Disequilibrium in balance of paymentsA review by Unnayan Onneshan
In order to meet the expenditure requirements, Bangladesh has to regularly borrow from different foreign sources. As a result, interest payment on loan is one of the main elements that imbalances the balance of payment. Interest payment is increasing over the years and increased in FY2010-11 at $220 million which is 2.33 percent higher than that of FY2009-10. In the business-as-usual scenario, interest payment might increase to $232 million in FY2012-13.
THE secondary income is one of the components of current account balance. Of which, remittance is the prominent element to influence the overall balance in an economy and it is one of the most important sources of foreign earnings. According to the World Bank, Bangladesh emerged as the seventh largest remittance earner in FY2010-11 with the amount of $11,650.32 million. Bangladesh is a densely-populated developing country with large numbers of less skilled and low-waged labourers. The semi-skilled or unskilled workers are the main source of obtaining more remittance inflow in the country.
The number of expatriate workers is following an irregular trend over the years. The number of migrant workers was the highest at 0.98 million in FY 2007-08 and then it continued to decline because of the global economic recession and collapses in the construction sector in the Middle East. Manpower export increased by 2.85 per cent in FY2010-11 than that of the previous fiscal year. The percentage of labour migration slowed in FY2010-11 because of the global economic recession, political instability in Middle East and squeezing demand of labour markets.
Although the manpower export declined during the period from FY2007-08 to FY2010-11, the workers’ remittance is increasing in volume but at a decreasing rate. The growth rate of remittance dropped from 32.39 per cent in FY2007-08 to 6.03 percent in FY2010-11. In the business-as-usual scenario, remittance might increase to $12,237.1 million in FY2011-12 and $12,823.83 million in FY2012-13.
In the first seven months of FY2011-12, manpower exports were 74 per cent higher than that of the same period of the previous year. During the first ten months of FY2011-2012, the remittance flow stood up at $10,615.75 million, which was 10.43 per cent higher than that of the previous fiscal year. At the same time, the highest remittance received from Saudi Arabia was $3,017.65 million, which is around 29 per cent of the total remittance received. The second highest remittance received from the UAE (18.65%). The share of Europe in receiving total remittances is only about 8 per cent, where most remittances were from the United Kingdom and Germany.
In April 2012, receipt of remittance was $1,083.89 million which is 2.27 per cent lower than that of March 2012. Labour migration was 0.57 million up to April 2012. During the last few months of this current fiscal year, remittance followed a negative growth rate. According to the Bangladesh Association of International Recruiting Agencies, over 80,000 Bangladeshis worked in Libya. The recent crisis in Libya has forced to quit many of the Bangladeshi workers from strife-torn Libya.
In FY2011-12, the projection in MTMF, IMF-MEFP, MTBF and the business-as-usual scenario on remittance were $12,900 million, $12,815 million, $10,020 million and $12,265.18 million respectively. However, in the business-as-usual scenario, remittance might stand at $12,880.05 million in FY2012-13, which might be lower than those of the projections in MTMF, MTBF and IMF-MEFP.
Capital account balance
DURING July-April of FY 2011-12, capital account, which records all the short- and long-term international movements of capital and is also known as the financial account, reflecting the net change in national ownership of assets, was in surplus at $429 million which is 2.27 per cent lower than that of the same period of the previous fiscal year. In FY2010-11, capital transfer was $600 million, which was 22.95 and 58.31 per cent higher than that of FY2009-10 and FY1993-94 respectively. The lowest amount of capital transfers was $163 million in FY2004-05 and after that, it increased in the following fiscal year by 130.06 per cent. Although capital transfers are following an irregular trend from FY1993-94, in the business-as-usual scenario, it might reach at $631 million in FY2012-13, which is 5.17 per cent higher than that of FY2010-11.
Financial account balance
THE components of financial account are the foreign direct investment, portfolio investment and the others investment. FDI as per cent of the GDP has decreased over the years because of the political unrest, global economic crisis, increase in inflation, declining foreign aid, squeezed investment and shaky reserve mainly because of excessive import bills for petroleum products for guzzler quick rental power plants.
FDI, portfolio and other investments
FDI includes the long-term capital investments such as the purchase or constructions of machinery, buildings or even whole manufacturing plants. During July-April in FY2011-12, FDI was $580 million, which is 7.94 per cent lower than that of the same period of the previous fiscal year. In FY2010-11, net FDI was $768 million, which is 15.88 per cent lower than that of FY2009-10. The FDI inflow was the highest in FY2008-09 at $961 million, which was 28.48 per cent higher than that of FY2007-08. In the business-as-usual scenario, FDI might reach at $843 million in FY2012-13.
