Report

On
Exchange Rates and Economic Growth in Bangladesh
COURSE NAME: Macroeconomics
Course Code: F-208

SUBMITTED TO:
Shahadat Hussain
Lecturer,
Department of Finance and Banking
University Of Barisal

SUBMITTED BY:
Shahadat Hossain
Roll: 16 FIN 056
2nd Year 2nd Semester
Session: 2016-2017(Admission Session 2015-2016)
Department of Finance and Banking
University Of Barisal
Date of submission:07-01-2018
Exchange Rates and Economic Growth in Bangladesh
Abstract
This report aims to understand the effects of exchange rate changes on economic growth in
Bangladesh. Exchange rate and exports play an important rule in Bangladesh. This study
examines the impact of exchange rate and export to GDP in Bangladesh using the time series
data from 1981-2017. Ordinary least square method is used to estimate the model. The results
show that there is a positive relationships between exchange rate ,export and GDP. Exchange
rate of Bangladesh has received wide attention among all concerned from end-May, 2003 when
Bangladesh adopted the floating exchange rate system. So it is very important to find out the
reasons for which the exchange rate fluctuates frequently. This study suggests to increase
exchange rate and export to increase economic growth in Bangladesh.

Introduction
The exchange rate management has, of late, received renewed attention with the emergence of
global financial crisis and its likely impact on trade, investment and overall gross domestic
product (GDP) growth in 2007/08. The importance of exchange rates is very clear. But the
reasons for which the exchange rates fluctuates more is not known. Some important factors for
the economy of any country are interest rates for that country, its inflation rates and GDP growth
rate. It could be possible that these economic factors can directly influence the exchange rates
movement of any country. It is applicable for Bangladesh also. With these expectations here it
has been tried to find the relationship among the exchange rates fluctuations of Bangladesh with
the economic factors of the country - interest rates, inflation rates and GDP growth rate. To
analyzes the impact of interest rate, inflation rate and GDP growth on the exchange rate, this
project considered the mostly exchangeable currencies with Bangladeshi taka, which are - Indian
rupee, Japanese Yen, US Dollar, UK Pound and Euro. In the era of globalization and financial
liberalization, exchange rate plays an important role in international trade and finance for a small
open economy like Bangladesh. This is because movements in exchange rates affect the
profitability of multinationals and increase exchange exposure to enterprises and financial
institutions. Fluctuations in the exchange rate may have a significant impact on the
macroeconomic fundamentals such as interest rates, prices, wages, unemployment,
and the level of output. This may ultimately results in a macroeconomic disequilibrium that
would lead to real exchange rate devaluation to correct for external imbalances. In different
countries study shows that there is theoretical relationship between exchange rate fluctuations
and various macroeconomic indicators such as interest rate, inflation rate, current account and
gross domestic product .Changes in interest rate, inflation rate, current account and gross
domestic product affects exchange rate fluctuation.

Review of literature
There are numerous studies that have assessed the relationship among export, exchange rate
movements and economic growth. The main findings of these studies are represented below.,
based on a two sector growth model and by using annual data for the period 1981-2017 found
that export growth has significantly increased economic growth through its positive impacts on
total factor productivity in the country. export growth is often considered to be a principal
determinant of production and employment growth in an economy and they argued that foreign
currency made available through export earnings facilitates import of capital goods, which in
turn increases production potential of an economy. Edwards and Rhode found negative short-run
effects but in the long-run the output response to devaluation appeared to be positive. Rizzo
found that the higher the exchange rate, the poorer will be the condition of the importing country
and vice versa. In such a case, there is no doubt to say that exchange rate has a direct impact on
the economic growth of any country. Two alternative reasons were responsible for that Real
exchange rate affect relative cost of production and relative exchange rates affect the relative
wealth significantly across countries. He also found that relative wealth significantly affects
foreign direct investment in the united state and the effects of real wages have little impact on
FDI. nominal shocks in flexible exchange rate regimes have adverse implications on investment
behavior and a fixed exchange rate encourage FDI. .This is because fluctuation in exchange rate
brings about changes in trade balance by influencing the country’s export and import. Exchange
rates may cause the price level to change and, as a consequence, it may change the income
distribution of the economy. These studies indicate that there is an important relationship among
exchange rate, export and GDP. In this backdrop, the currency of Bangladesh has been devalued
and depreciated since independence against some of the foreign currencies to whom it was
pegged with, especially against USD. In the above literature review it is seen that the previous
study on impact of exchange rate and export on economic growth were used backdated data and
method. However; in recent years, the impact of growing balance of payment have pressured on
exchange rate of Bangladesh. In this context, the study is an attempt to evaluate the impact of
exchange rate change and rise in export volume on output growth of Bangladesh economy by
using up-to-date data and econometric method. Data and methodology This study is primarily
based on secondary data. To conduct this study annual data of exchange rate, export and GDP
growth from 1981-2017 are collected from Bangladesh Economic Review and Bangladesh Bank
Monthly Economic Trend. In this work, simple linear regression analysis has been used.
Regression analysis studies the causal relationship between one economic variable to be
explained and one or more independent variables. It helps us to see the trend and make
predictions outside or within a given data. Ui denotes the error term which is normally
distributed with a zero mean and a constant variance. The values of β0, β1, β2 and β3 will be
obtained by using the ordinary least squares estimation technique by the help of SPSS means
Statistical Package for the Social Sciences. The statistical significance of the parameters will be
established. In testing for the statistical significance of the parameters, we use the rule of thumb
and the t-test. The rule of thumb states that for a parameter to be statistically significant, the
absolute value of the t-statistic should be greater than or equal to two. There are three major
problems which affect regression results. These problems are autocorrelation. In this study to test
these problems Spearman’s Rank correlation; Durbin-Watson d test and VIF have been used.

