Strategy to reverse falling BoP trend

Shahiduzzaman Khan A high-profile meeting of the Coordination Council of the government reviewed the current macro-economic challenges this week. It discussed some ways and means to help overcome them. Low level of foreign aid disbursement and rising trade imbalance that caused strains on the country's balance of payment (BoP) figured prominently in the meeting. It dwelt at length various measures to address the current BoP problem, lower government's borrowing from the banking system and consider the arrangement to foot the rising subsidies bill. The latest data showed imports grew in all major sectors from consumer items to intermediate goods, industrial raw materials, capital machinery and petroleum products. Trade gap has widened to nearly $9.0 billion because of much larger imports in value terms, creating a pressure on the deteriorating BoP, which is now more than $500 million in the negative. Bangladesh Bank (BB) data shows industrial raw materials, capital machinery and machinery for miscellaneous industries accounted for more than 54 per cent of the country's imports for fiscal 2010-11. Import of intermediate goods was nearly $2.0 billion or 7.0 per cent of the total imports. Import of petroleum and petroleum products, which is growing rapidly on additional demand to run rental power plants, constituted more than 10 per cent of the total import in value terms. Import of consumer goods was not far behind -- about $3.5 billion or 12 per cent of the total imports. Though analysts termed the trend in imports 'good' for the country's industrialisation, they said time has come to manage this high import growth, which they said 'not sustainable'. Up to now BoP is not in crisis, but 40 per cent growth in imports is not sustainable without a simultaneous growth of export receipts, remittance earnings and foreign aid inflows. Bangladesh had record surpluses in the current account of the BoP in the past few years. The surplus was $2.4 billion in fiscal 2008-09 and $3.7 billion in fiscal 2009-10. The BoP situation changed dramatically in fiscal 2010-11. While exports of goods and services measured in nominal dollar terms grew even more rapidly than in the past, registering an expansion of 37 per cent over the level of fiscal 2010, imports of goods and services increased at an unprecedented pace of 41 per cent. As a result, the trade balance widened by 56 per cent to $10 billion in 2010-11 from $6.4 billion a year ago. As compared to this, remittances grew modestly by 5.5 per cent. In order to reverse this trend, the government is considering imposition of regulatory duty on a number of luxury items to discourage their imports and, thus, reduce pressure on the country's BoP. These items are now subjected to 25 per cent duty. Indeed, the government is now facing multiple internal and external complexities that resulted in severe deterioration of BoP situation, large bank borrowing and a big spending burden by way of subsidies. The country's external balance sheet is under pressure largely due to slow growth in inward remittances and high import bills which have been putting extra pressure on the rising inflation. In the first nine months of the current fiscal year, the deficit in overall balance reportedly stood at $529 million, while it was a $2.26 billion surplus in the same period last fiscal year. Although foreign direct investment (FDI) and exports increased, the uneasy situation has been created mainly due to a marked fall in foreign aid receipts and declining rate of growth of remittance earnings. As a result, the current account balance surplus dropped by about three-fourths compared to a surplus in the same period of the previous fiscal year. Of the options, the government is likely to go for issuing sovereign bond to international markets in a bid to address the nagging problem. The Citi Bank NA and Standard Chartered Bank have reportedly proposed recently to the Ministry of Finance (MoF) to issue the bond as a move to deal with the current economic challenges. The authorities are examining the proposal of issuing the bond. The expert opinion from the Coordination Council meeting may be sought before taking a final decision on it. Bangladesh Bank, in a recent communication made to MoF, has reportedly expressed its concern over the looming BoP problems and urged the government to take necessary steps to help attract foreign currency to the country. The International Monetary Fund (IMF) has projected that the current account balance may face a deficit by $849 million in the current fiscal year. It has cautioned that the increased government borrowing from the banking system would fuel the inflationary pressures further and suggested the central bank to tighten the monetary policy in order to contain inflationary pressure. High inflation has been eroding domestic purchasing power as well as the country's external competitiveness. The finance minister recently claimed that the economy was now in a "very good" shape. He, however, identified a few 'risks' such as pressure on the BoP, enhanced subsidies, higher import bills and the double-digit inflation. He blamed the media and the members of the civil society for portraying the current state of economy negatively. Mr Muhith said the government has undertaken some steps to address the problems prevailing in the macro-economy. None will contest the fact that the emerging pressure on the country's BoP is a serious threat to its economy. If pressure on BoP escalates, it can create social and political instability. Besides, the effects of higher inflation -- rising prices of goods and charges for services respectively -- on the conditions of living of the poor, not-so-poor and even the middle income groups of people, will have reasons to give disconcerting signals. Under the circumstances, the government needs to act quickly to curb import of non-essential goods and put a brake on public spending in not so priority areas at this stage. The relevant authorities need to act promptly on prioritising its areas of actions accordingly. The implementation of an integrated plan of action to this effect brooks no delay. szkhan@dhaka.net