Bangladesh Economic Update June12-June13

Bangladesh Economic Update
Balance of Payment
June 2012

Bangladesh Economic Update, June 2012 2 | P a g e
Bangladesh Economic Update
Volume 3, No. 6, June 2012

Acknowledgement:
Bangladesh Economic Update is a monthly publication of the Economic Policy Unit of the
Unnayan Onneshan, a multidisciplinary research organisation based in Dhaka, Bangladesh. A team,
under the guidance of Rashed Al Mahmud Titumir, comprising Syed Naimul Wadood, Nahida
Sultana and A. Z. M. Saleh prepared the report.

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Executive Summary

The Bangladesh economy is experiencing disequilibrium in balance of payments due to shortsighted
policy decisions, internal economic imbalances and global economic crisis. The BoP slipped into a
deficit for the first time in a decade resulting in heightened risks to Bangladeshs external position.

The government agreed a three-year reform programme with the International Monetary Fund
(IMF) styled Memorandum of Economic and Financial Policies (MEFP) to access credit the IMFs
Extended Credit Facility (ECF) arrangement to stave-off the pressures on the BoP.

The access to IMF funds requires reduction in aggregate demand by employing mechanisms such as
depreciation of currency and cut in import demand and supply of investible funds to the
entrepreneurs. The central bank has already allowed the local currency to depreciate significantly
against the foreign currencies and put in place contractionary monetary policy to restrict money
supply to the private sector and import of goods and services.

The central bank may have to resort to further devaluation of taka and administer reduction in
imports, if supply of foreign currencies from sources such as remittances does not maintain
considerable growth momentum nor the government anticipated flow of foreign aid is materialised.

The restrictive monetary targets, agreed in the IMF-MEFP, have in effect reduced the fiscal space of
the government, demonstrated in the recently approved national budget of 2012-2013. The choice
of instruments of resource mobilisation for deficit financing and public spending has been limited to
regressive instruments such as raise in value added tax (VAT).

The shortsighted different policies (e.g. quota rent for power sector) have increased the import
payments while the growth rate of export earnings has started decelerating. A substantial
requirement for foreign currency to finance high import of petroleum products have resulted in
depreciation of Taka against USD and the foreign exchange reserve has also dwindled. Along with
that, the contractionary monetary policy has restrained the import of capital machineries and
intermediate goods, which again had negative fallouts on investment and export performances.

In the current fiscal year, the flow of foreign aid disbursement has witnessed a comparatively lower
amount in comparison with other fiscal years. In addition, the incremental foreign direct investment
(FDI) inflow and receipt of remittance has experienced a trend of deceleration. Moreover, domestic
private investment is facing difficulties due to ever increasing domestic borrowing of the
government from banking sector that holds back the expansion of productive sector.

In recent fiscal years, trade deficit has widened at a staggering rate mainly because of soaring import
bills particularly for quick rental power plants and sluggish rate of export earnings. The current
imbalance of balance of payment (BoP) has occurred mainly due to the trade imbalances. The
continuous depreciation of the national currency against dollars has assisted to increase the import
payments. Accommodative policies coupled with global headwinds and firming oil prices have
widened the trade imbalances and also resulted in losses of foreign exchange reserve.

During July-April FY 2011-12, export earnings (including EPZ) were USD 19543 million which was
8.19 percent higher than that of the same period of the previous fiscal year. During July-April of FY

2011-12, import payments (including EPZ) were USD 26888 million which were 8.65 percent
higher than that of the corresponding period of the previous fiscal year because of the higher
growth rate of fuel imports for the higher demand of quick rental power generation. During July-
April FY 2011-12, trade deficit increased by 9.87 percent and reached at USD 7345 million against
USD 6685 million in the same month of the previous fiscal year.

Exports are following a negative growth rate during the recent months of this current fiscal year
because of the EU debt crisis which has cast a shadow on the expectations of export. In FY 2012-
13, targets of the Medium Term Macroeconomic Framework (MTMF), IMF-MEFP and Medium
Term Budgetary Framework (MTBF) on percentage change of exports are 14.5 percent, 16.6
percent and 14.5 percent respectively while the business as usual scenario suggests it at 9.32 percent.
The target of the MTMF and MTBF on percentage change of import is only 15 percent while IMF-
MEFP targets at 13.6 percent and under the business as usual scenario it might be only 9.60 percent
in FY 2012-13.

Depreciation of Taka against USD increases the export earnings and increases the import bills
(measured in Taka). During the last few months of this fiscal year, depreciation of Taka against USD
is increasing at a staggering rate, which ultimately increases the trade deficit. In December 2012,
depreciation was 6.09 percent and 3.07 percent was found in January 2012. Depreciation of local
currency may generally create the importable goods expensive and the exportable goods cheaper as
well.

Improvement of terms of trade of a country eases the current account deficit. It is observed that
import price index in Bangladesh exceeds the export price index. Under the business as usual
scenario, terms of trade might decrease to 70.71 in FY 2011-12. In comparison, in FY 2010-11,
terms of trade was 72.37 percent which was 52 percentage points higher than that of FY 2009-10
and the export price index and the import price index increased by 7.31 percent and 6.74 percent
respectively.

Interest payment is increasing over the years. In FY 2010-11, it increased to USD 220 million which
is 2.33 percent higher than that of FY 2009-10. In FY 2001-02, it was USD 161 million and in FY
2004-05, it was USD 203 million. After that, it was higher in FY 2008-09 at USD 238 million. Under
the business as usual scenario, interest payment might increase to USD 226 million in FY 2011-12
and USD 232 million in FY 2012-13.

The percentage of labour migration decelerated in FY 2010-11 because of the global economic
recession, political instability in Middle East and squeezing demand of labour markets. During the
first ten months of this current fiscal year, the remittance flow stood up at USD 10615.75 million
which was 10.43 percent higher than that of the previous fiscal year. In FY 2011-12, the target of
MTMF, IMF-MEFP, MTBF on remittance are at USD 12900 million, USD 12815 million and USD
10020 million respectively while business as usual scenario suggests that receipt of remittance might
stood at USD 12265.18 million.

