Volume 9, Issue 8, August – 2024 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24AUG1260

Cash Incentive on Remittance Inflow and its

Impact on Economic Growth in Bangladesh
Md. Nurnabi Miah1 Puja Bhattacharjee2
Assistant Director, Research Department Assistant Director, Research Department
Bangladesh Bank Bangladesh Bank
Motijheel, Dhaka-1000 Motijheel, Dhaka-1000

Abstract:- Remittances are crucial for driving economic improving the well-being of families left behind and fueling
growth in developing countries like Bangladesh, as they economic growth in the receiving countries. Remittances
effectively influencenearly all macroeconomic indicators thrives economic growth by alleviating poverty, creating
within the financial ecosystem. opportunities for employment, and so on in developing
countries like Bangladesh (Majumder, S. C., & Donghui, Z.
This study examines the impact of remittance inflow (2016). Along with that, remittances also plays an important
on economic growth in Bangladesh considering the cash role in accumulating human capital through financing in
incentive policy of the government. The ARDL Bound acquiring education nutrition, and better health condition
testing approach is employed for the analysis using a which further leads to an increase in total factor productivity
monthly dataset covering the period from January 2015 and subsequent growth (Jayaraman, T. K., Choong, C. K., &
to April 2023. The evidence from the results provides a Kumar, R. R. (2012). Like many other developing countries,
substantial and favorable influence of remittances on the remittance from citizens working abroad provides an
economic growth of Bangladesh, both in the short term important source of much-needed funds. In addition,
and the long term. According to the expected error remittances play a supportive role in strengthening the current
correction term, it is projected that the economy will account balance. Remittance is the second largest source of
undergo a correction of its imbalances at an annual rate foreign exchange earnings after the garment sector. However,
of 58%. Consequently, a strategic blend of short-term if the cost of imported raw materials is subtracted from the
policy adjustments and long-term initiatives has the foreign exchange earnings of the garment sector, remittance
potential to enhance the influence of remittances in will become the largest sector
fostering sustainable economic growth and elevating the
the quality of life for both expatriates and the nation as a In the economic tapestry of Bangladesh, remittances
whole. constitute a substantial portion of the Gross Domestic Product
(GDP). As the number of Bangladeshi migrants escalates, so
Keywords:- Cash Incentive, Remittance, Economic Growth. does the inflow of remittances, although at a rate lower than
the surge in outbound migration. The surge is primarily
I. INTRODUCTION attributed to an increasing proportion of unskilled or semi-
skilled laborers compared to professionals in international
Remittance is one of the most crucial factors for migration. Moreover, the illegal transfer of funds significantly
Bangladesh's economic health. Remittances from Bangladeshi affects the proportion of remittances relative to the migrant
workers abroad are a vital source of foreign exchange, worker population. Acknowledging the pivotal role of
significantly influencing the economic growth of Bangladesh. remittances in bolstering the national economy, the
Not merely a transfer of funds, remittances represent a vital Government of Bangladesh implemented a strategic policy
economic variable that resonates across multiple dimensions measure in 2019 to incentivize remittance inflow. This policy
of Bangladesh's economic landscape. They bolster the balance offered a 2% cash incentive to incentivize and facilitate the
of payments, augment foreign exchange reserves, spur repatriation of earnings by expatriates to their homeland from
national savings, and invigorate the velocity of money within July 2019. The decision to provide such cash incentives
the economy. The pivotal role of remittances is reflected in stemmed from a comprehensive understanding of the positive
their positive impact on nearly all macroeconomic indicators, implications of remittance inflow on various aspects of the
exemplifying their centrality in the nation's financial country's economy. It not only contributes to individual and
ecosystem. Remittances increase the demand for money and household welfare, but it also has far-reaching effects on the
expand the supply of funds in the recipient countries' banking national economy, including investments in infrastructure,
system (Kim, J. (2019). This contributes to the financial education, and healthcare. The cash incentive policy aimed to
development of remittance-receiving economies leading to amplify these benefits and stimulate a more robust remittance
higher economic growth. For almost two decades, remittances inflow. Following the success and positive impact of the
have consistently contributed approximately 35% of initial 2% cash incentive, the Government of Bangladesh
Bangladesh's export earnings, overshadowing even foreign further augmented the rate to 2.5% starting in January 2022.
aid, thereby diminishing dependence on external financial This increase in the incentive rate reflected a strategic effort to
assistance. Moreover, remittances play a crucial role in

