Is current account deficit concerning?

For the fifth consecutive year, Bangladesh recorded the deficit in current account balance with the rest of the world. The deficit stood at its highest level of US$9.56 billion in FY18. In the later years, it gradually declined to $4.79 billion and $4.72 billion and finally came down to $3.81 billion in the last fiscal year (FY21).  Thus, the current account deficit is not a new phenomenon in the country. It, however, becomes a matter of concern during the outbreak of the pandemic.

The latest External Sector Report of the International Monetary Fund I(MF) found that "the global reaction to the pandemic further widened global current account balances-the sum of absolute deficits and surpluses among all countries-from 2.8 per cent of world GDP in 2019 to 3.2 per cent of GDP in 2020. Those balances are set to widen further as the pandemic continues to rage in much of the world." As the IMF rang an alarm bell, should Bangladesh worry about the current account deficit? Finding the answer requires a brief analysis of the balance of payment situation. 

To put it simply, the current account of a country provides a record of the country's transactions with other countries of the world. It is in terms of trade in goods and services as well net earnings on foreign investments and net transfer of payments over a period of time, such as remittances. In other words, the account records the regular external transactions of the country and goes into a deficit when money sent outward exceeds that coming inward.

The current account deficit in Bangladesh originated largely from the higher trade deficit which is a result of higher import payments compared to export earnings in goods and services. Bangladesh Bank statistics showed that country's merchandise trade deficit with the rest of the world stood at $22.79 billion in the past fiscal year, recording a 27.68 per cent growth over the previous fiscal year (FY20) when annual trade was recorded at $17.85 billion. Though the estimate is provisional and subject to revision in near future, the big jump in imports compared to export in the last fiscal year widened the trade gap. Import registered 19.71 per cent growth in FY21 and reached $60.68 billion as estimated on a free on board (f.o.b.) basis. At the same time, export recorded 15.38 per cent growth over the previous fiscal year and stood at $37.89 billion on f.o.b. basis. The f.o.b. price of exports and imports of goods is the market value of the products at the point of uniform valuation or the customs frontier. Bangladesh Bank statistics also showed that the deficit in trade in services stood at $3.0 billion in the last fiscal year. Thus the combined deficit in goods and services stood at $25.79 billion.

Part of the deficit was offset by a robust inflow of remittance which was mostly sent by the non-resident Bangladeshis abroad. By posting 36 per cent growth, the annual inflow of remittance stood at $24.78 billion in FY21 from $18.20 billion a year ago despite the Covid-19 pandemic.  There was also a big surplus of financial account in FY21 as reflected in an increase in the inflow of foreign debt and foreign direct investment. A rise in short-term borrowing coupled with an increase in trade credit also helped to ease pressure on financing. These not only help to offset the rest of the current account deficit but also boosted the surplus of the overall balance of payments in FY21. Bangladesh Bank statistics showed that overall BoP increased to $9.27 billion in the last fiscal year from $3.17 billion in FY20.

The current account deficit may also be reviewed from the national income accounts. The difference between national savings and investment reflects the current account deficit. To put it another way, the deficit may 'reflect a low level of national savings relative to investment or a high rate of investment-or both.' The provisional estimate of the Bangladesh Bureau of Statistics (BBS) showed a positive current account balance in the last fiscal year in terms of savings and investment gap. Gross national savings was estimated at Tk 9,149.34 billion against the domestic investment of Tk 9,010.03 billion. Thus, there is a surplus of Tk 139.31 billion in savings over the investment. As a negative statistical discrepancy of Tk 205.26 billion, the gap between Gross Domestic Expenditure and Gross Domestic Product (GDP), the balance in current account stood at Tk 344.57 billion or $4.02 billion.

Though the estimate is provisional and subject to revision, BoPs data and national accounts give an opposite picture regarding the current account balance. Thus a close examination is required especially when the provisional estimate of GDP for FY21 was released around one and half months after the ending of the fiscal year. As a rule of thumb, it is the BoP data on the current account that is usually considered more realistic.

Against the global surplus of current account balance which is estimated at 3.20 per cent of global GDP in the last year, many countries including Bangladesh registered a deficit. Again, some other countries registered a surplus in the current account. IMF pointed out that four major factors are there: decline in travel, collapse in oil demand, the boom in medical products trade and shift in household consumption. The fund also observed that these factors 'contributed to some countries seeing a wider current account deficit, meaning they bought more than they sold. On the other hand, a larger current account surplus, meaning they sold more than they bought.'

Bangladesh is in the first group which is reflected in higher growth in imports of goods and services. Moreover, like many other countries, Bangladesh also allowed a relaxed monetary stance and pushed fiscal stimulus to support the economic activities in different sectors. As a result, the current account deficit was unavoidable with little to worry about.

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