Anyone who’s been following the politics and political economy of Bangladesh knows that remittances are a strong and important driver of the domestic economy. Over the last 30 years, the rate of annual growth of remittances has averaged about 19%. This is an impressive rate of growth and as such, it is engine of both economic growth and poverty reduction.
In 2009, the World Bank’s blog on development in South Asia laid out the import of remittances, lest there were anyone sitting on the fence, in a move to try to reject the impact of remittances:
“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.”
That is to say, interest rates are low because of high rates of remittance inflows: the macroeconomy has been propped by up the fact that people in the Middle East had been sending back home large chunks of their monthly paycheck.
So that is the consequence of what happens when people send back home money to their families. One might add, that remittance payments lessen the burden of social welfare payments and international aid donations. This is, as it were, a win-win dynamic. But what determines the flow and level of these payments? It helps to again turn to World Bank research on remittance payments.
“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.”
No wonder then that as the global economic downturn has dragged on and the price of oil has dropped from its historical high, thereby costing Bangladeshi workers their relatively lucrative jobs, the government of Bangladesh is moving to regulate and streamline remittance payments.
