Friday, June 21, 2024


Dhaka Tribune

It’s the external sector, stupid!

Our economy is in need of increased focus on external earnings

Update : 10 Aug 2023, 12:29 PM

Current-account deficit is reported to have narrowed at $3.3 billion, as per "balance of payments" statement, in the financial year 2022-2023. Different initiatives like margin imposition against import LCs, tariff hike on luxuries, high value import monitoring, etc helped to narrow the flows under current account.

The deficit in current-account in financial year 2021-2022 was $18.6bn. During the period under review, financial-account deficit is recorded at $2.1bn which was in surplus of around $15.5bn in the financial year 2021-2022. 

Is it a matter of achievement to curtail imports? It is a question. It is definitely an achievement for external transactions. In a simple calculation, current-account deficit of only $3.3bn can easily be supported by stock of foreign currency. It is an indication of banking system in better position, no doubt. 

Transactions with external sectors are executed in different phases. For economic transactions, goods and services come in for which payments go out. In the reverse case, goods and services go out and payments come in. 

The economic transactions are reflected in current-account under "balance of payments" statement. In the financial year 2022-2023, the position is negative as noted earlier. Normally financial-account supports the deficit of current-account. It is found that current-account deficit of $18.6bn in financial year 2021-2022 was met by positive balance of around $15.5bn in financial-account. The remainder was basically supported by stock of foreign currency of the country. Due to this shortage in financial year 2021-2022, foreign exchange market of the country experienced disruption, the taka faced a huge depreciation. This all led to an enhanced price hike. 

External sectors play a vital role for economies like ours having resource constraints. In respect of goods, there needs to be natural sources. As an example, we can say that soybean -- edible oil -- needs raw beans, which are not naturally available in our country. Alternative edible oils are not adequate to cater the needs. Without producing locally by input imports, finished soybean can be imported.

But local purchasing powers cannot support to consume such finished imports. Purchasing powers need to be created. If soybean is to be produced locally, manufacturing activities should be in place. This can generate huge employment, creating more purchasing power.

This may be a positive wave lifting all boats. Such achievement in employment is not possible through imports of finished soybean. Bangladesh imports few items commercially which are not viable to be produced locally. Even inadequate high-tech facilities result in imports of some items which are traded commercially in the economy. This creates employment required for trading activities.

But this is not as high as is possible by manufacturing industries. 

Due to constraints in input contents, manufacturing industries depend on external sectors. Disruption of inputs will lead to reduced production capacity or stoppage of production. Cross-border trade is not an easy path. Global practices need to be observed in this regard. We have our own legal tender, the taka. This is used locally for internal transactions. For cross-border transactions, globally acceptable currencies are required.

Few currencies work as facilitators for global transactions. These are the US dollar, Euro, pound, etc. Different regions and blocks are trying to do away from the grips of leading currencies. Despite that, only a few currencies as noted earlier are in dominance. 

Currency is a factor. Acceptable currencies need to be earned for cross-border transactions. This is one of the best alternatives that every economy wants to achieve. But it is not so easy to earn income from external sources as much as needed. There are other alternatives -- foreign investment, loans, grants named as major ones.

Of the alternatives, loans are an easy item comparatively. In the immediate past financial year of 2022-2023, financial-account shows a negative position. It indicates that earlier, dues were paid or Bangladesh extended loans to external sectors. Extending loans to external sectors is barely possible. But in fact, it seems to have happened.

The financial-account under "balance of payments" statement shows trade credit in a negative position of $6.5bn indicating exports on credit sales for which exporters are yet to receive payments. As per export regulations, payments need to be realized within four months from the date of shipments. Trade credit should be discounted through supply chain finances prevailing in different names.

The fat figures compared to that of the past year indicate external financing sources are not smooth enough for early payments before maturity of export bills. Exporters are not comfortable to receive payments earlier due to high financing cost compared to taka loans, which may be a cause. Whatever the reason is, deficit in financial-account cannot be of help for current-account deficit. 

