Bangladesh Bank sees further deterioration of current account deficit

Even though the foreign exchange market is stable with a surplus balance of payment, the Bangladesh Bank anticipates further deterioration of the current account deficit in the near future due to negative export earnings and job losses among Bangladeshi migrant workers.

In the latest monetary policy announced on Wednesday for the current fiscal year, the deficit in the current account is anticipated to slightly deteriorate with moderate receipts in financial accounts as compared to the previous year.

The balance of payment witnessed a surplus of $3,655 million in FY20, contributed to by a decline in the current account deficit on the back of robust remittance inflows along with higher inflows of Foreign Direct Investment (FDI) and somewhat healthy inflows of medium and long-term loans.

However, the deficit in trade balance widened to $17,861 million during this period amid a decline in exports and imports by 16.9 percent and 8.6 percent respectively owing mainly to sluggish domestic and international demand during H1 FY20, which was further aggravated by the worldwide outbreak of Covid-19, according to the monetary policy statement.

The export growth fell by 16.9 percent in last fiscal year when import expenditure declined by 8.6 percent, central bank data shows.

Despite an economic slowdown in most of the remittance source countries, the government's two percent cash incentive was instrumental to achieving a 10.9 percent growth of inward remittances in FY20, reasonably higher than the 9.6 percent growth recorded in FY19.

However, somewhat worrisomely, available information indicates that overseas employment of Bangladeshi workers and professionals has dropped sharply in 2020, said the monetary policy statement.

Many overseas workers, it is reported, have already become jobless due to the Covid-19 pandemic and as such the growth in inward remittances might not be sustainable unless the ongoing pandemic situations in the host countries improve fast, said the report.

The exchange rate remained broadly stable and competitive in FY20 aided by the timely interventions of the Bangladesh Bank, it added.

During the first half of FY20, the exchange rate of taka against dollar faced a little depreciating pressure, which disappeared gradually during the second half due mainly to shrinking growth of imports and a significant amount of receipt in the financial accounts along with a good inflow of workers' remittances.

However, the exchange rate of taka against the dollar depreciated by 0.5 percent in FY20 which is markedly smaller than that of India and China but in line with other Asian competitors like Vietnam and Cambodia.

The movement of the Real Effective Exchange Rate (REER) index signals that the taka is (as of the end of June 2020) largely overvalued – mainly due to big price differentials with the major trading partner countries of the foreign currencies' basket, according to the monetary policy statement.