Capital flight cut, import curbs help halve BoP deficit

A letup in external trade imbalances appeared at the last fiscal end with the balance of payments (BoP) deficit getting halved to US$4.3 billion from the level a year before.

Capital-flight cut and import curbs largely helped the reduction in BoP deficit, economists say, with its healing impact on other relevant major macroeconomic parameters.

Just-released official statistics show the deficit in Bangladesh's balance of payments decreased significantly to $4.3 billion in the July-June period of the 2023-24 fiscal year from $8.2 billion in the previous year.

The central Bank of Bangladesh Thursday released the data, attributing this reduction primarily to decreased outflows of foreign-currency funds.

Month to month, the BoP deficit also improved from the $5.9 billion recorded in May 2024.

This BoP gauge measures a country's transactions with the rest of the world. A deficit indicates that more money left the economy than came in, while a surplus means the opposite.

The current-account deficit (CAD) also improved to $6.5 billion for the 2023-24 fiscal year, down from $11.6 billion the previous year.

Conversely, the financial account recorded a surplus during the July-June period but yet was 34-percent lower than previous year's, reaching $4.5 billion compared to $6.9 billion in FY 2023.

Capital account also increased by $79 million to $554 million in hand during the same period.

Economists attribute the overall BoP improvement to two main factors: a reduced current-account deficit and a decline in unaccounted outflows.

Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, notes that the overall BoP deficit for FY24 decreased by about 48 per cent compared to the previous year.

He explains that the improvement in the current-account deficit was due to a 10.6-percent decrease in import payments and a 10.7-percent increase in remittances.

Dr Hussain points out that slower economic growth and import controls contributed to reduced import levels while increased numbers of workers abroad and better rates offered by formal channels boosted remittances.

He guesses that the decline in unaccounted outflows might be related to a reduction in opportunities for capital flight, possibly due to import compression.

"Just a wild guess!!!" the economist strikes an enigmatic note about usual drain on the country's foreign-exchange reserves.

Dr M. Masrur Reaz, Chairman and CEO of the Policy Exchange of Bangladesh, also attributes the improvement in the BoP to cut-down imports.

He says poor import growth was a key factor behind the overall BoP improvement. Import payments fell by 10.6 per cent to $63.2 billion during the July-June period.

Dr Masrur also notes that a surplus in the financial account emerged following corrections to export data, which helped maintain the financial-account surplus.

However, export receipts decreased by nearly 6.0 per cent to $40.8 billion during the period.

He is concerned as to how data inaccuracies can distort macroeconomic variables, referring to the export-data distortion.

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