1.

0 Introduction
1.1 Problem Statement Remittance generates remarkable benefits for the home country economy, especially for that of a developing country, in terms of macro and microeconomic impacts. The remitters, most of whom were once unemployed in the home country, are now getting employed in the host country, and on the other hand, the inward remittance is causing employment generation domestically by reinforcing national savings, capital accumulation and investment. Over and above the employment aspect, many other key macroeconomic variables in Bangladesh such as growth, poverty reduction, social security, BOP situation have proven to be significantly positively related to remittances. Bangladesh has a long history of migration and overseas remittances. It is reported that as far back as in !"# Bangladeshi nationals had migrated to the port cities of $ondon and $iverpool in the %& '(ahmood !! ). The British had a scheme of issuance of employment voucher to overseas workers seeking work abroad. The scheme, during the British regime, opened up a great opportunity for Bangladeshi workers to migrate to %nited &ingdom '%&). It is believed that thousands of Bangladeshis, especially from *ylhet, took the opportunity and created a flow of migration towards %&. +or certain reasons, however, this flow had weakened by the !,-s and the direction of the migration flow changed in the !.-s. /fter the birth of Bangladesh, most Bangladeshi migrants sought to look 0ob to (iddle 1ast countries as well as selected 1% destinations 'mainly 2ermany). / tendency to find employment in developed countries like %*/, 3anada, Italy and in some /sian countries like 4apan, (alaysia and *ingapore was observed in the !!-s and onward. The process of migrating abroad from Bangladesh is continuing strongly till now. The huge increase in outward migration makes Bangladesh as one of the ma0or remittance recipient countries in the world. In recent years, Bangladesh has been receiving remittance inflow close to %*5 and more each month. $ast year, Bangladesh had received %*5 billion

#.6" billion in

remittances and a decade ago the figure was %*5 #.7 billion 'The 5aily *tar, #- #). This has boosted the central bank8s foreign currency reserve and stabili9ed pressure on B5T and balance of payment. If the current trend of remittance inflow continues central bank hopes that the remittance will stand at %*5 " billion in the current fiscal year.

Bangladesh8s economy has been growing at rate of over ,: in recent years. ;owever, this growth rate was concomitant with high inflation especially double digit rate and fiscal pressure coming mainly from financing subsidy payment to power sector of the economy. 1.2 Objective
The main ob0ective of this paper is to find out how remittance contributes to the economic growth of the country and whether is contributes to inflation. In doing so, the paper will answer following <uestions=

5oes inward remittance contribute to inflation is a country8s economy> ;ow> ?hat are the trends, patterns and usage of remittance in Bangladesh>
Throughout the paper @remittance8 will mean @inward workers8 remittances8 through formal channels8 unless mentioned otherwise.

1.3 Literature Review At present, remittances play a crucial role in the economy of Bangladesh. At the macro level, it helps to relieve foreign exchange constraint, stabilize the exchange rate movement, and improve the balance of payments. A comfortable foreign exchange reserves can be maintained through contribute to increasing growth of remittance which can macroeconomic stability and reduce aid overall

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, poverty reduction and self employment. It also improves countrys creditworthiness. However, it has been more stable source of foreign earnings than both !I and foreign aid. "emittance grew around #$.% percent in #%%$&%# which increased to #'.( percent in )$$%&#$ and *.$' in )$#$&##. "emittances as percentage of most +ey macroeconomic variables showed upward trend during #%,#&)$##. It is observed that the remittance&-!. ratio touched

#$.(' percent in )$## as compared to #.%' percent in #%,#&,) / Begum and *utradhar #- #0. Inward foreign remittance is used for the purposes in Bangladesh /Bangladesh Ban+ "eport, )$##0 such as buying food, repayment of loans, education, medical treatment, operating business, savings, investing. Inflation has been a ma0or phenomenon in the economic landscape of Bangladesh in the recent past. It has started to increase since the second <uarter of +A#- - and continued to rise throughout +A#and +A#- #. /s in most years, food inflation was higher than as opposed to ). general inflation. +ood inflation reached to B..7: in *eptember #!..#: in *eptember #- - 'B*B, #-