The portfolio investment means the purchase of share and bonds. Sometimes it refers to the short-term investments. Portfolio investment was in deficit at $142 million during July-April in FY2011-12. In FY2010-11, it decreased to $28 million which was 76.06 per cent lower than that of FY2009-10. It was the highest at $106 million in FY2006-07 and then it continued to decline at an increasing rate. The continuation of trend suggests that the deficit in portfolio investment might reach $32.4 million in FY2012-13.
Net other investment includes capital flows into bank accounts or provided as loans. A continuous negative trend of net other investments is following from FY2003-04 to FY2010-11. In FY2010-11, net other investment was in deficit at $2,324 million which was 60.01 per cent lower than that of FY2009-10. However, the net other investment was in surplus in FY1993-94 at $599 million. In the business-as-usual scenario, it might decline to $2,787.6 million in FY2012-13.
Lower value of net FDI, negative value of portfolio investment and the continuously declining trend of other investments are pushing the financial account to further deficit. In the business-as-usual scenario, the deficit in financial account might reach $1,822.6 million in FY2012-13. In FY2010-11, financial account recorded a deficit of $1,584 million, which was $651 million in the corresponding previous fiscal year. In FY2005-06, the positive trend of net FDI, increase in portfolio investment and the huge declining contribution of net other investments caused the deficit in financial account balance which was $141 million and in the next fiscal year, the financial account was in surplus. After then it continued to have deficit in financial account balance.
Foreign exchange reserve
Foreign exchange reserve has increased at a decreasing rate over the years due to soaring import bills, the global financial crisis, economic slowdown and higher rate of inflation. Other factors associated are the depreciation of the taka against the dollar and the increase in debt and deficit led to decline in the current fiscal year. In FY2010-11, foreign exchange reserve increased by only 1.51 per cent than that of the previous fiscal year. It is only 0.14 per cent of the total GDP and 0.15 per cent in FY2009-10. In 1990s, the average foreign exchange reserve was $1,949.33 million; it was $5,352.95 million in the 2000s, up 174.60 per cent from the previous decade. The regime-wise trend of reserve shows that it was $2,701.53 million during FY2002-03 to FY2004-05 and increased to $11,016.86 million during FY2009-10 to FY2011-12. In the business-as-usual scenario, the reserve might reach at $11,866.97 million in FY2012-13, which indicates that the incremental growth rate of foreign exchange reserve might shrink in the upcoming fiscal years due to the recent slower rate of remittance inflow and upward trend of petroleum imports.
During January-April FY2011-12, reserve continued to slide due to the steady depreciation of the taka, decrease in export earnings, remittance and the upward trend of import bills. After clearance of monthly payments to the Asian Clearing Union, foreign exchange reserve dropped by 6.59 per cent in May 2012 from the previous month. Reserve increased in April 2012 as the first instalment ($141 million) of $987 million was disbursed by the International Monetary Fund. However, the continuation of trend from July 2011 to May 2012 suggests that reserve might slide by the end of the just-finished fiscal year unless receipt of remittance and export earnings gives a positive vibe.
INSTEAD of the continuous trade deficit, the current account balance recorded a positive trend from FY2001-02 to FY2003-04. Then, it started to increase from FY2005-06 till FY2010-11. However, the incremental growth rate of current account balance has followed an erratic trend over the years. In FY 2010-11, current account surplus was $995 million, which was though 73.37 percent lower than that of the previous fiscal year. The reason was negative trade balance with a deficit of $7,328 million. In addition, receipt of workers’ remittance and FDI was 6.03 per cent and 15.9 per cent lower than that of FY2009-10. According to the IMF-MEFP, one of the major causes of the pressure on the current account balance is the substantial rise in fuel prices on the international market. The continuation of yearly trend suggests that the surplus in current account balance might attain in the upcoming fiscal years but at a slower rate.
The current account balance stood at $455 million in March 2012 which was $177.52 million in the previous month of this current fiscal year. During July-April FY2011-12, current account surplus was $509 million which is 35.37 per cent lower than that of the same period of the previous fiscal year. The slower rate of current account surplus occurred mainly due to the increase in deficits of trade and primary income. In the mean time, a larger deficit in trade and primary income increased by 9.87 and 19 per cent respectively than that of July-April FY2010-11. Along with the increasing trend of remittance inflow at 10.4 per cent, increase in secondary income has helped to attain the current account surplus.
