The financial account of the balance of payments (BoP) turned negative in the first five months of the current fiscal year, highlighting the challenges Bangladesh is facing in protecting its foreign currency reserves from depletion as funds outflows exceeded inflows.
A financial account is a component of the BoP that covers claims on or liabilities to non-residents concerning financial assets. Its components include direct investment and portfolio investment.
In July-November of the current fiscal year, the financial account deficit stood at $157 million, way lower than a surplus of $4.84 billion recorded in the identical period a year earlier, data from the central bank showed.
“As far as I can remember, the financial account has never been in deficit in the last 20 years. It always used to be a surplus,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
The crisis facing the BoP may accelerate the depletion of the country’s foreign currency reserves, which stood at $33.63 billion on January 4, down from $44.95 billion a year earlier.
Zahid Hussain, a former lead economist of the World Bank’s Dhaka office, echoed Mansur.
“Usually, the financial account shows surplus but it is now in deficit. In the coming days, the pressure on foreign currency reserves may persist,” Hussain said.
The BoP is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world. It also refers to the incoming and outgoing amounts of export-import, remittance and services which also show in the current account balance.
Until recently, the current account deficit had widened owing mainly to higher import payments. But in the first five months of FY23, the deficit dropped 8.88 per cent to $5.67 billion, driven by the central bank’s restriction to rein in import costs.
A current account deficit occurs when the total value of goods and services a country imports exceeds the total value of goods and services it exports.
Between July and November, imports rose to $32 billion whereas exports stood at $20.74 billion and remittances flows were $8.79 billion, BB data showed.
The overall deficit in the BoP tripled to $6.38 billion due to an increase in trade credit and a decrease in foreign and portfolio investments as well as the deficit in the current account balance.
The deficit in trade credit, in which an importer can purchase goods without paying cash upfront and pay the supplier at a later scheduled date, quadrupled to $2.26 billion.
As of September, the private sector foreign debt stood at $25.40 billion. Of the sum, $11.89 billion was short-term trade credit.
Two factors are driving up the trade credit.
First, export shipments have been carried out but the receipts might not have arrived yet. Second, the short-term buyer’s credit is being repaid but fresh loans are not coming in, Hussain said.
“As a result, the outflow of funds may increase.”
Due to the dollar crisis, the overall investment climate in developing countries is not conducive. And Bangladesh is no exception.
In Bangladesh, the BoP pressure has developed so investors are jittery and pulling their funds out, said Mansur.
“This is a clear indication that investors have no confidence in Bangladesh’s economy.”
The disbursement of foreign loans to the government has also slumped.
As of November, the loan disbursement dropped 20 per cent year-on-year to $2.36 billion from $3.01 billion in the same period a year earlier, data from the Economic Relations Division showed.
MA Razzaque, research director of the PRI, called the situation “quite challenging” for the economy.
“Given the current reserve situation, it was hoped that external resources would help ease the pressure. But clearly, this has fallen short of expectation,” he said.
A lack of commitment and disbursement also compelled the government to rely more heavily on the banking system, including the creation of new money through printing, Razzaque added.
“The aid pipeline should have been used promptly and effectively under the current circumstances.”
Razzaque, also the chairman of the Research and Policy Integration for Development, a think-tank, expects the situation to improve after getting the first phase of a loan from the IMF.
The IMF is expected to lend $4.5 billion to Bangladesh over a three-year period.
The slow implementation of the projects funded by external loans is not helping the overall situation as well, Razzaque said.
Khandaker Golam Moazzem, research director of the Centre for Policy Dialogue, urged the government to explore alternative sources of funds along with the IMF.
