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Bangladesh

Author(s):
International Monetary Fund
Published Date:
February 2010
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I. Remittances in South Asia and the Philippines: Determinants and Outlook1

Summary

  • This paper analyzes the surprising strength of remittances in Bangladesh and other countries in South Asia and the Philippines in 2009.
  • The empirical analysis in the paper suggests that the continued strong growth of remittances in these countries is related to the resilience of non-oil GDP growth in the GCC countries and the surge in the GCC countries’ hiring of migrant workers from South Asia during 2006–2008.
  • The remittances to GDP ratio in South Asia and the Philippines is likely to remain robust in the near term. The demand for migrant workers is likely to remain strong in view of the projected reacceleration of non-oil growth in the GCC countries during the next few years, supported by continued high oil prices.

A. Introduction

1. More than one year into the global financial crisis, remittances continue to rise in South Asia and the Philippines. Inflows of workers’ remittances to these countries increased rapidly before the global financial crisis. Their continued strength has important implications for the balance of payments and macroeconomic policies in these countries:

  • Since the onset of the crisis, Sri Lanka’s imports and export both declined and the trade deficit narrowed. Remittances are holding up and are now sufficient to finance the trade deficit, thereby providing important support to the balance of payments.
  • In Bangladesh, the strength of remittances in conjunction with weak imports caused a record current account surplus in FY2009 (July 2008–June 2009). The injection of liquidity from unsterilized interventions conducted by the central bank to maintain the de facto peg of the taka to the U.S. dollar pushed interest rates down and inflated banks’ excess reserves. Unless monetary conditions are tightened, this risks setting the stage for an acceleration of inflation and credit to the private sector.

2. This paper analyzes recent trends in remittances to South Asia and the Philippines (Section B). It also reports on an empirical investigation of the factors driving the continued strength of remittances to these countries (Section C). Finally, the paper discusses the outlook for remittances in South Asia (Section D).

B. Recent Trends in Remittances

3. During the past three decades, the growth of remittances to a representative group of 45 emerging market economies (EMCs) and low-income countries (LICs) moved broadly in line with the growth of these countries’ exports (Figure 1).2 The correlation coefficient between the growth of exports and the growth of remittances is 0.60.

Figure 1:Exports and remittances 45 LICs and MICs, 1979-2008

(growth in percent)

4. There have been a few episodes of weak or negative growth in remittances to EMCs and LICs but some downturns in advanced economies did not trigger declines in remittances. For instance, the growth of remittances was weak, and negative in some years, during the 1980s, following a boom in the late 1970s. During the Asia crisis in 1998 remittances contracted by 3 percent and exports by 6 percent. However, remittances continued to grow when exports of EMCs and LICs contracted in 2002 in response to a mild recession in advanced economies. In 2008, the growth of remittances to our sample of 45 countries decelerated to 10 percent. Countries with close ties to the United States suffered the most. For instance, remittances to Mexico declined by 4 percent.

5. For the group of 45 low- and middle income countries the volatility of remittances was lower than the volatility of exports during 1979–2008. It is often argued that remittances are more stable than capital account inflows. The large capital outflows from many low- and middle income countries in the wake of the global financial crisis testifies to the volatility of capital account flows. It is also often argued that remittances are more stable than exports. Indeed, for the representative sample of 45 LICs and MICs, over the period 1979-2008, the coefficient of variation for remittances was 0.9 compared to a coefficient of variation of 1.05 for exports.

6. For the six countries studied in this paper the volatility of remittances was lower than the volatility of FDI and portfolio flows but higher than the volatility of exports and aid inflows during 1979–2008 (Table 1):

