Falling financial account squeezes BoP, reserves

Widening financial-account deficit for huge outgoings affects balance of payments (BoP) and basically denies Bangladesh economy benefits of growing surplus in its current account, economists say.
Meanwhile, the country's gross foreign-exchange (forex) reserves dropped below $20 billion as the central bank paid $1.29 billion to the Asian Clearing Union (ACU) against import bills, sources at the Bangladesh Bank (BB) said Sunday.
On the BoP front, the deficit in financial account widened further as per statistics available until January of this fiscal year. The fall in supply of foreign currencies, particularly the American greenback, from foreign direct investment (FDI), portfolio investment and increasing trade-credit deficit is largely contributing to the growing shortfalls in the financial account, according to the sources.
And these factors keep upsetting the benefits of a sound surplus in the current-account coffer.
According to BoP data for July-January period of the financial year 2023-24, the deficit in the financial account had climbed to $7.36 billion until January while the volume of deficit was only 812-million negative in the first seven months of the last fiscal year (FY'23).
The data show gross inflow of FDI having dropped 13.36 per cent to $2.43 billion by end of January 2024 from $2.81 billion recorded until previous January.
And the massive shortfall was recorded on account of trade credit that rose to $9.22 billion in the first seven months of the current FY'24 from $2.51 billion recorded a year ago.
However, the upturn in current-account surplus continued, reaching $3.15 billion in the July-January period of the FY'24, in a bounceback from a shortfall of $4.65 billion recorded a year ago.
But, the overall balance in the BoP improved with the deficit having narrowed to $4.69 billion in the foresaid period of this fiscal from $7.39 billion on a year-on-year basis.
Seeking anonymity, a BB official said the gap of overall balance in the BoP eased by around $4.0 billion while the current-account deficit turned into positive territory, which are good developments under current context of macroeconomic situation.
"But the most concerning part is financial account, which keeps weakening. As a result, the country is not getting the benefits of the positive developments, the current-account surplus in particular," the central banker added.
Contacted for his view of the riddles, Prof M. A. Taslim, head of Economics department at Independent University, Bangladesh, said the current account became surplus because of high import compression considering future macroeconomic vulnerability amid persisting forex tightness.
"As a matter of fact, the outflow of dollars through import comes down significantly in recent months, which is, in fact, reflected in the current account of the BoP," he said.
The noted economist points out that the tendency of fresh external borrowings by both private and public sectors has slowed down but repayment of the existing loans continues, putting pressure on the financial account.
He foretells that the supply of industrial raw materials, intermediate and capital goods, largely disrupted because of the import tightening, could dampen the overall economic growth in days ahead.
Founding chairman of the Policy Exchange Bangladesh Dr Masrur Reaz says it is encouraging to see the surplus in current account, which will contribute to the effort for stabilising the volatility on the forex market.
"But the bulging increase in the deficit of financial account becomes a matter of serious concern as it indicates that the macroeconomic situation remains under stress," he adds.
Alongside the less-than-expected level of inflow of FDI, the economist says, the capital market becomes extremely volatile and the portfolio investment has taken a dip.
On the other hand, the release of development funds has fallen.
"So, we need to take right preparation so that the tranches of the development funds come in time and portfolio investors feel encouraged to invest here," he suggests.
With the latest ACU payments, the country's gross stock of forex declined to $19.99 billion as of March 07, 2024 as per the IMF-prescribed BPM6 from $21.15 billion recorded on the previous day.
In terms of the BB arithmetic, the gross volume of forex reserves fell to $25.18 billion until Thursday last from $26.40 billion calculated on March 06, 2024.
Seeking anonymity, a BB official confirmed payment of the import bills through ACU mechanism, saying that the country being a member of the trading platform used to clear import bills every two months.
"So, the change in reserves situation after ACU payment is normal. There is nothing to worry as the supply of forex keeps rising in recent days because of the rising trend in the earnings from export and remittance," the central banker said.
The central bank from later last month introduced currency swap through which the cash-hungry commercial banks having enough foreign currencies are allowed to sell their overbought forex to meet their local-currency obligations at much lower rate.
According to the BB data, the central bank purchased a total of $1.16 billion in just 10 days of the deals under the Taka-Dollar swapping arrangements until March 07, 2024.
Through selling the US greenback at the spot rate (Tk 110 a dollar), the commercial banks received some Tk 127 billion from the central bank.
The ACU is an arrangement through which member-countries settle payments for intra-regional transactions among participating central banks on a net basis.
Bangladesh, Bhutan, India, Iran, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka are members of the Tehran-headquartered ACU. The member-countries of the union clear their payments every two months.

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