/ccording to the Bangladesh Bureau of *tatistics 'BB*), pointCtoCpoint inflation rose to .!.: in *eptember #and food inflation increased to a level more than what policy analysts had forecasted, due to higher food and oil prices. *uch high food inflation contributed more to the overall national inflation. In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. ?hen the general price level rises, each unit of currency buys fewer goods and services. 3onse<uently, inflation also reflects an erosion in the purchasing power of money D a loss of real value in the internal medium of eEchange and unit of account in the economy. / chief measure of price inflation is the inflation rate, the annuali9ed percentage change in a general price indeE 'normally the 3onsumer Price IndeE) over time. / number of economic theories have eEplained the factors associated with supply and demand which contributes to inflation. The rate of change in the money supply is positively correlated with inflation, and negatively correlated with the growth in real income. Inflation can arise due to demand pull and cost push factors. Inflation is reviewed as a domestic monetary phenomenon which arises due to the monetary financing of fiscal deficits, or by eEtending credit to the private sector by central monetary authorities '5ornbusch and +ischer, !!B). On the other hand, according to the monetarist view pioneered by (ilton +riedman inflation is caused due to an eEpansion in B

the money supply '+riedman, !.-). The third view holds that increase in aggregate demand in the source of demandpull inflation. This is &eynesian theory of inflation which occurs in a situation when at an optimum or employment of output aggregate supply falls short of aggregate demand pull '&eynes, !B,). In Bangladesh, both economic and nonCeconomic 'e.g., monetary and nonCmonetary) factors can give rise to inflation '&hatun, and /hamad #- #). To eEplain the inflationary trend, /hmed '#--!) eEamines the sources of inflation in Bangladesh taking into account both demandCside and supplyCside factors. ;e finds that inward remittance, government debt, inflation inertia, nonCcompetitive market behavior, food and oil prices affect inflation to a large eEtent. (a0umdar '#--,) also points out some specific supply side factors of inflation such as wageFlabor cost, import cost, eEchange rate, oil price, market syndication and supply shortage of agricultural commodities. Raihan and +atema '#--.) find that both demandCside and supplyCside factors such as price hike of food and nonCfood items have significant influence on the rising trend of inflation in Bangladesh. Inflation in Banglade ! / widely discussed plausible cause of high inflation in Bangladesh is the impact of global price hike. The other ma0or source of high inflation in Bangladesh is high food inflation in the domestic market. The rise in food inflation affects the overall inflation significantly. Broad money supply shows positive and increasing trend in growth. The response of broad money supply to inflation is an indicator of future inflation '&ahn and Benolkin, #--.). *ince +A#--#, increasing inflation has generally been associated with the growth rate of broad money supply in Bangladesh '&hatun, and /hamad #- #). $astly, monetary policy influences food and nonCfood inflation simultaneously. Bangladesh government gives subsidy for petroleum oil at the endCuser level. This causes huge fiscal burden and conse<uent pressure on the balance of payment 'BoP) of the country. Rationali9ing fuel oil price and power tariff in line with the actual buying or production price could reduce the unfavorable BoP position. The central bank of Bangladesh has been pursuing a monetary policy to achieve growth and reduce price level. ;owever, given the persistent nature of high inflation Bangladesh "

Bank increased cash reserve ratio '3RR), repurchase agreement 'repo) and reverse repo a number of timers. ;owever, such contradictory policy has not been effective to curb the demandCled inflation. 2iven the nature of inflation in Bangladesh it is important that policy makers integrate monetary and fiscal policies to reduce inflationary pressure so that economic growth can be sustained '&hatun, and /hamad #- #). 1." Sco#e The study will cover remittance inflows and their effect on Bangladesh economy, particularly on inflation in the in the last one decade. 1.$ %et!odolog&

The study is based on secondary data that are available in statistical publication, 0ournal and Bangladesh Bank reports. The data shall be analy9ed based on correlation and regression analysis of various macro economic factors influencing inflation and economic growth of Bangladesh.

2. 'nal& i and Inter#retation

2.1 Remittance trend Gumber of Bangladeshis leaving the country for employment abroad has been increasing in the last decade. The remittance received from abroad has been growing as well. / total of ". ! lakh Bangladeshi workers went abroad for employment during +A #- -C Remittance during #- -C is about %*H . .,7 billion which is more than , percent that

of the average of the last year. The number of eEpatriate Bangladeshi workers and the amount of remittances in Taka and %* dollar are shown in Table . (able 1) *umber of +,#atriate Banglade !i and t!eir Remittance -i cal .ear #-- C-# #--#C-B #--BC-" #--"C-7 #--7C-, #--,C-. #--.C-6 #--6C-! #--!C #- -C *o. of em#lo&ment abroad /0000 !7 #7 #.. #7#! 7," !6 ,7"#. " ! 'mount of remittance (illion %*H Percentage 3rore Tk. #7- ."" B-,-.B BB.#."! B6"6.B"6- .66 7!.6.". .! "..6 !,.6. , -!6..",7-.B#
.