Table 1.The volatility of remittances and other BOP inflows, 1980-2008
Coefficient of variation: standard deviation in percent of the mean for the ratio of the inflow to GDP
RemittancesExportsAidFDIPortfolio
Bangladesh554845138829
India4745516780
Nepal983025175
Pakistan511640105220
Sri Lanka20145251225
Philippines58346076168
Mean553146102304
Median53324891220
Sources: IMF, Balance of Payments Statistics; World Bank, World Development Indicators.
Sources: IMF, Balance of Payments Statistics; World Bank, World Development Indicators.
  • The inflow of remittances in Bangladesh, India, Nepal, Pakistan, Sri Lanka, and the Philippines was considerably less volatile than FDI and portfolio flows.
  • Contrary to what was found for the sample of 45 low- and middle income countries in aggregate, remittances in South Asia and the Philippines were more volatile than exports. To understand this, it should first be noted that the metric of volatility used here, namely the coefficient of variation, scales the standard deviation of a time series by the mean of the time series. Except for the case of Nepal where remittances now exceed 20 percent of GDP, typical variations in remittances matter less for the balance of payments than typical variations in exports because the U.S. dollar value of exports is larger, often substantially, than the value of remittances. Upon correcting for the average size of the inflows, remittances turn out to be more volatile. Clearly, the strong recent rise in remittances relative to exports will tend to make the 30-year average of remittances relatively small and the coefficient of variation relatively large. Similarly, the coefficient of variation of exports is relatively high for countries with relatively strong growth of exports in recent years (Bangladesh, India).

7. However, while exports of low- and middle income countries are projected to contract in 2009, remittances have held up very well in South Asia and the Philippines and are set to record strong growth in 2009 (Table 2). 3 The October 2009 World Economic Outlook projected a 25 percent contraction of exports of EMCs and LICs in 2009 with a subsequent recovery of growth to 7 percent in 2010. By contrast, remittances to Bangladesh continue to grow at the average rate recorded during 2006–08. The acceleration of remittances to Pakistan may be partly related to the substantial correction in the exchange rate which took place in the third quarter of 2008 and which made it more attractive for migrants to send foreign exchange home. The acceleration of remittances to Sri Lanka may be related to the end of the conflict with the Tamils and brightened the country’s outlook and boosted patriotism of migrants. The growth of remittances to India, Nepal and the Philippines has decelerated from the high rates recorded during 2006–08 but remains solid.

Table 2.Inflow of Remittances, 2002-2009
2002200520082008Annual change in $-value (in percent)
(in percent of GDP)(in US$bn)2006-08 (average)Q/QH)Through
South Asia 1/5.97.09.171.82420
Bangladesh5.77.011.09.02829Nov-09
India3.33.04.250.8299Jun-09
Nepal11.013.819.52.53010Aug-09
Pakistan4.83.94.27.01832Nov-09
Sri Lanka4.57.16.52.61418Sep-09
Philippines9.010.89.716.4156Oct-09
Sources: IMF (BOP Yearbook; World Economic Outlook); Country authorities; World Bank remittances database-March 2009; CEIC Data Co. Ltd.

Simple averages of the countries in the region, except the US$-value of remittances.

Sources: IMF (BOP Yearbook; World Economic Outlook); Country authorities; World Bank remittances database-March 2009; CEIC Data Co. Ltd.

Simple averages of the countries in the region, except the US$-value of remittances.

8. The strong growth of remittances during 2006–08, which has carried through into 2009, seems closely related to the surge in labor migration in recent years (Table 3). Figure 2 illustrates the increase in gross labor migration in the five countries for which data is available. Starting from a high base relative to the size of the population, Sri Lanka and the Philippines experienced a steady but relatively unspectacular growth of the outflow of migrants in recent years. The other three countries for which data is available experienced a remarkable surge in labor migration in recent years, albeit from a relatively low base. In the case of Bangladesh the surge started in 2006. In Pakistan it started one year later. It should be noted that despite the strong increase in new deployments from Bangladesh, Nepal and Pakistan between 2005 and 2008, these countries still lag considerably behind Sri Lanka and especially the Philippines in terms of the extent of annual gross migration outflows relative to the size of the population.

