BRAC UNIVERSITY

Assignment Topic
Balance of Trade and Balance of Payment with special reference of Bangladesh

Submitted to
Dr. Shah Ahsan Habib

Prepared by:
Student Name: Marshal Richard

Student ID# 10364057 Program: MBA Course: BUS 510: International Business

Date of Submission: 22 April 2012

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Introduction
Bangladesh is one of the fastest growing economic countries among the LDC’s country. According to the International Monetary Fund, Bangladesh ranked as the 42rd largest economy in the world in 2011 in PPP terms and 57th largest in nominal terms, among the Next Eleven or N-11 of Goldman Sachs and D-8 economies, with a gross domestic product of US$269.3 billion in PPP terms and US$104.9 billion in nominal terms. The economy has grown at the rate of 6-7% per annum over the past few years. More than half of the GDP is generated by the service sector; while nearly half of Bangladeshis are employed in the agriculture sector. Other goods produced are textiles, jute, fish, vegetables, fruit, leather and leath. An easy way to understand any country's economic scenario is through its Balance of Trade (BOT) and Balance of Payment (BOP) figures. Balance of Trade shows the difference between the total amount of incoming and outgoing currencies through import and export. Balance of Payment (BOP) is a summary of economic activities between the residents of a country and the rest of the world during a given period, usually one year. The main purpose of keeping these records is to inform government authorities about the overall international economic position of the country in order to assist them in arriving at decisions on monetary and fiscal policy, on the one hand, and trade and payments policy on the other. Balance of payments statistics are therefore helpful to government authorities charged with maintaining macroeconomic stability. BOT is a part of BOP, but it is significant for the economy because import and export is one of the most important economic activities of a nation. Moreover the balance of trade shows whether the external sector of a particular country is doing well or not. Along with BOT, BOP depicts the overall economic balance of a nation and the health of foreign reserve of that nation.

Objectives of the Assignment:
1. To discuss the theoretical aspect of Balance of Payment 2. To discuss balance of trade(BOT) and balance of payments(BOP)

Theoretical aspect of BOP:
BOP is the summary statement of all economic transitions of a nation with the rest of world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The Bop accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Each transaction is recorded in accordance with the principles of double-entry bookkeeping, meaning that the amount involved is entered on each of the two sides of the balance-of-payments accounts. Consequently, the sums of the two sides of the complete balance-of-payments accounts should always be the same, and in this sense the balance of payments always balances. Conceptually all economic transactions are bilateral in nature and thus these

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transactions must balance in long run. In Bangladesh central bank (Bangladesh Bank) maintains Bop in Bangladesh empowered by Foreign Exchange Regulation Act 1947.

Three accounts in BOP1. Current Accounts 2. Capital Accounts 3. Official Reserve Accounts.

Current Accounts I. II. III. IV. V. Export of goods Import Of goods Export of services Import of services Unilateral transaction( Profit, Dividend, Interest) I. II.

Capital Accounts Foreign direct investment(FDI) Portfolio Investments(Cross border selling securities) External Debt I. II. III.

Official Accounts Foreign exchange rate Special drawing Rights(SDR) reserve Gold reserve

III. *Trade Flows.

*Investments and financial flows.

  

In the process of main training BOP official reserve account is huge to adjust current and capital account. Even after that if BOP not equal to zero, we make it zero by offering a separate entry known as error and omission or we say statistical discrepancy. If official reserve bears plus (+) sign, it means BOP deficit; that is foreign currency inflows is lower than foreign currency outflows and reserve decreases that amount. If official reserve amount bears minus (-) sign; it means BOP surplus. That is foreign currency outflows and foreign exchange reserve increases by that amount.

In connection of BOP:
    BOT = Balance of export and import of goods. Current account balance = Balance of export and import goods and service. All Unilateral transactions. Capital account = Balance of FDI, Portfolio investment and external debt. Overall balance = Balance of all the item of current and capital.

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Calculation Sample:
Export of goods & services **** Import of goods & services (****) BOT Profit inflows Profit outflows Current a/c balance ***** **** (****) **** FDI inflows FDI outflows Portfolio investment abroad Portfolio investment inflows External debt abroad ***** (*****) (****) **** (****)

Capital a/c balance

****

Overall Balance:
Current a/c balance ****

Capital a/c balance Current balance Statistical Discrepancy OR

***** ***** ***** ***** ****

Balance of Trade of Bangladesh:
Foreign trade plays an important role in achieving rapid economic development of a country. Bangladesh as a developing country, foreign trade can be considered of paramount importance. However, trade balance of this country has never been in a favorable position. Each year Bangladesh has to spend a huge amount of foreign currency for importing consumer goods and materials, which is not a positive sign for our country. Bangladesh also spends much more for importing industrial raw materials, but it is a positive signal for our economy as it shows enhanced production of the economy. The country’s requirement of petroleum products is entirely met by import. Bangladesh had consecutive deficit balance of trade in the last 6 years and the gap is increasing every year. Bangladesh imports mostly petroleum product and oil, machinery and parts, soya bean and palm oil, raw cotton, iron and steel and wheat. Bangladesh main imports partners are China (17% of total), India, Indonesia, Singapore and Japan.

