Import curbs pay off – country’s external position finally turns green

Infographic: TBS

The country's external position improved significantly in the first six months of the current fiscal year as the current account balance turned to surplus from deficit, narrowing down trade gap with trading partner countries, thanks to controlled imports giving the central bank a considerable relief.

Bangladesh Bank data shows the current account balance turned to surplus of $2 billion in July-December of FY24, overcoming a deficit of nearly $5 billion in the same period of FY23. 

The surplus current account balance consisting of primary remittance income and exports helped narrow down the trade deficit to $4.5 billion from $12.3 billion during the same period last fiscal.

However, the deficit in the financial account widened to $5.3 billion in July-December of FY24 from a surplus of $144 million in the same period of FY23.

The financial account which was built with inflow of foreign investments, loans and aids also started to improve slowly as the deficit amount was $5.4 billion a month back in July-November period of FY24, central bank data shows.

The improvement in external indicators came at the cost of business sufferings as banks are in conservative approach in opening LCs (Letters of Credit) for imports, causing closure of many small businesses.

Import growth declined by 20% year-on-year in July-December of FY24 helping to improve external position when export growth was 0.64%. 

The monthly inflow of remittance improved to nearly $2 billion for the last few months contributing to rebuilding the current account balance.

The improvement in external position also stopped dollar rate volatility settling down the price at Tk122-Tk123 for importers. 

During unveiling the monetary policy for the second half of FY24, Bangladesh Bank Governor Abdur Rouf Talukder said the majority portion of the loans had been paid off and the monthly external loan payments will come down to $100-$200 million soon. As a result, the reserve will rebound in the coming days.

Infographic: TBS

He said the current account balance turned into a surplus thanks to controlled imports. Though controlled imports caused suffering for many businesses, the central bank had no other option.

He said there is no alternative than to increase dollar inflow. Banks are encouraged to increase their credit line with foreign lenders to improve their dollar liquidity.

What experts say

Saleh Uddin Ahmed, former governor of Bangladesh Bank, told The Business Standard that the trade deficit narrowed due to reduced imports, mainly because of import restrictions enforced during the dollar crisis. 

"However, it's essential to consider how long these restrictions will be in place. They may need to be lifted at a suitable time now to ensure uninterrupted production, maintain employment levels, and sustain national growth," he added. 

He further said the dollar crisis stems from decreased export earnings and insufficient remittances. Therefore, the only solution lies in boosting export and remittance incomes. "Offering incentives on remittances helps, but other options should also be explored, such as diversifying exports beyond the garment sector."

He also suggested tapping into non-traditional export markets and attracting foreign investment by making the country more investment-friendly.

Selim RF Hussain, chairman of Association of Bankers Bangladesh (ABB) and managing director of BRAC Bank, told TBS that due to regulatory measures by the central bank, the trade deficit has decreased leading to a surplus in the current account balance. 

"This has had a positive impact on the banking sector with the central bank now tightly controlling over- and under-invoicing bringing stability to banks," he added. 

Regarding allegations of traders buying dollars at higher rates, he said the situation has improved and expressed hope that the central bank would take further steps on the issue.

How better external position reflected in forex market

After a year-long volatility, the forex market seems to be cooling down as the exchange rates of dollars have settled down between Tk123 and Tk124 in the last 1.5-month, checking the steep fall of taka.

Reduction in payment pressure of private sector short term loans and conservative approach in LC opening against imports helped to check exchange rate fluctuation, said industry insiders. 

Political stability is another non-economic factor which contributed to bringing macroeconomic stability as the country has overcome election-centric uncertainty, according to industry experts.  

Bangladesh Bank is expecting no further fluctuation in exchange rates and planning to not go for further devaluation in near future until introducing the newly announced crawling peg mechanism, said a senior executive of the central bank. 

Though exchange rate fluctuation stopped, the gap between official rate and unofficial rate is still high above Tk12 diverting remittance into informal channels. 

The officially declared dollar rate is Tk110 to Tk110.5 for buying and selling but most banks have been purchasing remittances at above Tk122 and selling to importers above Tk123, according to industry insiders. 

Despite the high gap between official and unofficial exchange rate, the Bangladesh Bank did not go for devaluation after November last year. Rather, the central bank cut the dollar price twice during the November-December period last year. 

The country experienced 26% devaluation of taka in just one year in 2022 but it slowed down to 2.8% in 2023. 

On the other hand, the REER (Real Effective Exchange Rate) based exchange rate which surged to above Tk119 in October last year settled down to Tk115 plus in January signalling that devaluation pressure eased. 

The REER is an indicator of the competitiveness of a country's currency with respect to a basket of currencies, adjusted for inflation effects.

The REER index indicates that the bilateral exchange rate of the dollar should be Tk115 instead of the current rate of Tk110. 

However, remitters are already enjoying a dollar price of Tk 115 if 2.5% of the government's incentive and 2.5% banks' own incentive are considered.