Is the current account deficit a cause for concern?

For the fifth consecutive year, Bangladesh recorded the current account deficit with the rest of the world. The deficit reached its highest level of US $ 9.56 billion in fiscal 2018. In recent years, it has gradually narrowed to US $ 4.79 billion and US $ 4.72 billion. dollars and ultimately fell to $ 3.81 billion in the last fiscal year (FY21). Thus, the current account deficit is not a new phenomenon in the country. However, this becomes a matter of concern during the outbreak of the pandemic.

The latest International Monetary Fund I (MF) external sector report found that “the global response to the pandemic has further enlarged the global current account balances – the sum of all countries’ absolute deficits and surpluses – by 2, 8% of global GDP in 2019 to 3.2% of GDP in 2020. These balances are expected to widen further as the pandemic continues to rage in much of the world. As the IMF sounded the alarm, should Bangladesh be worried about the current account deficit? Finding the answer requires a brief analysis of the balance of payments situation.

To put it simply, a country’s current account provides a record of the country’s transactions with other countries in the world. This is in terms of the trade in goods and services as well as the net benefits on foreign investment and the net transfer of payments over a period of time, such as remittances. In other words, the account records the country’s regular foreign transactions and becomes in deficit when the money sent exceeds what comes in.

The current account deficit in Bangladesh is largely due to the higher trade deficit which is the result of higher import payments relative to export earnings from goods and services. Statistics from the Bangladesh Bank showed that the country’s merchandise trade deficit with the rest of the world stood at $ 22.79 billion in the past fiscal year, growing by 27.68 percent per year. compared to the previous fiscal year (FY20) when annual trade was recorded at $ 17.85 billion. Although the estimate is provisional and subject to revision in the near future, the sharp increase in imports over exports over the past fiscal year has widened the trade gap. Imports grew 19.71 percent in FY21 and reached an estimated $ 60.68 billion on a free on board (fob) basis. At the same time, exports grew 15.38% over the previous fiscal year and amounted to $ 37.89 billion on an fob basis. The fob price of exports and imports of goods is the market value of the products at the uniform valuation point or at the customs border. Statistics from the Bangladesh Bank also showed that the services trade deficit stood at $ 3.0 billion in the last fiscal year. Thus, the combined deficit of goods and services stood at $ 25.79 billion.

Part of the deficit was offset by a large influx of remittances which were mainly sent by non-resident Bangladeshis abroad. Showing 36% growth, annual remittances rose to $ 24.78 billion in FY21, up from $ 18.20 billion a year ago despite the Covid-19 pandemic . The financial account also recorded a large surplus in FY21, as evidenced by an increase in inflows of foreign debt and foreign direct investment. An increase in short-term borrowing coupled with an increase in trade credit also helped ease the pressure on financing. These not only helped offset the remainder of the current account deficit, but also reinforced the overall balance of payments surplus during FY21. Statistics from the Bangladesh Bank showed that the overall BoP rose to $ 9.27 billion in the last fiscal year, from $ 3.17 billion in fiscal year 20.

The current account deficit can also be revised from the national income accounts. The difference between national savings and investment reflects the current account deficit. In other words, the deficit may “reflect a low level of domestic savings relative to investment or a high rate of investment – or both”. The Bangladesh Bureau of Statistics (BBS) provisional estimate showed a positive current account balance over the last fiscal year in terms of savings and investment gap. Gross national savings were estimated at Tk 9,149.34 billion against domestic investment of Tk 9,010.03 billion. Thus, there is a surplus of Tk 139.31 billion in savings over investment. As a negative statistical deviation of 205.26 billion Tk, the gap between gross domestic expenditure and gross domestic product (GDP), the current account balance stood at 344.57 billion Tk or 4, 02 billion dollars.

Although the estimate is provisional and subject to revision, BoP data and national accounts give the opposite picture for the current account balance. Therefore, careful consideration is required, all the more so as the provisional estimate of GDP for fiscal year 21 was released approximately a month and a half after the end of the fiscal year. As a rule of thumb, it is the BoP data on the current account that is generally considered to be the most realistic.

Faced with the global current account surplus estimated at 3.20 percent of global GDP last year, many countries, including Bangladesh, recorded a deficit. Again, some other countries recorded a current account surplus. The IMF pointed out that four major factors are present: the decline in travel, the collapse in demand for oil, the boom in trade in medical products and the change in household consumption. The fund also observed that these factors “have contributed to some countries seeing a larger current account deficit, which means they bought more than they sold.” On the other hand, a larger current account surplus, which means they sold more than they bought.

Bangladesh is in the first group, which translates into higher growth in imports of goods and services. Moreover, like many other countries, Bangladesh has also allowed loose monetary policy and pushed fiscal stimulus measures to support economic activities in different sectors. As a result, the current account deficit was inevitable with little cause for concern.

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