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Table 1: Cost of export, import and trade balance (In million USD)

Fiscal Year

Total Export

Total Import 11870 13301 15511 19481 20291 21388 30336

Trade Balance) -3297 -2889 -3458 -5330 -4710 -5155 -7328

2004-05 8573 2005-06 10412 2006-07 12053 2007-08 14151 2008-09 15581 2009-10 16233 2010-11 23008 Source: Bangladesh Bank

35000 30000 25000 20000 15000 10000 5000 0 -5000 -10000 Total Export Total Import Trade Balance)

Chart: Balance of trade in Bangladesh Table 2: Export- Import ratio in term of Trade balance Fiscal Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Trade Balance(million USD) -3297 -2889 -3458 -5330 -4710 -5155 -7328 Export-Import Ratio

1:1.38 1:1.28 1:1.29 1:1.38 1:1.30 1:1.32 1:1.32

On the above table we see that, last few fiscal years import ratio always higher then export ratio; i.e. import is higher than export.

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Export of Bangladesh
Bangladesh exports were worth 20313.8 Million USD in 2011. Bangladesh exports mainly readymade garments including knit wear and hosiery (75% of exports revenue). Others include: Shrimps, jute goods (including Carpet), leather goods and tea. Bangladesh Exports: Commodities Here are the major export commodities of Bangladesh:
    

Garments Frozen fish and seafood Jute and jute goods Leather Tea

Bangladesh Trade: Export Partners The following were Bangladesh’s export partners as of 2011:
      

United States: 24% Germany: 15.3% United Kingdom: 10% France: 7.4% The Netherlands: 5.5% Italy: 4.5% Spain: 4.2%

Table 3: Total Export and Growth rate Export (In Million USD) 8573 10412 12053 14151 15581 16233 23008

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Growth Rate 13.99% 21.45% 15.76% 17.41% 10.11% 4.18% 41.74%

Source: Statistics Department, Bangladesh Bank.

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Sector wise contribution in the export of Bangladesh: Table 4: Export receipts from major commodities during the last three fiscal years.
Commodity group 2010-2011
Amount %

2009-2010
Amount %

2008-2009
Amount %

Readymade garments 96440 77.1 Jute manufactures 4777 3.8 Fish, shrimps and 4149 3.3 prawns Leather and leather 3367 2.7 manufactures Furnace oil, naphtha 707 0.6 and bitumen Raw jute 1977 1.6 Handicraft 33 0.0 Tea 19 0.0 Fertilizer 181 0.1 Others 13356 10.8 Source: Statistics Department, Bangladesh Bank.

67247 3655 3211 2430 993 1330 114 37 237 8016

77.1 4.2 3.7 2.8 1.1 1.5 0.1 0.0 0.3 9.2

67257 2391 3123 1962 661 931 61 82 711 7245

79.7 2.8 3.7 2.3 0.8 1.1 0.1 0.1 0.8 8.6

Import of Bangladesh:
Table: Importable commodities in 2011 Major Items Food Grains Edible Oil Sugar Crude Petroleum POL Chemical Fertilizer Plastics And Rubber Articles Thereof Raw cotton Textile And articles Thereof Iron, Steel And Other Base metals Capital Machinery Others (including imports for EPZ) Total Amount (Billion USD) 1911 1067 654 923 3186 1254 1241 1302 2689 2680 2004 2325 12422 33658 % of Total Import 6% 3% 2% 3% 9% 4% 4% 4% 8% 8% 6% 7% 37% 100%

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Table: Import payments of Bangladesh with top twenty countries in 2011 Major Countries China, P.R. India Malaysia Japan Singapore Korea, Republic of Thailand Indonesia Kuwait Hong Kong Taiwan Australia Germany Brazil U.S.A Pakistan Uzbekistan Canada Vietnam U.K. Other Country Total Taka in Crore 42079.60 32483.20 12427.60 9332.30 8586.10 7995.10 7353.20 5999.60 5606.50 5398.50 5232.50 5190.40 4933.00 4848.20 4840.00 4783.50 4417.30 4096.30 3284.70 2372.20 32590.10 213849.9 In million US $ 5905.70 4560.00 1738.80 1306.60 1208.30 1118.30 1028.20 840.70 787.70 760.80 730.50 731.70 691.00 677.70 676.70 669.30 621.90 573.10 459.20 333.10 4573.00 29992.3 % of Total 19.70 15.20 5.80 4.40 4.00 3.70 3.40 2.80 2.60 2.50 2.40 2.40 2.30 2.30 2.30 2.20 2.10 1.90 1.50 1.10 15.40 100

Source: Statistics Department, Bangladesh Bank.

