The state of the economy: Balance of payments

Published : 8 Jan 2012, 01:29 PM
Updated : 8 Jan 2012, 01:29 PM

The balance of payments is fast emerging as the soft underbelly of the economy. It was in rather good health since 2001-02. The current account balance was positive throughout the new millennium except for a blip in 2004-05. This was certainly an unusually good outcome for a resource-poor least developed country. In particular, the country ran large current account surpluses since 2005-06 that helped to build up a substantial stock of international reserves. This gave the external value of the domestic currency a stability that was unheard of in its short history; the taka value of the US dollar, the principal currency in trade transactions, remained stable for nearly 5 years.

Since the beginning of the last year the balance of payments came under some stress, and it does not seem to be relenting. The situation has worsened considerably during the last six months. International reserves have fallen markedly to less than three months import payments. The foreign exchange market has become jittery and the taka has depreciated substantially. From a stable value of about Tk69/US$ at the beginning of 2010-11, it is now trading at over Tk82/US$, a depreciation of nearly 20 percent. There is a distinct prospect of further depreciation of the taka.

Although the balance of payments is in the main a statement of the transactions of the national economy with the rest of the world, it also reflects the over-all macroeconomic performance of the economy. A current account deficit is simply the manifestation of an excess of domestic spending over national income (i.e. excessive spending), and an over-all balance of payments deficit is a reflection of the inability of the economy to earn or attract as much foreign exchange as it owes to the rest of the world. Consequently the deficit has to be paid out of the sock of accumulated international reserves.

The current account of the balance of payments records all current transactions including goods and services, factor incomes and current transfers. Import payments requirements of Bangladesh always exceeded export receipts such that the trade balance was always negative. During the first 5 months of 2011-12, the merchandise trade deficit has ballooned to $5.2 billion, a 30 percent increase over the corresponding period last year.

In the earlier years of the nation the trade deficit was balanced in large part by foreign loans and assistance. Since then the importance of foreign capital has declined as a new source of large current transfers opened up, viz. remittances of expatriate workers. Remittances grew in size and importance over the years; these now account for more than 10 percent of the national income and fully cover the total trade deficit. Remittances converted Bangladesh from a current account deficit to a current account surplus country.

However, with the slowdown of remittances during the last 3 years, the current account surplus declined sharply from $3.7 billion in 2008-09 to only $0.99 billion in 2010-11.

The European economic crisis and the global recession have started to impact the external sector of the country. The growth of export that had reached a dizzying height of 41.5 percent last year has fallen off sharply. The growth during the period July-November 2011 stood at 17.3 percent. The November growth rate tumbled to only 2.4 percent. The rate of decline during the last few months suggests a real possibility that the export growth for the fiscal year 2011-12 will be in a single digit. This would most likely lead to a substantial deficit in the current account. Multilateral agencies have predicted a one billion dollar deficit; but it could be larger unless remittances pick up sharply.

The current account deficit need not stress the balance of payments if the capital account is in sufficient surplus. However, this seems very unlikely at least this fiscal year. Negotiations with the development partners for funds have fallen on a hard rock. Allegations of corruptions and denials have stifled progress on major loan commitments. As a result foreign assistance has declined precipitously. The net disbursement of aid during the first 5 months of the current fiscal year was only $68.9 million in contrast to $322.7 million that was received during the same period last year. The government had hoped for substantial budget support from the World Bank and balance of payments support from the IMF. In the recently concluded consultation with the IMF, the government seems to have come up with an empty hand. The IMF has imposed some very tough conditions for the release of funds. Other major donors who had promised funds seem to have withdrawn with a 'wait and see' attitude. It will be difficult to change their mind until the World Bank resumes funding.

With the Yunus saga, WikiLeaks and the World Bank allegations of corruption, extra-judicial killings and the infrastructure woes, the nation is faced with an image crisis. The good work of the apparel exporters will not offset the impact of these unwarranted problems. With an image crisis, the country is unlikely to attract a large amount of foreign investment, which has declined substantially since 2008-09. Thus, there is little prospect of a substantial surplus in the capital account to offset the growing current account deficit. Consequently the deficit will have to be paid by running down the stock of international reserves. The process is already on; the reserves have been drawn down since the beginning of 2011 by more than $1.5 billion. The reserves stood at only about $9.5 billion at the end of 2011.

There is not much to be hopeful about a turnaround of the balance of payments in a short time. The problem arose with the excessive spending and borrowing by the government and a drying up of the foreign sources of funds. While the former reflects poor economic management the latter reflects a poor handling of foreign relations. Some tough decisions will have to be taken to move the economy out of this mire.

It is difficult for any elected government to reduce spending toward the end of its tenure. Most of the election promises of this government remain unfulfilled. It will want to achieve something to crow about during the forthcoming hustings. This will require greater, and not less, spending, and hence may lead to greater deficits. The government will probably risk greater deficits to public ire, but may end up with both.

—————————
M A Taslim is a professor of the Department of Economics, University of Dhaka