Foreign exchange reserve is increasing at a decreasing rate over the years due to soaring import bills,
the global financial crisis, economic slowdown and higher rate of inflation. Other factors associated
are the depreciation of Taka against USD and the increase in debt and deficit cornered the reserve to
decline in the current fiscal year. During January-April FY 2011-12, reserve continued to slide down

than that of the previous fiscal year due to the steady depreciation of taka, decrease in export
earnings, remittance and the upward trend of import bills. The reserve might reach at USD 11389.29
million under the business as usual scenario and it might stand at USD 9110 million and USD 9700
million according to the target of IMF-MEFP and MTMF respectively in FY 2011-12.

During July-April FY 2011-12, current account surplus was USD 509 million which is 35.37 percent
lower than that of the same period of the corresponding previous fiscal year. The slower rate of
current account surplus occurred mainly due to the increase in deficits of trade and primary income.
In the meantime, a larger deficit in trade and primary income was increased by 9.87 percent and 19
percent respectively than that of July-April FY 2010-11.

In FY 2011-12, IMF-MEFP and MTBF targeted that current account balance as percent of GDP
might reach at negative value of 0.7 percent and 0.2 percent respectively. However, the target of
MTMF and the business as usual scenario suggests that it might attain at 0.4 percent and 1 percent
respectively.

During July-April of FY 2011-12, capital account was in surplus at USD 429 million which is 2.27
percent lower than that of the same period of the previous fiscal year. In FY 2010-11, capital
transfer was USD 600 million which was 22.95 percent higher than that of FY 2009-10. Under the
business as usual scenario, it might reach at USD 615 million in FY 2011-12 and USD 631 million
might obtain in FY 2012-13.

Lower value of net FDI, negative value of portfolio investment and the continuously declining trend
of other investments are edging the financial account to further deficit. Under the business as usual
scenario, the deficit in financial account might reach at USD 1703.3 million in FY 2011-12 and USD
1822.6 million in FY 2012-13.

In spite of a capital account surplus of USD 429 million, a financial account deficit of USD 934
million and a large negative errors and omissions contribute to the overall account balance deficits
of USD 106 million during July-April of FY 2011-12 against a deficit of USD 502 million during
July-April of 2010-11. For the first time in a decade, the overall balance of payments slipped into a
deficit in FY 2010-11 and might drive down further in the upcoming fiscal years.

In recent fiscal years, trade
deficit has widened at a
staggering rate mainly because
of soaring import bills
particularly for quick rental
power plants and sluggish rate
of export earnings.

1. INTRODUCTION

The current issue of the Bangladesh Economic Update focuses on
the pressure exerted on the balance of payments due to internal
economic imbalances and mismanagement of different policies.
The issue also diagnoses the targets of IMF-MEFP on balance of
payments taken under the ECF. The prescription of shrinking
import in the upcoming fiscal years would not only reduce the
import of capital machineries and intermediate goods, prerequisite
for the expansion of productive sector, but also result into
contraction in export which would widen trade deficit further.
Ultimately, the balance of payments of the country would face
immense pressure, if effective and time-befitting measures are not
taken to foster the flow of remittance, FDI, investment along with
the import of capital machineries and intermediate goods.

2. CURRENT ACCOUNT BALANCE

Current account includes imports and exports of merchandise,
military transactions and service transactions. The net flow of
current transactions, including goods, services, and interest
payments between the countries is known as the current account
balance. At a glance, it is the sum of the trade balance, service,
primary and the secondary income. If the foreign earnings are
higher than the expenditure then it is known as the current account
surplus and vice versa.

2.1 Trade Balance
1

Historically, the import bills were higher in comparison with export
earnings due to which Bangladesh had had to face a persistent trade
deficit over the years. In recent fiscal years, trade deficit has
widened at a staggering rate mainly because of soaring import bills
particularly for quick rental power plants and sluggish rate of
export earnings.

"
The gap between the nations exports and imports of goods and services is known as the
Balance of Trade. If the export earnings are higher than the import bills then it is known
as Trade Surplus and if the export earnings are lower than the import bills then it is
known as the Trade Deficit.

The current imbalance of
Balance of Payments has
occurred mainly due to the trade
imbalance.

During July-April FY 2011-
12, export earnings (including
EPZ) were USD 19543
million which was 8.19 percent
higher than that of the same
period of the previous fiscal
year.

2. 1. 1 Export and Import

The current imbalance of Balance of Payments has occurred mainly
due to the trade imbalance. The trade deficit is increasing at a
staggering rate because of the increase in import payments and
slower rate of the export earnings. The continuous depreciation of
national currency against dollars has assisted to enlarge the import
payments. Accommodative policies coupled with global headwinds
and firming oil prices have widened the trade imbalances and
resulted in losses in foreign exchange reserve.

During July-April FY 2011-12, export earnings (including EPZ)
were USD 19543 million which was 8.19 percent higher than that
of the same period of the previous fiscal year. However,
Merchandise export earnings have decreased by 7.13 percent in
April 2012 than that of April 2011. Exports are facing a negative
growth rate during the recent months of this current fiscal year
because of the EU debt crisis which has cast a shadow on the
expectations of export. Moreover, the financial crisis in the western
world is hampering exports from Bangladesh. EU Zone covers 51
percent of total export earnings of the country while 22 percent
comes from the U.S.A. Recently the EU debt crisis and global
recession especially in U.S.A has decreased the price of
commodities and discouraged the export earnings.

Figure 1: Monthly scenario of exports and imports

Source: Authors calculations based on Bangladesh bank 2012

At the initial month of FY 2011-12, merchandise export earnings
from export was USD 2339.5 million which was 1.99 percent
higher than that of June 2011 and it was the lowest in September
2012 at USD 1447.5 million because of the high inflation rate and
the depreciation of Tk. against USD during the present fiscal year.