Percentage 1!ange /20 "-. . #B. " #. # 6.!! B,."! #..!, B .". ##.6".-!. 6

change ':) B#.6 ##.#7 -.#". #"..6 #".7B#.B! ##."# B.",.--

"B!-. ! .. !.76 !6.#.B! #B,",.!. B##.".," #!6.77"#!B.#" ,,,.".6. .,- -.!, 6#!!#.6!

Source) Bangladesh 1conomic *urvey Report #- -C

-igure 1) (rend in %an#ower +,#ort and Remittance Inflow

Bangladesh 1conomic *urvey Report #- -C

+igure shows the trends in (anpower 1Eport and Remittance Inflow. +rom the table and graph it appears that in the recent past, there is a declining trend in both the number of manpower eEport from and amount of remittance inflow in Bangladesh. 2.2 Im#ortance of remittance to Banglade !3 econom& The ratio of remittances to 25P and eEport earnings also increased over the years. In +A #-- C-# remittances as percent of 25P and eEport stood at 7.#, percent and " ..6 percent respectively. In +A #- -C remittances as percent of 25P and eEport were approEimately -.7B percent and 7-.6# percent respectively. Table # shows remittances in terms of 25P and eEport earnings for the last. (able 2) Remittance a #ercent of 45P and +,#ort -i cal .ear #-- C-# #--#C-B #--BC-" #--"C-7 #--7C-, #--,C-. #--.C-6 #--6C-! #--!C #- -C ' #ercent of 45P 7.#, 7.!7.!6 ,.B. ...7 6.6B -.-# -.!, . B -.7B
.

' #ercent of +,#ort " ..6 ",.., "".B7 "".B. "7.,# "!.-! 7,.-! ,#.#7 ,..67-.6#

Bangladesh 1conomic *urvey Report #- -C

2.3 Source of remittance /naly9ing the statistics of the Bureau of (anpower 1mployment and Training 'B(1T), it is reported in Bangladesh 1conomic *urvey Report #- -C that about half of overseas workers who went abroad are lessCskilled. The number of eEpatriates classified by skill is shown in Table B. +rom the table, it is observed that the share of professional workers has decreased significantly. ;owever, the shares of skilled and semiCskilled workers are at the satisfactory level.
(able 3) *umber of +,#atriate 1la ified b& S6ill 3alender Aear Professional *killed *emiCskilled #-,!""#."# B-.-# #--# ""77,#,7 B,-#7 #--B 76,# ."7B#!#B, #--" ! -. 6 66. #"7,, #--7 !"7 ,B!B #"7", #--, !#7 7",6 BB!,7 #--. ,., ,7BB6 6B,.B #--6 6," #6 "7B#6#7 #--! "#, B"#,7 .",-" #- B6. !-,# #",! #!# ##! "! #6.#! Bangladesh 1conomic *urvey Report #- -C .

$essCskilled -!76 67 , B,7,# ".B!6 #77, #B 76 "6#!## "76! , #77-.#6.##7 B-6!!#

Total 66!,7 ##7#7, #7" !#.#!76 #77""B6 7 , 6B#,-! 6.7-77 ".7#.6 B!-.-# 7,6-,#

2." Remittance and mone& u##l& Remittances are inflows of foreign eEchange into the country from workers overseas. If the central bank, Bangladesh Bank 'BB), does not interfere with the operations of the commercial banks then the foreign eEchange received from overseas remains as foreign eEchange in the balance sheets of the commercial banks. ;owever, BB re<uires commercial banks to surrender most of their foreign eEchange receipts to it in eEchange of local money. ?hen such a re<uirement is in force, remittance is reported in the balance sheet of Bangladesh Bank as an increase in international reserves, which has immediate implications for the supply of domestic money. There are three types of monetary aggregates in Bangladesh= . Garrow money, #. Broad money and B. Reserve money or high powered money. The money supply process primarily depends on highCpowered money, which is eEpected to have a positive impact on money supply. ;ighCpowered money e<uals currency in circulation including Bangladesh Bank notes and government notes and coins plus 6

statutory reserve balances with Bangladesh Bank when highCpowered money rises, and other things remain the same, the money supply is eEpected to rise. This may be eEplained with the help of two basic monetary e<uations. Total Reserve money 'or highCpowered money) is e<ual to domestic credit 'or assets) plus international reserves held by Bangladesh Bank. The money that we use in our daily transactions derives from the <uantity of R(. The total supply of money is e<ual to money multiplier times the highCpowered money 'The 5aily *tar, #--!).
(able ")(rend in %onetar& 'ggregate 'AearConCyear percentage change)

Indicator Garrow (oney Broad (oney Reserve (oney 5uring +A#- -C

200$708 #-.". !.B#.. #

2008709 ..,# ..-, ..!.