In the business-as-usual scenario, current account surplus might be attained in the upcoming fiscal years, but the incremental growth might decrease. The current account surplus might increase to $1,115.4 million in FY2012-13.
Capital account shows an upward trend over the years. In FY1999-00, it was $561 million, which was 44.96 per cent higher than that of FY1998-99. It fall down drastically in the subsequent fiscal year which was the lowest in FY2004-05 at $163 million and this was 16.84 per cent lower than that of FY2003-04. It was $600 million in FY2010-11 which was 22.95 per cent higher than that of FY2009-10. In the business-as-usual scenario, it might reach $624.6 million in FY2012-13.
The lower flows of foreign direct investment, portfolio investment and the others investment contribute to increase the financial account deficits. In FY2010-11, financial account deficit was $1,584 million which was 73.49 per cent lower than that of FY2009-10. In the same fiscal year, the net FDI was 15.9 per cent and the portfolio investment was 76.07 per cent lower than that of FY2009-10. Financial account recorded a deficit of $370 million in FY1998-99 and $116 million in FY1999-00. After that, the financial account surplus was continuing from FY2001-02 to FY2008-09. The continuation of the trend suggests that financial account deficit might increase to $1,834.3 million in FY2012-13, which is 20.62 per cent higher than that of FY2010-11.
In spite of a capital account surplus of $429 million, a financial account deficit of $934 million and a large negative errors and omissions contribute to the overall account balance deficits of $106 million during July-April of FY2011-12 against a deficit of $502 million during July-April of 2010-11. For the first time in a decade, the overall balance of payments slipped into a deficit in FY2010-11.
Impacts of IMF-MEFP
IN ORDER to overcome the imbalances of balance of payments and to restore macroeconomic stability, the government has received loan of SDR 639.96 million (about $1.0 billion) for three years under the extended credit facility.
The IMF-MEFP requires more efforts to raise export (and other) earnings and reduce import payments, or more generally to reduce aggregate demand. Recent months of this current fiscal year, the depreciation of taka against dollars is increasing. According to IMF-MEFP, it is further necessary to depreciate Taka against dollars and to take different measures of imports restrictions if remittances and foreign assistance do not maintain the required growth. Moreover, the flexibility of exchange rate might not only increase the import bills but also may create pressure on balance of payments. Automatically this might decelerate the foreign exchange reserve.
The central bank has been following contractionary monetary policy to rein in higher rate of inflation, and this is in line with the IMF-MEFP policies. The IMF-MEFP has asserted to increase the rate of interest. Another condition is to limit bank borrowing and set a ceiling on the reserve money held by the Bangladesh Bank. Ultimately, this would increase the investment cost and monetary squeeze would decline the domestic investment. This slower rate of investment may not only decline in generation of employment but also reduce aggregate demand. Thus this contractionary monetary policy as pursued by the Bangladesh Bank may result in a reduced GDP growth rate in the upcoming fiscal years.
The central bank may resort to further devaluation of taka and administer reduction in imports, if supply of foreign currencies from sources such as remittances does not keep up considerable growth momentum nor the government anticipated flow of foreign aid is materialised.
The restrictive monetary targets, agreed in the IMF-MEFP, have also in effect reduced the fiscal space of the government, demonstrated in the recently approved national budget of 2012-2013. The choice of instruments of resource mobilisation for deficit financing and public spending has been limited to regressive instruments such as raise in value added tax (VAT).
SOARING import bills particularly for quick rental power plants and sluggish rate of export earnings has widened trade deficit in the recent fiscal years. The declining import of capital machineries and intermediate goods has aggravated the growth prospects of the country. Depreciation of local currency against the dollar, low foreign exchange reserve, and downward trend of incremental growth rate of remittance receipt have also exerted pressure on the balance of payment.
Deficits of trade and primary income, lower value of net FDI, negative value of portfolio investment and the continuously declining trend of other investments along with negative errors and omissions contribute to the overall account balance deficits in FY2010-11 which might increase further in the upcoming years.
This is an abridged version of the June issue of Bangladesh Economic Update, a monthly release by the Economic Policy Unit of the Unnayan Onneshan, a multidisciplinary research organisation, based in Dhaka, Bangladesh. A team under the guidance of Rashed Al Mahmud Titumir, comprising Syed Naimul Wadood, Nahida Sultana and AZM Saleh prepared the report.
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