In FY 2010-11, export
earnings (including EPZ) were
USD 23008 million which
was 41.71 percent higher than
that of FY 2009-10.

Historical trend of export
earnings shows that it is
increasing at an irregular trend
except the case of the negative
growth rate of FY 2001-02.

Under the business as usual scenario, monthly export earnings
might reach at USD 1897.54 million by the end of this current
fiscal year.

In FY 2010-11, export earnings (including EPZ) were USD 23008
million which was 41.71 percent higher than that of FY 2009-10
due to various measures of attracting the export sectors and export
diversifications especially in readymade garments. To note that one
of the leading sectors of export earnings was readymade garments
which stood at USD 13043 million in FY 2010-11 and increased by
37.30 percent than that of the previous fiscal year. Other sectors
such as raw jute, jute goods and leather experienced increases by
35.73 percent, 24.05 percent and 32.20 percent respectively in FY
2010-11 than that of the previous fiscal year.

Figure 2: Export and Import in Bangladesh

Source: Authors calculation based on Bangladesh Bank, 2012

Historical trend of export earnings shows that it is increasing at an
irregular trend except the case of the negative growth rate of FY
2001-02. Export earnings (including EPZ) were USD 3473 million
in FY 1994-95, and then it increased to USD 6476 million in FY
2000-01. In FY 2001-02, export (including EPZ) decreased by 8.45
percent because of the depreciation of Taka against dollars. After
that, it continued to increase up to FY 2005-06 when it increased
by 21.45 percent than that of FY 2004-05. From FY 2006-07 to FY
2009-10, export increased at a slower rate because of the global
economic recession in FY 2008-09. The continuation of data trend
shows that export earnings (including EPZ) might stand at USD
24716 million and USD 26424 million respectively in FY 2011-12
and FY 2012-13.


In FY 2011-12, earnings from
readymade garments reached up
to USD 13043 million which
that the corresponding figure for
the previous fiscal year.

In FY 2011-12, the projection
on export earnings growth of
MTMF and MTBF is the
same at 14.5 percent, whereas
the business as usual scenario
and IMF-MEF might stand
at 7.39 and 14.2 percents
respectively.

2.1.1.1 Sector Wise Contribution of Export

Merchandise export earnings have increased by 10.36 percent in
July-March FY 2011-12 due to higher growth of readymade
garments (36.61 percent), leather (20.13 percent) and fish and
shrimp (16.23 percent). In FY 2011-12, earnings from readymade
garments reached up to USD 13043 million which was 34.70
percent higher than that the corresponding figure for the previous
fiscal year. In the same period, raw jute, leather, fish and shrimp
increased by more than 20 percent than that of the previous fiscal
year. By March 2012, merchandise export earnings from fish and
shrimp decreased by 21.4 percent and readymade garments slowed
down by only 4.6 percent.

Figure 3: Sector wise performance of exports over the months

Source: Authors calculations based on Bangladesh Bank, 2012

2.1.1.2 Future Scenario of Export

There is a huge discrepancy among the projection of MTMF,
MTBF, IMF-MEFP and the business as usual scenario on the
percentage change of export earnings from FY 2011-12 to FY
2015-16.

In FY 2011-12, the projection on export earnings growth of
MTMF and MTBF is the same at 14.5 percent, whereas the
business as usual scenario and IMF-MEF might stand at 7.39 and
14.2 percents respectively.

In FY 2012-13, projection of the MTMF, IMF-MEFP, MTBF and
the business as usual scenario of percentage change of exports is
14.5 percent, 16.6 percent, 14.5 percent and 9.32 percent
respectively. By examining the projections, we find that the


of MTMF, MTBF, IMF-
MEFP and the business as
usual scenario on growth rate of
import might stand at 15, 14,
18.1 and 7.46 percent
respectively.

During the last few months of
this fiscal year, depreciation of
Taka against USD is
increasing at a staggering rate
which has increased the trade
deficit.

projections of MTMF and MTBF on growth rates of export
earnings are more ambitious than the others.

Table 1: Future Scenario of Exports Earnings Growth Rates
UO Projection MTMF MTBF IMF
2010-11 41.49 41.7 41.7 41.7
2011-12* 7.39 14.5 14.5 14.2
2012-13* 9.32 14.5 14.5 16.6
2013-14* 11.08 14.5 14.5 15.7
2014-15* 12.68 15 15 14.49
2015-16* 14.15 15 15 12.97
Source: Authors calculations based on Ministry of Finance, International
Monetary Fund and Bangladesh Bank, 2012

2.1.1.3 Future Scenario of Import

The projection of MTMF on percentage change of import exceeds
the projection of any other sources. In FY 2011-12, the projection
of MTMF, MTBF, IMF-MEFP and the business as usual scenario
on growth rate of import might stand at 15, 14, 18.1 and 7.46
percent respectively. In FY 2012-13, projection of the MTMF on
percentage change of import is only 15 percent whereas the
business as usual scenario is 9.60 percent. This also shows that the
gap between MTMF target and business as usual scenario might
increase in the upcoming fiscal years.

Table 2: Future scenario of Imports Payments Growth Rates
UO Projection MTMF MTBF IMF
2010-11 41.79 41.8 41.8 41.8
2011-12* 7.46 15 14 18.1
2012-13* 9.60 15 15 13.6
2013-14* 11.54 15 15 12.4
2014-15* 13.32 15.5 15.5 11.29
2015-16* 14.95 15.5 15.5 10.1
Monetary Fund and Bangladesh Bank, 2012

2.1.1.4 Depreciation and Trade Deficit

Depreciation of Taka against USD increases the export earnings
and increases the import bills (measured in Taka). During the last
few months of this fiscal year, depreciation of Taka against USD is
increasing at a staggering rate which has increased the trade deficit.
In FY 2010-11, export earnings increased by 41.71 percent and
import bills by 41.84 percent. In the meantime, depreciation of Tk.
was at 6.34 percent which increased the trade deficit by 42.24
percent in FY 2010-11 than that of the previous fiscal year.