Figure 2.Gross Outflow of Workers

(Index, 2001=100)
Table 3.South Asia and the Philippines: Population, Migration, and Remittances
BangladeshIndiaNepalPakistanSri LankaPhilippines
Population (2007, in millions)1591,125281622088
Population growth (2007, in percent)1.71.31.72.20.61.9
Population growth (1988-92 average, in percent) 1/2.32.02.42.61.32.4
GDP per capita (2007, in U.S. dollars)4311,0463678791,6161,639
Registered new deployments (in thousands)
2002225105147204892
2005253159142231989
20088752444302521,236
Remittances (in percent of GDP)
20025.73.311.04.84.59.0
20057.03.013.83.97.110.8
200811.04.219.54.26.59.7
Share of remittances from GCC-countries (percent of total)
200277446018
2008 2/6324546015
Sources: Country authorities, CEIC, and World Bank, World Development Indicators

The average growth of the population during 1988-92 can be used as a proxy for the current growth of the labor force.

Estimate for India is based on RBI Monthly Bulletin March 2009, p.410.

Sources: Country authorities, CEIC, and World Bank, World Development Indicators

The average growth of the population during 1988-92 can be used as a proxy for the current growth of the labor force.

Estimate for India is based on RBI Monthly Bulletin March 2009, p.410.

9. Longer time series of the remittances to GDP ratio of the six countries in this study show increasing importance of the GCC countries as the source of remittances (Figure 3). In recent years, spearheaded by the United Arab Emirates, GCC countries have liberalized their economies, adopted outward-oriented development strategies and embarked on ambitious medium-term investment programs in infrastructure. The strong growth of the GCC economies triggered an increase in the demand for migrant workers. As a result, the ratio of remittances to GDP from GCC countries has been rising faster or declining less4 than the ratio of remittances to GDP from other countries.

Figure 3.Countries in South Asia and the Philippines: Composition of remittances

(in percent of GDP)

Sources: International Financial Statisks; and country authorities.

10. There is also an important “September 11, 2001” effect. In most countries, the remittances to GDP ratio jumps in 2002 following the adoption of anti-money laundering laws to clamp down on informal remittances effected through Hawala/Hundi intermediaries and generally increased scrutiny of cross-border financial flows following the terrorist attacks on the United States (Box 1). For example, recorded remittances from non-GCC countries to Bangladesh were steady at around 1 percent of GDP until 2001. Since then, this category of remittances saw a sustained rise.

Box 1.Informal Remittances Through Hawala/Hundi Intermediaries

During the 1980s and 1990s informal remittances increased substantially. However, with informal remittances the foreign exchange can remain outside the destination country and can become a vehicle for capital flight from a destination country with a closed capital account and tight controls on foreign exchange for current international transactions. Figure 3 illustrates the flows of funds in case a Bangladeshi migrant worker in a host country makes a transfer to a relative at home through a Hawala/Hundi intermediary. The intermediaries in different countries may be linked through an informal network. However, in the illustrative example no foreign exchange flows into Bangladesh as a result of the transfers of funds.

Low international oil prices during 1998–2001 curtailed government spending in the GCC countries. This, in turn, put downward pressure on recorded remittances from the GCC countries. The weakness of recorded remittances coincided with anemic growth of exports. To alleviate the resulting scarcity of foreign exchange in Bangladesh, the government undertook to channel a larger share of remittances through formal channels, thereby reducing the funding of unauthorized capital account outflows through Hawala/Hundi intermediaries. Accordingly, the draft Money Laundering Prevention Act was finalized in March 2001. The law was enacted in 2002 amid increased global awareness and scrutiny of money-laundering practices following the attacks on September 11, 2001.

Figure 3.Flows of funds: Remittances from a host country to Bangladesh through Hawala/Hundi intermediaries

From the point of view of Bangladesh, a notional foreign exchange inflow facilitates a notional capital outflow. However, the involvement of the Hawala/Hundi intermediaries allows the foreign exchange to remain offshore and Bangladesh’s balance of payments records neither the inflow of remittances nor the capital outflow

Person A: Bangladeshi migrant worker in a host country who wants to remit funds to person B in Bangladesh

Person B: Recipient of remittance in Bangladesh

Person C: Resident of Bangladesh who is looking to transfer money to a third country

5 Hyder (2003) estimates that total remittances (formal and informal) to Pakistan at the end of the 1990s amounted to about US$ 8 billion per annum. However, recorded remittances amounted to only about US$1.5 billion per annum. The decline in the remittances to GDP ratio during the 1980s and 1990s (Figure 3) largely reflects a shift to informal channels.

