Chapter One

Introduction

Background
This report attempts to identify the past and present scenario /trend of balance of payment of
Bangladesh. A number of factors such as exchange rate changes, monetary and fiscal policies,
domestic and foreign income growth, supply shocks, and competitiveness determine the trade
balance of a country. The real exchange rate is an important determinant of exports and imports
of a country since it represents the rate at which the domestic goods and services that can be
exchanged with the output produced by foreign countries. A depreciation of exchange rate will
spur the demand for domestic exports as foreigners find that they are able to purchase more of
considered countries goods with the same amount of their exports since their imports have
become relatively cheaper. On the other hand, the consumer of considered countries will find
that their imports have become more expensive and therefore they may reduce the purchase of
foreign goods and increase the consumption of domestic substitute goods. This suggests that real
exchange rate depreciation affects trade balance, which in turn has a direct positive impact on the
exportable and importable industries in the domestic economy creating more jobs and income for
the citizens.
The balance of trade is the difference between the monetary value of exports and imports in an
economy over a certain period. A positive balance of trade is known as a trade surplus and
occurs when value of exports is higher than that of imports; a negative balance of trade is known
as a trade deficit or a trade gap.

Bangladesh experienced deficit on balance of trade since a long time. Finally, the decision come
that she follows floating exchange rate and the scenario has been changed. Bangladesh
devaluated its currency (taka) several times to make an improvement on balance of trade rate.
More specifically, by raising the relative price of imports, devaluation reduces the volume of
imports in domestic currency with price elastic import demand and increases export volume

Page 1 of 33
(more than the fall in the price of exports) by lowering the relative price of exports in foreign
currency with price elastic foreign demand for exports.

The Bangladesh Bank reports balance of payment in Bangladesh. Monetary policy authority of
Bangladesh depreciates or appreciates to improve the domestic income by improving balance of
trade like other countries. Depreciate and appreciate their exchange rate year by year.

1.1 Origin of the report

We have prepared this report to fulfill the accomplishment of our course in MBA named
“International Financial Management” and taken by Dr. A. A. Mahboob Uddin Chowdhury.
Taking his consent we have selected our Topics “An Empirical Study Of Balance of Payment
of Bangladesh” with a great desire to know about this subject which is very much relevant with
this course as well as important for country very much.

1.2 Objective of the report

 To understand the concepts of Balance of Payment.

 To find the trends of trade balance and their determinants for Bangladesh
 To find the trends of Balance of Payment of Bangladesh.
 To find out the strength of various factors which influence the trade balance of
Bangladesh
 To gain an in-depth knowledge about how different accounts are recorded, calculated and
what are their impact in the overall Balance of Payment.
 To gain knowledge practically through analysis of the year to year up and down of the
Balance of Payment
 To predict some policy measures for the overall improvement of trade balance based on
empirical results.

Page 2 of 33
1.3 Scope of the report:

For limited time constraint we were not able to find correlation of various factors with balance of
payments. Actually there is a huge scope to work in these issues. We can also try to find the
significance factor that has a great impact on balance of payment. But due to mainly time
constraint we could not suggest a proper policy to develop the BOP of Bangladesh, a developing
country.

1.4 Methodology of the report:

Data Source: This report has been completed by taking information from secondary sources. We
have completed our report by taking information from Bangladesh Bank websites, regarding
Balance of Payment of Bangladesh. We have also taken information from different websites.
Such as World Bank, Website of Bangladesh Bank, Bangladesh Export Bureau, Bangladesh
Bureau of Statistics and others. Relevant journals, brochures and articles available in website
have also been used as secondary sources.

Data Analysis Techniques: We mainly find descriptive Statistics (Graphs and tables) to analyze
balance of payment Scenarios and trends of Bangladesh.

Software Tools: Use Excel software as data analysis tool.

1.5 Limitations of the Report:

Mostly we relied on some websites containing information about Balance of Payment. We

collected a large part of information of this report from the website of Bangladesh Bank. We
could not verify the validity of all information. We could give more up to date and verified
information if we would have more time.

Page 3 of 33
 Chapter Two

Theory of Balance of Payments

2.1 Balance of Payments

Balance of payments is an important topic in international financial managements. It is also

called Balance of International Payments. It is a summary of all economic transactions between
the people of domestic country and foreign residents for a specific country over a specified
period of time or other international bodies. It represents an accounting of a country’s
international transactions for a period, usually a quarter or a year. It accounts for transactions by
business, individuals, and the government.