Depreciation of Tk. is expected
to make the importable goods
expensive and the exportable
goods cheaper as well.

In December 2012,
depreciation was 6.09 percent
and 3.07 percent was found in
January 2012.

The depreciation slowed down
the import growth of capital
machinery and intermediate
goods that is very alarming for
the industrialization of the
country.
Figure 4: Trade deficit and depreciation of Taka

Source: Authors calculations based on Bangladesh bank, 2012

In FY 2000-01, depreciation of Tk. against USD was the highest at
10.53 percent where export earnings was USD 6476 million which
was 12.39 percent higher than that of FY 1999-00 and import bills
was USD 9363 million which was 11.42 percent higher than that of
the previous fiscal year. Trade deficit increased by 7.83 percent in
FY 2000-01 than that of FY 1999-00.

Taka depreciated by 1.55 percent in FY 2001-02 and the trade
deficit decreased by 12.08 percent than that of FY 2001-02 where
the export earnings reduced by 8.45 percent and the import bills
decreased by 17.79 percent.

In December 2012, depreciation was 6.09 percent and 3.07 percent
was found in January 2012. Depreciation of Tk. is expected to
make the importable goods expensive and the exportable goods
cheaper as well. In the meantime, import and export were valued at
USD 2910.5 million and USD 2064.9 million respectively which
indicates that export earnings increased by 29.76 percent and
import decreased by 8.00 percent than that of the previous fiscal
year. Import bills increased by 15.78 percent in January than that of
the previous month of this current fiscal year. The main reason of
this increase in import payments was the import of petroleum
products and crude petroleum for the quick rental power plants.

However, the local currency started to gain strength by February
2012 which also saw decreases in both of imports bills and export
earnings.. The main concern is that soaring import bills decreased
the reserve and increased the borrowing from different sources.
The depreciation slowed down the import growth of capital
machinery and intermediate goods that is very alarming for the
industrialization of the country. Decline in imports also decreased


During July-April of FY
2011-12, import payments
(including EPZ) were USD
26888 million which were
8.65 percent higher than that of
the corresponding period of the
previous fiscal year.

However, import payment has
declined by 9.99 percent in
April 2012 than that of April
2011 after taking a restrained
monetary policy and
devaluation of Taka against
USD.

In FY 2010-11, import bill
(including EPZ) was the
highest at USD 30336 million
which was 41.84 percent higher
than that of FY 2009-10.

the export earnings as most of the export products of the country
are secondary. In the same way, the increase in import payments
has created a pressure on the foreign exchange reserve. The
demand for dollars exceeds the supply which is depreciating the
local currency against USD.

2.1.2 Import Payments

During the last few months of this current fiscal year, import
payments are following a declining trend but the export earnings is
declining more than that of the import payments which is fostering
the trade deficit at a continuous basis.

During July-April of FY 2011-12, import payments (including
EPZ) were USD 26888 million which were 8.65 percent higher
than that of the corresponding period of the previous fiscal year
because of the higher growth rate of fuel imports for the higher
demand of quick rental power generation. Except food grains and
other than food items, crude petroleum, petroleum products have
increased by more than 50 percent during July-March of FY 2011-
12. During the same period of FY 2011-12, import of capital
machinery increased by a very small amount than that of the same
period of the previous fiscal year. During July-April of FY 2011-12,
the fresh LCs opening of capital machinery and consumer goods
decreased by 25.78 percent and 19.96 percent respectively which
might adversely affect the industrial sectors of the country.

However, import payment has declined by 9.99 percent in April
2012 than that of April 2011 after taking a restrained monetary
policy and devaluation of Taka against USD. During the recent
months of this current fiscal year, the imports of food grains with
an expected bumper rice harvest has declined and effective
measures have been adopted by Bangladesh Bank to discourage the
luxury imports. This may ease the pressure on trade balance in the
rest months of this current fiscal year and foreign exchange
reserves as well.

In FY 2010-11, import bill (including EPZ) was the highest at USD
30336 million which was 41.84 percent higher than that of FY
2009-10. Imports (including EPZ) were USD 3473 million in FY
1994-95 and then it continued to increase up to FY 2000-01. It
decreased to USD 7697 million in FY 2001-02 which was 17.79
percent lower than that of FY 2000-01 because of the political
unrest and the depreciation of Taka against USD. After that, it
increased following an erratic trend in the next six fiscal years and
this showed an upward trend of imports in FY 2007-08 which was
25.59 percent higher than that of the previous fiscal year. Under the


It is observed that import price
index in Bangladesh exceeds
the export price index which
might fuel up the current
account deficit further.

business as usual scenario, import bills might reach at USD 32600
million in FY 2011-12 and USD 34864 million in FY 2012-13.

Figure 5: Sector wise performance of imports (July-March FY 2010-
11 to July-March FY 2011-12)


Imports of food grains were increased by 120.08 percent in FY
2010-11 than that of the previous fiscal year because of the increase
in food inflation. However, the most satisfactory situation is that
import of food grains reduced by 44 percent in July-March FY
2011-12 than that of July-March FY 2010-11 because of the various
measures taken by Bangladesh Bank which discouraged the imports
of consumption and luxurious goods.

2.1.3 Terms of Trade
2

In FY 2010-11, terms of trade was 72.37 percent which was 52
percentage points higher than that of FY 2009-10 and the export
price index and the import price index increased by 7.31 percent
and 6.74 percent respectively. Improvement of terms of trade in
country eases current account deficit. However, it is observed that
import price index in Bangladesh exceeds the export price index
which might fuel up the current account deficit further. Terms of
trade was the highest in FY 1997-98 as 103.09 percent where
export and import price index was 168.04 and 162.99 percent
respectively. Export and import price index decreased by 34.19
percent and 29.05 percent respectively in FY 1999-00. After that, it

2
Terms of Trade are an important element in the policy instrument. It means the ratio of
the export to import prices. When terms of trade increases, export earnings are increasing
and import bills are decreasing and it drives to the higher national income levels with the
same amount of merchandise exports. When the exports are enjoying dominance over
imports in terms of unit values, then it is known as the favourable terms of trade.