C. Empirical Investigation of the Determinants of Remittances

11. The specification of the equation for the determinants of remittances in this study is similar to that estimated in other papers (see e.g. IMF (2005), Chami et al. (2008) and Singh et al. (2009)). Accordingly,

  • The dependent variable is defined as the remittances to GDP ratio. Total remittances here refer to the 3 components of remittances identified in the balance of payments—workers’ remittances, compensation of employees and migration transfers. However, for five of the six countries in our sample, workers’ remittances represent the only meaningful component of remittances. The other components are either zero or have relatively insignificant amounts. An exception is the Philippines. For the Philippines, the remittance time series includes the workers’ remittances plus compensation of employees working abroad adjusted for expenses.5
  • The independent variables are real GDP in the home country, real GDP in the host country, the real effective exchange rate of the currency of the home country (REER), and the real interest rate differential between the home country and the host country (weighted by the share of total remittances). To address possible endogeneity concerns6 we use the lagged value of home GDP and the lag of the REER.

12. In line with the possible altruistic motive of remittances, the expected sign for the variable capturing home real GDP is negative. In particular, when adverse economic shocks decrease income in the home country, migrant workers can be expected to remit more money to cushion the effect of those shocks on their families.

13. The expected sign for the variable capturing host real GDP is positive. Stronger growth in the host country can be expected to improve the earnings of migrant workers, allowing them to increase their remittances. Stronger growth in the host country will also boost the demand for migrant workers, further improving the prospects for remittances.

14. For the GCC countries we use non-oil GDP rather than total GDP to construct the host GDP variable. For each of the six countries in our sample host-country real GDP is constructed using the shares in total remittances as weights. However, unlike for the other host countries, for the GCC countries we use non-oil real GDP rather than total real GDP. Our focus on non-oil GDP in GCC countries is a key contribution of this study. As far as we know, no other study has done this.7

15. For the GCC countries, non-oil GDP is arguably a better proxy for the earnings capacity of migrants and the demand for migrant labor than total GDP. The vast majority of migrant workers in GCC countries from South Asia work in the non-oil sector. And developments in the overall economy are only loosely related to fluctuations in oil and gas production. In particular, the production of oil by GCC countries varies with OPEC production quotas while the output of gas typically varies with production capacity. When production quotas are adjusted downwards to support prices, oil-GDP of the GCC countries declines. However, the other sectors of the economy may continue to be buoyant as the resulting sustained high oil prices allow the governments to continue to implement their budgets.

16. In line with the possible altruistic and investment motives of remittances, it is expected that countries with an overvalued exchange rate (i.e. a higher value of the REER index) will receive less remittances. Rajan and Subramanian (2005) observed that countries with an overvalued exchange rate tend to receive smaller amounts of remittances. A plausible explanation is that migrant workers respond to an overvalued exchange rate by sending goods instead of cash or by reducing remittances in anticipation of a downward correction of the REER. Similarly, in line with the possible investment motive of remittances it is expected that higher real interest rates in the home country or lower real interest rates in the host country will, all other things equal, lead to larger flows of remittances to the home country.

17. Estimation results, summarized in Table 4, are broadly in line with those reported in other studies and consistent with the expected theoretical relationships. Also, the magnitude of the coefficients is similar to that of other studies that have included a larger sample of developing countries. Results are fairly robust to dropping variables with insignificant coefficients and to using various regression specifications. They are also robust to dropping one country at a time. OLS estimation results for the panel of 6 countries are reported in the first column of Table 4. For instance, a one percent increase in real remittances-weighted host-country GDP is associated with a 2.1 percent increase in the remittances to GDP ratio. Lagged real home-country GDP has the expected negative sign and the real interest rate differential has the expected positive sign. However, the coefficient for the real interest rate differential is only statistically significant when India is included in the panel (the first and third column in Table 4).8 The coefficient for the REER has the expected negative sign but is not statistically significant. Estimation results with fixed effects (FE), to take into account possible differences in the intercepts for each country in the panel, broadly confirm the results of the OLS regressions.

