There has been great excitement and much commentary on recent developments of the Bangladesh economy.
This is the first of three articles on these issues.
This article examines the changes in the balance of payments.
The second article deals with exchange rate management and outlook through FY25.
The final article deals with three long run methods of balance of payments adjustment.
In particular three developments have attracted attention:
(1) The preliminary estimate for GDP growth for FY22 was 7.25%. The strong growth arose from the continuing recovery of the manufacturing sector.
(2) The sharp rise of the current account deficit of the balance of payments, that over the first nine months of FY22, increased to -$14.1 billion from a deficit of -$100 million in the first nine months of FY21.
(3) The inflation rate has risen above 6% for five consecutive months. Common opinion is that this underestimates the inflation rate.
The economy has recovered strongly after the pandemic moderated resulting in both rapid growth of exports and of imports.
Table 1A summarizes the balance of payments, showing the actual for FY21, the actual figures for FY21 and FY22 for nine months, and my forecast for 12 months of FY22.
The highlights are the current account deficit will increase from FY 21 deficit of -$3.8 billion to a projected FY22 deficit of -$18.8 billion.
The overall balance after taking account of net inflows of foreign capital indicates a shift from a surplus of $9.3 billion in FY21 to a deficit of -$4.3 billion in FY22.
What happened?
Exports grew by $11 billion over the nine months period while imports robustly increased $21 billion.
Remittances declined by $3.2 billion.
These major items indicate a decline in the current account of $13.2 billion.
Export increase was largely in the RMG sector where world demand rose sharply as brands restocked, China was producing little, Vietnam was still struggling with Covid-19 and other countries were not competitive.
Part of this increase was due to higher prices but data is not available to divide the change into quantity and price.
Remittances through the banking channel fell due to shifts into the hundi channel.
These shifts reflected two effects: Rising import prices increased the wish to under invoice and second, expectations of a depreciating Taka led to increased capital flight. Together exports and remittances raised only $7.8 billion more over 9 months of FY22 compared to the same period of FY21.
Imports increased $21 billion. What were the imports for?
Table 2A summarizes the merchandise imports of eight months of FYs 21 and 22.
Of the increase of $20 billion the intermediate goods, excluding those for the construction sector covered 55% of the increase and investments goods including inputs into construction were 30%.
The strong growth of imports arose from the increases in investment and the increase of production, largely in manufacturing.
Out of the 55% of intermediate goods, 64% were for the RMG sector.
There are certainly significant increases in the dollar import prices but no data is available to separate these effects.
We note that there was a significant increase in the import value of wheat, sugar and edible oil.
The main story here is that the economic recovery from the pandemic led to large exports, rising investment, and increasing production for domestic consumption.
Unfortunately, the increase of import prices threw the balance of payments into a limited deficit.
This deficit is projected to be -$4.3 billion.
Such a correction was going to happen due to the behavior of remittance flows.
The hundi demand for funds to cover under invoicing fell when imports fell.
This was certain to reverse when the economy began to grow.
Import prices
The world inflation during the past year raised import prices.
In addition, the Taka depreciated about 10-12% [to be discussed in the second article.]
The Taka prices increasing now at about 6.5% according to the official data, were partly driven by the rising import prices.
The 10% depreciation added about 1.5-2% inflation to the underlying 5% price increase of the whole economy.
The best way to think about this is: Consider the economy as earning so much foreign exchange from capital inflow, remittances and exports.
Then the GDP, at a fixed exchange rate, can grow at some rate requiring imports more or less equal to the earnings of foreign exchange.
Try to grow slower and the balance of payments will run a surplus; try to grow faster and one will have a deficit.
Before the pandemic, the Bangladesh economy was earning enough foreign exchange to grow at 7-7.5% without balance of payments pressures.
After the pandemic this has proved impossible.
The reason for this is the increase in commodity and energy prices that has now become a general inflation over many prices.
One interesting note is that in comparing 9 months of FY22 with FY21 we see that there has been no increase in the value of energy imports [oil, diesel, and natural gas].
As energy prices are likely to fall in the next year there should be reduced pressure from these import demands.
However coal imports will begin to increase sharply with 1,800 MWs of coal fired capacity available.
When the economy is run at a pace that results in more imports than can be covered with the earnings of foreign exchange, then the balance of payments deficit can be corrected in the short run in three ways and in the long run in another three ways.
Short run adjustments
1. Allow the Taka to depreciate; this will tend to increase exports and decrease imports. If nothing else is done then the exchange rate will adjust until the deficit is reduced to zero.
2. The central bank can sell dollars from reserves, sufficient to cover the deficit. Obviously, this is a short run measure.
3. Introduce regulations and restrictions on foreign exchange transactions to reduce imports.
All of these steps have been undertaken. (1) The Taka has depreciated 10-12% as discussed in the second article. (2) The central bank has sold dollars to the banks. This is roughly equal to the decline of reserves, although some may end up in the hands of the commercial banks. (3) Finally, some regulations have been issued to restrict the imports of goods and services. In my opinion these regulatory actions will have little impact on the flow of imports and are more for show than a real economic policy action.
Long run adjustments
1. Slow down the economy: On a temporary basis this reduces imports and provides time for the authorities to develop the other two adjustments. This action is always required for a two- or three-year period to achieve a correction to the balance of payments. If not done then reserves will decline over several periods until one has to slow the economy more and longer than if done at the start of the problem. But the keys are to raise interest rates and reduce the government deficit. Real interest is declining. So far the deficit has not increased; the domestic financing of the deficit is slightly lower for the 8 months (FY22) component to 8 months (FY21).
2. Work out good infrastructure projects and fund them through FDI or through the development banks. This shifts some of the development costs onto foreign borrowing. The government is doing this to some extent but there is much more that can be done. Raising FDI (net basis) to $4 billion per annum and increasing infrastructure to $5 billion per year is also feasible.
3. Most important is to increase the amount and diversity of exports. We return to this in the third article.
What is at stake here?
Due to the pandemic disturbing the world economy the flows of goods and services were turned into unusual, even chaotic directions.
Recovering, the Bangladesh economy is putting in a very strong performance in increasing exports and overall investment in the economy.
A large current account deficit appeared but this is readily managed over the next two-three years.
There is absolutely no need for panic.
Bangladesh’s economic position is very strong.
Plenty of problems of course, who does not have such, but the outlook is very favorable.
The very worst thing to do would be to impose regulations to control the inflow of imports.
Such a strong regulatory action would break the current excellent position of the country and lead to a decade of grief and slow growth.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics
