Impact of remittances on economic growth, exchange rate and household consumption expenditures in Bangladesh

This thesis aims to examine the impact of remittances on economic growth, exchange rate and household consumption expenditures in Bangladesh. The first objective of the study is to examine the impact of remittances on economic growth, in particular how the development of domestic financial sector influences a country’s capacity to take advantage of remittances. Bangladesh’s remittances, specifically inflows, are an important source of income support and economic growth. Employing ARDL model on a dataset of 46 years from 1976 to 2021, this study finds that remittances boost growth in Bangladesh with developed financial systems. The study also finds that capital formation is positively associated with economic growth in the long run while remittance is negatively influencing economic growth. Thus, policies should focus on developing the financial system, reducing the cost of remitting and encouraging migrants to send remittances using formal channels. In the second objective, this study explores whether that changing levels of remittances may have impact on real exchange rate using disaggregated sectorial data for Bangladesh. Based on estimation of ARDL, the results show that 80% of the short -run error is adjusted during a period, however, the workers' remittances are statistically insignificant in both the short term and long term. Therefore, we concluded that this study unable to capture the spending effects of remittances in Bangladesh. This study further examines another phenomenon of Dutch Disease, i.e. the resource movement effect of remittances by specifying the tradable and non- tradable output as the dependent variable, in addition to the standard equation that has the real exchange rate as the regressed. Nevertheless, the results also failed to capture this effect. Based on the findings the study provides recommendations to the policymakers to be more cautious in utilizing the remittances so that the phenomenon that is known as Dutch Disease can be avoided. The third objective analyses the impact of international remittances on household spending behaviour in the Bangladesh context. The total household spending has been classified into several categories, namely education, health, food, consumed and durable goods, housing and land. For addressing the self-selection bias, the study applied the propensity score matching technique. Findings from the study reveal that remittances have positive and significant impact on the amount spent on almost all the spending categories except higher education at university level and housing (mud and bamboo). In this regard, the policymakers should find the process of how to motivate the householders to spend the remittances for the purpose of higher education. The study can be useful for the government and household decision- makers to utilize the remittances sent from abroad. This study contributes to the body of knowledge with recent variations on the microeconomic impact of remittances at the household level in a remittance-receiving country.

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