A decline in fresh foreign credit, coupled with increased repayment of foreign debt, had pushed Bangladesh’s financial account into a significant deficit in the ongoing fiscal year, putting the country’s economy under pressure.
There is however a glimmer of hope as the July-December period financial account deficit shows slight year-on-year improvement. But the deficit still stands at more than $5 billion, central bank data shows.
A tremendous improvement has also occurred in the overall balance of the country’s balance of payment, and the Bangladesh Bank is optimistic that such improvement will help boost the country’s foreign exchange reserve position.
According to latest central bank data, the country’s overall balance deficit declined from $6.45 billion to $3.67 billion in the July-December period of FY24, compared year-on-year.
Deficits that arise in the overall balance of BoP are met from foreign exchange reserves. So, during July-December period of FY24, almost half of the reserves have been depleted compared to the same period last year.
Financial account deficit still a challenge
Despite a better improvement of the overall balance, the huge deficit in the financial account is still a big challenge for Bangladesh. The deficit improved slightly in December last year, which shows hope for the economy, believes the central bank.
This deficit was $5,475 million in the July-November period of current FY, and the figure declined by $85 million to $5,390 million in the July-December period.
However, in the July-December period of FY23, this figure stood at a surplus of $144 million. The Bangladesh Bank target under the latest Monetary Policy Statement (MPS) is $200 million surplus at the end of FY24.
Speaking to The Business Post, Bangladesh Bank spokesperson Mezbaul Haque said, “Our biggest priority is to adjust the financial account. We achieved this during the July-December period to some extent.
“The key reason behind this was change in the exchange rate and increase in interest rate. As a result, the money market problem is slowly getting resolved. Due to an increase in the interest rate, Taka is gradually becoming more attractive.”
Mezbaul, also the central bank executive director, continued, “As overall balance deficit declines, it helps lessen the depletion of reserves. It should further help us in improving the country’s reserve position.
According to BoP data, at the end of December, Bangladesh’s foreign exchange reserves stood at $21.86 billion in line with the IMF BPM6 method. The latest recorded position of reserves was $19.95 billion on February 7 this year.
In the MPS for July-December of FY24, the Bangladesh Bank mentioned, “This shift towards a financial account deficit stemmed primarily from several factors, including a slowdown in private foreign borrowings amid global interest rate hikes, and economic uncertainties.
Additionally, this deficit contributed to faster repayment of short-term private foreign borrowings, intended to avoid additional costs linked to rising base interest rates. Moreover, a significant trade credit emerged due to delayed repatriation of certain export earnings.
According to the BoP data, net foreign direct investment (FDI) inflow declined by 15.55 per cent to $755 million in the July-December period of FY24, compared to year on year.
Meanwhile investment by non-resident Bangladeshis declined year-on-year by 1.79 per cent to $55 million in the same period of FY24.
Besides, net aid flow improved by 5.3 per cent to $2931 million in the July-December period of FY24, compared to the same period of FY23. Fresh foreign loan inflow also improved in the same period.
Such loans increased by 8.68 per cent to $3.88 billion in the July-December period of FY24, compared to year on year.
However, the repayment of such loans jumped by $20.08 per cent to $951 million in the July-December period of FY24, compared to the same period of FY23. Trade credit deficit rose to $7.44 billion in the July-December period of the current financial year.
Errors and omissions also improved in the July-December period of FY24. This amount stood at only $369 million in H1 of FY24, compared to $1.84 billion recorded in the same period of FY23.
Current account balance improves
The reduction in import expenditure and increase in remittances to meet the USD shortage has led to significant changes in the current account balance deficit under the balance of payments.
In the July-December period of FY24, export income increased by 0.64 per cent to $25.98 billion, and import payments declined by 19.8 per cent to $30.58 billion compared to the same period year on year.
This move helped drop the trade balance figure to $4.59 billion during the July-December period of FY24, which was $12.31 billion in the same period last FY. Workers’ remittance increased by 2.91 per cent to $10.79 billion in H1 of FY24, compared to year on year.
As a result of this, the current account balance has now moved from deficit to surplus. It had a $1.92 billion surplus during the July-December of FY24, compared to the $4.9 billion deficit recorded in the same period of FY23.
In the latest monetary policy, the Bangladesh Bank set a target of $332 million in deficit in the current account balance at the end of FY24.