Bangladesh's 'terms of trade (TOT)' increasingly go against the country, according to a central-bank report, following faster growth of the import-price index relative to the export-price index amid global market volatility.
The report portrayed the situation of the past fiscal, and local economists and a multilateral lender forecast that this mismatch in foreign trade will deteriorate further this year (FY2022) leading to TOT losses for Bangladesh.
Fallout from the war in Ukraine and sanctions against Russia are largely to blame for the distortion in balance of trade, they say.
The export-price index and the import-price index grew by 3.23 per cent and 5.06 per cent respectively during the reported fiscal year, the Bangladesh Bank said in its latest annual report released recently.
TOT, a key macroeconomic indicator, represents the ratio between a country's export prices and its import prices. This means how many units of exports are required to purchase a single unit of imports. When TOT is favourable, it means that a country is accumulating more capital from exports than it is spending on imports.
On this dichotomy in trade calculations Dr Zahid Hussain, former lead economist at the World Bank, says this deterioration surfaced simply because of supply-chain disruptions in the past fiscal year.
"The supply-chain disruption led the price of goods up in the international market. So the prices of the import goods were higher than local exports," he told the FE.
This is an income loss for Bangladesh as the country had paid much more than its receipts from exports which marked a record growth of over 54 per cent in March last.
In the meantime, a World Bank publication styled South Asia Economic Focus 2022 released recently said that the war in Ukraine would impact demand for exports. South Asia exports about 25 per cent of its products, including textiles and garments, to Europe, where demand growth is expected to slow.
The report says the immediate terms-of-trade impact solely due to expected oil-price increases triggered by the war and related sanctions is expected to be 0.9 per cent for the region (South Asia).
But it ranges between 0.38 and 1.4 per cent of GDP, as global oil prices will likely remain high in 2022 and into 2023.
The report estimates Bangladesh's terms of trade loss around 0.5 per cent of the GDP.
The war could reduce income growth in South Asia this year by 2.2 percentage points: 1.3 percentage points because of slower GDP growth and 0.9 percentage points because of terms-or-trade losses.
By end-2022, real growth of both export and import is expected to slow, as demand at home and abroad softens due to higher prices.
The publication also reads the upheaval in commodity prices will have an immediate and direct impact on current-account balance in 2022.
"Demand for imports will return, but the commodity price surge will play a dominant role in the higher import bill expected through most of 2022, leading to widening deficits for the region in 2022 and a small improvement in 2023."
Even before the war in Ukraine, most countries were already expected to see their current-account balances deteriorate in 2022 amid higher import prices and pent-up demand for imports carrying over from 2021 (exports of goods had recovered strongly in 2021).
However, the report says that higher remittances will offset higher import bills in Bangladesh and Nepal as higher oil prices underpin demand for migrant workers in Gulf Cooperation Council (GCC) countries.
