Even though Bangladesh recorded a strong rebound in current account balance, the financial account deficit reached an all-time high of $9.25 billion in the July-March period of FY24, triggered by the big negative trend of net trade credit.
It seems that the deficit is creeping towards $10 billion.
Net trade credit stood at negative $12.24 billion during the above mentioned period of FY24, compared to just negative $3.92 billion recorded year-on-year, show latest Balance Of Payments (BoP) data published by the Bangladesh Bank on Monday.
Net trade credit is the gap between shipment value of an export [found in current account] and the USD inflow into the banking system against that export, said expert.
The marginal growth of net foreign direct investment (FDI), negative growth of portfolio investment, low growth of fresh foreign loans, and high growth of loan repayments are also widening the country’s financial account deficit.
It should however be noted that the country’s overall balance has improved in the first nine months of FY24, and the balance was negative $4.75 billion, compared to negative $8.48 billion posted in the same period of FY23, show BoP data.
Overall balance deficits have helped reduce the depletion of reserves. According to Bangladesh Bank data, the forex reserves stood at $19.91 billion at the end of March this year, which may cover 5.1 months of goods import payments.
To prevent further erosion of forex reserves, the Bangladesh Bank has set the USD price at Tk 117 by introducing the crawling peg system last week.
Speaking to The Business Post, Policy Research Institute Executive Director Ahsan H Mansur said, “Financial account deficit is a big problem for the whole economy, and it is a bad sign for the country’s overall balance of payment.”
Trade, current account deficits
The BoP data shows that due to huge restrictions on imports, the country’s current account balance is now a surplus of around $5.8 billion in the July-March period of FY24. Such balance was a $3.3 billion deficit in the same period of FY23.
In the current account segment, export earnings in the first nine months of FY24 increased by 3.99 per cent to $40.87 billion, while import payments declined by 15.42 per cent to $45.62 billion, compared to the same period of FY23.
The remittance inflow growth was 6.48 per cent in the same period of FY24 and the amount was $17.07 billion.
Mansur added, “The central bank also restricted imports due to the shortage of USD. As a result, the regulator was able to decrease the deficit of trade. However, restrictions on imports are not good for our country.”
Financial account deficit
Though Bangladesh has established several economic zones around the country, the amount of net FDI inflow is not that good. Bangladesh is the lowest FDI destination among the South Asian nations according to the data from several international reports.
In July-March period of FY24, net FDI stood at $1.22 billion, an increase of only 1.32 per cent compared year-on-year. The non-resident Bangladeshi’s (NRBs) withdrew their portfolio investment by 22.58 per cent in the same period of FY24, compared to FY23.
During the July-March period of FY24, the country received $5.47 billion in long term fresh loans, and the growth was 9.05 per cent compared year-on-year. But the repayment growth was 20.14 per cent, and the amount was $1.51 billion in the same period of FY24.
Meanwhile in the same period the repayment of short term loans increased to $1.77 billion in July-March period of FY24, according to the BoP data.
Commenting on the issue, Ahsan H Mansur said, “Bangladesh is not getting enough foreign short term loans due to trust issues. The country is currently suffering from a USD shortage, and foreign investors have been monitoring it for a long time as well.
“If they do not feel secure, then would they invest in Bangladesh? The private sector is also not very keen on taking short term foreign loans due to the high interest rate in the global financial market.”
Trade credit hits the financial account
Experts say even though the current account deficit is now surplus, the Bangladesh Bank is unable to reduce the financial account deficit due to the huge amount of negative trade credit.
Trade credit was negative $12.24 billion in the July-March period of FY24, compared to only negative $3.92 billion in the same period of FY23.
Commenting on the matter, former lead economist of the World Bank Dhaka Office Dr Zahid Hussain said, “We are witnessing that the USD inflow against exports is declining. So the trade credit outflow deficit already exceeded $10 billion.
“This negative trade credit appears to be an outflow. To put it more simply, the net trade credit is the gap between shipment value of an export [found in current account] and the USD inflow into the banking system against that export.”
He pointed out, “For example, if the export value is $100, then if you get $80 against it, then the remaining $20 is a gap shown under trade credit. As this gap widens, it means the USD inflow is declining into the country against the export value.”