Objectives of the study

The objectives of this study are referring as follows:
 To investigate the exchange rate policy of the government of Bangladesh and to
analyze its impact on growth of the economy i.e. GDP.
 To give some possible solutions and recommendation based on the empirical
result of this study.
Result Analysis
An estimated regression result of econometric model is shown in the following tabular form:
Table-1; Model: GDP = β0 + β1EXR + β2EXP + Ui

Variable Coefficient T statistics Collinearity Statistics

Constant 12305.536 4.268
EXR .844 17.465 5.681
EXP .163 3.369 5.681
R square .988
DW test 1.149
Predictors EXP, EXR
Dependent GDP
Variable
using spearman’s rank correlation, we obtained the correlation coefficients between considering
independent variable and residual for three model are shown in the following tabular form –

Variable Spearman’s Rank Correlation

between residual and
independent
variable
EXR 0.015
EXP 0.028

In this table all the values of spearman’s rank correlation are less than .05. That means very low
rank correlation. This indicates the absence of the estimated model. Using the Durbin –Watson
test formula, we obtain d= 1.149. Based on the decision rule n =32 and k = 3, from the Durbin-
Watson table, dL = 1.24 and dU= 1.65; n=32 k=2, from the Durbin Watson table, dL = 1.31 and
dU= 1.57. we accept H0 and reject H1 because d=1.149 lies within the acceptance range which
means that there is no autocorrelation. It is seen that in table-1the value of VIF for both exchange
rate and import is 5.681which is less than 10; that indicates estimated result of econometric
model is free from multi correlation. As shown from the above tests, the results shown from the
ordinary least square for econometric model is a sensible one and has no problem of
autocorrelation. We therefore accept the results of the above estimated econometric model. In
table-1 the R2 given from the regression analysis is 0.988; which is approximately 98.8%.
Statistically, econometric model is a very good fit. Economically, it means that about 98.8% of
the total variation in the GDP growth rate is attributed to or explained by the exchange rate and
export in Bangladesh. In the estimated model the slope of exchange rate variable is 0.844 and the
slope of the export variable is 0.163. This means that a 1% increase in exchange rate and export
volume will cause GDP is increase by 0.844% and 0.163% respectively. Using the rule of thumb
which states that if the absolute value of t-statistic is greater than 2; then, the parameter in
question is statistically significant. From the regression results, in table-1 the t-statistic of
exchange rate variable is 17.465 and export variable is 3.369; which are greater than 2. The
analysis and discussion of the results in section 5 all confirm the conclusion that gross domestic
product in Bangladesh is influenced significantly by the exchange rate and export volume.
However, this is true in the short–run.
Conclusion and Recommendation
The Real Effective Exchange Rate is an important determinant of measuring the global
competitiveness of a country and, therefore, has a strong influence on export earnings,
improvements in balance of payments and long term growth .Hence, the impact of the REER on
real export earnings is an important issue of discussion for many developed and developing
countries. This study attempted to examine the relationship among GDP growth rate and
exchange rate and export in Bangladesh for the period 1981 to 2013. Further tests were
performed to ascertain the presence of autocorrelation. The regression results was also found to
be very sensible. Also, the regression results showed that there is a positive relationship among
GDP growth rate and exchange rate and export in Bangladesh and the regression results are
statistically significant. Therefore, we strongly concluded that there is a positive relationship
among GDP growth rate and the rate of exchange and export in Bangladesh. This implies that as
exchange rate and export increases, GDP growth rate also increases. This results, confirm the
theory that high exchange rate stimulates economic growth in the short run. Therefore, policy
makers should stabilized monetary and fiscal policies in the long run. In the long run, the
authorities of Bangladesh should emphasis stable monetary and fiscal policies. They should
intervene in the foreign exchange market as needed to prevent excessive volatility in the nominal
and hence, the real exchange rate. However, they should not attempt to influence its level. Policy
makers should also ensure that resources are put to maximum use under the correct and right
avenues such as technical education, better incentive and motivation for effective and efficient
performance. This will allow massive output expansion to meet the demands of Bangladeshis
and then export the surpluses to other countries to obtain foreign exchange, instead of importing
goods and services from other countries.