200970: 6.#B ..,B !..6

200:70; .!! !. . B ."7

200;710 B#.", ##."" ,.-B

2010711 .. 6 # .B" # .-!

Bangladesh 1conomic *urvey Report #- -C

, yearConCyear growth in narrow money '( ) decreased sharply while

broad money '(#) decreased marginally and reserve money 'R() increased significantly as compared to the preceding fiscal year. ;owever, moderate increase in time deposit has resulted slight decrease in broad money. (oreover, the increase in reserve money was largely attributed to the increase in net domestic asset instead of net foreign asset 'Bangladesh 1conomic *urvey Report #- -C ).

(oney multiplier 'i.e., (#FR() increased to ".7 in +A#--!C - as compared to "..# in +A#--6C-!. (oney multiplier increased slightly to ".7# at the end of 4une #at the end of 4une #- - 'Bangladesh 1conomic *urvey Report #- -C from ".7 ). The increase in

international reserves increases the money supply of the economy by the money multiplier. If Bangladesh Bank had mopped up, say, one billion dollar, it would have increased reserve money by Tk 6,--- crore, and therefore added to the money supply by Tk B, ,- crore. The following +igure # shows the trend of (# growth rate, 25P growth, Rate of inflation and income velocity of money. It shows that there is an overall positive correlation between (# growth rate and inflation rate from the period +A#---C#consistently around ,: over the period +A#---C#moneti9ation. ! . Inflation rate moved up whenever (# increased in the economy. 25P growth rate has remained . Inflation rate The Income velocity of money was on a declining trend over the past several years indicating increased

-igure 2) %ovement of 45P 4rowt!< %2 4rowt!< Rate of Inflation and Income =elocit& of %one&

*ource= Bangladesh Bank /nnual Report #- -C The central bank has instruments to prevent money supply from increasing. One of these is sterilisation, i.e. sale of credit 'government bondsFbills) to the public or, what is called in BB parlance, Ireverse repoI operations. This allows the BB to mop up eEcess li<uidity from the market. The other effect of remittances is on the foreign eEchange rate 'in Bangladesh this usually means takaC%* dollar rate). ?hen there is a large inflow of foreign eEchange, the supply of foreign eEchange increases, and the value of the foreign currency tends to depreciateJ or what is the same thing, the local currency, taka, appreciates.
2.$ 1on umer Price Inde, and Inflation

Bangladesh Bureau of *tatistics 'BB*) computes Gational 3onsumer Price IndeE '3PI) using food and nonCfood commodities and services consumed by the consumers in their dayCtoCday life. The current 3PI has been constructed using !!7C!, as the base year.
(able $ ) 1on umer Price Inde, and Inflation 'Base year !!7C!,K --) 20017 20027 20037 200"7 200$7 20087 20097 200:7 2002 2003 200" 200$ 2008 2009 200: 200;

Inde,

200;7 2010

20107 2011

2eneral ': change)

#..!

".B6

7.6B

,."6

.. .

..##

!.!B

,.,,

..B

6.6-

Source) Bangladesh 1conomic *urvey Report #- -C .

-igure 3 ) Rate of inflation /*ational)

Source) Bangladesh 1conomic *urvey Report #- -C

+rom the above table and graph, it is observed that there has been an increasing trend of inflation from +A #-- C-# to +A #--.C-6. In +A #--6C-! the rate of inflation came down but in +A #--!C - the rate increased again and continued in #- -C
2.8 Relation !i# among variable

/s the study is on remittance and its effect on inflation, the relationship between percentage change in remittance and percentage change in 3PI is eEamined. Table , shows the percentage change in remittance and 3PI.

