Balance of Payments

Balance of Payments is a record of official estimates of all transactions between two countries during a year. It shows the sum total of all external transactions arising from export and import of goods and services and transfers, such as remittances and capital inflows and outflows (transactions on capital account). Bangladesh has experienced deficits in its balance of trade since its independence and the problem became chronic because of the country's heavy dependence on imports and at the same time, its requirement for running development programmes. The sharp increase in oil prices during the early 1970s enhanced the import payments for crude oil, petroleum products and fertilisers.

Due to crop failures caused by devastating floods that occurred most frequently as well as drought, and devastating cyclonic storm, Bangladesh occasionally had to import large amount of food grain on cash payment, which resulted in a massive deterioration in the country's balance of payments situation in the post liberation period of end of the past century. In addition, the terms of trade consistently deteriorated due to rising import prices and instability in export earnings, causing continuous deficits in trade accounts of balance of payments. Despite adoption of various export promotion measures and rising trend in wage earners remittances, the disequilibrium in the balance of payments position persisted. The increased liberalisation of the external sector during the 1990s also contributed to the widening of the gap in the trade balance of the country during this period.

Items FY-2000 FY-01 FY-02 FY-03 FY-04 FY-05 FY-06 FY-07 FY-08 FY 08-09
Import -7566 -8430 7697 -8707 -9840 -11870 -13301 -15511 -19481 -20291
Export 5701 6419 5929 6492 7521 8573 10412 12053 14151 15583
Trade Balance -1865 -2011 -1768 -2215 -2319 -3297 -2889 -3458 5330 -4708
Services (net) -645 -918 -499 -691 -874 -870 -1023 -1256 -1525 -1621
Income (net) -302 -344 -402 -358 -374 -680 -702 -905 -994 -1361
Current Transfer Of which workers' remittances 2394 2171 2826 3340 3743 4290 5438 6554 8551 10154
1949 1882 2501 3062 3372 3848 4802 5979 7915 9689
Current Account Balance -418 -1098 157 176 176 -557 824 936 702 2536
Capital Account 561 432 410 428 196 163 375 490 509 451
Financial Account -116 682 391 413 -31 784 -141 762 -392 -808
FDI 383 550 391 376 276 800 743 793 748 941
Portfolio Investment 0 0 -6 2 6 0 32 106 47 -159
Other Investments (Net) -499 132 6 35 -313 -16 -916 -137 -1187 -1590
Errors and Omissions 152 -297 -550 -202 -170 -323 -720 -695 -488 -121
Overall Balance 179 -281 408 815 171 67 338 1493 331 2059

Source Bangladesh Bank.

Bangladesh received a substantial amount of assistance under various facilities of the International Monetary Fund to correct her balance of payment disequilibrium position. The amount drawn by Bangladesh from IMF under a stand-by arrangement in June 1974 and July 1975 stood at SDR 93.75 million. Bangladesh received SDR 62.50 million under Compensatory Financing Facility for export shortfall in December 1972. This stand-by programme was attributed to declines in the current account deficit of $881 million or 12.33% of the GDP in 1975-76, to $439 million or 6.42% of the GDP in 1976-77. Bangladesh also received a substantial amount of grants and concessional loans from bi-lateral sources as well as other international financial institutions and organisations. Despite all these Balance of Payment of the country could not be reached to a sustainable level. Thus the situation warrants some effective measures like correction of the country's overvalued exchange rate as well as liberalisation of the trade regime.

To make country's external sector competitive the first devaluation was done in 1975. Thus, the devaluation of Bangladesh currency in terms of US dollar by 61% in May 1975 and further, by 10% and 11% within June to December 1975, and January to December, 1976, had a positive impact on the balance of payments situation of the country. Bangladesh also undertook other internal corrective measures during that period like adoption of restrictive monetary and fiscal policies. These were reflected in the raising of bank rate from 5% to 8%, reduction of subsidies, and upward adjustment of prices of some public utilities. Along with these measures, policies for export promotion and import substitution were undertaken by the government to correct imbalances in payments situation.

The current account deficit of BOP of Bangladesh reached $1,436 million or 11.23% of the GDP in 1979-80, but gradually declined to $1,055 million or 6.85% of the GDP in 1985-86, and further to $981 million, or 4.19% of the GDP in 1990-91. Bangladesh's drawings from the IMF continued to increase. These drawings during the period from 1976 to 1982 amounted to SDR 689.39 million under various facilities viz., Compensatory Financing Facilities, Oil Facilities, Trust Fund Facilities, Stand-by Arrangements and Extended Fund Facilities. The adjustment policies that Bangladesh pursued under various facilities of the IMF brought about some positive changes in the economy. The aggregate demand management policies initiated by IMF through streamlining fiscal and monetary systems proved largely successful. The exchange rate and interest rate policies of Bangladesh brought about positive results. The Fund's arrangements for high conditional loans also worked as a 'seal of approval' for enhanced foreign assistance to Bangladesh. Bangladesh entered into Structural Adjustment Facility with IMF in February 1987 and into Enhanced Structural Adjustment Facility in August 1990 to improve her balance of payments position. Bangladesh also received emergency assistance from IMF in November 1998.