These transactions are specially calculated by the government but other individual firms and
corporate bodies also calculate the transaction regarding the balance of payments. It is
calculated in a particular period of time. Balance of payment provides the total economic supply
and demand of a country. Suppose if Canada imports more Dollar than it exports that means
supply of Dollar exceeds the demand of foreign exchange market. On the reverse case the Dollar
would likely to appreciate. This makes the balance of payments very important in international
financial managements.

A balance of payment Surplus means the export is greater in respect to the import of the country.
Here the country’s government and its people act as the saver. The balance of payment Surplus
indicates the economic boost for that country. It might be possible for them to lend beyond the
country. In total the good indication of economy will result the boost in the factories and that’s
why they will expand their operations. For that reason they will also hire more people and
employments will be created.

The balance of payment surplus is current account surplus plus the narrowly defined capital
account surplus. The balance of payment Deficit means that there will be more imports of goods
and services than the exports of goods and services. This will create a negative impression of the
economy of that country. That country needs to borrow currency to pay for the goods and
services those were exported. The balance of payment Deficit also puts negative impression to
the other countries about the country’s economy.
Page 4 of 33
2.2 Components of Balance of Payment

A balance of payments statement can be broken down into various components. Those that
receive the most attention are the current account and the capital account.

The components of balance of payments are:

1. Current account
2. Capital account
3. Financial account

2.2.1 Current Account

Current account is a very important component of Balance of Payments as it reflects the

economic condition of a country. The current account represents a summary of the flow of funds
between one specified country and all other countries due to purchases of goods and services, or
the provisions of income on financial assets.

Components of Current Account Payments:

The main components of the current account payments are for i) merchandise (goods) an

Services 2) Factor Income and 3) Transfers.

1) Payments for merchandise and services: Merchandise export and imports represent tangible
products, such as computers and clothing that are transported between countries. Service export
and imports represent tourism and other services, such as legal, insurance and consulting
services, provided for customers based in other countries. Goods are traded by any country at
any point of period. When the ownership of any good transferred from local country to foreign
country then it is called the export. On the other hand when the ownership transferred from
foreign country to local country then it is called the import.

When some intangible goods are used by a foreign or local region in exchange of money then it
is called the services.

Page 5 of 33
The trade balance is the measurement of a country’s exports and imports. Current balance is the
largest component of balance of payment. Although all countries try to avoid trade deficit, it is a
positive thing for emerging market as it helps to grow faster than they can if maintains surplus.

The current account refers the sum of trade balance and effect of net income. Current account is
in balance if people of a country provide enough income as well as the savings to fund their
purchases. If people spend more for foreign imports then it will cause current account deficit.

Positive current account indicates the country is lender to other countries of the world. On the
other hand is current account is negative then it indicates the borrower of money from the other
countries of the world. Current account surplus will result the increase of foreign assets, on the
opposite case the reverse will decrease the foreign assets. If economy’s current deficit is high it
means the absorption of the nation is higher than the production. On the other hand if current
account surplus is high this means the absorption is lesser than the production, which is a
positive indication to the country’s economy.

2) Factor Income Payments:

A second component of the current account is factor income, which represents income (interest
and dividend payments) received by investors on foreign investments in financial securities.

When an individual accepts money from a foreign entity then it is called the income. A foreign
company’s investment on a domestic region is considered as debit.

3) Transfer Payments:

A third component of the Current account is transfer payments, which represent aid, grants and
gifts from one country to another. That actually occurs when a country provide currency to other
country without receiving any return.

Calculation of Current Account: Current account can be calculated as,

CA = (X ̶ Y ) + NY + NCT

CA = Current Account

X = import of goods

Page 6 of 33
Y = export of goods

NY = income from abroad

NCT = net current transfers

2.2.2 Capital Account

The capital account includes the value of financial assets transferred across country borders by
people who move to a different country. It also includes the value of non-produced nonfinancial
assets that are transferred across country borders, such as patents and trademarks. The sale of
patent rights by home country reflects a credit to the balance of payments account while
purchase of patent right from foreign country reflects a debit to the home country balance of
payments. Thus the capital account measures two things. First one is domestic ownership that
changes of foreign assets. Second one is the foreign ownership of domestic assets. If foreign
ownership is greater than the domestic ownership then it results the deficit. On the reverse case it
will result the surplus.