Period #-- C-# #--#C-B #--BC-" #--"C-7 #--7C-, #--,C-. #--.C-6 #--6C-! #--!C #- -C

(able 8) Percentage 1!ange in remittance and 1PI Broad 2 c!ange in Remittance flow in +,c!ange %one& in remittance 1rore (6. Rate 1ore (6 "-. . ",B!-. ! #B. " .,. !.76 ",--7. 7..! #. # !,6.#.B! #!,.7,..76.! 6.!! #B,,",.!. 7 ,""!. , .B! B,."! B#,#.".,.,,#6,.#,..-6 #..!, " ,#!6.7# ,!! . ,!.-B B .". 7",#!B.#" #"6,..!.!,6., ##.6,,,,.".6. #!,,7#6.-,6.6 ".-.,,- -.!, B,B,-B#.B,!."" !. 6 6#,!!#.6! "B!,#!".7. .#

2 c!ange 1PI #..! ".B6 7.6B ,."6 .. . ..## !.!B ,.,, ..B 6.6

3ompiled by authors from +B33I

Relation !i# between #ercentage c!ange in 1PI and #ercentage c!ange in remittance The relationship between percentage change in 3PI and percentage change in remittance for the period from #-- C-# to #- -C can be eEplained by the following e<uation=

: change in 3PI K ,.7,.6 L -.-#B6 M : change in remittance r s<uareK -.- 67 /s r s<uare is close to - there is hardly any relationship between percent change in remittance and change in 3PI. It shows that there are other factors both internal and eEternal which causes percentage of inflation to change. Relation !i# between #ercentage c!ange in 1PI and total remittance inflow The relationship between percentage change in 3PI and total in remittance inflow for the period from #--#C-B to #- -C can be eEplained by the following e<uation=

: change in 3PI K 7. . , L 0.000042 M total inflow of remittance r s<uare K -." ,7 /s r s<uare is -." ,7 there is some relationship between total remittance inflow and change in 3PI. It shows that there are other factors both internal and eEternal which causes percentage of inflation to change. Relation !i# between remittance inflow and %2 The relationship between remittance inflow and (# in the economy for the period from #--#C-B to #- -C can be eEplained by the following e<uation=

(# K B".#-.6# L ".B6" M total inflow of remittance r s<uare K -.!, /s r s<uare is -.!, there is strong relationship between total remittance inflow and (# in the economy. It shows that there are other factors both internal and eEternal which causes percentage of inflation to change. #

2.9 > age of remittance /ccording to a survey conducted by Bangladesh Bank in #- # remittance in Bangladesh is used for the following purposes= To buy food To repay loan To build and renovate homes To buy land and flat To pay for education To send member of family abroad To start a business To spend for marriage To invest in +5Rs and other savings instrument To invest in savings certificate To invest in capital market.

(ost of the people use the money to buy food, repay loans, construct and renovate home, educate members of family, pay for medical bills and buy land and flat.

3.0 -inding
Remittance has been growing steadily over the last decade as the number of people migrating to abroad has been increasing. In #-- C-# amount of remittance was Tk. "B!crore which grew to Tk. 6#!!#.6! crore in #- -C . it

Remittance accounted for 7.#,: of 25P of Bangladesh in #-- C-# and in #- -C for Bangladesh8s economy.

accounts for -.7B: of the 25P and 7-.6#: of 1Eports. This shows remittance is crucial

Remittance is coming mainly from lessCskilled workers as their number has been growing each year. Gumber of professional people growing abroad shrunk in recent years. (oney supply in Bangladesh depends on . narrow money, #. broad money '(#), and B. reserve money 'high power money). The foreign eEchange received from overseas in B

form of remittance remains as foreign eEchange in the balance sheets of the commercial banks. This increases (# in the economy. (oney supply depends on reserve money and money multiplier. (# and money multiplier have been increasing over the last decade. ?henever money supply (# increases there is upward trend movement of inflation rate. 3onsumer price indeE '3PI) depends on food and nonCfood inflation. This inflation rate in #-- C-# was #..!: and in the year year #--.C-6 to #- -C the rate was above ..7:.

Regression and correlation analysis between percentage change in 3PI and percentage change in remittance flow is positive and very week 'r s<ure K -.- 67) respectively. 3orrelation between percentage change in 3PI and total remittance inflow in not strong as r s<ure K -." ,7. 3orrelation between total remittance and (# in the economy is very strong as r s<uare K -.!,. Remittance is used for several purposes by its beneficiary, mainly the family members of the remitters.

0". 1onclu ion

Remittance inflow to Bangladesh has been growing over the years. /s there is strong correlation between remittance and money supply in the economy, increase of remittance increases money supply as it has been found. Inflation is not 0ust caused by money supply in the economy there are other factors and government monetary policy which also affect inflation. Remittance plays an important role in the economy as it counts a significant portion of the 25P. People have been using the remittance flow for various purposes which can improve their lives.

"