The Business Standard
Financial account deficit exceeds $8b

Financial account deficit exceeds $8b

*The financial account deficit – which comprises foreign direct investment, short-, medium-, and long-term loans, and trade credits – crossed the $8 billion mark in the July-February period of the fiscal 2023-24, thanks to increased trade credit deficit and loan repayment pressure.* According to the Bangladesh Bank, the financial account deficit amounted to $8.36 billion at the end of February, reflecting an increase of $574 million from January. This figure contrasts with a $2.32 billion deficit in the equivalent period of the last fiscal year. The financial account balance is the primary source from which a country can make foreign payments. When a country's current account balance turns negative, it utilises the financial account for foreign payments. If the financial account becomes negative, then payments are made directly from reserves. In this context, the World Bank forecasts slow economic growth for Bangladesh as inflation is likely to remain elevated, while foreign exchange reserves are expected to remain low. In its latest edition of Global Economic Prospects, the global lender warns that continued import restrictions and rising input costs could impede private investment, while slower export growth to Europe might impact the overall economic prospects for the country. The World Bank also suggested that the crawling peg should function as a market-clearing exchange rate mechanism, aiming to narrow the gap between formal and informal exchange rates. "This approach would aid in rebuilding external buffers by incentivising remittances through formal channels, thereby making informal channels less appealing. Additionally, it would help reduce the financial account deficit by facilitating the expansion of trade credit and other forms of external financing," it added. At present, the official exchange rate is Tk110 per dollar, while the unofficial rate is above Tk115-120. "Gross foreign exchange reserves have declined sharply over the past year, reaching $20.8 billion in February 2024. Implementing a sustainable exchange rate policy is key to stemming the significance," said the World Bank. The total net reserve stood at nearly $15.3 billion on 28 March excluding $4.5 billion in liabilities from the gross reserve of $19.8 billion, according to Bangladesh Bank data. Zahid Hussain, former lead economist at the World Bank's Dhaka office, said, "We have made some improvements in the overall balance of payments. Our current account balance is also on the positive side. However, the deficit in the financial account has increased, which is not favourable for our external balance." "In particular, the trade credit deficit has increased by almost three times compared to the same period last fiscal year. Differences in export shipments and payments serve as major determinants of trade credit," he added. A trade credit deficit implies that exporters are not bringing their full payment into the country, he said, adding, "Another implication is that a portion of the growth we see in our exports exists only on paper. In other words, we are not receiving payment for the full amount of exports we are reporting." The Bangladesh Bank data shows the trade credit deficit stood at $10.75 billion during the July-February period of the current fiscal year, compared to $3.56 billion in the same period a year ago. The financial account deficit is widening due to the decrease in various short-, medium-, and long-term loans. The repayment amount exceeds the acquisition of new short-term loans, according to the central bank. *Current account surplus surges $1.67b in a month* The country's external position has improved in the first eight months of the ongoing fiscal year due to the significant decrease in imports and the positive growth of exports and remittances due to various measures taken by the central bank. The current account surplus, one of the key components of the external position, has increased by $1.67 billion in one month. Bangladesh Bank data shows the current account balance turned into a surplus of $4.76 billion in July-February of FY24, overcoming a deficit of nearly $3.46 billion in the same period of FY23. The current account, encompassing the balance of trade (exports minus imports of goods), net income from abroad, and net current transfers, holds significant importance as a key component of the broader balance of payments. *Trade deficit drops* The trade balance represents the variance between the export and import values of a country. A trade surplus arises when exports surpass imports, while a trade deficit occurs when imports exceed exports. Bangladesh, being reliant on imports, experiences a trade deficit in its balance of payments each month. According to data from the central bank, the country recorded a trade surplus in February. Consequently, the trade deficit for the July-February period of FY24 decreased to $4.62 billion compared to the period from July to January. In contrast, the deficit stood at $13.36 billion for the same period in the previous fiscal year.
Published on: 2024-04-03 20:17:26.053127 +0200 CEST