Current account deficit narrows further, reserves inch up to $30b
World Bank’s $507m budget support gives a boost to forex holdings
Bangladesh's deficit in current account balance – which comprises primary and secondary income through trade, services, and remittances – narrowed slightly in the first nine months of the current fiscal year thanks to a fall in imports, providing the Bangladesh Bank with breathing space in managing the external position.
The current account deficit slightly narrowed in March to stand at $3.6 billion in the July-March period of FY23, down from $3.74 billion in July-February, according to the Bangladesh Bank's data.
This marks a significant improvement from the deficit of $14.38 billion in July-March of the previous fiscal year.
Furthermore, Bangladesh's foreign exchange reserves increased to $30.36 billion on Wednesday, up from $29.78 billion just a day earlier. This rebuilding of reserves was made possible as the country received $507 million in budget support from the World Bank, as per Bangladesh Bank Spokesperson Mezbaul Haque.
Keep updated, follow The Business Standard's Google news channel
A senior executive of the Bangladesh Bank said the improvement in the current account deficit reflects the efficient performance of the real economy as the growth of exports and remittances is rising. However, he noted that the current account balance improvement could not ease pressure on the external balance due to a negative financial account.
The central bank is nonetheless satisfied with the current account balance improvement, as it shows that the economy is performing well, noted the executive, adding that the financial account deficit is temporary, as foreign lenders are currently unwilling to give loans due to the ongoing global crisis situation.
The country's export earnings grew by 7.76% year-on-year in the July-March period of the current fiscal year, while remittance growth was 4.78% during the same period. However, import growth was negative 12.33%, contributing to improving the current account deficit.
Besides, the financial account deficit widened to $2.2 billion in July-March, up from $1.9 billion in July-February of the current fiscal year, as per central bank data. In contrast, the financial account had a surplus of $12 billion in the July-March period of the previous fiscal year.
The fall in foreign direct investment and foreign loan flow contributed to this deficit, putting pressure on reserves.
The current account balance is the primary source of a country to make foreign payments. When a country's current account balance turns negative, it makes foreign payments from the financial account. If the financial account becomes negative, then payments are made directly from reserves.
Currently, the deficit in both the current account balance and the financial account has caused a faster erosion of forex reserves, according to industry insiders.
In this situation, the trade deficit widened to $14.6 billion in July-March from July-February of the current fiscal year, while the deficit was $25 billion in the July-March of the previous fiscal year.
Though the latest external indicators showed improvement compared to a year ago, they could not ease the dollar crisis, as more taka devaluation is expected.
Recently, the Bangladesh Bank decided to devalue the taka further to narrow the gap between the dollar selling rate from reserves and the market rate. An IMF review team that visited the country from 25 April to 7 May this year stressed the need for faster implementation of a unified exchange rate to ease pressure on foreign exchange reserves.
As part of this decision, the central bank devalued the taka by 1.50 in the first week of this month, setting the rate of the dollar selling price from reserves at Tk104.5. The price will increase to Tk106 by next month.
