Nibedita Roy and A. Z. M. Saleh
Unnayan Onneshan-The Innovators, September, 2011
The remittance, a driver of growth of the economy of Bangladesh, has become a cause of concern, particularly against the backdrop of dwindling current account balance and volatility in the exchange rates, having implications over the macroeconomic stability and prospects of growth. The gap between actual flow of remittance and the government’s target articulated in the medium term macroeconomic framework (MTMF) is on the rise and might grow sharply in the upcoming years. In FY 2010-11 the actual receipt of remittance totals USD 11,650.30 million than that of the MTMF projection of USD 14,000 million, a shortfall of USD 2,349.70 million. If the current trend prevails, the gap might increase further in FY 2014- 15 and under the business as usual scenario, the flow of remittance might stand at USD 15,309.996 million against the MTMF projection of USD 31,400 million.
Remittance as percentage of GDP has been increasing over the years till FY 2009-10 when it was 10.95. However in FY 2010- 11, the amount of remittance flow in the country totals Tk. 82,992.89 crore while the amount of remittance as a percentage of GDP drops down to 10.54. In FY 2011-12, if the current rate of decline continues, the remittance as a percentage of GDP might drop down to 9.98 while the percentage change in remittance might be 8.27. Under the business as usual scenario, the per cent change might slide down to 7.09 but remittance as a percentage of GDP might increase to 11.12 in FY 2014-15.
The positive relation between growth of remittance and GDP is observed till FY 2003-04 when growth rate of GDP was 6.27 per cent. But after FY 2003-04, the growth rate of GDP decreased with the increase of remittance due to the higher rate of inflation, which remained higher than the growth rate of GDP. In FY 2010-11, the growth rate of remittance is 9.04 per cent while the growth rate of GDP remains at 6.66 per cent and rate of inflation increases to 8.8 per cent. The continuation of current trend might witness the declining growth rate of remittance and GDP at 6.62 and 5.46 per cent because of mounting pressure of inflation.
Remittance as a percentage of export earning was on the rise since FY 2007-08 when it was 56.09 per cent. In FY 2010-11, the growth from export earnings is 41.74 per cent higher than that of previous fiscal year and remittance as percentage of export earnings has dropped down to 50.82 per cent. Under the business as usual scenario, export earning in FY 2014-15 might increase to USD 29,699.696 million while remittance as per cent of export earnings might stand at 51.55 per cent. In FY 2010-11, flow of remittance has increased by 6.03 per cent than that of previous fiscal year and reaches at USD 11.65 billion while foreign currency reserve increases by only 1.50 per cent reaches at USD 10.91 billion. If the current trend continues, remittance and foreign exchange reserve in FY 2011-12 might reach at USD 12.56 and 11.84 billion respectively, which might be 7.85 and 8.55 per cent than that of FY 2010-11. In FY 2014-
15, remittance might reach at USD 15.31 billion and foreign currency reserve at 14.64 billion.
Remittance plays a significant role for a positive current account balance in any economy. In FY 2010-11, there is a large share of remittance that is USD 11,650 million while the trade deficit is USD 7,328 million, service deficit USD 2,398 million and income deficit USD 1,354 million. Current account surplus in FY 2010-11 is only USD 995 million, which is 73.28 per cent less than that of FY 2009-10 while current account surplus was USD 3,724 million. In fiscal year 2010-11, the growth rate of merchandise export and import is 41.74 and 41.84 respectively and at the same time trade deficit has increased at the rate of 42.20 per cent.
As the rule of the thumb states that at least three months’ import bill equivalent reserve is required for any economy. In FY 2010- 11, gross official reserve totals USD 10.7 billion while gross official reserve (in month of import) is 3.6 months. In FY 2014- 15, receipt of remittance might increase at USD 20 billion, gross official reserve at USD 17.6 billion but gross official reserve (in month of import) might fall down further to 3.2 months only. This may further fall down, if the national currency continues to devalue against the major currencies and the rate of growth in import increases at a higher pace than that of export. In fiscal year 2010-11, the average exchange rate of taka against USD is 70.48 than that of 69.19 in FY2009-10 and the percentage change of depreciation of BDT against USD is 1.63. Taka has been further devalued.
Considering eight currency baskets, the real exchange rate has been depreciated from 97.78 in FY 2009-10 to 94.18 in FY 2010-11. For the price hike of food product as well as fuel oil, import of machineries for establishing new electricity plant and import of fuel for producing electricity, the demand of foreign reserve has increased. As a result the value of taka against USD has depreciated. The relative share of foreign aid is very low compared to the percentage share of remittance in GDP. In 2010-11, receipt of net foreign aid totals USD 1,049.63 million against total foreign aid of USD 1,777.33 million, the net foreign direct investment amounts USD 768 million while the total amount of remittance is USD 11,650.32 million. Under the business as usual scenario, net foreign aid and flow of remittance in FY 2014-15 might reach at USD 1,066.69 million and USD 15,309.996 million respectively.
The growth rate of remittance induces that rate of inflation, if the currency received is not used for purchasing capital goods rather used in buying of consumption goods. In poorer households, remittance may finance the purchase of basic consumption goods, housing, and children’s education and health care. A total of 43 per cent of remittance receipt is spent on food consumption nationally while only 19.2 per cent is spent on cash savings, 6.4 per cent on investment in business. With the amount of USD 11.65 billion, Bangladesh is the seventh largest economy of remittance receiver in FY 2010-11 according to the World Bank. However, the percentage of labour migration has dropped down in the recent years due to the recent economic recession, Middle Eastern political unrest and squeeze in the demand of labour markets. In FY 2010-11, a total of 0.45 million people have migrated from the country which was 6.04 per cent more than that of FY 2009-10. Under the optimistic scenario, labour migration in FY 2014-15 may increase to 0.55 million with an average growth rate of around only 4 per cent which might drop down further, if new markets of labour are not found immediately.
The labour migration scenario of Bangladesh is highly country specific. Recent political unrest in these Middle Eastern countries might cause an adverse effect on migration and remittance balance for Bangladesh. The receipts of remittances from Bangladeshi migrants during FY 2010-11 has stood at around USD 11,650.30 million or Tk. 82,992.89 crore that is 11.12 percent of GDP. In FY 2010-11, the amount of remittance from Middle Eastern country totals USD 7,215.53 million which is 0.10 per cent less than that of FY 2009-10. However, remittance from non-Middle Eastern countries in FY 2010-11 totals USD 4,434.79 million, which is 17.80 per cent more than that of the previous fiscal year.