Capital account refers the change of ownership of assets that are controlled by foreign entity. The
reserve account (with loans) and investments of the country and the rest of the world. The capital
account is very much negligible component of the balance of payment. If a country sells lesser
assets in terms of cash and it purchases more assets in terms of cash, then the capital account will
be negative. On the reverse case, the capital account will be positive. The current account tells us
about the net income of a country, on the other hand the capital account tells us the change in
ownership of the nation’s asset.

2.2.3 Financial Account

The key components of financial account are for 1) Direct foreign Investment 2) portfolio
investment and other capital investment.

1) Foreign direct investment:

Direct foreign investment represents the investment in fixed assets in foreign countries that can
be used to conduct business operations. Example of direct foreign investment include a firm’s

Page 7 of 33
acquisition of a foreign company, its construction of a new manufacturing plant, or its expansion
of existing plant in a foreign country.

It refers the long term capital investment. For example, repairing and construction of building,
machinery are capital investments. Investing in foreign countries refers the cash outflow and it
also remarks the deficit.

2) Portfolio investment

Portfolio investments represents transactions involving long term financial assets (Stocks ,
Bonds) between countries that do not affect the transfer of control. Thus a purchase of a portion
of stocks of a foreign country is classified as portfolio investment, because it represents a
purchase of foreign financial assets without changing control of the company. But if transfer of
control happens than, all stocks are purchased by home country than it is called acquisition and
would be classified as a direct foreign investment.

It refers the trade of shares and bonds. It is also said as short term investment.

3) Foreign Reserve Account

Generally speaking, foreign exchange reserves consist of any foreign currency held by a
centralized monetary authority, like the Central Bank of a respective country. Foreign exchange
reserves include foreign banknotes, bank deposits, bonds, treasury bills and other government
securities. Colloquially, the term can also encompass gold reserves or IMF funds. Foreign
reserve assets serve a variety of purposes, but are primarily used to give the central government
flexibility and resilience; should one or more currencies crash or become rapidly devalued, the
central banking apparatus has holdings in other currencies to help them withstand such markets
shocks. Reserve account is actually the buy and sell of foreign currency which is controlled by
the central bank of the country.

Page 8 of 33
 Literature Review

3.1 Review of Literature

If a country has received money, this is known as a credit, and if a country has paid or given
money, the transaction is counted as a debit. Thus theoretically, BOP should be zero. Meaning
that assets (credits) and liabilities (debits) should balance, but in practice this happens very
rarely. Balance of payments data of home country and host country have significance to
government officials. International Business manner ,Investors and consumers, Because such
data influence and are influenced by other key macroeconomic variables such as GDP,
employment, price levels , Exchange rate and interest rate. Thus BOP used as an indicator of
economic and political stability. Therefore many studies attempted to estimate short run and long
run relationships between trade balance and its determinants in different countries applying
different theoretical and methodological constructs. In this section, some of these relevant
literature studies are summarized in terms of their methodologies and findings in the basis of
publishing year.

Developing countries like Bangladesh should relax restrictions on imports more slowly than
barriers to exports, according to research by Amelia Santos-Paulino and Professor Tony
Thirlwall, published in the February issue of the Economic Journal. This is because it takes
longer for exporters to respond to trade liberalization than it does for imports to flood in,
potentially causing seriously disruptive balance of payments difficulties. (Cf. Hossain 2006)

M.S.Rahman Chowdhury – Bangladesh’s Balance of Payments: an Econometric Analysis

This study is the first major attempt to estimate in a rigorous and systematic way the impact of
trade liberalization not only on export growth but also on import growth, the trade balance and
the balance of payments. Previous studies have ignored the fact that if liberalization leads to a
flood of imports, the balance of payment consequences may seriously disrupt economies because
deficits cannot easily be financed.

Hossain and Alauddin (2005) examine the process of Bangladesh’s trade liberalization and its
impact on the growth and structure of exports, imports, GDP and other macroeconomic variables

Page 9 of 33
with particular emphasis on export. By using econometric investigation based on the ARDL and
the ARDL co-integration techniques they empirically found trade liberalization has had a
positive impact on the growth, that is, both anti-export bias reduction and import-GDP ratio have
significantly impacted on exports in the long run.