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Volume 9, Issue 8, August – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24AUG1260

sustain and enhance the inflow of remittances, thereby sector like Bangladesh. The study highlighted the importance
promoting economic growth and stability. of remittances for the country's economic development and
offered policy considerations regarding migration
This study endeavors to explore the dynamics of cash management, skilled migrant development, and their
incentives on remittance inflow and their consequential economic impact, emphasizing the need to further investigate
impact on the economic growth of Bangladesh. It seeks to remittances' direct effect on poverty reduction and household
provide a comprehensive analysis of the policy's welfare.
effectiveness, its implications on the economy, and the
potential for further improvements. By examining the Chowdhury, M. S. R. (2015) analyzed the impact of
relationship between cash incentive, remittance inflow, and remittances and other growth determinants on low-income,
economic growth, this study aims to contribute to informed lower-middle-income, and upper-middle-income economies
policy decisions, fostering sustainable economic growth for from 1981 to 2010. The study found no association between
Bangladesh. The rest of the paper is organized as follows: remittances and economic growth in low-income economies.
Section 2 presents the empirical studies related to the paper; However, remittances were positively linked to economic
Section 3 provides a description of the sample and data; growth in lower-middle-income and upper-middle-income
Section 4 contains model specification and methodology; economies.
Section 5 includes result analysis and discussion. Finally,
section 6 provides concluding remarks and outlines policy Majumder, S. C., & Donghui, Z. (2016) focused on
implications. analyzing the long-term impact of remittances on economic
growth in Bangladesh. The study utilized Autoregressive
II. LITERATURE REVIEW Distributed Lag (ARDL) models and highlighted that
remittances contributed significantly to Bangladesh's GDP,
Remittances have emerged as a crucial source of constituting 8.2% in 2014 and 6.7% in 2006.
financing for developing countries like Bangladesh
considering both their substantial volume and the significant Utilizing time series econometric techniques, Kaphle, R.
impact they can have on the economy. In recent years, there R. (2018) conducted a study examining the causal relationship
has been an increasing focus within the academic literature on between remittances, trade, and economic growth. The study
studying the economic effects of remittances. These studies revealed a long-term relationship between remittances, trade,
highlight the growing importance of remittances sent by and economic growth. However, it found no short-term causal
migrant workers from developing countries who work abroad relationship between remittances and economic growth,
emphasizing their substantial contributions to the economy. whereas trade had a significant influence even in the short
term on GDP during the analyzed period.
Begum, M. N., & Sutradhar, R. R. (2012) investigated
the behavior of remittance inflows and its determinants in Sarkar, M. S. K., Rahman, et al. (2018) examined the
Bangladesh. Their study revealed a short-term positive link relationship between remittances and economic growth in
between domestic exchange rates and remittances, attributed Bangladesh using time series data from 1995-2016. The study
to government efforts to channel remittances formally. The found a positive relationship between remittances and GDP,
study also found a positive relationship between domestic gross capital formation, domestic savings, and household final
inflation and remittances, suggesting that it encouraged higher consumption expenditure. On average, Bangladesh
remittance sending as it reduced purchasing power. experienced a 10.85% increase in remittances during this
period, surpassing GDP growth. The study recommended the
Goschin, Z. (2014) viewed remittances as potential importance of initiatives to maintain consistent remittance
capital flows with macroeconomic growth potential. Two growth for the country's socio-economic development.
growth models were developed and tested using aggregate
data from 1995 to 2011 from ten Central and Eastern Ekanayake, E. M.et al. (2020) investigated the influence
European (CEE) countries. Panel estimation methods were of workers' remittances on economic growth and poverty
applied to accommodate potential cross-section heterogeneity. reduction in 21 Latin American countries. The study utilized
The findings demonstrated a significant and positive influence data from 1980 to 2018 and employed various econometric
of remittances on both absolute and relative GDP growth methods, including panel least squares, fully-modified least
across the CEE countries. squares, and Autoregressive Distributed Lag (ARDL-ECM)
analysis, and explored the hypotheses that remittances
Masuduzzaman, M. (2014) explored the impact of positively affect economic growth and help reduce poverty.
remittances on economic growth and development in The findings revealed a positive long-term effect of
Bangladesh using time series data from 1981 to 2013. remittances on economic growth in most countries, with
Employing the Johansen co-integration test and vector error varied short-term effects. Additionally, remittances were
correction models, the study revealed a long-term positive associated with lower poverty rates in the region.
relationship between remittance inflows and gross domestic
product (GDP), suggesting that remittances contribute to Using balanced panel data from 1977 to 2016, Sutradhar
Bangladesh's long-term growth. Additionally, the study found (2020) analyzed the impact of workers' remittances on
that remittances significantly influence financial development, economic growth in Bangladesh, India, Pakistan, and Sri
particularly in a growing economy with a developing financial Lanka. The study applied multiple statistical models including