The current account deficit during the 1990s did not pose a serious problem for Bangladesh. The deficit in the current account declined from $981 million, or 4.19% of the GDP in 1990-91, to $664 million, or 2.28% of the GDP in 1994-95, but rose to $1,291 million, or 4.05% of the GDP in 1995-96. Thereafter, this deficit continued to decline till 1999-2000. Notable developments that have taken place in Bangladesh during the 1990s include a continued trade liberalisation policy and implementation of the Financial Sector Reforms Programme. A liberal Import Policy Order for 1995-97 was put into effect to remove quantitative restrictions on imports. A fairly liberal five-yearly trade policy became effective from July 1998. Average nominal tariff rate declined from 57% in 1991-92 to 20% in 1997-98 and further, to 16% in 1999-2000. The highest decline in tariff rate was from 90% in 1991-92 to 37.5% in 2000-2001.

Despite liberalisation of import trade of the country, improvements in current account deficit continued during the late 1990s due mainly to increase in export receipts, decline in deficits in services account, and increase in wage earner's remittances. The net position under services' account became positive in 1996-97 and continued to be so till 1999-2000. The wage earners remittances recorded increase from $555 million in 1985-86 to $764 million in 1990-91, to $1,217 million in 1995-96, and further to $1,949 million in 1999-2000.

Decline in import growth coupled with steady export growth narrowed the trade deficit as percentage of GDP up to end of 2002. On the other hand there occurred a sharp rise in the service account deficit that largely offset the improvement in trade the country's trade account. However, a recorded improvement in the worker's remittances during this period turned the current account deficit to a surplus level. Improvement in current transfer also helped improvement in current account balance. This trend continued except in FY 2005 and the current balance at the end of 2006 stood a record level surplus of US $824 million. On the other hand the capital and the financial account experienced a bit pressure during this period. Particularly the deterioration in capital account was remarkable in FY 2004 and FY 2005, although it showed some improvement in FY 2006. Financial account also deteriorated during this period due mainly to substantial reduction in the flow of Medium and Long Term (MLT) loans coupled with a sizeable net outflow of the short term loans and trade credit. With these trends the overall balance of payment during FY 2001to FY 2006 did not show a very comfortable picture and in a number times went at alarming level. However, the country's Balance of Payment showed a healthy trend from 2006 to onwards except in 2008 particularly due to worldwide economic crises. Despite increase in deficit in the service and income account of the BOP's current account, the balance in this account is showing a continuous surplus till now due mainly larger inflow of worker's remittances. Increased flow of workers abroad, improvement of banking services along with enhanced anti money laundering activities and depreciation of the BDT, were perceived to be among the reasons behind this healthy trend.'

Both capital and financial account of the country's BOP depicted a gloomy picture from FY 2000 onwards. Reduction in inflow of loans and grants due mainly to lower implementation status of the country's ADP, lower institutional capacity etc, lower inflow of foreign investment both FDI and Portfolio due to tighter global credit market and massive capital erosion of the global financial institutions, increased attention of the international investors to other South and South East Asian countries might have contributed this. Poor performance of the energy sector, insufficient infrastructural facility, political uncertainty, slow decision-making process also contributed this. Despite these, the overall balance reached a comfortable level of US $1493 million in FY 2007. However, although the overall; balance showed some deterioration in FY 2008 due to worldwide economic meltdown the situation improved in FY 2009 and it stood at US $2058.'

The bangladesh bank prepares balance of payments (BOP) positions of the country following the IMF Balance of Payments Manual. The data are derived from various sources such as foreign exchange transaction records of authorised dealers, documents of the Ministry of Food on import of food grain by the government, documents of Ministry of Finance on imports financed through foreign loans and grants, and custom records for the preparation of BOP. The deficit in the current account of balance of payment in 1972-73 was $370 million. It rose to a record level at $1,003 million in 1974-75 or 7.08% of GDP. The current account of the BOP of Bangladesh are continuously showing surplus from FY 2002 till now except in FY 2005. [Syed Ahmed Khan and A Samad Sarker]