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Trade account in negative territory — crisis beckoning?

Shakhawat Hossain | Monday, 14 March 2022


There are different macroeconomic indicators. Of them, four indicators are vital-- GDP (gross domestic product), fiscal budget, monetary accounts, and external sector accounts. The last one is presented through a statement known as 'balance of payments' or BoP. There are three parts in the statement -- trade balance, current account balance, and capital and financial accounts balance.

A part of external sector account is reflected in GDP calculation. Under expenditure method, GDP is a summation of public and private consumption, public and private investment, and net exports (exports minus imports). From GDP, savings are easily calculated. Deduction of public and consumption, public and investment from GDP results in savings. This is nothing but net exports which may be either surplus or deficit. Surplus is savings meaning that a part of income is left after expenditure. On the other hand, deficit is dissavings indicating an economy is consuming more compared to its income. In this case, net export is an indicator of savings or dissavings of an economy.

Consumption is a factor for trade balance. In case imports are higher compared to exports, trade balance goes to negative territory. Imports are used for consumption by natural persons or legal persons.

Consumption by natural persons or individuals is of  recurring nature. Such imports are required for items which are not produced in the economy or loss of production due to natural disaster. Consumption by legal persons is nothing but imports of capital goods and industrial inputs. Such type of imports is considered as investment. In this context, dissavings or negative trade balances mean an economy is investing more compared to its income. Therefore, such situation becomes investment expenditure from consumption expenditure as indicated earlier.

Trade balance in negative territory due to import of  industrial production is a positive sign for the long run. Present external expenditure will, in future, either increase foreign currency inflows or save foreign currency due to reduction of import payments.

The recent update on balance of payments statement from the country's central bank shows wider gap between exports and imports -- export is lower by US$ 18.70 billion from import. Negative views are reported to have been expressed by different corners. This can spread as panic. Its ultimate effect goes to reduce confidence level of foreign suppliers, lenders and investors which can increase import costs, loan prices, and reduce inflows of foreign investment.

To cope with trade balance situation, exchange rate adjustment is suggested. In respect of real effective exchange rate, Bangladesh currency is said to be overvalued. Depreciation of local currency may result in increased inflows on account of export proceeds and wage remittances.

Exporters send goods but bring employment. Considering its capacity to generate huge employment, exchange rate adjustment may be a necessity. Exchange rate benefits facilitate beneficiaries of wage earners to receive incremental amount in local currency. This can remove supply supports in illegitimate foreign exchange market. Increased amount in local currency due to exchange rate adjustment will encourage inward remittances. But adjustment in exchange rate has negative impact on import payments. Higher cost is required to buy foreign currency for which offset is needed by supporting through fiscal window in form of tax benefits.

Balance of payments is a flow statement. As of January, 2022 of the current fiscal year, trade deficit is recorded at US$18.70 billion. After adjustment of factor payments, transfer payments including wage remittances, current account balance stands at negative territory of US$10.06 billion. This deficit is covered by different external receipts under capital and financial accounts such as external loans, grants, foreign investment, etc. Overall position, net of capital and financial accounts, stands at negative of US$ 2.05 billion during the period. How this shortfall is covered. Simple answer is: support from international reserve by central bank. If external borrowings would support this shortfall, the overall position would have been zero. But this shortfall is basically supported by international reserve maintained by central bank. Support to external sector from reserve assets is a function of safety net for rainy season.

As said earlier, dissavings mean high consumption, either in current goods or in durable goods, compared to income. Most of the import transactions of the country are executed through letters of credit (LCs). Bangladesh Bank prepares a statement containing information on opening and settlement of import LCs. During the period from July, 2021 to January, 2022 of the current fiscal year, opening of LCs stands at $52.36 billion, settlement of payment is recorded at $45.48 billion. Of the total items, consumer goods consist of 11.20 per cent in respect of opening of LCs and 11.36 per cent in respect of settlement during the period. Other items are intermediate goods, raw materials, machinery, fuels, and others for commercial and industrial sectors. This information shows that major imports near to 90 per cent of total are for industrial purposes. These imports are used to generate either income from external sector or facilitate savings in outward payments by import substitution. Trade balance contained in statement- balance of payments is a flow statement. Short term trade deficit indicates future growth; no negative beckoning is from this picture.

At February-end of 2022, international reserve stands at $45.96 billion. As per balance of payments statement, the reserve can support payments against import of goods and services for five months. With regard to external debt position as per information of central bank, gross outstanding position up to September 2021 stands at $80.85 billion. Compared to gross national income of $438.18 billion in fiscal year 2020-2021, the external debt is very insignificant. Of the total debt, $12.53 billion is recorded as short-term debt of private sector. This is basically for short term import finance. During Covid-19, industrial importers received policy supports by way of enhanced deferral facilities. On the other hand, public sector debt is basically for longer period. In both public and private sector loans, no record of default is recorded in repayments. During the current fiscal year, banks are reported to have been supported by foreign currency near to $3.5 billion. Central bank with sound international reserve is extending this support from time to time since long. Given the sound position of international reserve moving upward by earnings, the economy is on a sound footing. The international reserve trend is capable enough to face any challenge with regard to unseen pressure on local currency. Nothing seems to be worrying since local currency is at overvalued level.  

Export is one of the major income tools from external sector. During July-February of the current fiscal year, export is recorded at $33.84 billion which is around 31 per cent higher compared to the same period of last fiscal year. A negative trend is noticed at wage remittances, absolute figure up to February 2022 of fiscal year 2021-2022 is $13.44 billion but this seems to be new normal compared to unexpected growth in the last fiscal year.

Trade balance as found in balance of payments statement is an indication of future growth; it is not a beckoning of crisis. Rather it is a way forward to upward movement. Hence, the situation does not warrant balance of payments supports from non-state organisations. Availing supports in this way may pose negative notion with regard to external transactions.

 

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