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Volume 9, Issue 8, August – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24AUG1260

Pooled OLS, fixed effects, random effects, and dummy GDP growth. The study recommended improving reliable
variable interaction models to estimate the impact of transfer means and reducing transfer costs to leverage
remittances and found that remittances negatively affected remittances for sustained GDP growth in Ghana.
economic growth in Bangladesh, Pakistan, and Sri Lanka, but
had a positive impact in India. Overall, the relationship However, a good number of studies attempted to
between remittances and economic growth across the four investigate the relationship between the remittance inflow and
countries was found to be significantly negative. economic growth. Almost all the studies reveal that the
remittance inflow promotes economic growth, especially in
Utilizing advanced panel econometric methods, Adjei et developing countries. Despite the fact that a good number of
al. (2020) focused on investigating the relationship between studies have broadly attempted to examine the relationship
remittances and economic growth in West Africa. The study between remittance inflow and economic growth, there seems
found a significant positive impact of remittances on to be a space for more research in this area. Almost all the
economic growth in West Africa. The study emphasized the studies have concluded a long-run positive relationship
importance of managing remittance funds prudently and between remittance inflow and economic growth. Some
recommended creating an attractive investment climate for studies found bi-directional causation whereas others found
diasporas Africans to maximize the benefits of improved unidirectional causation between the two. Besides, some
remittances. Additionally, the study emphasized the necessity studies also found a short-run relationship between remittance
for West African economies to prioritize domestic investment inflow and economic growth, whereas others did not. Most of
over foreign capital inflows for sustainable economic growth the researchers used yearly data. This study stands apart from
its predecessors by aiming to investigate the impact of
Saha, S. K. (2021) examined the impact of remittances government cash incentive policies on remittance inflow and
on the economic progress of Bangladesh through a time series their subsequent effects on the economy of Bangladesh using
analysis covering the period from 1995 to 2016. Using various monthly data.
time series techniques including the Johansen–Juseliues test
and the Granger causality test, the study highlighted a notable III. DATA AND SAMPLE DESCRIPTION
positive influence of overseas remittances on long-term
economic growth (per capita GDP), with a unidirectional Economic growth models make a theoretical connection
causality observed between foreign remittances and domestic between the accumulation of capital and the process of
investment. economic growth. The foundation of the advanced growth
theory is rooted in the neoclassical growth model developed
Ibne Afzal et al. (2022) examined the impact of the by Solow and Swan (Solow, R. M., 1956 Swan, T. W., 1956).
government's two percent remittance incentive policy in The objective of this model is to show a correlation between
Bangladesh, designed to encourage legal money transfers and economic growth and the accumulation of capital (Dohtani,
curb illegal transactions from overseas. The analysis 2010).
demonstrated a strong link between Bangladesh's reserves and
remittances, especially in comparison to Bhutan, Pakistan, and In order to test the influence of remittances on economic
Sri Lanka, but the correlation between Pakistan and Sri Lanka growth, capital accumulation is presented in the form of
was statistically insignificant. This suggests that the policy has remittance earnings where remittance is the main explanatory
had a noticeable effect on remittance flows and is contributing variable and the Industrial Production Index is used as a proxy
to the growth of reserves through legal channels in of GDP growth which is the dependent variable. Control
Bangladesh. variables are chosen based on related empirical growth
literature. Foreign Exchange reserve, Inflation (point to-
Abdulai, A. M. (2023) analyzed the impact of remittance point), and exchange rate are the control variables considered
on GDP growth from 1990 to 2020 using the ARDL for this analysis. Data have been collected from the various
technique. Results revealed a long-term association between issues of Monthly Economic Trends and Macroeconomic and
GDP growth, remittance inflows, foreign direct investment, Financial Data published on the Bangladesh Bank website. A
unemployment, inflation, trade, population growth, and monthly time series of data covering the period from January
official development assistance. Additionally, the study found 2015 to April 2023 was used in the study. The description of
that unemployment mediates remittances' negative effect on the variables is explained in the following table.

