Disequilibrium in balance of paymentsA review by Unnayan Onneshan
THE Bangladesh economy is experiencing disequilibrium in balance of payments due to short-sighted policy decisions, internal economic imbalances and global economic crisis. The BoP slipped into a deficit for the first time in a decade resulting in heightened risks to Bangladesh’s external position.
The government agreed a three-year reform programme with the International Monetary Fund-styled memorandum of economic and financial policies to access the fund’s extended credit facility arrangement to stave off BoP pressures.
The access to IMF funds requires reduction in aggregate demand by employing mechanisms such as depreciation of currency and cut in import demand and supply of investible funds to the entrepreneurs. The central bank has already allowed the local currency to depreciate significantly against the foreign currencies and put in place contractionary monetary policy to restrict money supply to the private sector and import of goods and services.
The central bank may further resort to devaluation of taka and administer reduction in imports, if supply of foreign currencies from sources such as remittances does not keep up considerable growth momentum nor the government anticipated flow of foreign aid is materialised.
The restrictive monetary targets, agreed in the IMF-MEFP, have in effect also reduced the fiscal space of the government, demonstrated in the recently approved national budget of 2012-2013. The choice of instruments of resource mobilisations for deficit financing and public spending has been limited to regressive instruments such as raise in value-added tax.
The short-sighted policy decisions have increased the import payments while the growth rate of export earnings has started decelerating. A substantial requirement for foreign currency to finance high import of petroleum products have resulted in depreciation of the taka against the dollar and the foreign exchange reserve has also dwindled. Along with that, the contractionary monetary policy has restrained the import of capital machineries and intermediate goods, which again had negative fallouts on investment and export performances.
In the current fiscal year, the flow of foreign aid disbursement has witnessed a comparatively lower amount in comparison with other fiscal years. In addition, the incremental FDI inflow and receipt of remittance has experienced a trend of deceleration. Moreover, domestic private investment is facing difficulties due to ever increasing domestic borrowing of the government from banking sector that holds back the expansion of productive sector.
In recent fiscal years, trade deficit has widened at a staggering rate mainly because of soaring import bills particularly for quick rental power plants and sluggish rate of export earnings. The current imbalance of BoP has occurred mainly due to the trade imbalances. The continuous depreciation of the national currency against dollars has assisted to increase the import payments. Accommodative policies coupled with global headwinds and firming oil prices have widened the trade imbalances and also resulted in losses of foreign exchange reserve.
Current account balance
THE current account includes imports and exports of merchandise, military transactions and service transactions. The net flow of current transactions, including goods, services, and interest payments between the countries, is known as the current account balance. At a glance, it is the sum of the trade balance, service, primary and the secondary income. If the foreign earnings are higher than the expenditure, it is known as the current account surplus and vice versa.
Historically, the import bills were higher in comparison with export earnings due to which Bangladesh has had to face a persistent trade deficit over the years. In recent fiscal years, trade deficit — the gap between the nation’s exports and imports of goods and services — has widened at a staggering rate mainly because of soaring import bills particularly for quick rental power plants and sluggish rate of export earnings.
The current imbalance of BoP has occurred mainly due to the trade imbalance. The trade deficit is increasing at a staggering rate because of the increase in import payments and slower rate of the export earnings. The continuous depreciation of national currency against US dollars has assisted to enlarge the import payments. Accommodative policies coupled with global headwinds and firming oil prices have widened the trade imbalances and resulted in losses in foreign exchange reserve.
During July-April FY2011-12, export earnings (including EPZ) were $19,543 million which was 8.19 per cent higher than that of the same period of the previous fiscal year. However, Merchandise export earnings have decreased by 7.13 per cent in April 2012 than that of April 2011. Exports are facing a negative growth rate during the recent months of this current fiscal year because of the European Union debt crisis, which has cast a shadow on the expectations of export. Moreover, the financial crisis in the western world is hampering exports from Bangladesh. The EU zone covers 51 per cent of total export earnings of the country while 22 per cent comes from the US. Recently the EU debt crisis and global recession, especially in US, has decreased the price of commodities and discouraged the export earnings.