References
 Theory and Evidence. Journal of Economics Development, Volume29, Number1,
 June2004Kara, A., Nelson, E. (2002). “The Exchange Rate and Inflation in the UK.”.
Discussion
 Agenor, P.R. (1991). “Output, Devaluation and the Real Exchange Rate in Developing
 Countries,” Review of World Economics,
 Akther,M and Sarker, M.I. (2013), “ Sources of Exchange Rate Fluctuations in
Bangladesh”,
 Working Paper Series 1305.
 Attah, P. and Enu, P. (2013), “An Econometric Analysis of the Relationship between
GDP
 Growth Rate and Exchange Rate in Ghana”. Journal of Economics and Sustainable
Development,
 ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online), Vol.4, No.9.
 Begum, S and Abul, F.M (1998); “Export and Economic Growth in Bangladesh”. The
Journal
 of Development Studies; Volume, 35; Issue 1.
 Edwards, S., “Exchange Rate Misalignment in Developing Countries,” World Bank
 Occasional Papers, n.2, New Series, 1989.
 Exchange rate.org, Wikipedia, Google, Historical rates for the USD
Appendix
Fiscal years GDP (in GDP growth rate Nominal Export (in
million US$) (in %) exchange million US$)
rate (with US$)
1981-82 18028.2 3.80 20.07 626

1982-83 17159.3 2.38 23.80 687

1983-84 19635.8 4.02 24.94 811
1984-85 21643.5 5.18 25.96 936
1985-86 21170.0 3.22 29.89 819
1986-87 23758.5 4.25 30.63 1074
1987-88 25604.2 3.73 31.24 1231
1988-89 27710.1 2.16 32.14 1292
1989-90 30475.3 2.61 32.92 1524
1990-91 30978.9 5.94 35.68 1718
1991-92 31338.6 3.34 38.15 1994
1992-93 32031.3 5.04 39.14 2383
1993-94 33852.2 4.57 40.00 2534
1994-95 38088.6 4.08 40.20 3473
1995-96 40729.2 4.92 40.84 3884
1996-97 42317.9 4.62 42.70 4427
1997-98 44025.4 5.23 45.46 5172
1998-99 45708.9 4.87 48.06 5324
1999-2000 47123.9 5.94 50.31 5752
2000-01 46988.5 5.27 53.96 6467
2001-02 47567.2 4.42 57.43 5986
2002-03 51913.6 5.26 57.90 6548
2003-04 56498.1 6.27 58.94 7603
2004-05 60381.7 5.96 61.39 8655
2005-06 61975.2 6.63 67.08 10526
2006-07 68443.4 6.43 69.03 12178
2007-08 79565.6 6.19 68.60 14111
2008-09 89360.5 5.74 68.80 15565
2009-10 100364.3 6.07 69.18 16205
2010-11 111943.2 6.71 71.17 22928
2011-12 116088.0 6.23 79.09 24302
2012-13 129863.6 6.00 79.93 27027
2013-14 130943.9 6.01 77.58 30108
2014-15 141531.8 6.06 78.15 31209
2015-16 153632.3 7.55 78.44 34974
2016-17 157305.6 7.11 82.59 34806

Source: Exchange rate.0rg Bangladesh Bureau of Statistics; Statistics Department, Bangladesh Bank;
Export,