Containing ballooning trade deficit

Shahiduzzaman Khan | Published: March 17, 2018 21:16:33


The latest central bank data suggest the country's overall trade deficit crossed $10-billion mark in the first seven months of the current fiscal year. The reason was mainly attributed to higher import payments against lower export receipts.

Reports say higher import payment obligations, particularly for food grains, fuel oils and capital machinery, pushed up the overall trade deficit significantly during the period under review. The deficit rose by nearly 92 per cent or $4.84 billion to $10.12 billion in July-January period of FY 18 from $5.28 billion in the same period of the previous fiscal.

The overall import increased by more than 25.20 per cent to $31.18 billion in the period under review of FY 18, from $24.90 billion in the corresponding period of the previous fiscal. But the export earnings grew by 7.31 per cent to $21.05 billion in the first seven months of FY 18 against $19.62 billion in the same period.

The higher trade deficit has pushed down the current account balance significantly during the period under review, despite an uptrend in inward remittance. The country's current-account deficit reached $5.35 billion during the period against $890 million in the same period of the last fiscal.

Trade deficit and trade surplus result from several macroeconomic variables, including savings and investments. The country which saves more than its investments will have a trade surplus and vice versa. Bangladesh stands in such a zone as, according to economists, its gross domestic savings is lower than the investments.

Now the question arises as to what trade surplus and trade deficit does really mean. A country has a trade surplus when it exports more than it imports. On the other hand, a nation has a trade deficit when it imports more than it exports. A surplus is generally a positive development, while a deficit is seen as negative. Analysts, however, say trade imbalances of either sort are common and necessary in international trade.

Economists and trade policy analysts of the government track trade deficits and surpluses by recording as many transactions with foreign entities as possible. They collect receipts from customs offices and routinely total imports, exports and financial transactions. The full accounting is called the balance of payments and is used to calculate the balance of trade.

For the country exporting goods in demand, its companies get increasing numbers of foreign orders. These companies either receive or accumulate foreign currency that foreign firms use to purchase goods, or financial institutions receive foreign currency and see a rising demand for the exporting country's currency, causing its price on international markets to rise. All these aspects of a trade surplus allow the government, financial institutions and exporting companies in the country to acquire wealth and thrive.

Bangladesh's annual current account balance registered a deficit of $1.48 billion in the last fiscal for the first time in five years. However, the country's gross inflow of foreign direct investment (FDI) increased by 1.58 per cent to $1.99 billion from $1.96 billion in the same period of FY 17. On the other hand, net FDI inflow dropped 2.21per cent.

On the other hand, the country's overall balance of payments (BoP) nose-dived to a deficit of $1.03 billion in the first seven months of this fiscal, which was a surplus of $2.19 billion in the same period last fiscal. The BoP deficit increased significantly during the period under review as the country has made the highest-ever payment of $1.56 billion to Asian Clearing Union (ACU) against imports recently.

In order to improve the situation, it is necessary that the government should bring more sectors under the tax system, as Bangladesh's tax-to-gross domestic product (GDP) ratio is only 8.5 per cent -- one of the 22 countries whose tax-to-GDP ratio is lower than 9.0 per cent. 90 countries have tax-to-GDP ratio of over 20 per cent.

If the tax revenue is increased and government purchase kept constant, national savings would increase, which is crucial to reverse the BoP trend. It is also necessary to raise private sector investment that will create more and better jobs. Critical for private sector growth will be enhanced competitiveness that requires policy support to improve the investment climate and increase integration with global and regional markets.

Bangladesh should, on the other hand, continue its effort to reduce its cost of doing business and also take immediate measures to eliminate the hidden cost on a priority basis to increase its competitive edge compared to other countries. Cost of investment in the country is, indeed, not getting cheaper as all the cost components have increased considerably over the years.

Hidden cost, which is non-figurative but exists in matters related to procedure, policy, law and infrastructure, has high correlation with the cost of doing business and cost of investment in a country. The hidden costs and loopholes in policies are creating hindrances to the Bangladesh's foreign direct investment (FDI).

It is thus essential for the country to address and eliminate the impediments that are responsible for the high cost of investment. To be more competitive, immediate attention should be given to the cost components that still remain less competitive, especially in container transportation, land price of industrial estates, initial internet connection fee, monthly basic internet connection fee, mobile phone subscription fee, corporate income tax etc.

Analysts say it is necessary to take effective measures immediately to boost export earnings as well as increase the flow of inward remittance further for improving the current account balance position in the country.

Sharp rise in import of rice and other consumer goods due to the loss of crop in flood led the country to go for higher imports and make higher import payments. The prices of rice increased sharply in the local markets due to shortage of the staple food in government stocks after the flash floods in the country's north-eastern haor areas. The import of the item is on the rise to contain its prices and to meet the future demand.

All said and done, such a huge trade deficit is not a good sign for the country as it may leave an adverse impact on the macroeconomic situation. The government should restrain import of unnecessary and luxury goods and take steps to raise export earnings through diversification of exports to reduce it.

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