In the initial month of FY2011-12, merchandise export earnings from export was $2,339.5 million which was 1.99 per cent higher than that of June 2011 and it was the lowest in September 2012 at $1,447.5 million because of the high rate of inflation and the depreciation of the taka against the dollar during the present fiscal year.
In FY 2010-11, export earnings (including EPZ) were USD 23008 million, which was 41.71 per cent higher than that of FY 2009-10. The readymade garments, the leading sectors of export earnings, stood at $13,043 million in FY2010-11 and increased by 37.30 per cent than that of the previous fiscal year. Other sectors such as raw jute, jute goods and leather experienced increases of 35.73 per cent, 24.05 per cent and 32.20 per cent respectively in FY2010-11 than those of the previous fiscal year.
Historical trend of export earnings shows that it is increasing at an irregular pace except the case of the negative growth rate in FY2001-02. Export earnings (including EPZ) were $3,473 million in FY1994-95, and then it increased to $6,476 million in FY2000-01. In FY2001-02, export (including EPZ) decreased by 8.45 per cent because of the depreciation of the taka against the dollar. After that, it continued to increase up to FY2005-06 when it increased by 21.45 per cent than that of FY2004-05. From FY2006-07 to FY2009-10, export increased at a slower rate because of the global economic recession in FY2008-09. If such trend continues, the export earnings (including EPZ) might stand at $24,716 million and $26,424 million respectively in FY2011-12 and FY2012-13.
Merchandise export earnings have increased by 10.36 per cent in July-March FY 2011-12 due to higher growth of readymade garments (36.61%), leather (20.13%) and fish and shrimp (16.23%). In FY2011-12, earnings from readymade garments reached up to $13,043 million which was 34.70 per cent higher than that the corresponding figure for the previous fiscal year. In the same period, raw jute, leather, fish and shrimp increased by more than 20 per cent than those of the previous fiscal year. By March 2012, merchandise export earnings from fish and shrimp decreased by 21.4 per cent and readymade garments slowed down by 4.6 per cent.
There is a huge discrepancy amongst the projections by the government articulated in its different documents such as medium-term macroeconomic framework, medium term budgetary framework, IMF-MEFP and the business as usual scenario on the change of export earnings for the periods of FY2011-12 to FY2015-16.
For FY 2012-13, the projections of the MTMF, IMF-MEFP, MTBF and the business as usual scenario of percentage change of exports are 14.5, 16.6, 14.5 and 9.32 respectively. By examining the projections, we find that the projections of MTMF and MTBF on growth rates of export earnings are more ambitious than the others.
The projection of MTMF on percentage change of import exceeds the projection of any other sources. For FY2012-13, the projection in the MTMF on percentage change of import is only 15 per cent whereas the business-as-usual scenario indicates 9.60 per cent. This also shows that the gap between MTMF target and business as usual scenario might increase in the upcoming fiscal years.
Depreciation and Trade Deficit
Any depreciation of the taka against the dollar increases the export earnings and increases the import bills (measured in taka). During the last few months of this fiscal year, depreciation of the taka against the dollar has been increasing at a staggering rate, which has increased the trade deficit. In FY2010-11, export earnings increased by 41.71 per cent and import bills by 41.84 per cent. In the meantime, depreciation of the taka was at 6.34 per cent, which increased the trade deficit by 42.24 per cent in FY2010-11 than that of the previous fiscal year.
In FY2000-01, the depreciation was the highest at 10.53 per cent where export earnings was $6,476 million which was 12.39 per cent higher than that of FY1999-00 and import bills was $9,363 million which was 11.42 per cent higher than that of the previous fiscal year. Trade deficit increased by 7.83 per cent in FY2000-01 than that of FY1999-00.
