Low imports, high exports ease pressure on external balance

Infographic: TBS

Highlights

· The trade deficit decreased to $17.2 billion in FY23, a 48% reduction compared to the previous fiscal year.

· The current account deficit saw a significant reduction from $18.64 billion to $3.33 billion during the July-June period of FY23.

· The positive trend can be attributed to decreased import payments, which fell by $13 billion, representing a decline of nearly 16%.

·  Export earnings increased by 6.28% and remittance earnings grew by 2.75% in FY23.

· The financial account deficit also narrowed, from $2.36 billion to $2.14 billion in the July-June period of FY23.

· The country's financial account surplus was $15.46 billion at the end of FY22.

· The fall in foreign direct investment and foreign loans contributed to the deficits in the current account and financial account balances.

Bangladesh managed to cut its trade deficit in half and narrow down the current account deficit at the end of the fiscal 2022-23, largely due to a decrease in imports and increases in exports and remittance inflows. This has eased pressure on the external balance of the country.

According to data obtained from the Bangladesh Bank, the country's trade deficit narrowed down to $17.2 billion in FY23, an almost 48% reduction from the $33.25 billion deficit recorded in the previous fiscal year.

The positive trend is further evident in the current account deficit, which saw a remarkable reduction from $18.64 billion in FY22 to $3.33 billion during the July-June period of FY23. This significant improvement can be attributed to a decrease in import payments, which fell by $13 billion, representing a decline of nearly 16%.

A senior official of the central bank expressed optimism about the developments, stating, "We have made substantial progress in the trade balance. This achievement is primarily attributed to the increase in exports and strategic measures taken by the central bank to curtail imports."

The improved trade balance had a ripple effect on the current account balance, he noted, adding, "Last year, there was a deficit of more than $18 billion in the current account. The deficit has now come down to one-sixth. Positive growth in remittances also played a role here."

Export earnings increased by 6.28% year-on-year in FY23, whereas remittance earnings grew by 2.75% during the same period.

However, the import cost was reduced by 15.76% helping to narrow the trade deficit.

Besides, the financial account deficit narrowed by $200 million to $2.14 billion in the period of July-June in FY23, down from $2.36 billion in the July-May period of the same fiscal year. However, the country's financial account surplus was $15.46 billion at the end of FY22.

Central bank officials say trade balance, current account balance, and financial account balance improved in June this year compared to the previous month. They expressed optimism that the positive trend would continue in the new financial year as well.

A fall in foreign direct investment and foreign loans contributed to the deficits in the country's current account and financial account balances, putting pressure on reserves.

The current account balance is the primary source of a country to make foreign payments. When a country's current account balance turns negative, it makes foreign payments from the financial account. If the financial account becomes negative, then payments are made directly from reserves.

Currently, the deficit in both the current account balance and the financial account has caused a faster erosion of forex reserves, according to industry insiders.

When asked why the financial account has become negative, a senior official of the central bank said that there was a little instability in the economy of the world this year. 

"Moreover, the international rating agencies have decreased our outlook. Mainly we borrow foreign currency which is reflected in the financial account balance. Actually, the inflow of dollars has decreased for many reasons in the last year. Firstly, our foreign direct investment (FDI) has fallen, secondly borrowing by trade credit has become negative which was positive in the past", he added.

Explaining the matter, a policy-making official of the central bank told TBS that the financial account was positive last year. 

He said, "This means that our borrowings from various foreign banks and institutions were high. Many loans have been repaid this year.

"Another meaning of financial accounts being negative is that our debt repayment pressure will be less in the coming days." 

The official believes that FDI will increase if the ongoing political unrest subsides. However, he also admitted that the negative balance of the financial account is putting pressure on the reserve in the current situation.

Bangladesh's foreign exchange reserves stood at $29.72 billion on Tuesday, it was $30.36 billion a month ago.

Selim RF Hussain, chairman of the Association of Bankers Bangladesh (ABB) and managing director and CEO of Brac Bank, said, "The central bank has informed us that the net open position (NOP) of the country's banking sector has been positive for the past two months. This is certainly good news for our banking sector. Besides, we are in a good position in the bank's cash dollar holding. The BOP has been improving for the past few months."

However, the ongoing crisis of dollars will not end soon, he observed, adding, "This is because now imports are low, but that cannot be maintained for long. Imports will increase again."

He suggested that the authorities now focus on improving the country's financial accounts. 

The financial account tracks international transactions involving financial assets and liabilities. It records changes in ownership of financial assets between residents and non-residents.