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The Financial Express

BD economy and current account surplus

| Updated: November 19, 2020 16:40:25


BD economy and current account surplus

Financial or current account in an economy indicates the state of total export earnings along with inward foreign remittance and the import payments. Ultimately, the current account surplus helps the foreign exchange reserve to be robust. Foreign investors' confidence on any economy is boosted, if the current account is in surplus. The current account surplus instead of deficit recently came as a blessing for an emerging economy like that of Bangladesh. The economy, now hit hard by the novel coronavirus, is now showing competitive performance, no doubt. The current account surplus came following lower trade deficit coupled with higher inflow of remittance as was seen recently. Bangladesh being an import-oriented economy, was not expecting that the current account would be in surplus amid the pandemic.

The present situation of the current account will help attract Foreign Direct Investment. The investors will never oversee the current account situation of any economy prior to taking any attempt for investment. It represents the strength of any economy. The current account balance, a measure of the economy's trade and financial flows with other economies, rose to US$ 3.3 billion at the end of August last, according to the Bangladesh Bank (BB). During the period, exports were recorded at $6.7 billion and import payments at $7.4 billion. In July-August of 2019, exports were at $ 6.6 billion, but imports soared by $1.2 billion to $8.6 billion. On the other hand, foreign remittance inflow during July-August, 2020 was much higher at $ 4.6 billion against $3.0 billion in the same period a year earlier, according to a financial daily. Besides, the current account deficit stood at $ 1.52 billion in the seven months of the fiscal year 2019-20, down from $4.04 billion in the same period of the fiscal year 2018-19, the Bangladesh Bank data showed.

In view of statistics regarding financial account maintained by the central bank, our economy is in a better state than before. Some fiscal years ago, Bangladesh economy was totally in a sorry state with a huge current account deficit. Bangladesh has now become a role model to the developing economies in terms of growth rate. The leading economies in the world had been trying their best to find out the real cause behind the GDP growth of above 8.0 per cent. So, there are no reasons to be worried much about the pandemic-time economy. Bangladesh now runs forward with good macroeconomic indicators despite having many problems. According to recently released GDP data of the Bangladesh Bureau of Statistics (BBS), Covid-19 could not weaken the economic growth rate much. Already Bangladesh's economy has proved IMF and ADB projections wrong. The projections were made based on the pandemic earlier. The current account surplus amid the deadly virus is not an easy task done.

As a least developed country, we are lucky enough to have surplus current account amid the pandemic. If the economy sees a deficit current account, the economy has to face a lot of hurdles to go ahead. A current account deficit means the value of imports of goods and services or investment income is greater than the value of exports.

If the current account deficit is financed by borrowing, the economy has to make repayment at high interest rates. A few decades back, Russia, Brazil and some African countries experienced repayment problems. In view of the current account deficit, the investors lose confidence to invest their capital in any country. A persistent current account deficit implies that the economy is relying on consumer spending. The economy begins to become unbalanced between short-term consumption and long-term investment. For any current account deficit, the economy becomes uncompetitive and the exchange rate is relatively overvalued. Nevertheless, the economies having large current account deficits are always at risk of seeing the value of currency fall. A large deficit could cause cost-push inflation.

As an emerging economy Bangladesh now expects a good volume of Foreign Direct Investment (FDI), there is no alternative but having a surplus current account. It is important to note that foreigners have a greater claim on domestic assets due to the current account deficit. Debates are there about whether the surplus current account is good or not for any economy. To cover the deficit, inward investment is needed that creates jobs and leads to higher growth. Both surplus and deficit current accounts bring good for any economy. In Bangladesh's perspective, moderate surplus current account is required for many reasons. Being an import-dependent economy, Bangladesh now needs to gear up exports more than before. There is a possibility that the inward foreign remittance will shrink in the post-pandemic period. So, diversification of exportable products has become an emergency that helps bolster the current account.

The economic indicators of Bangladesh are better than other south Asian countries. The latest World Economic Outlook released by the International Monetary Fund (IMF) made brilliant  projections on Bangladesh's economy. In 2020 the per capita GDP of Bangladesh will be US$ 1,887.97 at current prices that could surpass India. The findings said per capita GDP of India is going to be US$ 1,877 in 2020. No doubt Bangladesh had been experiencing steady growth over the past decade. Still Bangladesh's economy had been struggling for years to survive with the lowest tax-GDP ratio in South Asia. Besides, the investment-GDP ratio now stands at 27.73 per cent that is much lower than Nepal and Bhutan. A report titled "2020 Investment Climate Statements: Bangladesh" released by the United States expressed dissatisfaction over the investment climate. In view of the said observations, there is no alternative to framing a business-friendly policy for a longer period. India might beat Bangladesh economically in many ways. In the meantime, India has developed internal policies to attract FDI. Traditionally, Bangladesh is in a slow process to update any type of policy. Only surplus current account will not suffice. In order to be competitive, amendment or revision of existing policies is needed on an urgent basis. To join a race with the leading economies, similar business-friendly terms and conditions must be made available there.

The writer is a banker and economic analyst. E-mail: [email protected]

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