Under the business as usual
scenario, terms of trade might
decrease to 70.71 in FY
2011-12 whereas export index
and import index might
increase to 207.71 and 289.54
respectively.

Interest payment is increasing
over the years.

consistently deteriorated up to FY 2010-11 due to the volatility of
export earnings and the increases in import bills, causing the
continuous deficits in trade accounts of balance of payments.
Under the business as usual scenario, terms of trade might decrease
to 70.71 in FY 2011-12 whereas export index and import index
might increase to 207.71 and 289.54 respectively. It might decrease
further to 69.04 in FY 2012-13.

Figure 6: Terms of trade over the years


2.2 Interest Payment

In order to meet the expenditure requirements, Bangladesh has to
regularly borrow from different developed countries and
organizations with different conditions. As a result, interest
payment on loan is one of the main elements that imbalances the
balance of payment.

Figure 7: Interest payment over the years

Source: Authors calculation based on statistics department, Bangladesh Bank,
2012


scenario, interest payment might
increase to USD 226 million
in FY 2011-12 and USD
232 million in FY 2012-13.

The number of expatriate
workers is following an
irregular trend over the years.

scenario, remittance might
increase to USD 12237.1
million in FY 2011-12 and
USD 12823.83 million in
FY 2012-13.

Interest payment is increasing over the years. In FY 2001-02, it was
USD 161 million and in FY 2004-05, it was USD 203 million which
was 16.00 percent higher than that of FY 2003-04. After that, it
decreased by 0.99 percent in the following fiscal year and increased
in FY 2010-11 at USD 220 million which is 2.33 percent higher
than that of FY 2009-10. Under the business as usual scenario,
interest payment might increase to USD 226 million in FY 2011-12
and USD 232 million in FY 2012-13.

2.3 Remittance

The secondary income is one of the components of current
account balance. Of which, remittance is the prominent element to
influence the overall balance in an economy and it is one of the
most important sources of foreign earnings. According to the
World Bank, Bangladesh emerged as the seventh largest remittance
earner in FY 2010-11 with the amount of USD 11650.32 million.
Bangladesh is a densely populated developing country with large
numbers of less skilled and cheap labours. The semi-skilled or
unskilled workers are the main source of obtaining more remittance
inflow in the country.

The number of expatriate workers is following an irregular trend
over the years. The number of migrant workers was the highest at
0.98 million in FY 2007-08 and then it continued to decline because
of the global economic recession and collapses in the construction
sector in the Middle East which declined the demand for external
labour in countries such as Malaysia, Saudi Arabia etc. Manpower
export increased by 2.85 percent in FY 2010-11 than that of the
previous fiscal year. The percentage of labour migration slowed in
FY 2010-11 because of the global economic recession, political
instability in Middle East and squeezing demand of labour markets.

Although the manpower export declined during the period from
FY 2007-08 to FY 2010-11, the workers remittance is increasing in
volume but at a decreasing rate. The growth rate of remittance
dropped from 32.39 percent in FY 2007-08 to 6.03 percent in FY
2010-11. Under the business as usual scenario, remittance might
increase to USD 12237.1 million in FY 2011-12 and USD 12823.83
million in FY 2012-13.

In the first seven months of FY 2011-12, manpower exports were
74 percent higher than that of the same period of the previous year.
During the first ten months of this current fiscal year, the
remittance flow stood up at USD 10615.75 million which was 10.43
percent higher than that of the previous fiscal year.


In the first seven months of FY
2011-12, manpower exports
were 74 percent higher than
that of the same period of the
previous year.

During the first ten months of
this current fiscal year, the
remittance flow stood up at
USD 10615.75 million which
that of the previous fiscal year.

In April 2012, receipt of
remittance was USD 1083.89
million which is 2.27 percent
lower than that of March
2012.
Figure 8: Remittance and number of migrated people

Source: Bureau of Manpower, Employment and Training and Foreign Exchange
Policy Department and Bangladesh Bank, 2012.

At the same time, the highest remittance received from Saudi
Arabia was USD 3017.65 million which is around 29 percent of the
total remittance received. The second highest remittance received
from U.A.E (18.65 percent). The share of Europe in receiving total
remittances is only about 8 percent, where most remittances were
from the United Kingdom and Germany.

Figure 9: Share of remittance from different countries

Source: Authors calculation based on Foreign Exchange Policy Department,
Bangladesh Bank, 2012

In April 2012, receipt of remittance was USD 1083.89 million
which is 2.27 percent lower than that of March 2012. The
continuation of data trend shows that remittance might reduce
further to USD 1164.09 million by the end of this current fiscal
year. Labour migration was 0.57 million up to April 2012. During


of MTMF, IMF-MEFP,
MTBF and the business as
usual scenario on remittance
was USD 12900 million,
USD 12815 million, USD
10020 million and USD
12265.18 million respectively.

the last few months of this current fiscal year, remittance followed
a negative growth rate. According to Bangladesh Association of
International Recruiting Agencies (BAIRA), over 80,000
Bangladeshis worked in Libya. The recent crisis in Libya has forced
to quit many of the Bangladeshi workers from strife-torn Libya.

2.3.1 Future Scenario of Remittance

The projection of MTBF, IMF-MEFP and the business as usual
scenario on remittance is lower than that of the projection of
MTMF. In FY 2011-12, the projection of MTMF, IMF-MEFP,
MTBF and the business as usual scenario on remittance was USD
12900 million, USD 12815 million, USD 10020 million and USD
12265.18 million respectively. However, under the business as usual
scenario, remittance might stand at USD 12880.05 million in FY
2012-13 which might lower than that of the projection of MTMF,
MTBF and IMF-MEFP.

