Macroeconomic impact of remittances and the Dutch Disease in a developing country

The magnitude of the flow of remittances to a developing country like Bangladesh and their rate of growth has become a significant factor in its economy. The huge flow of remittances affects the production sector and employment structure, as well as the scale of external trade competitiveness of the economy as measured by the real exchange rate (RER). Movement of the RER from its equilibrium position is very important and is also crucial in identifying the factors most influencing this movement. Using Johansen cointegration and Vector Error Correction models, this study has found that the flow of remittances is appreciating the RER and decreasing the external trade competitiveness of Bangladesh; thus, the procedure is slowly bringing about deterioration in the economy of Bangladesh, a process known as Dutch Disease. To counter this, a gradual relaxation of the trade barrier plus promotion of external trade diversification and diversion of the remittances flow from non-tradable sectors to priority investment areas will counteract the adverse consequences of remittances on the Bangladeshi economy in the long run.