Table 1 Description of the Variables

Variables Description Expected sign Source
GDP Industrial Production Index (as a proxy of GDP) - BB (Macroeconomic and Financial Data)
REM Remittances (USD Million) + Monthly Economic Trends, BB
INFP2P Inflation (point to point) +/- Monthly Economic Trends, BB
Forex Foreign exchange reserve (USD Billion) + Monthly Economic Trends, BB
EXC Exchange rate (end period) +/- Monthly Economic Trends, BB
Base year 2005-06

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Volume 9, Issue 8, August – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24AUG1260

IV. MODEL SPECIFICATION AND GDP= f (Remittances, Foreign exchange reserve, Exchange
METHODOLOGY rate, Inflation)

The primary goal of this study is to analyze the effect of The econometric specification of this model is as follows,
remittances in the economic growth of Bangladesh. So, the
empirical model can be written as,

GDP = β0 + β1 (REM)t + β2 (FXR)t + β3 (EXC)t + β4 (INFp2p)t + μt………………………………………………………………(1)

However, the monthly time series data from January enhanced to 2.5 percent in January 2021, resulting in
2015 to April 2023 is represented by the t in the equation. significant impacts on the flows of remittances. The monthly
Here, in this equation we have incorporated a dummy variable data provides a comprehensive overview of the dynamics of
as there is a structural break in the series. Generally, dummy remittances and other related controls during the pandemic.
variable is incorporated in an equation to capture the effect of This impact is demonstrated through the utilization of a
two or more variables on the outcome. One of the main dummy variable in the present study. The period spanning
advantages of using interaction term in dummy is that, they from July 2019 to April 2023 is denoted by the presence of a
are easy to interpret, although there is a disadvantage using cash incentive as 1, while the absence of such an incentive is
dummy that these variables can increase the complexity of the denoted by 0. In order to provide a more precise specification
regression model. of the impact of the incentive, we have employed an
interaction between a dummy variable and the remittance.
The Government of Bangladesh implemented a 2
percent cash incentive in July 2019, which was subsequently The augmented form of equation (1) is now as follows

GDP = β0 + β1 (REM)t + β2 (FXR)t + β3 (EXC)t + β4 (INFp2p)t + β5(dummy)t + β6 (rem*dummy)t + μt…………………………(2)