Bangladesh economy experienced a robust growth for more than a decade. Export trade sowed the growth path. In the late eighties of the last century, export trade, through readymade garments, led the current-account to be balanced. This facilitated relaxed transactions with external sectors by declaration of taka convertible on current account. As a result, infrastructure investment by public sector and development of import substitution industries by private sector gained momentum.

Its positive impact will be realized when Bangladesh economy graduates from the LDC status. Manufacturing sectors of the country led to the development of the service sector, positioning the economy in a better shape. There are many parameters behind it, but policy supports for cross-border transactions is one of them. In the development periphery through upper stages, dependency on external sectors will continue, which  requires matchmaking in current-account transactions.

There comes a question whether it is a good sign to decrease deficit in current-account, compared to earlier years, by curtailment of imports. Maybe, but it would otherwise be possible through enhancement of income from external sectors. If it had happened, the economy would move to a new path.

The economy is in need of that. As we know, a surplus in financial-account supports deficit in current-account. Definitely this support is required in the same way as manufacturers depend on short term trade credit in the name of supplier’s or buyer’s credit. As usual, this will continue.

On the other hand, the economy needs to increase its values from external sources. Export is one of the main sources. Bangladesh is still dependent on ready-made garments as export products and western countries as destinations. Export needs to be diversified with exploration of new markets. In this case, policy support should be extended to all products, whether they are produced for global markets or for both domestic and international markets.

It is claimed that manufacturers producing for domestic markets and global markets are not treated in the same way of export oriented industries. The policy support is basically duty-free input imports and credit facilities at rebated rates. There should be some devises so that proportionate facilities can be extended to these sectors for promotion of exports like agro-products, light engineering, steels, pharmaceuticals, and many other sectors.

It is said that trade agreements like BTA, RTA, FTA, PTA, etc can create windows for market exploration. But there is two-way traffic, requiring to give tariff benefits to receive the same. Net exporters want to make such agreements which are not viable for the economy.

An alternative path is to promote exports through different trade hubs like Singapore, Hongkong, Dubai, or Zurich. International traders operate in the hubs who can support exports in consideration of commission. On the other hand, merchanting trade and countertrade are pathways for generating income from external sources.

Services are a source of external income. There are four modes under which services are traded. These are cross-border service delivery, consumption abroad, commercial presence, and physical presence. Income from mode 3 is possible if we can invest abroad, but it is subject to approval from the authorities concerned. Wage remittances are received but this is not under mode 4. Income sent by remitters is transfer payment: One-way traffic. Physical presence is a way in which a person goes abroad, provides services, and comes back with income.

These two modes are rare in practice. But the first one is possible to be explored, in which people provide services from Bangladesh such as consultancy, and other professional and business services including IT services. There is scope to earn adequate income. This is as good as physical exports, but it does not require declaration since services are moved in non-physical form. As such, monitoring framework does not work if income is not repatriated.

It is said that service income is subject to deduction of source tax at a higher rate compared to exports of physical goods. Like goods exporters, services providers need to incur different expenses abroad. Service exporters are allowed to retain a part of their income in foreign currency accounts from which they can meet their needs. But they need to pay different taxes and levies to effect remittances abroad. Tax issues are reported to be discouraging factors, which needs to be addressed. 

A tourist visiting Bangladesh expends money in foreign currency. This is a good source of inward remittances. Physical currency notes are found to be replaced by alternative payments system such as cards, wallets, etc. The payments are captured by banks. What is to happen if banks abroad provide acquiring services? This is a challenge requiring attention. The loopholes can be plugged in by providing retention facilities in foreign currency accounts out of their income and to allow remittance supports therefrom without facing regulatory hassles, including taxes. 

Different paths are there to match the gap of external transactions. Dependency on external inputs is inevitable, curtailment of which may not lead the economy to a higher level. It is better to focus on external earnings. Promotional agencies working for exports of goods and income from services should work on them, as outlined above, in coordination with other supporting agencies. 

Mehdi Rahman works in the development sector.

Top Brokers


Popular Links