• Friday, March 06, 2015

Current account surplus erodes

Rejaul Karim Byron

The current account surplus eroded 35 percent year-on-year in fiscal 2013-14 despite the narrowing of trade deficit.

Last fiscal year, the current account, which reflects the country's net income, stood at $1.55 billion in the surplus in contrast to $2.39 billion the previous year.

The trade deficit shrank 2.89 percent to $6.8 billion on the back of a bigger increase in exports than imports: exports rose 12.04 percent whereas imports grew only 8.92 percent.

The drop in remittance inflow though has been blamed for the slide in current account surplus. Last fiscal year, remittance inflow declined 1.56 percent year-on-year, according to data from the central bank.

“Though the current account surplus decreased, it is still large,” said Zahid Hussain, lead economist of the World Bank's Dhaka office.

While this may be considered positive in terms of having a comfortable external balance and adequate supply of foreign exchange relative to demand, it also reflects the weakness in the domestic investment climate, as a result of which the country is unable to redeploy all its national savings in the domestic economy, Hussain added.

The WB economist further said an emerging economy like Bangladesh is expected to have a deficit in its current account, driven by strong imports of capital machinery and intermediate inputs.

While imports appear to have recovered relative to last year, the growth rate is still in single digit, a significant part of which came from the increase in food and other consumer goods imports, he added.

The impact of current account surplus on the overall balance of payments was reinforced by the surplus in financial account, despite a decline in inflows of foreign direct investment and a sharp increase in outflows on account of trade credit.

The financial account was $2.79 billion in the surplus owing to the increase in net medium- and long-term official loans and the positive 'errors and omissions'.

There was a $504 million inflow in 'errors and omissions' last year in contrast to a $752 million outflow in fiscal 2012-13.

In theory, the current account and the capital and financial account should balance. But in practice, this is not the case, because all BoP items are measured independently, irrespective of actual payment flows.

Errors and omissions are a balancing item, that is a net figure, so that errors in individual items may cancel each other out if they have opposite numerical signs.

Overall balance of payments surplus crept up to $5.5 billion from $5.1 billion in fiscal 2012-13, creating pressure on the nominal exchange rate to appreciate, Hussain said.

Bangladesh Bank remained active on the buying side of the foreign exchange market to prevent any significant exchange rate appreciation. It bought a total of $5.15 billion last fiscal year and $773 million between July 1 and August 7 this year.

On August 12, the taka-dollar exchange rate stood at Tk 77.47, which was Tk 77.63 in June. One year ago, it was Tk 77.75.

BoP is a statement that summarises an economy's transactions with the rest of the world for a specified time period.

Published: 12:00 am Friday, August 15, 2014

TAGS: World Bank Trade deficit current account surplus

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