The coefficients of β1, β2, β3 and β4 show the elasticity of

remittances, foreign exchange reserve exchange rate and Following the verification of the absence of unit roots
inflation respectively. β0 and սt represent the intercept and within the data, our subsequent step involved examining the
stochastic disturbance term respectively. existence of cointegration in the series through the utilization
of the bound cointegration test. The ARDL bound test was
V. METHODOLOGY initially proposed by Pesaran and Shin in 1999 and further
expanded upon by Pesaran, Shin, and Smith in 2001.This
Regression analysis with non-stationary series produces approach enables the differentiation between the model's
erroneous results that are unsuitable for analysis, forecasting, long-term relationship and short-term dynamics within the
or policymaking, as indicated by Bashar (2015) and Emeka theoretical framework.
and Aham (2016). Subsequently, in the initial stages of the
estimating procedure, this study utilized the Augmented For the ARDL approach equation 2 can be written as the
Dickey Fuller test (ADF) and Philips-Perron test (PP) to model used by Pesaran, Shin, and Smith (1999) and Pesaran
assess the stationarity of the collected data. et al (2001) as follows;
𝑛 𝑛 𝑛 𝑛 𝑛
∆GDPt=β0+∑𝑘=1 𝛽1 ∆ (𝑅𝐸𝑀)t-k+∑𝑘=1 𝛽2 ∆ (𝐹𝑋𝑅)t-k+∑𝑘=1 𝛽3∆ (𝐸𝑋𝐶)t-k+∑𝑘=1 𝛽4∆ (𝐼𝑁𝐹𝑝2𝑝)t-k+∑𝑘=1 𝛽5 ∆ (𝑑𝑢𝑚𝑚𝑦)t-k +
𝑛
∑𝑘=1 𝛽6 ∆ (𝑟𝑒𝑚 ∗ 𝑑𝑢𝑚𝑚𝑦)t-k+ λ1 ∆REMt+λ2 ∆FXRt+λ3 ∆lnEXCt+λ4∆lnINFp2pt + λ5 ∆dummyt +λ6 ∆(rem*dummy)t + εt--------(3)

Where n represents the maximum lag order, β0 exceeds the upper critical bound. However, if the value falls
represents the drift component which ∆ shows the first within the range of the upper and lower critical bounds, the
difference and εt is the white noise. Here, β1- β6 and λ1- λ6 outcome will be deemed inconclusive. Once evidence of
represent the long-run dynamics, and the short-run dynamics cointegration is shown, the subsequent stage involves
of the model respectively. estimating the long-run connection using the Autoregressive
Pesaran et al (2001) devised two distinct sets of critical Distributed Lag (ARDL) model. However, it is essential to
values for the F-test. There are two sets, one representing the employ a suitable model order selection criterion in order to
lower bound and the other representing the upper bound. If identify the optimal lag time for selecting the appropriate
the value of the F-test is smaller than the lower critical bound, model of the long-run underlying problem.
it can be concluded that the model does not exhibit a long-run
relationship. Conversely, the existence of a long-term link The Long-run association among the variables can be written
among the variables might be inferred when the F-test score as following
𝑛 𝑛 𝑛 𝑛 𝑛
∆GDPt=β0+∑𝑘=1 𝛽1 ∆ (𝑅𝐸𝑀)t-k+∑𝑘=1 𝛽2 ∆ (𝐹𝑋𝑅)t-k+∑𝑘=1 𝛽3∆ (𝐸𝑋𝐶)t-k+∑𝑘=1 𝛽4∆ (𝐼𝑁𝐹𝑝2𝑝)t-k+ ∑𝑘=1 𝛽5 ∆ (𝑑𝑢𝑚𝑚𝑦)t-k +
𝑛
∑𝑘=1 𝛽6 ∆ (𝑟𝑒𝑚 ∗ 𝑑𝑢𝑚𝑚𝑦)t-k+ εt-----------------------------------------------------------------------------------------------------------------(4)

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Here, n is the optimum lag length. Lastly, to find out the short-run dynamics the error correction
model can be formulated below in the equation 5
𝑛 𝑛 𝑛 𝑛 𝑛
∆GDPt=β0+∑𝑘=1 𝛽1 ∆(𝑅𝐸𝑀)t-k+∑𝑘=1 𝛽2 ∆(𝐹𝑋𝑅)t-k+∑𝑘=1 𝛽3∆(𝐸𝑋𝐶)t-k+∑𝑘=1 𝛽4∆(𝐼𝑁𝐹𝑝2𝑝)t-k+∑𝑘=1 𝛽5 ∆(𝑑𝑢𝑚𝑚𝑦)t-k +
𝑛
∑𝑘=1 𝛽6 ∆(𝑟𝑒𝑚 ∗ 𝑑𝑢𝑚𝑚𝑦)t-k+ ϕECMt-1 + εt-----------------------------------------------------------------------------------------------------(5)