Balance of Payments of Bangladesh:
Table: Balance of Payments of Bangladesh in the past six years:
(In Million $)

Fiscal Year
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Current Account Balance
-557 824 936 702 2416 3724 995

Capital Account Balance
163 375 490 576 451 512 600

Financial Account Balance
784 -141 762 -457 -825 -651 -1584

Errors and omissions
-323 -720 -695 -490 16 -720 -646

Overall Balance of Payment
67 338 1493 331 2058 2865 -635

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Balance of Payment
4000 3000 2000 1000 0 -1000 -2000 Current Account Balance Capital Account Balance Financial Account Balance Errors and omissions Overall Balance of Payment

Balance of payment of Bangladesh had been surplus for the past five years but in 2010-11 the BOP account showed deficit balance which is due to huge import pressure and relatively low inflow of foreign remittance as well as frequent depreciation of Taka.

Performance of remittance flows:
Remittances from Bangladeshis working overseas, mainly in the Middle East are the major source of foreign exchange earnings. Bangladesh has emerged as a major exporter of manpower, targeting particularly the labor-intensive sectors of the various developed and developing economies. Over the past 5 years, a record number of Bangladeshi workers, 1.6 million 2009, have left the country in search of jobs abroad. Over the years, the contribution of remittances to Bangladesh’s economy in terms of GDP has increased significantly (from 4.0% in 2000/01 to 10.8% in 2008/09). If remittances through informal channels were taken into account, for which no official data are available, this would be even higher. Setting aside the role of remittances in terms of beefing up Bangladesh’s forex reserves and enhancing its ability to import, remittances sent from overseas also play a crucial role in strengthening the social security of the family members of the remitters, who often come from low-income households.
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 20010-11 Foreign Remittance Inflow (in million USD) 3848 4802 5979 7915 9689 10987 11650 Growth Rate 14% 25% 25% 32% 22% 13% 6%

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Remittance Growth Rate
35% 30% 25% 20% 15% 10% 5% 0%

Remittance Growth Rate

In the recent years, the growth of foreign remittance has become lower due to global economic recession which results in BOP deficit balance in the year 2010-11.

Performance of Foreign Direct Investment:
BB is encouraging our private firms to finance from foreign investments. Some of the firms such us Apex and Pran already have green signal from BB. In 2010- 2011, net Foreign Direct Investment (FDI) stood at $768 million. Let us have a closer look at the countries providing us FDI. According to BB, FDI inflows for the period January-June, 2011 from major countries were: Egypt ($116.41 million) , U K ($ 77.97 million), UAE ($72.27 million), Switzerland ($61.11 million), Singapore ($28.77 million), USA ($23.78 million), South Korea ($23.50 million), Hong Kong (US$ 18.69 million),

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 20010-11

FDI (in million USD) 800 743 793 748 961 913 768

Growth Rate 190% -7% 7% -6% 28% -5% -16%

In 2011 Bangladesh, sector-wise a total of US$ 359.14 million came to the telecommunication sector, US$ 145.19 million to Textile & Wearing, 163.07 million to Banking, US$ 92.06 million to Power, Gas & Petroleum, US$ 12.77 million to Food Products, US$ 13.63 million to Agriculture & Fishing, US$ 126.78 million to the other sectors

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Conclusion:
The Balance of Trade and Balance of Payment of Bangladesh indicates economic scenario of Bangladesh. The balance of trade has been deficit for the past many years and the gap is increasing considerably. Export growth has been satisfactory though the major portion of export income comes from RMG sector but major portion of raw materials for RMG sector are imported goods; so there is no positive change in BOP. To increase export growth, the export oriented industries should be diversified and variety should also come. Balance of payment had been surplus for the past 5 years, but it has been deficit in the year 2011, due to the low rate of foreign remittance inflow, low FDI and foreign aids. The overall scenario of the economy reflects the impact of global recession, huge import payment pressure and scarcity of foreign currency reserve through the Balance of trade and Balance of payment of Bangladesh.

=0=

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References:
Bangladesh Bank’s Website:            http://www.bangladesh-bank.org/econdata/bop.php?txtPeriod=1 http://www.bangladesh-bank.org/econdata/bop/bop_bb.php http://www.bangladesh-bank.org/econdata/bop/imp_pay_marchandise.php http://www.bangladesh-bank.org/econdata/import/imp_pay_overall.php http://www.bangladeshbank.org/econdata/import/imp_pay_majorcommodity_yearly.p hp http://www.bangladesh-bank.org/econdata/import/imp_pay_country_commodity.php http://www.bangladesh-bank.org/econdata/import/imp_pay_country_yearly.php http://www.bangladesh-bank.org/econdata/export/exp_rcpt_overall.php http://www.bangladesh-bank.org/econdata/export/exp_rcpt_comodity.php http://www.bangladesh-bank.org/econdata/export/exp_rcpt_country_commodity.php

Bangladesh board of investment’s website:   http://boi.gov.bd/about-bangladesh/investment-and-trade/foreign-direct-investmentin-bangladesh http://boi.gov.bd/component/content/article/433

Bangladesh Economic Review 2011 Class Lectures of Dr. Shah Ahsan Habib.

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