Figure 10: Future scenario of Remittance

Monetary Fund, Bangladesh Bank, 2012

3. CAPITAL ACCOUNT
3
BALANCE

During July-April of FY 2011-12, capital account was in surplus at
USD 429 million which is 2.27 percent lower than that of the same
period of the previous fiscal year. In FY 2010-11, capital transfer

3
The second component of BOP is the capital account which records all the short term
and long term international movements of capital. It is also known as the financial
account and this reflects the net change in national ownership of assets. A surplus in the
capital account means money is flowing into the country and when money is flowing out
of the country, it is known as the deficit in the capital account.


During July-April of FY
2011-12, capital account was
in surplus at USD 429
lower than that of the same
year.

During July-April in FY
2011-12, FDI was USD 580
lower than that of the same
year.
was USD 600 million which was 22.95 and 58.31 percent higher
than that of FY 2009-10 and FY 1993-94 respectively. The lowest
amount of capital transfers was USD 163 million in FY 2004-05
and after that, it increased in the following fiscal year by 130.06
percent. Although capital transfers are following an irregular trend
from the period of FY 1993-94, under the business as usual
scenario, it might reach at USD 615 million in FY 2011-12 and
USD 631 million might obtain in FY 2012-13, which are 2.55
percent and 5.17 percent higher respectively than that of FY 2010-
11.

Figure 11: Situation of Capital transfer over the years


4. FINANCIAL ACCOUNT BALANCE

The components of financial account are the foreign direct
investment (FDI), portfolio investment and the others investment.
FDI as percent of Gross Domestic Product (GDP) is decreasing
over the years because of the political turmoil, global economic
crisis, increase in inflation, drying foreign aid, lack of aid
commitments, squeezed investment and shaky reserve mainly
because of excessive import bills for petroleum products for
guzzler quick rental power plants.

4.1 FDI, Portfolio and Other Investments

Foreign direct investment (FDI) includes the long term capital
investments such as the purchase or constructions of machinery,
buildings or even whole manufacturing plants. FDI is following an
irregular trend over the years. During July-April in FY 2011-12,
FDI was USD 580 million which is 7.94 percent lower than that of
the same period of the previous fiscal year. In FY 2010-11, net FDI

scenario, net FDI might reach
at USD 806 million in FY
2011-12 and USD 843

Portfolio investment was in
deficit at USD 142 million
during July-April in FY
2011-12, which is in deficit in
the same period of the previous
fiscal year.

scenario, net other investment
might decline to USD 2787.6

was USD 768 million which is 15.88 percent lower than that of FY
2009-10. The inflow of FDI was the highest in FY 2008-09 at USD
961 million which was 28.48 percent higher than that of FY 2007-
08. Under the business as usual scenario, net FDI might reach at
USD 806 million in FY 2011-12 and USD 843 million in FY 2012-
13.

The portfolio investment means the purchase of share and bonds.
Sometimes it refers to the short term investments. Portfolio
investment was in deficit at USD 142 million during July-April in
FY 2011-12, which is in deficit in the same period of the previous
fiscal year. In FY 2010-11, it decreased to USD 28 million which
was 76.06 percent lower than that of FY 2009-10. It was the
highest at USD 106 million in FY 2006-07 and then it continued to
decline at an increasing rate in the next successive fiscal years. The
continuation of data trend shows that the deficit in portfolio
investment might reach at USD 32.4 million in FY 2012-13.

Net other investment includes capital flows into bank accounts or
provided as loans. A continuously negative trend of net other
investments is following from FY 2003-04 to FY 2010-11. In FY
2010-11, net other investment was in deficit at USD 2324 million
which was 60.01 percent lower than that of FY 2009-10. However,
the net other investment was in surplus in FY 1993-94 at USD 599
million. Under the business as usual scenario, it might decline to
USD 2787.6 million in FY 2012-13.

Figure 12: Financial account balance

Source: Authors calculations based on Statistics Department, Bangladesh Bank
and EPB 2012


scenario, the deficit in financial
account might reach at USD
1703.3 million in FY 2011-
12 and USD 1822.6 million
in FY 2012-13.

Foreign exchange reserve is
increasing at a decreasing rate
over the years due to soaring
import bills, the global financial
crisis, economic slowdown and
higher rate of inflation.

scenario, reserve might reach at
USD 11389.29 million and
USD 11866.97 million in
FY 2011-12 and FY 2012-
13 respectively.

During January-April FY
2011-12, reserve continued to
slide down than that of the
previous fiscal year due to the
steady depreciation of taka,
decrease in export earnings,
remittance and the upward
trend of import bills.

Lower value of net FDI, negative value of portfolio investment and
the continuously declining trend of other investments are edging
the financial account to further deficit. Under the business as usual
scenario, the deficit in financial account might reach at USD 1703.3
million in FY 2011-12 and USD 1822.6 million in FY 2012-13. In
FY 2010-11, financial account recorded a deficit of USD 1584
million which was USD 651 million in the corresponding previous
fiscal year. In FY 2005-06, the positive trend of net FDI, increase
in portfolio investment and the huge declining contribution of net
other investments caused the deficit in financial account balance
which was USD 141 million and in the next fiscal year, the financial
account was in surplus. After then it continued to deficit in
financial account balance.

4.2 Foreign Exchange Reserve

Foreign exchange reserve is increasing at a decreasing rate over the
years due to soaring import bills, the global financial crisis,
economic slowdown and higher rate of inflation. Other factors
associated are the depreciation of Taka against USD and the
increase in debt and deficit cornered the reserve to decline in the
current fiscal year. In FY 2010-11, foreign exchange reserve
increased by only 1.51 percent than that of the previous fiscal year.
It is only 0.14 percent of the total GDP which was 0.15 percent in
FY 2009-10. In 1990s, the average foreign exchange reserve was
USD 1949.33 million which was USD 5352.95 million in the next
decade of 2000s. This also shows that average reserve increased by
174.60 percent in 2000s from the decade of 1990s. The regime wise
trend of reserve shows that it was USD 2701.53 million during FY
2002-03 to FY 2004-05 while it increased to USD 11016.86 million
during FY 2009-10 to FY 2011-12. Under the business as usual
scenario, reserve might reach at USD 11389.29 million and USD
11866.97 million in FY 2011-12 and FY 2012-13 respectively,
which states that the incremental growth rate of foreign exchange
reserve might shrink in the upcoming fiscal years due to the recent
slower rate of remittance inflow and upward trend of petroleum
imports.

