Securing a sound balance in current account

FE Team | Published: October 10, 2024 20:49:04

The improvement in Bangladesh's current account over the past two months, following a prolonged downturn, is encouraging. Recent reports indicate that the current account moved into a surplus in August, primarily due to lower import costs and higher remittance inflows. According to Bangladesh Bank data, the months of July and August recorded a current account surplus of US$111 million, a significant shift from the $610 million in deficit during the same period of the previous fiscal year. The country's trade deficit narrowed by over 9 per cent, falling to $2.75 billion from $3.04 billion in the corresponding period of the last fiscal. Import expenses decreased by 1.2 per cent to $9.91 billion from $10.03 billion, while export earnings rose by 2.5 per cent to $7.16 billion from $6.99 billion. Additionally, remittances during this period surged by 15.8 per cent, reaching $4.14 billion.
It is clear that the current account surplus is driven by a combination of three factors -- reduced import costs, higher remittances from overseas workers, and increased export earnings. It is worth noting that import activity slowed significantly in recent months due to foreign exchange reserve constraints. Many banks were hesitant to open letters of credit, leaving several import transactions, including those for bulk goods, pending. Restrictions on the import of non-essential items also accounted for reduced imports. Meanwhile, the resurgence of remittances from overseas workers played a key role in reversing the current account deficit. However, exports experienced only a modest increase.
Looking ahead, it is difficult to predict whether the situation will continue to remain so or improve further in the months ahead. According to experts, including central bank officials, it is too early to consider this a trend. With foreign exchange reserves recovering, imports are likely to increase driven by the need for primary, intermediate and finished products. In this context, the important thing that must not be overlooked is that while import of essentials will ease the market of most common consumer products, that of non-essential and luxury items could strain the reserves, offsetting the balance of trade and current account situation. Thus a critical consideration is the potential impact of non-essential and luxury imports. The government may need to revisit the restricted list and expand it further with the inclusion of some move non-essential items.
Maintaining a balanced current account is crucial for most countries, and for Bangladesh, preventing a deterioration of the situation is extremely important at this point in time. Achieving this will require a thrust on exports, particularly of the RMG products. This, under the present circumstances, seems challenging as many export orders got diverted to the competitors amid the recent workers' unrest in the garment industry. Similarly, continued growth in workers' remittances cannot be taken for granted, though simplifying and incentivising remitting procedures may encourage remittance inflow. Economists suggest a cautious approach, advocating for a prudent monetary policy and dynamic export-promotion strategies. Additionally, there is a need to monitor and prevent mis-invoicing in both import and export activities to safeguard the current account balance.