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The Financial Express

Bangladesh's BoP surplus during the pandemic

Is it a cause to celebrate or a  reason to worry?


| Updated: June 04, 2021 22:40:37


Bangladesh's BoP surplus during the pandemic

Bangladesh, like many others across the globe, struggled with the number of infections and the new normal of Covid-19-social distancing, virtual meetings, online classes etc.-since reporting their first case on  March 8, 2020. As a result, people across all socioeconomic backgrounds had been adversely affected.

A 10-day lockdown was initially imposed by the Bangladeshi government with no further movement restrictions post  May 30, 2020. This along with worldwide travel restrictions had major repercussions on the Bangladesh economy. However, their balance of payments through the pandemic may indicate otherwise. Bangladesh reported a staggering balance of payment (BoP) surplus of US$3.098 billion in the third quarter (Q3) of Q2020 compared to a deficit of US$204 million during the same period in 2019. Again, during the first nine months of the current fiscal year (FY21), overall balance of payments recorded a big surplus of $ 6990 million against a tiny surplus of $713 million in the same period of FY20, according to Bangladesh Bank statistics. Could this be a rare positive in our current times or a deeper long-term problem lurking?

One of the biggest contributors to this surplus was the current account surplus, which accounts for the net exports (exports minus imports), net income transfers (incoming income minus outgoing income) and net current transfers. Although, Bangladesh reported trade and current transfer deficits, these were heavily outweighed by the net factor income surplus largely as a result of major remittances influx during this period.

Despite higher unemployment world-wide, remittance inflows increased following a small initial decline between January 2020 to April 2020 and hit a peak in June-July 2020 (See Figure 1). While an increase in remittance is a positive outcome as it provides government with more foreign currency reserves to manage the exchange rate, buy imports and attract investors. Nevertheless, it must be investigated what has caused this increase. Is it due to migrant workers losing their jobs and bringing back all their savings? Or did the remittance inflows just increase through the legal channels as travel is restricted? The former could suggest a long-term problem for the Bangladesh economy, as lower remittance would be bought back in the future due to lower employment. The latter would be a positive outcome, not only for the government as they have more foreign currency available but also for the remittance providers as they received 2 per cent cash incentives on the remittance bought back to the country. However, roughly 200,000 redundant Bangladeshi migrant workers had returned in the initial months of the pandemic prior to travel restrictions and many more after flights resumed in June. Hence, hinting towards a long-term problem for the Bangladesh economy.

Furthermore, export and import both declined during the lockdown period as production halted. Export volume declined by 51.3 per cent from Q1 of 2020 to Q2 of 2020 and reached all time low at US$510 million during April 2020, causing widespread unemployment in the short term. Import volume declined during Q1 of 2020 and recorded a low of US$2.6 billion in April 2020. While a fall in imports may lessen the burden of import payments, it may also signal a decline in investments and the economy benefitting from technology spillovers from imports, which the country badly needs. Nevertheless, Bangladesh was still facing a trade deficit of US$3.8 billion. However, the export volumes are showing signs of recovery as movement restrictions are lifted locally and internationally. Bangladesh Bank reported an export volume of US$2.9 billion in Q3 of 2020 which reduced the trade deficit down to US$2.0 billion.

Another contributor to the BoP surplus is their capital account surplus, which accounts for capital outflows and inflows pertaining to foreign assets and liabilities in the country, most notably foreign direct investment (FDI). However, Bangladesh is also facing a decline in FDI during the pandemic-some 6.68 per cent, from US$804 million in Q2 of 2020 to US$750 million in Q3 of 2020. This pattern could be concerning as FDI acts as a powerful instrument especially in developing countries like Bangladesh, where it could be invested in infrastructure and/or technology boosting productivity. Additionally, a decline in FDI could lead the capital account to worsen leading exchange rate depreciation making imports more expensive and falling further. Hence, policies to combat this FDI fall must be prioritized to avoid long-term damages.

Overall, the long-term solution to combat these issues could be a successful vaccination drive. Bangladesh is already leading their immediate neighbours and contrasts well globally regarding Covid-19 vaccination. Fast immunisations could lead to increase in demand of Bangladeshi migrant workers over others and allowing them to travel safely either back to their original jobs or new ones. This way the remittances could stabilise and allow Bangladesh Bank to maintain and stabilise the managed float of Taka's exchange rates. A stable exchange rate may provide more confidence to foreign investors looking for investments in Bangladesh. Meanwhile, the Bangladesh government has already allocated a budget to train migrants for different jobs and soft loans for "employment-generating" activities. This along with a successfully vaccination drive and international coordination could provide a path to recovery and strengthening the Bangladesh economy for the future.

 

Tay Yi Ting and Utkarsh Dipesh Gupta are Economics Undergraduate Students at University of Nottingham Malaysia

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