The taka depreciated by 1.55 per cent in FY2001-02 and trade deficit decreased by 12.08 per cent than that of FY2001-02 where the export earnings reduced by 8.45 per cent and the import bills decreased by 17.79 per cent.
In December 2011, depreciation was 6.09 per cent and it was 3.07 per cent in January 2012. Any depreciation of the taka makes the importable goods expensive and the exportable goods cheaper as well. In the meantime, import and export were valued at $2,910.5 million and $2,064.9 million respectively indicating that export earnings increased by 29.76 per cent and import decreased by 8 per cent than that of the previous fiscal year.
However, the local currency started to gain a little strength by February 2012, which also saw decreases in both of imports bills and export earnings. The main concern is that soaring import bills decreased the reserve and increased the borrowing from different sources. The depreciation slowed down the import growth of capital machinery and intermediate goods that is alarming for the industrialization of the country. Decline in imports also decreased the export earnings as most of the export products of the country are secondary. In the same way, the increase in import payments has created a pressure on the foreign exchange reserve. The demand for dollars exceeds the supply, which is depreciating the local currency.
During the last few months of FY2011-2012, import payments have followed following a declining trend but the export earnings is declining more than that of the import payments which is fostering the trade deficit on a continuous basis.
During July-April, import payments (including EPZ) were $26,888 million which were 8.65 per cent higher than that of the corresponding period of the previous fiscal year because of the higher growth rate of fuel imports for the higher demand of quick rental power generation. Except food grains and other than food items, crude petroleum, petroleum products have increased by more than 50 per cent during July-March of FY2011-12. During the same period of FY2011-12, import of capital machinery increased by a small amount than that of the same period of the previous fiscal year. During July-April of FY2011-12, the fresh opening of letter of credits for capital machinery decreased by 25.78 per cent which might adversely affect the industrial sectors of the country.
However, import payment has declined by 9.99 percent in April 2012 than that of April 2011, following a restrained monetary policy. During the recent months, the import of food grains has declined due to bumper rice harvest.
In FY2010-11, import bill (including EPZ) was the highest at $30,336 million which was 41.84 per cent higher than that of FY2009-10. Imports (including EPZ) were $3,473 million in FY1994-95 and then it continued to increase up to FY2000-01. It decreased to $7,697 million in FY2001-02 which was 17.79 per cent lower than that of FY2000-01 because of the political unrest and the depreciation of the taka. After that, it increased following an erratic trend in the next six fiscal years and this showed an upward trend of imports in FY2007-08 which was 25.59 per cent higher than that of the previous fiscal year. In the business-as-usual scenario, import bills might reach at $34,864 million in FY2012-13.
Terms of trade
In FY2010-11, terms of trade, the ratio of the export to import prices, was 72.37 per cent which was 52 percentage points higher than that of FY2009-10 and the export price index and the import price index increased by 7.31 per cent and 6.74 per cent respectively. Improvement in terms of trade in a country eases current account deficit. However, it is observed that import price index in Bangladesh exceeds the export price index which might fuel up the current account deficit further. In the business-as-usual scenario, terms of trade might decrease further to 69.04 in FY 2012-13.
To be continued
This is an abridged version of the June issue of Bangladesh Economic Update, a monthly release by the Economic Policy Unit of the Unnayan Onneshan, a multidisciplinary research organisation, based in Dhaka, Bangladesh. A team under the guidance of Rashed Al Mahmud Titumir, comprising Syed Naimul Wadood, Nahida Sultana and AZM Saleh prepared the report.This is an abridged version of the June issue of Bangladesh Economic Update, a monthly release by the Economic Policy Unit of the Unnayan Onneshan, a multidisciplinary research organisation, based in Dhaka, Bangladesh. A team under the guidance of Rashed Al Mahmud Titumir, comprising Syed Naimul Wadood, Nahida Sultana and AZM Saleh prepared the report.
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