Current account deficit drops 87% in July-January

Infographic: TBS

The deficit in the current account balance, a key component of the country's balance of payments, decreased 87% during the July-December period in the current financial year.

Experts attribute the deficit decrease to significant export growth exceeding imports and improved remittance inflows.

The current account balance is calculated by adding primary and secondary net income to the trade balance, which is the difference between exports and imports.

According to Bangladesh Bank data, at the end of July-January in FY25, the current account deficit stood at $552 million, compared to a $4.28 billion deficit during the same period of the previous fiscal year. This means the current account deficit declined by 87% during the period. At the end of July–December in FY25, the current account had a surplus of $56 million.

In the first seven months of FY25, remittance inflows amounted to $15.96 billion. During the same period last year, remittances stood at $12.91 billion. This means remittance growth rose by $3.05 billion or 23.6%.

Despite the current account balance being in deficit, Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, views it positively.

He told TBS, "The current account deficit has significantly decreased compared to the previous fiscal year. This positive change is mainly due to an increase in remittances and a reduction in the trade deficit. 

"If the trade deficit had remained as high as in the last fiscal year, the current account deficit would have been even larger. However, we must strive to keep the current account balance in a good position to reduce pressure on the country's foreign exchange reserves."

The central bank data shows the trade deficit decreased by 9% at the end of July–January in the current fiscal year compared to the same period in the previous fiscal year as export growth outpaced import growth.

At the end of July–January in FY25, the trade deficit stood at $11.75 billion, compared to $12.91 billion in the previous fiscal year. In the first seven months of the fiscal year, export growth was 10%, while imports increased by 3.3%.

As export earnings increased by approximately $2.39 billion compared to an import rise of around $1.22 billion, Bangladesh was able to reduce its trade deficit.

Prof Mustafizur said, "A reduction in the trade deficit is positive from a balance of payments perspective. However, the import of many investment-related goods, including capital machinery, has declined. 

"This trend is reflected in the overall import figures. Currently, we do not see any significant momentum in investments. If investments increase in the future, imports will also rise."

Financial account surplus rises to $850m 

Due to the arrival of overdue export proceeds and aid from various donor agencies, the surplus in the financial account, the other key component of the balance of payments, increased to $850 billion during July–January in FY25.

According to a report by the central bank, the financial account surplus at the end of July–January in the previous fiscal year was $81 million, meaning the surplus increased by nearly $769 million in the current fiscal year.

During July–January in FY25, foreign direct investment decreased from $900 million in the previous fiscal year to $252 million. At the same time, the net trade credit deficit significantly decreased, meaning the export payments that were previously held abroad are now coming into the country. 

Compared to July–January of the previous fiscal year, the trade credit deficit dropped from $2.05 billion to $224 million in the current fiscal year. Additionally, in the first seven months of the fiscal year, medium and long-term loans decreased by 17.4%.

A senior official from the central bank said, "The US Federal Reserve has reduced its policy rate. As a result, the pace at which foreign banks and investors were pulling out investments from other countries has slowed down. However, new investments are not coming in at a significant rate."

Several senior officials from various banks said the actual foreign direct investment (FDI) is much lower. A significant portion of the FDI reflected in the balance of payments consists of reinvested earnings, meaning the profits from previous investments were reinvested.

The bankers said the reduction in the trade credit deficit is due to the arrival of export proceeds. They mentioned that with the uncertainty around the exchange rate decreasing, exporters are no longer holding dollars abroad as they did before. 

Additionally, during the previous government's tenure, the trade credit deficit appeared larger due to efforts to artificially inflate export figures, they said. The correction of these calculations has also contributed to the reduction in the trade credit deficit, said the bankers.

Prof Mustafizur commented that while the surplus in the financial account helps present a positive picture of the balance of payments, it is actually creating debt for the future.
 
External deficit falls 75% in July-Jan

Despite macroeconomic instability due to the aftermath of the anti-discrimination student movement in July–August, the fall of the Awami League government, the takeover by an interim government, subsequent flooding, and ongoing protests across the country over various demands, the overall deficit in the balance of payments that represent the country's external balance decreased by nearly 75% year-on-year in the first seven months of FY25.

The overall deficit in the balance of payments for the July-January period of FY25 stood at $1.17 billion. In comparison, the deficit at the end of the same period last year was $4.69 billion. This means the deficit decreased by nearly $3.5 billion compared to the previous fiscal year.

Commending the significant reduction in the balance of payments deficit, Prof Mustafizur said, "The decrease in the overall deficit is certainly good news for our economy. The impact of this improvement is already visible in the country's foreign exchange reserves and exchange rate."

However, the economist pointed out the increase in error and omission as a negative aspect, despite the positive indicators in the balance of payments. He mentioned that if this had been lower, there would have been no deficit in the balance of payments.

The negative balance of error and omission means an unrecorded outflow. In other words, dollars have been spent from the reserves, but the transactions are not being recorded or accounted for.

The main reason for the deficit in the first seven months of FY25 is the negative balance of error and omission, which stands at $1.7 billion. This represents a 161% increase compared to the same period in the previous fiscal year. At the end of July–January in FY24, the negative balance was $650 million.

Prof Mustafizur said due to the significant reduction in the demand for hundi, it cannot be said that the entire error and omission is due to capital flight. 

However, he emphasised the need for further investigation, particularly focusing on the increasing trend of this issue.