External deficit widens further, mounting pressure on reserves

Infographics: TBS

Deficit in the country's financial account balance swelled to $2.02 billion at the end of August from $946 million a month ago, putting further pressure on the dwindling forex reserves.

According to the Bangladesh Bank data, the trade deficit widened in August to stand at $1.01 billion, up from $0.64 billion in July.

At the end of September, the country's reserves stood at $21.15 billion, down from $23.26 billion at the end of August.

By the end of August, the current account balance, which includes primary and secondary income from trade, services, and remittances, increased further. Despite the trade deficit, primarily due to the addition of remittance income, it kept the balance in the positive. In total, by the end of August, deficit in balance of payments increased to $1.7 billion, up from $1.06 billion at the end of July.

The current account balance is the primary source of a country to make foreign payments. When the current account balance turns negative, a country makes foreign payments from the financial account balance. If the financial account balance becomes negative, then payments are made directly from reserves.

Bangladesh's deficit in trade balance – difference between export and import, and financial account balance – which comprises foreign direct investment; short-, medium- and long-term loans, and trade credits – widened further in August, thanks to decreasing trend of remittance and slower export growth.

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, told The Business Standard, "Our imports have decreased a lot, and remittances also declined by 13%. This is not good news for us. The surplus that we see in the current account balance is mainly due to the decrease in imports. In a $450 billion dollar economy like Bangladesh, if imports decrease so much, then how will that economy continue?"

The deficit in the financial account has increased due to the increase in the trade credit deficit, he said. "The country's merchandise is exported but the payment is not coming. Exchange rate has a big role on this matter. Bangladesh has to repay a lot of debt, whereas new loans are not available. Thus, financial access has become difficult for the country. Finally, this deficit reduces the country's forex reserves."

A senior official of the central bank said that in the first two months of the new fiscal year, the country's imports decreased by more than 22%. "In contrast, exports increased by 9%. As a result, although the trade deficit decreased somewhat compared to the previous fiscal year, it still remained far from surplus. This is because despite the decrease in imports, the amount of exports was higher." Therefore, he apprehended that the trade deficit may increase further in the coming months.

According to another BB official, the loans or aid that the country receives from various institutions are mainly disbursed on a quarterly basis. "Therefore, we will be able to see the impact of this on the balance of payment statement as of at the end of September."

The increasing interest rate on the dollar worldwide, the depreciation of the local currency, and Bangladesh's deteriorating position in the credit ratings of various international organisations are mentioned as reasons for the financial account's deterioration. Additionally, it is noted that Bangladesh's foreign direct investment has decreased compared to previous periods, and various loans are being received at a higher cost. These factors are contributing to the increase in the deficit in the financial account.

The depreciation of the local currency is seen as another reason for the gradual decline in foreign exchange reserves, contributing to the reduction in the financial account deficit. The value of the taka is being gradually reduced with the goal of market-based valuation of the dollar. In October of the previous year, the dollar was sold from the reserves at Tk96. In the last week of September, the value of the currency was further reduced to Tk110.50. This means that the value of the currency has decreased by 15% over a year. Due to this decrease in the value of the currency, the cost of repaying foreign loans has increased significantly.

Furthermore, in the global market, the interest rate on the dollar was once below 1%. Now it has risen as high as above 5%. This means that to take foreign currency loans, we are now required to pay much higher interest than before. This increased interest rate has reduced Bangladesh's ability to acquire loans.

Additionally, downgraded credit ratings of Bangladesh from international organisations are creating difficulties for obtaining forex loans and foreign direct investment.