Rising BoP trade credit becoming a headache

Bangladesh is seemingly holding a healthy surplus of current account balance, but the large financial account deficit – triggered by a double digit trade credit – has been causing the country’s overall balance to steadily deteriorate.

When a country’s export receipt falls below the value of its shipments, whether due to inability of the payer or receiver, this gap is reflected under the trade credit of Balance of Payment (BoP).

Not just Bangladesh, the rise of this particular indicator is a matter of headache for any country.

According to the Bangladesh Bank’s latest BoP data, during the July-February period of FY24, the country’s current account balance was a $4.76 billion surplus, which was a $3.45 billion deficit in the same period previous FY.

This surplus was made possible by strict import restrictions to mitigate the on-going USD shortage. However, the financial account deficits widened to $8.36 billion in the same period in FY24 and hit all-time high.

Such a deficit was about four times less at $2.32 billion during the July-February period of FY23.

Experts say the reason behind this large deficit in the financial account is the ever rising trade credit. BoP data shows that under the financial account, net trade credit was negative $10.75 billion in July-February of FY24, compared to negative $3.55 billion recorded year-on-year.

Providing a closer look into the phenomenon, World Bank Dhaka Office former lead economist Zahid Hussain told The Business Post, “This negative trade credit appears to be an outflow.

“Put 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.”

Commenting on the matter, a central bank official on condition of anonymity said, “The largest factor in trade credit is the gap between export value and receipt. But time is also a key factor, as exports are not realised immediately, it takes around 120 days.

“This gap is increasing as export earnings are not being repatriated on schedule. I recommend reaching out to exporters to speed up repatriation of earnings, and penalties for the non-compliant.”

The Business Post had reached out to Bangladesh Bank spokesperson Mezbaul Haque on phone for his comments on the matter, but he did not respond till the filing of this report.

An analysis of Bangladesh Bank data shows that from FY13 to FY22, Bangladesh exported goods worth $359.21 billion, but repatriated $314.37 billion. The remaining $44.84 billion is yet to be tracked down.

Meanwhile, according to the Export Promotion Bureau (EPB) data, Bangladesh’s exported goods value was $55.55 billion in FY23, but the central bank received $43.57 billion, this indicated an $11.98 billion gap.

This has continued in the current financial year. According to the Quarterly Review on Export Receipts during the July-December of FY24, the country’s total export receipt was $18.96 billion, against the export value of $27.54 billion, denoting a $8.58 billion difference.

Providing context, Zahid Hussain said, “The main reason behind this is our unstable and several exchange rates. Because of this, the exporters may not be fetching USD from their buyers. Many others may be laundering money through hundi – an illegal cross border transaction system.”

Moreover, short-term foreign debt repayments have increased. It was $1.77 billion in July-February of FY24, which was $1.01 billion in the same period of last FY.

In this context, Zahid Hussain said, “The confidence in Bangladesh’s financial sector is yet to return. So the repayment amount has increased. On the other hand, businesses may be a bit reluctant to take new loans as interest rates have increased in the world debt market.

Due to the USD crisis last year, many banks in Bangladesh could not pay their LC liabilities in time, which resulted in a decline in credit ratings. International credit rating agencies such as Moody’s and S&P have downgraded Bangladesh’s rating in the last year.

Central bank data on private sector’s short term foreign loans also shows that repayments are higher than receipts.

Last year, Bangladesh received loans of $25.79 billion USD in the private sector and repaid $31.13 billion. On the other hand, in January this year, the amount of loan payments was $2.19 billion while the amount of borrowing was $1.76 billion.

According to FY24 July-February BoP data, the amount of errors and omissions exceeded $1 billion in a jump compared to July-January of FY24. This amount was only $150 million in the July-January period of current FY, which jumped to $1.03 billion during July-February of FY24.

Economists believe that information regarding money laundering remains obfuscated behind these errors and omissions. They recommend checking the figures on a case by case basis, to identify where actually the errors are located.