External sector on good trajectory

Different government authorities do mathematical exercises on events that happened earlier. Based on the exercises, different projections are planned. The results of future predictions depend on the effectiveness of the implementation.

There are certain statements, prepared by different government agencies, known as national revenue statements, fiscal statements, monetary statements, and last but not least, external sector statements. The last is presented in the form of a “balance of payments (BOP)” prepared by the central bank.

Bangladesh is said to be standing on some key pillars – agriculture, ready-made garments (RMG) exports and remittances. Some comments would have been said about our economy in line with the recent economic crisis in Sri Lanka. In support of the comments, the balance of payments current account deficit position was quoted aloud.

Let’s focus on the math exercises. The central bank prepares the BOP which contains the trade balance, the current account balance and the financial account balance. All these elements are linked. Each position of an account – surplus or deficit – is used for the calculation of the next account. For example, the trade balance is carried forward for the calculation of the current account balance.

There is an appropriate link between the national income accounts and the current account balance of the balance of payments. In a simple calculation mode, the current account balance is taken into account in the national income accounts together with expenditures and investments in the public and private sectors. The current account balance is either saving or dissaving – the difference between income and expenditure, including investment. Savings means checking account in positive territory. The negative current account balance is dissaving.

Bangladesh is already on its way to graduating from least developed country (LDC) status and moving forward. After the Covid situation passed by about two years, the economy shifted gears. The economic engine is running now. Looking at the export trend, there is a long jump with a record growth of 33.41% through March 2022 of the current fiscal year and amounting to US$48.61 billion. As usual, RMG becomes the top export items. On the other hand, inbound remittances in 2020-2021 were recorded at $24.78 billion. The growth is said to be negative in the current fiscal year, commented on by different corners. But the trend is towards the new normal with a disbursement of $15.30 billion through March 2022 of FY22. The international reserve, according to central bank data, is over $44 billion despite approximately $4 billion in support in the current fiscal year.

In the first eight months or until February 2022 of the current fiscal year, the trade deficit is recorded at $22.30 billion. After adjusting for various items, including salary remittances, the current account balance stands at a negative position of $12.84 billion, which is covered by various external receipts under capital and financial accounts such as external loans, grants, foreign investments, etc. Overall balance, net of financial accounts, shows a deficit of $2.22 billion during the period. The deficit is covered with the support of the international reserve by the central bank.

As for the external debt position according to central bank information, the gross outstanding amount through December 2021 stands at $90.79 billion. Compared to gross national income of $438.18 billion in FY21, foreign debt is not large, only about 21%. Of the total debt, $15.46 billion is recorded as short-term private sector debt. It is essentially a short-term financing for the import of industrial raw materials and capital goods. The sustained position of international reserves moving higher with earnings growth is an indication of strength. The international reserve position is sufficiently capable of meeting the challenges regarding the invisible pressure on the local currency.

In the recovery stage of development, Bangladesh has to depend on imports of capital goods in addition to strategic goods like fuel. Bangladesh’s economy is a composite model of export and import substitution. Exporting brings in foreign currency and provides jobs. On the other hand, import substitution allows producing an output using the input content. Yet government tax revenue is significant through tariffs and taxes that function as a tariff wall for import substitution. Bangladesh is cautious when entering into free trade agreements with its counterparts. Import substitution, it is true, is not a way of earning foreign exchange, but it has an indirect impact on the external sectors by avoiding the outflow of foreign exchange. The concept may be seen by critics as “begging your neighbour” or “mercantilism”. But we have to be because our unavoidable imports at both ends of the public and private sectors have to be paid for with revenue from external sources – ‘pay as you win’. Many high-income countries have around 300% debt, but they are not facing default because they have the capacity to pay off current debts. Our “payment” for current dues is within our capabilities – salute to foreign currency holders like exporters and wage earners, and domestic industries saving foreign currency.

For external transactions, Bangladesh must depend on its counterparts abroad. World renowned banks operate in Bangladesh. There are foreign bank liaison offices in our country that sell their products like buyer credit, listing confirmation services, correspondence services, clearing services, etc. Their presence in Bangladesh indicates that we are a commercial hub for outward transactions. They trade in commodities due to different service fees. Over its half-century age, no default event is recorded for a single payment in the history of Bangladesh. Despite this, foreign banks charge different fees in Bangladesh at higher rates due to an unlisted county in investment! The presence of business counterparts in Bangladesh indicates the economic strength of Bangladesh.

If we look at the product basket, RMG is the best. But our basket is not limited to one product – RMG. There are one thousand tariff lines for export products. One size may not fit all. It is reported that political support for RMG is not suitable for other products. RMG is definitely a unique product which is an essential item for importers. The production process needs physical contact, it is always unclear whether the Industrial Internet (IOT) or the 4th Industrial Revolution (4IR) can automate the RMG production process. Yet, RMG addiction is still risk-free. There is light in the tunnel, we see that light engineering products and pharmaceuticals are trending higher in the export basket.

Bangladesh’s economy is on a secure footing and is expected to remain so in the future as well. We just need to tweak the policies from time to time to deal with changing situations. These are the adjustment of the exchange rate according to market demand, external term loans to allow only to meet external commitments, not to incur local expenses, and last but not least, investments outsiders to confine at company level. Proceeds from the sale of domestic assets should not be allowed to be transferred overseas.

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