Table 4.Determinants of remittances: regression results for a panel of 6 countries 1/2/
Dependent variabletotal remittances/GDP
Explanatory variablesOLSOLSFEFEFE
Home GDP (lagged one period)-1.29 ***-1.41 ***-1.61 ***-0.95-2.67 ***
(6.62)(4.72)(3.11)(1.54)(4.93)
Host GDP (non-oil GDP for GCC countries)2.12 ***2.58 ***3.01 ***1.79 **
(8.85)(9.26)(4.90)(2.59)
Advanced countries’ GDP0.37
(0.44)
GCC nonoil GDP2.68 ***
(7.24)
Stock of migrants and overseas workers0.21 ***0.34 ***0.40 ***
(6.70)(4.81)(6.94)
REER (lagged one period)-0.56-0.35-0.34-0.050.07
(1.34)(0.73)(0.86)(0.09)(0.13)
Real interest differential0.02 *0.000.02 **0.010.01
(1.80)(0.04)(2.19)(0.98)(0.96)
Constant-5.01 **-9.32 ***-8.98 ***-9.79 ***-6.08 *
(2.30)(3.70)(3.74)(2.85)(1.76)
Observations134941349494
R-squarcd0.340.660.590.720.79
Ho: host country coefficients are equalReject

The absolute value of t-statistics, based on robust standard errors, is indicated in brackets.

***, **, and * denote statistical significance at the 1,5, or 10 percent level, respectively.

The absolute value of t-statistics, based on robust standard errors, is indicated in brackets.

***, **, and * denote statistical significance at the 1,5, or 10 percent level, respectively.

18. The stock of migrants appears to be a key determinant of the remittances to GDP ratio. The Philippines publishes an annual time series for the stock of migrant workers. For the other countries in our sample we used the available data on the gross outflow of migrant workers to construct a proxy for the stock of migrants. In the absence of data on the number of returning migrants, and taking into account the importance of 2–3 year fixed-term contracts in the hiring of migrant workers in the GCC countries, we assume that one third of migrants arriving in a given year stay permanently in the host country. Of the remaining two thirds, we assume that one third returns to the home country after two years, another third returns after three years, and the final third of the two-third of the total flow of a given year would return to the home country after four years.

19. The highly significant independent effect of the stock of migrants on remittances provides an important insight into the reason for the relative stability of remittances compared to other foreign exchange flows. A one percent increase in the stock of migrants raises the remittances to GDP ratio by about 0.4 percent.

20. A formal test indicates that trends in non-oil GDP of the GCC countries may generally be more important for South Asia’s remittances than trends in advanced economies’ GDP. The last column of Table 4 reports the estimation results for a fixed-effects model in which the composite remittances-weighted host GDP is replaced by real GDP in advanced countries and non-oil real GDP in GCC countries. The reason for splitting Host GDP into advanced countries’ GDP and non-oil GCC GDP is twofold:

  • Amid the current downturn there is an ongoing debate about what will happen to remittances from different regions. For instance, remittances from the United States to Central America have been falling in 2008 and 2009.
  • There is also a measurement issue in attributing the origin of remittances. When a bank in the Philippines receives a remittance through the headquarters of a US bank, this remittance is recorded as originating in the United States. However, some of these remittances may be from migrants working in GCC countries whose money happens to be wired through a correspondent bank in New York.

Advanced countries’ real GDP is only found to be statistically significant (at the 10 percent level) in regressions which do not include the “stock of migrants” variable. These regressions are not reported in Table 4. In the regression shown in the last column of Table 4 the coefficient for advanced countries’ GDP is not significant. Moreover, the null hypothesis that the coefficients for advanced countries’ GDP and non-oil GCC GDP are equal is rejected.

D. The Outlook for Remittances to South Asia and the Philippines

21. The empirical analysis in the previous section suggests that the resilience of nonoil GDP growth in the GCC countries amid the ongoing global financial crisis along with the support provided by the large-scale hiring of migrant workers during 2006–2008 underlie the persistent strength of remittances in South-Asian countries and the Philippines in 2009.