IMF (2006; approved by Mark Allen) analysis on Exchange Rate and Trade Balance Adjustment
in 46 Emerging Market Economics suggests several important conclusions. This paper focuses
on the average impact of a nominal exchange rate change on the trade balance. A country’s trade
balance significantly depends on the elasticity of export demand or the nature of the
differentiated export products with a negatively sloped demand curve. Export volume and
pricing-to-market elasticity tend to be quantitatively small, so most of the response of trade
balance comes from the behavior of imports. The impact of an exchange rate change depends on
the initial trade balance; given the price elasticity of import is greater the price elasticity of
export and the country export more than its import, when the Marshall-Learner condition
governing depreciation in nominal exchange rate will improve the trade balance in term of
foreign currency. If the countries have a larger trade surplus than a less likely or a smaller of an
exchange rate movement on trade balances.
Ng Yuen-Ling, HarWai-Mun, Tan Geoi-Mei, examined the relationship between exchange rate
and trade balance in Malaysia for the period 1955 to 2006. They found on their study that the
rear exchange rate and the domestic income has a positive relationship with the trade balance,
but the foreign income (USA as foreign country) has a negative relation with trade balance,
which is as the same theory developed in economics. Finally, they suggested adopting import-
substitution policy, which may work better than the devaluation-based policy in improving
domestic income and trade balance.

SHAO Ziwei (2008) examined the most important economic factors that manipulate the bilateral
trade balance between Japan and the US. Ziwei's study include the net foreign asset position, and
come up a decision that there is no significant long run relationship between exchange rate and
trade balance, but in short run, Japan's trade balance is positively connected with exchange rate.
Aziz (2008) paper examined the empirical relation between real exchange rate and trade balance
of a developing country-Bangladesh. Aziz’s study depicts, the real exchange rate has a
significant impact on balance of trade of Bangladesh both in the short and the long run.

Page 10 of 33
The aim of the study by Jorge Carrera1 and Romain Restout (2008) was to determine what
factors influence real exchange rates in nineteen Latin American countries over the 1970-2006
period and through theoretical literature author found out six traditional fundamentals: the
Balassa-Samuelson effect, government spending, the terms of trade, the country’s openness to
international trade, foreign capital inflows and the net foreign assets positions. In this study
author followed the methodology proposed by Coudert and Dubert (2005) to identify the de facto
regime. The study investigates that all these determinants has strong potential effect on real
exchange rate whereas an increase in trade openness leads to a depreciation of the real exchange
rate.

Khatoon and Md.M.Rahman (June 2009) work on the context of Bangladesh and twenty major
trading partners of Bangladesh. They use the data from 1972 to 2006. They used co-integration
techniques to estimate long run relationship and in short run estimation they use Vector Error
correction model. Johansen Test for Co-integration shows in the long run a positive relationship
of trade balance with devaluation of exchange rate and foreign income and negative relationship
with domestic income. In short run there is a positive relation in between with trade balance and
devaluation of currency in Bangladesh.

David and Guadalupe (2006) tried to investigate the above fact in Argentina for which they used
multivariate co-integration tests for non-stationary data and vector error correction models. After
investigating last forty to fifty years data investigation confirms the existence of long-run
relationship among trade balance, real exchange rate and foreign and domestic incomes for
Argentina during different real exchange rate management policies. Author also tried to check
the Marshall-Lerner condition where they found that Ml condition is fulfilled in the periods
including fix exchange rate regime policy but not in those when exchange rate has shown more
flexible policies. Osman and Sarmidi (2012) in their study mainly focused on exchange rate
deviation, as the right choice of exchange rate regime can give a stable economy.

Page 11 of 33
 Chapter Four

Empirical Analysis of Balance of Payment

4.1 Export Scenerio Of Bangladesh

Export and Import are the major items of Current account. In the following graph we tried to
show the last ten years export Amont of Bangladesh.

Export (in million)

34257

40000
31209

27450
30187

22836

35000
27027
24302
22928

30000

25000
16205
15565

20000
Export (in million)
15000
Linear (Export (in million))
10000

5000

0
2012-13
2008-09

2009-10

2010-11

2011-12

2013-14

2014-15

2015-16

2016-17

2017-18

Source: Tradingeconomies.com

And here the export amount shows in million (USD). In 2006-07 fiscal years the export was
almost 10,000 million USD which was raised by 3 times and it was more than $30000 million. In
between 2006 and 2016 the raise was linear. In 2009-10 it was unchanged and the amount was
almost $15000 million. In 2010-11 it then raised to almost $ 23,000 million. After that the raise
was sharply linear. In 2015-16 export was highest in this 10 years span.

