Deficit in current account declining for import cuts

Bangladesh sees its current-account deficit narrow, mainly following a drastic fall in import of goods and services amid forex dearth with its domino effect on services and the economy, official data show.

The current-account deficit or CAD, which measures the flow of goods, services and investments into and out of the country, contracted nearly four times to $3.6 billion year on year in July-March period.

The national account gap now represents less than 1.0 per cent of gross domestic product (GDP).

Imports plummeted 12.3 per cent during the period while exports grew by 7.8 per cent, leading to a reduction in the trade imbalance to $14.6 billion, down by more than 41 per cent from its corresponding period a year before.

However, the overall balance-of-payments deficit increased over 2.6 times in July-March this fiscal year relative to the same period last year, reaching over $8.0 billion, according to the data prepared by the central bank of Bangladesh.

Such a widening deficit in the overall balance of payments causes squeeze in reserves, economists say.

They believe this development with the current account is due to restricted imports and goods-export receipts.

They also say as long as there is no major policy direction on the narrowing of the gap in overall balance of payments, there will be increased pressures on the reserves with multiplier effect.

Dr Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh (PRI), told the FE that Bangladesh now needs action on how to stop continued shrinkage in reserves.

"We're losing out on average $1.0 billion each month and this is due to the large deficit in the overall balance of payments."

He mentioned that the financial account, another key component of the BoP, now turned deficit amounting to $2.2 billion in March last, from an $11.9- billion surplus.

Dr Mansur, who had worked as the Middle-East chief of the IMF, said the main reason behind the fall in the financial account is a lack of confidence. "Dollar crisis is another key reason."

He also mentioned that Bangladesh failed to make many short-term repayments, especially from the private sector, which helped the financial-account fall.

Dr Zahid Hussain, former lead economist of the World Bank (WB), says the good news is a very drastic reduction in trade and current- account deficit due to a drastic reduction in import of goods and services which overpowered weaker export growth and a very significant 47.55- percent increase in interest payments.

"We should not lose sight of the fact that decreasing imports is not without cost in an economy heavily dependent on imported inputs and machinery," the economist says about contractionary impact on the overall economic front.

"This is beginning to surface in data on economic-activity indicators such as employment, private-sector credit, and tax collection," Dr Hussain told the FE.

The decrease in the current-account deficit has not helped reduce the pressure on the foreign-exchange market due to a turn in the financial account from an $11.9-billion surplus to a $2.2-billion deficit, he noted.

"The deficit in the financial account increased because of a large increase in trade credit, inability to roll over the liabilities of deposit money banks (DMB), and a sharp decline in gross multilateral debt coupled with a sizable increase in amortization payments." He says repatriation of export earnings has not kept pace with export growth, leading to increased outflows on account of trade credit.

"Increased reputation risk due to payment deferrals has made rolling- over debt very difficult for the DMBs."

Poor project implementation has slowed the utilization of the aid in pipeline.

"There is also a large increase in unaccounted outflows as evident from the increase in errors and omissions from $840 million outflows during July-March FY22 to $2.6 billion outflows during the same period this year," he says about what is reported as capital flight.

He recommends that Bangladesh Bank need to look into what is behind this increase in fund outflows.

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