Where, ∆ represents the first difference as before while ϕ VI. RESULT ANALYSIS AND DISCUSSION
is the coefficients of the error correction term for short run
dynamics. ECMt-1 describes the speed of adjustment that is  Stationarity Test
how much disequilibrium will be corrected. The coefficient of Table 2 shows that in the ADF test, none of the
the ECM is expected to be between -1 to 0. The negative sign variables except the industrial production index (IPI) and
indicates the degree of correction. foreign exchange reserves is stationary at levels, while in the
PP test, only IPI and remittances are stationary. However,
However, this approach will not be applicable if the remittances, the exchange rate, and inflation are stationary at
variables are integrated in order two i.e I(2). To forestall the first differences in the ADF test, while the foreign exchange
effort in futility, at the very beginning of the analysis we will reserve, exchange rate, and inflation are stationary at I(1) in
check the stationarity of the variables. the PP test. This confirms the absence of I(2) series and the
presence of only I(0) and I(1) series, making the ARDL
bound testing approach suitable for this study.

Table 2 Unit Root Test Results

ADF PP
Variables
Level 1st difference Level 1st difference
IPI -6.64* - -6.64* -
REM -3.44 -14.94* -5.06* -
FOREX -3.92** - 0.13 -13.39*
EXC -1.04 -5.41* -1.39 5.29*
INFp2p -0.29 -12.58* -0.50 -12.72*
Note: * p<0.01, ** p<0.05, *** p<0.1

 Bound Test for Cointegration the lag selection criteria (Table1 Appendix-1) as required by
Following this we are conducting the bound test of the ARDL model estimation process. The result of the
cointegration using maximum lag length of 2 obtained from cointegration in the bound test is represented in the Table 3.

Table 3 F-Bound Test result

H0: No levels of relationship
F statistics Value Significance I(0) I(1)
F-Stat 5.35 10% 1.99 2.94
K 6 5% 2.27 3.28
2.5% 2.55 3.61
1% 2.88 3.99

The F-statistic value of 5.35, as shown in the table, the long-run. Holding the ceteris paribus assumption, a unit
exceeds the upper bound value (I(1)) at the 5% significance increase in remittances will increase the GDP growth by 9
level. Therefore, we accept the alternative hypothesis, units. This result is expected as the part of the remittances is
concluding that there is long-run cointegration among the invested in the development projects of the country which are
variables. With the long-run relationship between the expected to promote economic growth of the country. This
industrial production index and other covariates confirmed finding aligns with those of Depken et al. (2021), Islam
through the bound test for cointegration, the ARDL (2022), Adnan et al. (2020), Oteng-Abayie et al. (2020),
framework was applied to estimate the long-run association. Nyeadi and Atiga (2014), Imai et al. (2014), Ratha (2013),
and Cooray (2012). However, it contrasts with the results of
Results from the Table-4 revealed that IPI has a long Ustarz and Issahaku (2017), Sutradhar (2020), and Singh et
run relationship with REM. The coefficient of remittances is al. (2010). Moreover, the interaction dummy with the
positive and statistically significant at 1% level indicating remittance also showed a negative but significant result.
that remittances positively affect the IPI (proxy of GDP) in

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Volume 9, Issue 8, August – 2024 International Journal of Innovative Science and Research Technology
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Table 4 Long-Run Relationship

Dependent variable GDP
Variables coefficients Standard error Prob.
Rem 0.09* 0.03 0.01
FOREX 7.19* 1.13 0.00
EXC 10.92* 1.65 0.00
INFp2p -9.40 7.92 0.24
dummy 88.69 58.26 0.13
Rem*dummy -0.07*** 0.04 0.07
Note: * p<0.01, ** p<0.05, *** p<0.1

Also, control variables namely Forex and EXC also remittance and the economic growth of a country that showed
showed a positive and significant impact on economic a significant result.
growth of a country while inflation showed a negative and an
insignificant result. Moreover, we used an interaction dummy  Short Run Dynamics
with the remittance to show more prominent relation of The short run dynamics of the ARDL framework is
explained in table 5.