22. Accordingly, the outlook for remittances depends on the outlook for non-oil growth in the GCC countries along with recent trends in the hiring of migrant workers in the GCC countries:

  • The October 2009 World Economic Outlook projected a gradual reacceleration of non-oil output in the GCC countries to 5½ percent by 2012. This is substantially below the 8 percent average non-oil growth rate recorded during 2004–2008. On this basis, the growth in the demand for migrant workers and the growth of remittances would likely ease but remain positive. While international oil prices have strengthened in recent months, the problems encountered by some companies in Dubai to refinance their debts may put a damper on the outlook for the region.
  • The growth in the number of migrant workers leaving Bangladesh, Pakistan, and Nepal to take up jobs in the GCC countries has decelerated from the highs in 2007–08 (Figure 5). In the case of Bangladesh year-on-year growth turned negative in September 2008. Reflecting strong adverse base effects, the year-on-year growth averaged -45 percent during the first 10 months of 2009. Data on the number of returning migrants which the Bangladeshi authorities have started to collect suggest that the stock of migrant workers is still rising, providing support to the remittances to GDP ratio in the coming years.
  • On the tentative proxy developed in this note, the stock of migrants from Bangladesh could be expected to stabilize in the near term as many of the workers hired in 2006–2007, during the height of the boom, start to return home (Figure 6). In that case, according to the estimation results discussed in the previous section, the positive effect of an increasing stock of migrants on the remittances to GDP ratio would disappear.

Figure 4.Real growth estimates and projections

Source: October 2009 WEO

Figure 5:Gross outflow of workers

(12-month percentage change in 3mma)

Figure 6:Bangladesh: Remittances and the Stock of Migrants

(index, 2005=100)
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1Prepared by Geert Almekinders and Zeno Abenoja (Central Bank of the Philippines). Mr. Abenoja was a summer intern in the IMF’s Asia and Pacific Department when the research for this paper was done.
2The coverage and reporting on remittances data is less uniform than that on merchandise trade data. In order to make a meaningful comparison of the growth of remittances and exports we focus on a group of 45 countries for which continuous and consistent data is available since 1978. It covers 70 percent of all remittances to LICs and EMCs in 2008. The data on exports covers the same 45 countries.
3The United Arab Emirates is an important source of remittances. For instance, it accounts for almost one-fifth of remittances to Bangladesh. A slowdown in Dubai, following the recent financial problem, would have adverse effects on remittances but these would probably be felt in 2010 and beyond.
4The decline in the ratio of total remittances to GDP in Sri Lanka and the Philippines in 2007 and 2008—despite continued strong growth of the total U.S. dollar amount of remittances (Tables 2 and 3)—reflects the appreciation of these countries’ real exchange rates.
5Based on the fifth edition of the IMF’s Balance of Payments Manual (BPM5), statistics on total remittances have three components: workers’ remittances, compensation of employees and migrant transfers (for a fuller discussion see Chapter 2 of Chami et al. (2008) and Box 2.4 in IMF (2005). Workers’ remittances refer to current transfers by migrants who are employed and are residents in the host countries. A person is considered a migrant if he stays or is expected to stay for at least a year in the host country. Workers’ remittances are included in current transfers. Compensation of employees refers to wages, salaries and benefits (in cash or in kind) earned by nonresidents for work performed for and paid for by residents in the host country. These workers include border and seasonal workers and other nonresident workers such as local staff of embassies. This item is recorded under income in the current account. Migrant transfers are contra-entries to flow of goods and changes in financial items that arise from the migration (change of residence for at least one year) of individuals between two countries. These items are recorded as capital transfers under other (non-government) sectors.
6Lueth and Ruiz-Arranz (2007) note that many of the attempts to establish a relationship between workers’ remittances and a set of macroeconomic variables suffer from a number of pitfalls, including ignoring issues of endogeneity and reverse causality.
7Non-oil GDP for the GCC countries is available in the WEO database starting from 1990. We extended the series back to 1980 based on real GDP data for the oil and non-oil sectors reported in individual GCC countries’ Article IV reports and accompanying papers on Recent Economic Developments or Statistical Appendices.
8The government of India actively encourages nonresident Indians to hold deposits in the Indian banking system. Gordon and Gupta (2004) find that the accumulation of NRI deposits respond positively to changes in relative interest rates on NRI deposits.

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