12
Bangladesh's export earnings have seen a 6.33% rise to $ 27.45 billion in the first nine months of
the current fiscal year. According to Export Promotion Bureau (EPB) data, in July-March of the
current fiscal year, Bangladesh earned $27.45 billion, up by 6.33%, compared to $25.81 billion
for the same period a year ago.

4.1.1. Major Export Items in Bangladesh

The following export product groups represent the highest dollar value in Bangladeshi global
shipments during 2017. Also shown is the %age share each export category represents in terms
of overall exports from Bangladesh.

0.80%
Major Export Items
0.70%
1.60% Knit or crochet clothing,
2.40% 0.40% 0.20%
1.80% accessories
2.60% Clothing, accessories (not
knit or crochet)
44.20% Miscellaneous textiles,
worn clothing
41.90% Footwear

Paper yarn, woven fabric

Fish

Source: Dhaka Chamber of Commerce & Industry

Bangladesh’s most valuable export products are unknotted and non-crocheted men’s suits and
trousers followed by knitted or crocheted t-shirts and vests, knitted or crocheted jerseys and
pullovers then unknotted and non-crocheted women’s clothing.

1. Knit or crochet clothing, accessories: US$17.5 billion (44.2% of total exports)

2. Clothing, accessories (not knit or crochet): $16.6 billion (41.9%)
3. Miscellaneous textiles, worn clothing: $1 billion (2.6%)
4. Footwear: $930.4 million (2.4%)
5. Paper yarn, woven fabric: $725.7 million (1.8%)

13
 6. Fish: $626.9 million (1.6%)
7. Headgear: $296.9 million (0.8%)
8. Leather/animal gut articles: $272.0 million (0.7%)
9. Raw hides, skins not furskins, leather: $143.7 million (0.4%)
10. Plastics, plastic articles: $91.9 million (0.2%)

Bangladesh’s top 10 exports are highly concentrated accounting for 96.5% of the overall value of
its global shipments. Plastics and plastic articles were the fastest-growing among the top 10
export categories from 2016 to 2017, up by 8.6% from 2016 to 2017. In second place for
improving export sales were leather/animal gut articles which were appreciated 6.8%.
Miscellaneous textiles and worn clothing posted the third-fastest gain in value up by 6%, trailed
by headgear up by 5.9%. Leading the declining product categories among the top 10 Bangladeshi
exports was raw hides. Skins other than furskins, and leather. That category shrank -33.1% year
over year.

The shipment of garments, which account for more than 80 % of the national export, grew
because of the increased sales of high-value items and the depreciation of the local currency
against the US dollar, according to exporters. The earning from garment export even crossed the
11 months’ target at 3.24% to $27.24 billion. The export growth in the apparel sector in June
might be a little less, but it will grow more from July onwards as the manufacturers have a
handful of work orders. In recent months, garment export to the US is declining as China, India
and Vietnam are performing well to the US markets. Although the export is growing, the prices
and demand for the garment items are declining worldwide. The country's garment factories are
full of orders from international retailers and brands, thanks to the massive progress in workplace
safety carried out by the Accord, the Alliance and the government.

The exporters also benefitted from the depreciated exchange value of the taka. On Monday, the
interbank exchange rate was Tk 83.70 per US dollar, up from Tk 80.50 a year earlier, according
to central bank data.

14
Shipment of agricultural products such as fruits and spices was up by 18.09% to $609.01 million.
Cement, salt and stone fetched $11.88 million, up by 24.01%, and pharmaceuticals brought home
$95.98 million, an increase of 15.89%.

Cotton, cotton products, and yarn exports went up by 15.86 % to $117.15 million in the July-
May period. Jute and jute goods also fared well as the demand for the goods made in Bangladesh
from the natural fiber is rising. In July-May, jute and jute goods fetched $966.90 million, up by
6.99 %. Jute and jute goods may fetch more than $1billion at the end of the current fiscal year
after three years. If it happens, only three sectors among 725 kinds of export goods from the
country -- apparel, leather and leather goods, and jute and jute goods -- will be earning more than
one billion dollars. Home textile export rose by 11.67 % to $823 million, footwear by 2.55% to
$225.77 million, furniture by 21.33 % to $58.19 million, bicycle at 4.47 % to $81.34 million and
ceramic products at 10.92 % to $40.52 million. On the other hand, exports of plastic goods fell
by 17.82 % to $90.04 million in July-May. Leather and leather goods sector, the second largest
export earner after garments, fetched $999.07 million in the 11-month period, down by 11.08 %.

