The Financial Express

External sector on right trajectory

| Updated: April 21, 2022 21:53:35

External sector on right trajectory

Different government authorities do mathematical exercises of events that happened earlier. Based on the exercises, different projections are forecast. The results of future forecasts depend on the efficiency of implementation.

There are some statements, prepared by different government agencies, known as national income statements, fiscal statements, monetary statements and last but not least, external sector statements. The last one is presented in the form of 'balance of payments (BOP)' prepared by the central bank.

It is said that Bangladesh is standing on some key pillars -- agriculture, readymade garment (RMG) exports and wage remittances. Some comments are reported to have been said on our economy in line with recent crisis-ridden economy-- Sri Lanka. In support of the comments, deficit position of current account balance of BOP has been cited loudly.

Let us focus on mathematical exercises. Central bank prepares BOP which contains trade balance, current account balance and financial account balance. All these are interlinked. Each position from an account - surplus or deficit - is used for calculation of next account. Example is that trade balance is brought forward for calculation of current account balance.

There is a suitable link between national income accounts and current account balance of BOP. In a simple way of calculation, current account balance is considered in national income accounts along with expenditure and investment both at public and private sectors. Current account balance is either savings or dissavings - difference between income and expenditure including investment. Savings mean current account in positive territory. Negative balance of current account is dissavings.

Bangladesh is already on the path to graduation from the Least Developed Country (LDC) status and moving forward. After passage of Covid situation of around two years, the economy has changed its gear. Economic engine is moving now. Just if we look at export trend, a long jump is found with a record growth of 33.41 per cent up to March, 2022 of the current fiscal year and stood at US$ 38.61 billion. As usual, RMG becomes topper in export items. On the other hand, inward remittances during 2020-2021 were recorded at $24.78 billion. The growth is said to be negative during the current fiscal, commented by different corners. But the trend stands at new normal with a remittance of $15.30 billion up to March, 2022 of the FY22. The international reserve, as per central bank's data, is more than $44 billion in spite of support of around $4 billion dollar during the current fiscal.

During the first eight months or up to February 2022 of the current fiscal year, trade deficit is recorded at $22.30 billion. After adjustment of different items including wage remittances, current account balance stands at negative position of $12.84 billion which is covered by different external receipts under capital and financial accounts such as external loans, grants, foreign investment, etc. Overall balance, net of financial accounts, stands at deficit of $2.22 billion during the period. The shortfall is covered with the support from international reserve by central bank.

With regards to external debt position as per information of central bank, gross outstanding position up to December, 2021 stands at $90.79 billion. Compared to gross national income of $438.18 billion in the FY21, the external debt is not big, only around 21 per cent. Of the total debt, $15.46 billion is recorded as short-term debt of private sector. This is basically short term finance for import of industrial raw materials and capital goods. The sustained position of international reserve moving upward with growth by earnings is an indication of sound strength. The international reserve position is capable enough to face challenges with regard to unseen pressure on local currency.

At pick-up stage to development, Bangladesh needs to depend on imports of capital equipment in addition to strategic goods like fuel. Bangladesh economy is a composite model of export-led and import substitution. Export brings foreign currency as well as it provides employment. On the other hand, import substitution supports to produce output with the help of input contents. Still revenue income of the government is significant from customs duties and taxes which work as tariff wall for import substitution. Bangladesh moves cautiously in making free trade agreements with counterparts. Import substitution, it is true, is not a foreign currency earning path but it has indirect impact on external sectors by saving outflows of foreign currency. The concept can be considered by critics as 'beggar thy neighbour' or 'mercantilism'. But we need to be so since our inevitable imports at both ends of public and private sectors need to be settled out of income from external sources - 'pay as you earn'. There are many higher income countries having debt of around 300 per cent but they do not face default since they have capacity to wash out the current liabilities. Our 'pay' for current dues is within capacity - salutes to foreign currency earners like exporters and wage earners, and domestic industries saving foreign currency.

For external transactions, Bangladesh needs to depend on counterparts abroad. World renowned banks are operating in Bangladesh. There are some liaison offices of foreign banks in our country selling their products like buyer's credit, ad-confirmation services, correspondence services, clearing services, etc. Their presence in Bangladesh indicates that we are a business hub for external transactions. They are doing goods business on account of different service charges. During its age of half century, no default case is recorded for any single payment in the history of Bangladesh. Despite, foreign banks charge Bangladesh different fees at higher rates on the ground of non-investment graded county! The presence of counterparts in business in Bangladesh indicates the economic strength of Bangladesh.

If we look at product basket, RMG is the topper. But our basket is not confined to single product - RMG. There are thousand tariff lines for export products. One size cannot fit all. It is reported that policy support to RMG does not fit for other products. RMG is definitely a one product which is essential item for importers. The production process needs physical touch, it is still under challenge whether industrial internet (IOT) or 4th industrial revolution (4IR) can automate RMG production process. Still , dependence on RMG is still risk free. There is light in the tunnel, we are seeing light engineering products and pharmaceutical products are on rising trend in the export basket.

Bangladesh economy is on a safe footing and is expected to remain so in future also. We just need to fine tune policies from time to time to cope with changing situations. These are - exchange rate adjustment depending on market demand, external term borrowing to permit only for meeting external liabilities, not to incur local expenses, and last but not least, outward investment to be confined at corporate level. Sales proceeds of domestic assets should not be allowed for transfer abroad.

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