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

Bus 510: International Business

 Introduction
Bangladesh is one of the fastest growing economic countries among the LDCs 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

Bus 510: International Business

 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 BOP-

1. Current Accounts
2. Capital Accounts
3. Official Reserve Accounts.

Current Accounts Capital Accounts Official Accounts

I. Export of goods I. Foreign direct I. Foreign exchange rate

II. Import Of goods investment(FDI) II. Special drawing
III. Export of services II. Portfolio Rights(SDR) reserve
IV. Import of services Investments(Cross III. Gold reserve
V. Unilateral transaction( Profit, border selling
Dividend, Interest) securities)
III. External Debt
*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 **** FDI inflows *****

Import of goods & services (****) FDI outflows (*****)

BOT ***** Portfolio investment abroad (****)

Profit inflows **** Portfolio investment inflows ****

Profit outflows (****) External debt abroad (****)

Current a/c balance **** 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 countrys 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.

Bus 510: International Business

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

Fiscal Year Total Export Total Import Trade Balance)

2004-05 8573 11870 -3297
2005-06 10412 13301 -2889
2006-07 12053 15511 -3458
2007-08 14151 19481 -5330
2008-09 15581 20291 -4710
2009-10 16233 21388 -5155
2010-11 23008 30336 -7328
Source: Bangladesh Bank

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

Chart: Balance of trade in Bangladesh

Table 2: Export- Import ratio in term of Trade balance

Trade Export-Import Ratio

Fiscal Year
Balance(million USD)

2004-05 -3297 1:1.38

2005-06 -2889 1:1.28
2006-07 -3458 1:1.29
2007-08 -5330 1:1.38
2008-09 -4710 1:1.30
2009-10 -5155 1:1.32
2010-11 -7328 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 Bangladeshs 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

Year Growth Rate
USD)

2004-05 8573 13.99%

2005-06 10412 21.45%
2006-07 12053 15.76%
2007-08 14151 17.41%
2008-09 15581 10.11%
2009-10 16233 4.18%
2010-11 23008 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 2009-2010 2008-2009

Amount % Amount % Amount %
Readymade garments 96440 77.1 67247 77.1 67257 79.7
Jute manufactures 4777 3.8 3655 4.2 2391 2.8
Fish, shrimps and 4149 3.3 3211 3.7 3123 3.7
prawns
Leather and leather 3367 2.7 2430 2.8 1962 2.3
manufactures
Furnace oil, naphtha 707 0.6 993 1.1 661 0.8
and bitumen
Raw jute 1977 1.6 1330 1.5 931 1.1
Handicraft 33 0.0 114 0.1 61 0.1
Tea 19 0.0 37 0.0 82 0.1
Fertilizer 181 0.1 237 0.3 711 0.8
Others 13356 10.8 8016 9.2 7245 8.6
Source: Statistics Department, Bangladesh Bank.

Import of Bangladesh:

Table: Importable commodities in 2011

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

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 Table: Import payments of Bangladesh with top twenty countries in 2011

Major Countries Taka in Crore In million US $ % of Total

China, P.R. 42079.60 5905.70 19.70

India 32483.20 4560.00 15.20
Malaysia 12427.60 1738.80 5.80
Japan 9332.30 1306.60 4.40
Singapore 8586.10 1208.30 4.00
Korea, Republic of 7995.10 1118.30 3.70
Thailand 7353.20 1028.20 3.40
Indonesia 5999.60 840.70 2.80
Kuwait 5606.50 787.70 2.60
Hong Kong 5398.50 760.80 2.50
Taiwan 5232.50 730.50 2.40
Australia 5190.40 731.70 2.40
Germany 4933.00 691.00 2.30
Brazil 4848.20 677.70 2.30
U.S.A 4840.00 676.70 2.30
Pakistan 4783.50 669.30 2.20
Uzbekistan 4417.30 621.90 2.10
Canada 4096.30 573.10 1.90
Vietnam 3284.70 459.20 1.50
U.K. 2372.20 333.10 1.10
Other Country 32590.10 4573.00 15.40
Total 213849.9 29992.3 100

Source: Statistics Department, Bangladesh Bank.

Balance of Payments of Bangladesh:

Table: Balance of Payments of Bangladesh in the past six years:
(In Million $)
Fiscal Current Capital Financial Errors and Overall Balance
Year Account Account Account omissions of Payment
Balance Balance Balance
2004-05 -557 163 784 -323 67
2005-06 824 375 -141 -720 338
2006-07 936 490 762 -695 1493
2007-08 702 576 -457 -490 331
2008-09 2416 451 -825 16 2058
2009-10 3724 512 -651 -720 2865
2010-11 995 600 -1584 -646 -635

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 Balance of Payment
4000

3000
Current Account Balance
2000 Capital Account Balance

1000 Financial Account Balance

Errors and omissions
0
Overall Balance of Payment
-1000

-2000

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 Bangladeshs 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 Bangladeshs 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 Foreign Remittance Growth Rate

Inflow (in million USD)
2004-05 3848 14%
2005-06 4802 25%
2006-07 5979 25%
2007-08 7915 32%
2008-09 9689 22%
2009-10 10987 13%
20010-11 11650 6%

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

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),

FDI (in million Growth

Year
USD) Rate
2004-05 800 190%
2005-06 743 -7%
2006-07 793 7%
2007-08 748 -6%
2008-09 961 28%
2009-10 913 -5%
20010-11 768 -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 Banks 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 investments website:

http://boi.gov.bd/about-bangladesh/investment-and-trade/foreign-direct-investment-
in-bangladesh
http://boi.gov.bd/component/content/article/433

Bangladesh Economic Review 2011

Class Lectures of Dr. Shah Ahsan Habib.

Bus 510: International Business