Finance study reveals relationships

Remittance decisive in  GDP, financial sector

A study has revealed a very positive relation between inward remittances and the per capita gross domestic product (GDP).

“If there is 1.0 per cent rise in the remittance inflow, the per capita GDP will grow by 0.12 percentage point in the short-run (usually 3 years),” the econometric analysis conducted by the Finance Division has estimated.

The per capita GDP stood at US$ 1,115 in the fiscal year (FY) 2013-14, according to the Bangladesh Bureau of Statistics (BBS).

If the inward remittances grow by 1.0 percentage point in the short run, the per capita GDP of $ 1,115 will rise by $ 133.8 to $ 1,248.8, according to the study.

The per capita GDP differs with the per capita gross national income (GNI). The per capita GNI stood at $ 1,190 in the FY 2013-14.

The per capita GNI usually remains higher than the per capita GDP for Bangladesh, as the net primary income from overseas sources including the remittances remains positive.

The finance division under the ministry of finance (MoF) conducted the study based on the yearly data from 1981 to 2013.

It, however, shows that in the long run the impact of remittance growth is much higher than that in the short term.

“If there is 1.0 per cent increase in the inward remittances in the long run, the country’s GDP will surge by 1.4 percentage points,” the study shows.

The analysis shows that the growth in remittances leaves its positive impact on the broad money supply and credit flow to the private sector.

The study authored by Mahedi Masuduzzaman, an official at the finance division, said the aim was to analyse the role of remittance in the economy and also find out the link of migrant workers’ remittance with the financial sector’s development in the country.

“We’ve found that inward remittance growth and the per capita GDP have relations both in the short and long run,” Mr Masuduzzaman told the FE on Sunday.

In conducting the study the mostly-used Johansen co-integration test was employed alongside the vector error correction model to reveal both the short-term and long-term links between remittance-growth and remittance-financed development, he said.

“This study finds a long-run positive relationship between inflow of remittance and gross domestic product indicating that remittance will be more likely to contribute to longer-term growth in Bangladesh,” he added.

He also said remittances had a significant and positive effect on financial sector’s development.

However, this study posits that the inflow of workers’ remittance matters for countries like Bangladesh, which has a relatively growing economy and a developing financial sector.

The empirical findings of the study, therefore, reveal that an appropriate policy coupled with proper management of overseas migration and more proficient use of remittance would aid the economic development of the country.

The study has noted that most of the remittances are used for purchase of food, clothing and other properties and for the purposes of education and health.

It says it is imperative to create appropriate investment opportunities as required by the migrant workers for proper utilisation of the remittances

Bangladesh is the seventh largest remittance earning country in the world and the second largest in South Asia. Bangladesh earned $ 14 billion in remittances in the calendar year 2013.

FE logo

By: Jasim Uddin Haroon