Table 5 Short-Run Relationship

Dependent variable GDP
Variables coefficients Standard error Prob.
D(REM) 0.10* 0.01 0.00
D(EXC) -11.79* 4.52 0.01
D(DUMMY) 90.06* 23.31 0.00
cointEq(-1)* -0.58* 0.09 0.00
R2 0.60
Adjusted R2 0.58
Note: * p<0.01, ** p<0.05, *** p<0.1

Results show that remittances have significant and The error correction term is significant at the 1% level,
positive influence on GDP growth in the short run. 1 percent and its highly significant negative sign confirms the presence
increase in remittance will increase the GDP by 0.10 percent. of a long-run relationship among the variables, as indicated
On the contrary, the exchange rate has a negative but by the bound test. The error correction coefficient shows that
significant impact on the economic growth in the short run GDP growth adjusts at a speed of 0.58 to return to
because depreciation of a currency helps in inward equilibrium. This means that 58% of the previous year’s
remittances. disequilibrium in GDP is corrected in the current year to
restore balance.

Table 6 Diagnostic Tests

Name of the test F-statistics Obs* R-squared P- value
Serial Correlation LM Test 0.29 0.66 0.75
Heteroscedasticity Test: Breusch-Pagan-Godfrey 1.73 17.77 0.08

The P- value of Breusch-Godfrey serial Correlation LM national savings, and velocity of money within the economy
Test, and Heteroscedasticity test: Breusch-Pagan-Godfrey is of Bangladesh. The cash incentive policy introduced by the
greater than 5 percent which is desirable. So, this model is Government of Bangladesh has effectively encouraged
free from autocorrelation and heteroscedasticity. remittance inflows, contributing to economic stability. This
study has shed light on the dynamics of cash incentives and
The stability of the parameters was confirmed using the their influence on remittance inflow, allowing us to better
CUSUM and CUSUMSQ tests. As shown in the figure, all understand their consequential impact on economic growth.
the blue lines remain within the boundaries of the red lines, In this study, the ARDL bound test approach has been
indicating that the models are stable at the 5% significance applied to analyze the linkage between the remittance inflow
level. (Figure 1, Appendix). and economic growth of Bangladesh using monthly data
covering the period from January 2015 to April 2023. This
VII. CONCLUSION AND POLICY approach allows for a detailed analysis of the short-term
RECOMMENDATION dynamics and the influence of government policies on
economic growth within Bangladesh. The findings from the
Remittances play a vital role in promoting economic empirical results indicate a positive and significant
growth by serving as a key source of foreign exchange relationship between remittances and the economic growth of
reserves and positively influence the balance of payments, Bangladesh. The findings imply that economic growth in

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Volume 9, Issue 8, August – 2024 International Journal of Innovative Science and Research Technology
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Bangladesh can be achieved by raising remittance inflow and [6]. Chowdhury, M. S. R. (2015). Remittances and
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regard. To optimize the impact of remittances and deter [8]. Depken, C. A.,II, Niksic Radic, M., & Paleka, H.
illegal channels such as hundi, policy adjustments are (2021). Causality between Foreign Remittance and
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the current 2.5% can act as a deterrent to the illegal hundi Sustainability, 202(13), 12201. https://doi.org/10.
system, encouraging expatriates to use formal channels. 3390/su132112201.
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inward remittances in expatriates' home countries and Swan type, I. Journal of Economic Behavior &
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remittance transfers. In this regard, establishing remittance remittances promote economic growth and reduce
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Volume 9, Issue 8, August – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24AUG1260

APPENDIX

VAR Lag Order Selection Criteria

Endogenous variables: IPI REM INFP2P FXR EXC
Exogenous variables: C
Date: 09/11/23 Time: 21:58
Sample: 2015M01 2023M04
Included observations: 98
Lag LogL LR FPE AIC SC HQ
0 -1832.166 NA 1.32e+10 37.49318 37.62506 37.54652
1 -1309.900 980.5796 517253.7 27.34491 28.13622 27.66498
2 -1238.892 126.0767* 203072.5* 26.40595* 27.85670* 26.99275*
* indicates lag order selected by the criterion

Fig 1 CUSUM and CUSUMQ Test of Stability

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