Current account surplus after years on robust remittances

Infographic: TBS

The current account, a key component of the country's balance of payments, has turned positive after years, driven by a robust inflow of remittances.

According to data from the Bangladesh Bank, at the end of July-August, the current account recorded a surplus of $111 million, compared to a deficit of $610 million last fiscal year.

The country recorded a current account surplus for the last time during the July-February period of FY21.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, told The Business Standard, "Remittances grew by 15.8% year-on-year during the July-August period. This is the main reason for the current account surplus.

"This trend continued in September as well. The growth is primarily due to remittances being diverted from informal to formal channels. One reason for this may be the significant reduction in money laundering from the country."

When asked about the decline in money laundering, the seasoned economist explained that many of the individuals involved in money laundering have either fled the country or gone into hiding, which has led to a reduction in such activities.

"However, we must remain vigilant to prevent new groups from stepping in to fill this void," he cautioned.

According to central bank data, the country's trade deficit decreased in the first two months of the current fiscal year, meaning the gap between exports and imports has narrowed.

By the end of July-August, the trade deficit stood at $2.75 billion, down from $3.04 billion in the previous fiscal year. During this period, exports grew by 2.5%, while imports declined by 1.2%.

Zahid Hussain said, "The decline in the trade deficit is beneficial for us, especially given the overall situation in the country. There has been positive growth in exports, despite expectations of a decrease. However, the falling imports are concerning for an economy like ours.

"A decline in imports indicates a reduction in investment and production. If these were on the rise, the growth in imports would be seen as a positive development. Therefore, while the reduction in the trade deficit is a combination of good and bad news, we must carefully assess its implications."

According to the central bank, the country's financial account deficit reached $145 million at the end of July-August, a significant decrease from $1.34 billion a year ago.

Zahid Hussain said, "Despite our export growth, a net trade credit deficit of $474 million was recorded in July-August, indicating that this amount of export proceeds did not return to our country.

"The crisis of confidence in our foreign banks has not significantly diminished, meaning the reality has not changed much. As a result, we continue to experience a deficit in the financial account."

The central bank reported that the country's balance of payments deficit for July-August stood at $1.4 billion, compared to $1.7 billion in the last fiscal year. The primary reason for the FY25 deficit is a negative balance of errors and omissions amounting to $1.43 billion, which was a positive $241 million at the end of the same period in FY24.

A senior official of the central bank explained that the negative balance of errors and omissions indicates an unrecorded outflow. In other words, dollars have been spent from the reserves, but the corresponding transactions have not been accounted for.

According to Zahid Hussain, the pressure on the country's balance of payments has not yet subsided since 2022. A negative overall balance means that dollars must be drawn from the country's reserves or financial sector. He noted that a negative balance of errors and omissions may indicate potential money laundering, although it is difficult to provide a definitive assessment.

To improve the balance of payments, the economist emphasised that the disparity between the dollar rates in formal and informal channels should not be allowed to widen. He stated, "The dollar rate should be flexible."

"We are receiving dollar support from various multilateral organisations, and there has been stability in the dollar rate in recent days. Therefore, now is the time for us to transition to a market-based dollar rate," he added.

Emphasising the importance of increasing imports, the economist noted that disruptions in the economy can create panic among stakeholders. He pointed out that various issues, including unrest, exist within different sectors of the country's financial landscape. He suggested that resolving ongoing law and order problems would lead to increased investment.

A recent report from the finance ministry indicated that the country's balance of payments is affected by rate cuts from the US Federal Reserve. The Fed reduced rates once last September, and if further cuts occur in the future, the pressure on the country's balance of payments may ease.