Economy: External front needs special care

As morning shows the day, so is a half-yearly review for the economy. A review sheds some light on the economy's performance for the whole year. 
The present write-up highlights specially the external side of the economy for the first half (July-December) of the current fiscal year FY17. It is based on data from documents of different organisations. One of these is the Quarterly Review regularly published by the Metropolitan Chamber of Commerce and Industry (MCCI). 
It appears from the review that export earnings during the first six months of FY17 stood at about US$ 17 billion as against US$ 16 billion of the corresponding period of the previous fiscal. The earnings grew by 4.0 per cent between the two periods. However, the export earnings fell short of strategic target of $17 billion by 3.0 per cent. The shortfall was due to three main factors: labour unrest in Ashulia that affected production and shipments of readymade garments (RMG), low demand in the international market, and appreciation of Taka against dollar. However, the overall export growth during the period seems to have been driven largely by RMG sector which accounted for over four-fifths of total exports (about $14 billion). The export of RMG registered a little over 4.0 per cent growth from the same period of the last fiscal.
A look at commodity-wise exports reveals both positive and negative growth during the periods under consideration. Commodities that witnessed a rise were woven garments, knitwear, leather, plastic products, etc. Commodities with negative growth included agricultural products, cotton and cotton products, ceramic products, etc. 
A glance at country-wise destination of exports shows that export earnings from the US and the UK - the top buyers of the country's products - declined mainly due to falling demand for RMG items in the two markets. Exporters say shipments of RMG products remained low due to labour unrest and a fall in demand for RMG products in the UK and the US markets resulting in negative growth of Bangladesh's exports to these markets. Devaluation of the pound sterling was also responsible for a negative export growth in the UK. Brexit might have indirect impacts. 
On the other hand, the expenditure side showed relatively higher growth. Import payments (C&F) during July-November of the current fiscal were 9.0 per cent higher than the corresponding period of the last fiscal.  Import payments over time increased mainly due to higher purchase of capital machinery and raw materials. Higher imports should indicate a rise in investment, especially private investment in the country.
However, the most disconcerting development is the fall in the inflow of remittances.  Over the last few decades, earnings from RMG and remittances emerged as the main sources of foreign exchange reserve (forex). A downward trend has serious ramifications on forex reserves. Remittance inflow during the first six months of the current fiscal dropped by about 18 per cent against the comparable period of the last fiscal. More paradoxically, earnings from remittances showed a downward movement despite a rise in overseas jobs for Bangladeshi nationals from 0.37 million to 0.38 million. 
Analysts attribute the fall in inflow of remittances to two important factors. First, a decline in world oil prices resulting in lesser jobs and earnings in manpower-importing countries, especially of the Middle East. Surprisingly, while low fuel prices help economic development through availability of cheap energy, the same low price affects remittances due to adverse effects on earnings of oil-producing countries. Second, differences of rates in official channel and the kerb market made the expatriate workers reluctant to send money through the former. The Taka-dollar exchange rate in kerb market went up to Tk 82 while the official market rate was Tk.78. This is a major concern as remittance is the biggest contributor to the country's forex reserve. Experts also fear further fall in the face of dwindling development activities in the Middle Eastern countries due to lower fuel oil prices in global market as well as declining exchange value of dollar. There has been marginal increase in the inflow of Foreign Direct Investment (FDI) during this period. Bangladesh needs even larger flow of FDI in future. 
According to the Quarterly Review, the current account deficit has hit the peak in the country's history during July-November period following a sharp fall in remittances and lower-than-expected export earnings. However, the balance of payments is still in surplus at US$ 1.9 billion in the first five months. But trade deficit widened in the wake of low export receipts and increased import expenditure (6.0 per cent versus 10 per cent respectively). By and large, foreign exchange reserve rose to a record US$ 32 billion at the end of December 2016. The reserves are equal to nine months' import payments. There are three advantages of a healthy reserve situation: higher credit rating for the country that enables the private sector to access foreign funds at low interest rate, more favourable economic environment and stability of the exchange rate - Tk. 78.7 at the end of December 2016 and Tk.78.4 at the end of June 2017. 
By and large, the performance of the external economy during the first six months of the current fiscal, barring shocks in remittance and FDI inflow, appears to be reasonably good. However, a business-as-usual approach during the next six months may not yield the desired outcomes as targeted in planning and budget documents targeted in planning and budget documents.
The writer, a former Professor of Jahangirnagar University, is currently Chair, Social and Economics Department (ESS), 
BRAC University. 
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