Of the four macroeconomic accounts, balance of payment is critically important, next to monetary and fiscal account. It is a well-recognised term since it is widely used as an indicator of economic growth and also reflects the state of the external sector of the economy. It is the sum total of all economic transactions of an economy with other countries. It is generally monitored by the central monetary authority of the country, and comprises current account, capital account, financial account and reserve account. The overall balance along with current and capital account is used by experts to analyse a country's economic performance.
Bangladesh has recently seen a current account deficit for the first time in the past two years. This has resulted in a widened trade and service deficit, added with dwindling primary and secondary income. However, among all these, declining inflow of remittance, which is a part of secondary income, has become a rising concern. In the current fiscal year, evidently, remitters are preferring channels outside banks to send money to get a better return. As a result, remittance inflow, which was keeping the secondary income balance positive, has declined.
In contrast, financial account, which is constituted with foreign direct investment (FDI) and foreign portfolio investment has seen a notable change. According to "World Investment report 2016", Bangladesh attracted FDI worth $2.23 billion in 2015 compared with $1.55 billion in 2014. Most of this investment has been in power and textile industries. And, these sectors significantly contribute to the expansion of international business. Second, foreign portfolio investments started performing well as overseas investors are considering Bangladesh stock market lucrative for long-term investment. Net investment by foreign investors during January to November 2016 stood at Tk 9.55 billion, which was Tk 1.07 billion during the same period a year ago (2015). Still, in the context of Bangladesh, the balance of the financial account is very insignificant compared with that of the current account.
In case of reserve balance, Bangladesh has seen an upward trend for the last one year, which currently stands at around $31 billion. This amount is enough to comfortably cover the country's import payments for eight months. The government's recently unveiled plan for use of reserve balance to finance mega projects has received appreciation from specialists.
The global scenario, amid global oil glut and profit deterioration of the Middle East countries, is likely to further exacerbate remittance inflow in the future. Consequently, it will harm the current account balance and overall balance. Besides, the overall balance surplus has also dwindled in this fiscal year. Although the balance is still positive, deteriorating trend is not a positive sign for the economy. The overall balance indicates the changes in reserve and a surplus certainly indicates higher inflow of foreign currency than the outflow from the country. This, as a result, allows the local currency to appreciate against the foreign currency i.e. considering US dollar as an intervention currency, a rise in surplus of the overall balance is likely to make Taka stronger against US dollar.
Similarly, if the overall balance shows a deficit, it will have the opposite effect over domestic currency. In addition, USD is surging against all the major currencies, and keeping the imminent FED interest rate hike in mind, USD is going to become stronger in the current calendar year. As a result, Taka will be depreciated against USD.
Considering the aforementioned facts, Bangladesh should try to overcome its dependence on current account by focusing on improvement in the constituents of capital and financial account of the balance of payment. The components of financial account have recently seen positive movements and it is high time steps were taken to further facilitate foreign investment in the country. Because the surge in the balance of capital and the financial account will significantly take away the pressure off the current account constituents. More precisely, it will decrease the country's reliance on remittance. Relying on remittance is highly uncertain, as the inflow of remittance depends on external factors which are not under the control of the monetary authority or government here. Thus, it is necessary to come up with new strategies in order to keep an overall positive balance, using constituents of other accounts rather than the current account.
The writer is a MBA Student BRAC Business School, BRAC University.
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