomic indicators

Md Moniruzzaman and Faroque Ahmed | Published: May 21, 2019 21:10:59 | Updated: May 22, 2019 20:27:21

At the beginning of the twenty-first century remittance inflow represents one of the key issues in economic development. Existing researches about the contribution of remittances to the development of economy have already created a growing interest in the developing countries. In the one hand, many studies traditionally reported that remittances have a positive strong and significant contribution to generating goods and services of an economy. On the other hand, some influential works have showed that they have little or poor or even negative impacts on economic growth of the developing countries.

A study has been conducted recently to examine the relationship between economic development and remittance inflow using time series panel data for four South Asian labour-exporting sending countries namely Bangladesh, India, Pakistan and Sri Lanka over the period 1976-2018. Panel unit root test is used and appropriate actions taken accordingly. Cross-sectional dependence and Panel cointegration tests have also been done model-wise. Then acting with response to their results, Panel Dynamic Ordinary Least Square is applied to estimating the marginal effects of remittances on different economic development indicators or variables of the countries during 1976-2018. Eight models are fitted to find the marginal effects of remittances on different economic development variables; where other than remittances, each variable is used as dependent variables and remittance is a common independent variable with others appropriate control variables in each model. 

Results of Dynamic Panel OLS model shows that remittance inflows have positively and significantly been contributing to economic growth of the South Asian countries as a whole; whereas inflation affects negatively. Results are very realistic considering the large share of remittance inflows as ratio to the GDP (gross domestic product) size of the South Asian countries. Moreover, most of the economies of the South Asian countries are small-sized and their small-scale domestic economic activities require a small number of labour. If people migrate to another developed country, these economies do not face labour shortage.

It is very important especially in the South Asian countries whether remittances contributed to banking sector development positively. Because banking sector is a large-sized sector and it has a vital role in economic growth of these countries. Here domestic credit to private sector by banks ratio to GDP (DCPB) is one of the major indicators of banking sector development. Results unfortunately indicate that remittances negatively and weakly contributed to banking sector development; whereas FDI (foreign direct investment) do positively. That is, a significant part of remittances does not come through formal channel like banking. Since inflation reduces economic growth and remittances negatively contributed to inflation, remittances have positive impact on economic growth indirectly in the South Asian countries. On the other hand, FDI increases inflation and has indirect negative effect on economic growth in these countries as a whole.

Results also show that remittances do not strongly increase government final consumption expenditure (GFCE) but strongly and positively contributed to household final consumption expenditure (HFCE) in these countries during that time period. That is, remittance is second variable next to population growth which increases household final consumption expenditure so strongly. Next to FDI, remittances have been positively and strongly accelerating trade. Note that trade is the sum of export and import. There is no indication of remittances cause export rather they are used to import luxurious goods from abroad and make current account deficit wider in the South Asian countries. 

Though the sign is negative, remittances are not significant to increase gross capital formation (GCF) whereas all other variables such as (DCPB), Trade Ratio (TR) and Population Growth (PG) positively and significantly improve (GCF). Results also show like GDP growth, remittances have significantly negative effect on population growth. Because those who send remittances back to their home country, they cannot stay with their family to give birth to babies.  

BANGLADESH CONTEXT: The remittance sent by the expatriates to Bangladesh has been consistently decreasing for the last few years. However, the country is making big socio-economic strides under the present government. It is found that, from 1990 to 2018, there was no evidence of significant and positive role of remittance on the economic growth in average because remittance through valid banking channel has not been significant enough till now.

The Bangladesh Bureau of Statistics (BBS) has carried out a survey on the types of remittance used in 2013. It can be seen that the type of expenditure used by the families of remittance beneficiaries is not development-friendly. Remittance is not being invested in productive sectors; families use it in non-productive sectors. They don't invest much in education. Rather, the remittance-recipient families use remittance money in non-productive sectors like purchase of luxury goods, investing in housing, land and apartments etc. Remittance flow is also affected by many weaknesses in business governance and politics. A large part of the remittance goes to overcome these weaknesses of politics and to fill some holes of the economy like 'current account deficit'.

The above review shows that remittance has some historic impact on the economic development of low-income countries like Bangladesh. It buttresses social protection. A major part of remittances from Bangladeshi expatriates are still routed through illegal channels like 'hundi'. These are more popular as these charge considerably lower rates for sending money. Hundi is also popular for its quick and wide network across the country. Most of the time, the funds sent through hundi can reach the receiver within an hour. Most remitters are not even aware that such channels are illegal.

Also, in most countries where workers are being sent, there is a high demand for skilled workers. Over the past few decades, skilled work has seen substantial hike in wages than work that requires little to no skills. Therefore, to increase and strengthen the remittance flow, the Bangladesh government should focus on developing skilled workers for employment overseas, and also find ways through which remittances sent by them can be channelled to productive sectors of the economy.

Dr. Md. Moniruzzaman is an Associate Professor at the Bangladesh Institute of Governance and Management (BIGM).


Faroque Ahmed is a Research Associate at the Bangladesh Institute of Governance and Management (BIGM).





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