During January-April FY 2011-12, reserve continued to slide down
than that of the previous fiscal year due to the steady depreciation
of taka, decrease in export earnings, remittance and the upward
trend of import bills. After clearing the monthly payments of ACU
(Asian Clearing Union), foreign exchange reserve dropped by 6.59
percent in May 2012 than that of the previous month of this
current fiscal year. Moreover, reserve increased in April 2012 as the
first installment (USD 141 million) of USD 987 million has already
disbursed by International Monetary Fund. However, the


The reserve might reach at
USD 11389.29 million under
the business as usual scenario
and it might stand at USD
9110 million and USD 9700
million according to the
projection of IMF-MEFP and
MTMF respectively in FY
2011-12.

continuation of trend from July 2011 to May 2012 suggests that
reserve might slide down by the end of this current fiscal year
unless receipt of remittance and export earnings gives a positive
vibe.

Figure 13: Monthly status of Foreign Exchange Reserve


4. 2. 1 Fut ure Sc enari o of Forei gn Exc hange Reserve

The projection of MTMF and MTBF on foreign exchange reserve
is higher than the projection of IMF-MEFP and the business as
usual scenario. There is a far difference between the projection of
reserve by MTMF and IMF-MEFP. In FY 2011-12, under the
business as usual scenario, reserve might be lower than that of the
projection of MTBF but higher than the projection of MTMF and
IMF-MEFP. The reserve might reach at USD 11389.29 million
under the business as usual scenario and it might stand at USD
9110 million and USD 9700 million according to the projection of
IMF-MEFP and MTMF respectively.

Figure 14: Future scenario of Foreign Exchange Reserve



The incremental growth rate of
current account balance is
following an erratic trend over
the years.

In FY 2010-11, current
account surplus was USD 995
million although which was
73.37 percent lower than that
of the corresponding previous
fiscal year.

The current account balance
stood up at USD 455 million
in March 2012 which was
USD 177.52 million in the
previous month of this current
fiscal year.

However, according to the projection of MTMF, IMF-MEFP and
MTBF, reserve might reach at USD 10700 million, USD 8334
million and USD 10701 million respectively in FY 2012-13 whereas
the continuation of reserve shows that it might reach at USD
11866.97 million. Increase in debt and deficit, inflation, devaluation
of currency and increase in import payments have reduced the
foreign exchange reserves.

5. OVERALL BALANCE

5.1 Current Account Balance

Instead of the continuous trade deficit, the current account balance
(CAB) recorded a positive trend from FY 2001-02 to FY 2003-04.
After that, it started to increase from FY 2005-06 till FY 2010-11.
However, the incremental growth rate of current account balance is
following an erratic trend over the years. In FY 2010-11, current
account surplus was USD 995 million although which was 73.37
percent lower than that of the corresponding previous fiscal year.
The reason behind was negative trade balance with a deficit of
USD 7328 million where imports surpassed the export earnings. In
addition, receipt of workers remittance and FDI was 6.03 percent
and 15.9 percent respectively lower than that of FY 2009-10.
According to the IMF-MEFP, one of the major causes of the
pressure on the current account balance is the substantial rise in
fuel prices on the international market. The continuation of yearly
trend suggests that the surplus in current account balance might
attain in the upcoming fiscal years but at a slower rate.

Figure 15: Monthly status of current account balance



During July-April FY 2011-
12, current account surplus was
USD 509 million which is
35.37 percent lower than that
of the same period of the
corresponding previous fiscal
year.

The current account surplus
might increase to USD 1055.2
million and USD 1115.4
million in FY 2011-12 and
FY 2012-13 respectively.

The current account balance stood up at USD 455 million in March
2012 which was USD 177.52 million in the previous month of this
current fiscal year. During July-April FY 2011-12, current account
surplus was USD 509 million which is 35.37 percent lower than
that of the same period of the corresponding previous fiscal year.
The slower rate of current account surplus occurred mainly due to
the increase in deficits of trade and primary income. In the
meantime, a larger deficit in trade and primary income was
increased by 9.87 percent and 19 percent respectively than that of
July-April FY 2010-11. Along with the increasing trend of
remittance inflow at 10.4 percent, increase in secondary income has
helped to attain the current account surplus.

Under the business as usual scenario, current account surplus might
attain in the upcoming fiscal years, but the incremental growth
might decrease. The current account surplus might increase to USD
1055.2 million and USD 1115.4 million in FY 2011-12 and FY
2012-13 respectively.

5. 1. 1 Fut ure Sc enari o of Current Ac c ount Bal anc e

According to the projection IMF-MEFP, current account balance
as percent of GDP might decrease in the upcoming fiscal years.
However, it might increase at a positive rate according to the
projection of MTMF and business as usual scenario.

In FY 2011-12, IMF-MEFP and MTBF projected that current
account balance as percent of GDP might reach at negative value
of 0.7 percent and 0.2 percent respectively. However, the
projection of MTMF and the business as usual scenario suggests
that it might attain at 0.4 percent and 1 percent respectively.

Table 3: Future scenario of current account balance
UO Projection MTMF IMF MTBF
2009-10 3.74 3.7 3.7 3.7
2010-11 0.94 0.9 0.9 0.9
2011-12* 1 0.4 -0.7 -0.2
2012-13* 1.06 0.2 -0.9 0.2
2013-14* 1.12 0 -0.8 0
2014-15* 1.18 0 -0.5 0
2015-16* 1.24 0.1 -0.3 0.1


scenario, capital account might
reach at USD 612.3 million
in FY 2011-12 and USD
624.6million in FY 2012-13.

