Unnayan Onneshan, an independent multidisciplinary think-tank, in its latest monthly economic update reveals that the country’s terms of trade have been deteriorating unabated, reflecting a major structural weakness of the economy.
The terms of trade, the value of exports relative to that of imports, reached at 70.1 percent in FY 2011-12 from 70.8 percent in FY 2010-11, it said.
The leading think-tank projects further weakening in the upcoming years to reach at 69.2 percent, 68 percent, 66.7 percent and 65.5 percent in FY 2012-13, FY 2013-14, FY 2014-15 and FY 2015-16 respectively, if radical actions are not taken.
Explaining that the terms of trade are influenced by a number of factors, the research organization says that the deterioration means that the gap between country’s dependency on export of low- value products and import of high-value products are increasing, disfavouring the rise of export prices comparative to import prices.
Referring to the dominance of seven low-value labour intensive export items of the country, the research organisation also states that although exports of woven garments, jute goods increased slightly in FY 2012-13 compared to the previous FY 2011-12, the exports of frozen food, knitwear, raw jute, chemical products, engineering and electric goods, and tea witnessed a decline compared to FY 2011-12.
Of the main five import items, excepting food grains, the remaining four – crude petroleum, raw cotton, capital machinery and iron, steel and other base metals – are, on the other hand, comparatively high-value industrial goods, adds the report.
Urging for a structural shift and transcending from the current practice of government taking policies on an adhoc basis, the Unnayan Onneshan suggests to opt for coordinated monetary and fiscal policies by way of fiscal incentives, subsidies and tax breaks to embark upon technological catching up and manufacturing high value-added products to stave off further deterioration of terms of trade.
The research organisation also points out that trade openness is increasing while terms of trade is decreasing which casts doubt over the efficacies of trade liberalisation. In FY 2012-13, the trade openness index reached at the highest level of 49.9 since FY 2001-02.
Observing that the economy has been experiencing a negative balance of trade over the years, the Unnayan Onneshan reasons out a greater fall in import than that in export behind this decline in trade deficit.
Trade deficit declined to USD 7010 million in FY 2012-13 from USD 9310 million in FY 2011-12. If the recent business scenario remains as usual, trade deficit might decline to USD 2494.33 million in 2013-14 and to USD 2667.71 million in 2015-16.
The Unnayan Onneshan notes that the surplus of current account has risen due to increase in remittances and fall in import payments.
The think-tank, however, observes that surplus achieved through reducing import of raw materials and capital machinery for its industrial sector may not be considered a blessing and this surplus has also appreciated the national currency, leading to loss in export competitiveness.
The portfolio investment and foreign direct investment (FDI) witnessed a negative rate of growth.
The Unnayan Onneshan also notes that net foreign inflow increased to USD 1887 million in FY 2012-13, from USD 1169 million in FY 2011-12. Furthermore, in July of FY 2012-13, the total foreign aid was USD 209.99 million and principal payment was USD 53.17 million for which net foreign aid was positive as USD 156.82 million. The net flow of foreign aid stood at USD -41.84 million in July, 2013 compared to the same period of the previous fiscal year.