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Does Current Account Increase the Economic Growth in Bangladesh? the Analysis of Gmm Technique

Md. Hasanur Rahman
Department of Economics, Comilla University, Cumilla-3506, Bangladesh

Azer Dilanchiev
Department of Economics, International Black Sea University, Georgia

Abstract/ Executive Summary:

Current account balance has played a role to enhance economic growth in Bangladesh. The major concentration of this study is to analyze the current account components of the balance of payment (BOP). This paper deals with quarterly base data from 2012Q3 to 2019Q4. The Generalized Method of Movement (GMM) technique has been implied to measuring the current account impact on economic growth. Four models have been developed where the estimated models deal with the current account balance (CAB) as the key variable. The result of model-1 represents that the current account has a negative relationship with economic growth in consideration of merchandise goods export and import. Model-2 to 4 represents that the current account has a positive impact on economic growth in Bangladesh. The sufficient current account is expected towards the purpose of financial and economic development where trade balance and service account have a significant role.

Keywords: BOP, Current account, Economic growth, GMM estimations

Location: In Bangladesh

Start Date:

End Date:

Program Area: Socio-economic and Policy

Non-commodity: Income generation

Objectives:

The specific objectives are presented below: 1) To analyze the components of the current account balance 2) To estimate the impact of the current account balance on economic growth in several aspects

Methodology:

To measure the impact of current account balances on economic growth in Bangladesh, this study used the quarterly basis time-series data from 2012Q3 to 2019Q4. The data has been collected from Bangladesh Bank (BB) and International Financial Statistics (IFS). Model Construction This study investigates the impact of current accounts (merchandise, service, primary income, and secondary income) on economic growth. The simple 1st model considers the current account with merchandise goods export and import account. (1). Model-2, measuring the impact of the current account balance on economic growth with considering service account. Service account payment has present in terms of SPAY, and service account receipt has present in terms of SREC. The service sector is the greatest contributor on GDP in Bangladesh besides agriculture and industrial sector and the service account is the key determinants of the current account balance (CAB) and this model investigate how CAB impact on economic growth. In model-3, primary income is added with current account balance to examine the role of current account balances to enhance economic growth. The term PIPAY estimates the primary in- come payment (BD Taka in core) and PIREC estimates the primary income receipt (BD Taka in core). The concentration of 3rd model is to investigate the impact of CAB on EG with consideration to PIPAY and PIREC. The final concentration is presented in model-4 where secondary income has been added to measuring the impact of the current account balance on economic growth. Secondary income alludes to moves recorded yet to be determined of BOP, whatever point an economy gives or gets products, income, service, or monetary things without remuneration through the official or private channel (Moreno-Brid, 2003b). SIOF presents the secondary income through the official channel (BD Taka in core) and SIPRI the secondary income through the private channel (BD Taka in core).

Source of Information: European Online Journal of Natural and Social Sciences 2021; Vol.10, No 1 pp. 52-69; ISSN 1805-3602

Article Link (Online Journal): www.european-science.com

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

Research in Bangladesh's economy has shown that export growth has risen less than import growth on average, leading to a rise in the trade deficit, sufficient to cause the financial crisis (Kibria and Hossain, 2020). The change needed to address the trade deficit has reduced the GDP growth lower than it actually would otherwise export-import balance will be preserved. For financial expansion and economic growth, the balance of payments is therefore important (Shastri, 2019). The current study is conducted to measure the impact of current account balances on economic growth. The quarterly based data from 2012Q3 to 2019Q4 has been used to estimate the econometric output. The GMM estimation has been used to measure the output of constructed models. There are four models developed considering the current account balance as a key factor of this study. The result of model1 presents that the imports have a positive impact on economic growth and export also has a positive coefficient but the result is not significant. The current account in this model has a negative impact. There are several reasons behind this such as import is greater than export in this economy, lack of savings and investment, shortage of domestic production and lack of specialization. Trade deficit influences the current account balances largely (Edwards, 2004). In model-2 the service account receipt is positively explained the economic growth where the impact of the current account is positive which is expected. In model-3, concentration is taken in current account balances concerning the primary in- come receipt and payment where the current account has also a positive impact on economic growth. The secondary income is included in model-4 where the current account still positive and significant to increase the economic growth. The recommendation of this study is that we need to diminish current account deficiency over the long haul to quicken the attempts towards auxiliary economic reformation with industry and service sectors that help in boosting the market size, progresses development potential, and carries steady and feasible streams into the economy.

Knowledge Management: Journal