Despite the significant widening of the trade account and external current account deficits, the country's balance of payments (BOP) has remained fundamentally strong primarily due to much stronger financial account surplus $3.8 billion in nine months of the fiscal year (FY) 2015 compared with $1.6 billion in the corresponding period of last fiscal.
The deterioration in the trade and current account balance is primarily due to slower export growth (less than 3.0 per cent) and a respectable growth in import payments.
The slowdown in readymade garments or RMG (both knit and woven) export growth, which accounts for more than 80 per cent of Bangladesh's export basket, has suffered in both the European Union (EU) and the US markets.
Export breakdown prepared by Export Promotion Bureau (EPB) shows a general sluggish performance in major categories, but some positive signs in certain areas which are worth noting.
It is interesting to observe that while all agricultural products (including flowers) declined, export of dry food and leaf tobacco (at $73.5 million and $61.5 million) increased by 33.2 per cent and 14.5 per cent respectively.
Export of plastic and melamine products (at $83.8 million) was impressive with 24 per cent growth. Leather footwear continued its strong forward march by registering 25.3 per cent growth at $383 million over the nine-month period of the current fiscal.
At $392 million, export level growth of engineering products has been impressive (32.2 per cent). In particular, it is encouraging to note that growth of electrical products increased by 85.2 per cent to $80.5 million during July-March period of the FY '15. Bicycle exports (at $110.2 million) also rebounded by 24 per cent after a slump in recent years.
The continued widening of the services accounts deficit is a matter of concern. The deficit at $3.6 billion already exceeds the full FY 2013-14 level by $400 million and the extent of deterioration was 24 per cent. Policy-makers must try to keep a lid on this growing imbalance.
Inflow of workers' remittance is slowing down and now stands at only 7.0 per cent. The number of people going abroad is not increasing much and the outlook in the Gulf countries does not appear good given the decline in oil prices.
The surplus in the financial account is primarily attributable to long and short-term foreign investments like foreign direct investment or FDI, (net) and portfolio investment.
Following a rundown of trade credits in FY'14, there has been a significant upsurge in accessing new trade credit in FY'15, contributing to a turnaround of about $1.5 billion of the $2.2 billion change in the financial account.
Although not a matter of concern yet, Bangladesh Bank (BB) should keep an eye on developments in this item.
Excessive dependence on trade credit, which is short term in nature, may not be good for future BOP stability.
This item should grow in line with the growth in trade volume over the medium term.
The rapid build-up in BB's foreign exchange reserve is contributing to Bangladesh's continued macroeconomic stability. But it is also creating appreciating pressures on the exchange rate.
Since Bangladesh taka (BDT) has already appreciated by more than 20 per cent by now since FY '11, BB is forced to buy foreign exchange from the interbank market to prevent a further appreciation of the taka in nominal terms.
The BB cannot allow the nominal exchange rate to appreciate when export growth is very slow and the country is losing its market share in RMG products in major markets.
Most of Bangladesh's major competitors-like India, Vietnam, Indonesia-- have their currencies depreciated against the surging US dollar while taka is stable or appreciating against the dollar. This is the most difficult policy choice for the Bangladesh Bank today.
[The writer is executive director of the Policy Research Institute (PRI).
The Financial Express (FE) - PRI
Economic Analysis Unit (EAU)]