The continuation of the data
trend showed that financial
account deficit might increase to
USD 1709.2 million in FY
2011-12 and USD 1834.3

5.2 Capital and Financial Account Balance

Capital account shows an upward trend over the years. In FY 1999-
00, it was USD 561 million which was 44.96 percent higher than
that of FY 1998-99. It fall down drastically in the subsequent fiscal
year which was the lowest in FY 2004-05 at USD 163 million and
this was 16.84 percent lower than that of FY 2003-04. Moreover, it
was USD 600 million in FY 2010-11 which was 22.95 percent
higher than that of FY 2009-10. Under the business as usual
scenario, it might reach at USD 612.3 million in FY 2011-12 and
USD 624.6million in FY 2012-13.

The lower flows of foreign direct investment (FDI), portfolio
investment and the others investment contribute to increase the
financial account deficits. In FY 2010-11, financial account deficit
was USD 1584 million which was 73.49 percent lower than that of
FY 2009-10. In the same fiscal year, the net FDI was 15.9 percent
and the portfolio investment was 76.07 percent lower than that of
the FY 2009-10. Financial account recorded a deficit of USD 370
million in FY 1998-99 and USD 116 million in FY 1999-00. After
that, the financial account surplus was continuing from FY 2001-02
to FY 2008-09. The continuation of the data trend showed that
financial account deficit might increase to USD 1709.2 million in
FY 2011-12 and USD 1834.3 million in FY 2012-13, which is 7.90
percent and 20.62 percent higher respectively than that of FY 2010-
11.

Figure 16: The overall Balance of Payments over the years

Source: Authors calculations based on Bangladesh Bank 2012

In spite of a capital account surplus of USD 429 million, a financial
account deficit of USD 934 million and a large negative errors and
omissions contribute to the overall account balance deficits of USD


106 million during July-April of FY 2011-12 against a deficit of
USD 502 million during July-April of 2010-11. For the first time in
a decade, the overall balance of payments (BOP) slipped into a
deficit in FY 2010-11.

6. IMPACTS OF IMF-MEFP

In order to overcome the imbalances of balance of payments
(BOP) and to restore macroeconomic stability, the government has
received loan of SDR 639.96 million (about USD 1.0 billion) for
three years under the Extended Credit Facility (ECF) by the IMF-
MEFP (International Monetary Fund Memorandum on
Economic and Financial Policies). The IMF-MEFP asserts a
combination of different conditionalities with four reforms. In
order to boost up the social and development-related spending and
improve the trade balance, the IMF-MEFP asserts the flexibility in
exchange rates using demand-supply mechanism and to tighten
further the monetary policy stance.

IMF-MEFP requires more efforts to raise export (and other)
earnings and reduce import payments, or more generally to reduce
aggregate demand. Recent months of this current fiscal year, the
depreciation of taka against dollars is increasing. According to IMF-
MEFP, it is further necessary to depreciate Taka against dollars and
to take different measures of imports restrictions if remittances and
foreign assistance do not maintain the required growth. Moreover,
the flexibility of exchange rate by the requirement of IMF-MEFP
might not only increase the import bills but also create pressure on
balance of payment. Automatically this might decelerate the foreign
exchange reserve.

From the beginning of this current fiscal year, the central bank has
been following contractionary monetary policy to rein in higher rate
of inflation, and this is in line with the IMF-MEFP policies. Under
the ECF loan, the IMF-MEFP has asserted to increase the rate of
interest. Another condition is to limit bank borrowing and set a
ceiling on the reserve money held by Bangladesh Bank (BB).
Ultimately this would increase the investment cost and monetary
squeeze would decline the domestic investment. This slower rate of
investment would not only decline in generation of employment
but also reduce aggregate demand. Thus this contractionary
monetary policy as pursued by the Bangladesh Bank may result in a
reduced GDP growth rate in the upcoming fiscal years.

The central bank may resort to further devaluation of taka and
administer reduction in imports, if supply of foreign currencies
from sources such as remittances does not keep up considerable


growth momentum nor the government anticipated flow of foreign
aid is materialised.

The restrictive monetary targets, agreed in the IMF-MEFP, have in
effect reduced the fiscal space of the government, demonstrated in
the recently approved national budget of 2012-2013. The choice of
instruments of resource mobilisation for deficit financing and
public spending has been limited to regressive instruments such as
raise in value added tax (VAT).

7. CONCLUSION

Soaring import bills particularly for quick rental power plants and
sluggish rate of export earnings has widened trade deficit in the
recent fiscal years. The declining import of capital machineries and
intermediate goods has further aggravated the growth prospects of
the country. Depreciation of local currency against USD, low
foreign exchange reserve and downward trend of incremental
growth rate of remittance receipt have also exerted pressure on the
balance of payment of the country.

Deficits of trade and primary income, lower value of net FDI,
negative value of portfolio investment and the continuously
declining trend of other investments along with negative errors and
omissions contribute to the overall account balance deficits in FY
2010-11 which might increase further in the upcoming years.

References

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Financial Policies, and Technical Memorandum of Understanding. Washington DC, USA: International
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3 May 2012]

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International Monetary Fund (IMF). 2012, Bangladesh: Staff Report for the 2011 Article IV Consultation.
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Annex-1

Mathematical Equation

) 1 (
1
) 1 (
! = "
+ =
b
l
b l
p
p
y
r
ry P P

Where,
l
P = Value of the launch year;
b
P = Value of the base year;
y = Number of years between launch year and base year;
r = Growth rate.

Then, a projection using this method could be computed as:
) 1 ( rz P P
l t
+ =

Where,
t
P = Value of the target year;
l
P = Value of the launch year;
z = Number of years between target year and launch year;
r = Growth rate


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