The shipment of leather and leather goods was hit largely by the relocation of tanneries from
Hazaribagh to Savar as production was hampered. All the 155 tanneries have been relocated, but
only 25 of them have so far been able to start production in their new location, industry people
said. Frozen and live fish exports fell by 1.59 % to $465.32 million. Overall, exports rose by 6.66
% year-on-year to $33.72 billion in the July-May period. The earnings narrowly missed the
periodic target of $33.87 billion, according to the data.

4.2 Import Trend of Bangladesh

15
16
17
18
19
20
21
4.3 Balance of Trade

Trade balance is the value of exported goods minus the value of imported goods. A positive
trade balance signifies a trade surplus, while a negative value signifies a trade deficit.
Bangladesh has been recording sustained trade deficits since 1976 mainly due to a high value of
imports. Main imports are petroleum and oil (11% of total imports); food items (11%) and textile
(10%). Main exports mainly readymade garments (80% of exports revenue). Below is the Trade
deficit trend from 2000-01 to last year (2017-18).

Balance of Trade (million US$)

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13* 2013-14 2014-15p 2015-16 2016-17 2017-18
-

(2,000) (1,772) (2,206)

(2,786)
(1,927) (2,367)
(2,978)
(4,000) (3,493) (4,689)

(6,000) (5,350) (5,132)

(7,293) (7,199)
(6,460)
(7,037)
(8,000)
(7,817)

(10,000) (9,472)

(10,613)
(12,000)

(14,000)

(16,000)

(18,000) (17,228)

(20,000)

 Source: Bangladesh Bank (https://www.bb.org.bd/econdata/index.php)

 Jul 17 – May 18 is considered for Year 2017-18 (https://www.bb.org.bd/econdata/bop.php)

From above graph we can comment that the trade deficit has been increased by eight times in last
17 years. In 2017-18 trade deficit becomes almost double (184%) than 2016-17 which crossed 17
thousand million of US$. During last 5 years this deficit varies from 7 thousand to 10 thousand
million US$. So last year is different than the previous years’ trend. If it follows linear trend then

22
last year’s deficit should be around 11 thousand but it crossed 17 thousand. From the below table
we can find the variables responsible for this huge change –

%
2016-17R 2017-18RP 2017-18P
Items Changes
July-May July-Apr July-May 4 over 2
1 2 3 4 5
Trade balance (Deficit) (9,363) (15,335) (17,228) 84.00%
Export f.o.b.(including EPZ) 30,890 30,011 33,296 7.79%

Of which : Readymade garments 25,625 25,306 28,129 9.77%

Import f.o.b (including EPZ) 40,253 45,346 50,524 25.52%

From the above table we can say that the main responsible of increasing deficit is the jump of
import. Import has been increased by 25% compared to the same period last year which is
equivalent to more than 10 thousand million US$. Export has also been increased by around 8%;
but it is very low compared to the increase of import. Import has been increased mostly because
of the increase of commodity import (especially Rice) as last year the country faced huge flood
which caused low production of paddy. Capital machinery and raw materials import has also
been increased in last year because of big government projects like Padma Bridge, Metro Rail
etc.

4.4 Country wise Remittances

23
If we take a look at the current combination of remittances received from other countries, then
we will see that USA, UAE and the Kingdom of Saudi Arabia have the largest contributors to
remittances sent to Bangladesh.

Foreign Remittances have fallen in recent years, from 15.317 Billion USD to 12.769 Billion
USD. This may be a reason for human capital not holding as much value as it did the previous
fiscal years. We have often heard of the bad conditions that workers are living in abroad;
therefore, there has been a cut from voluntary migration as labor to other countries. The world
economy’s downturn can also be held as a reason for such a drop in remittances.

Table 4.1: Number of Expatriate Employees and Amount of Remittance

No of Amount of remittance
F Employme In Million Percentage Tk. In Percentag
Y nt Abroad US$ Change % Crore e Change
000 %
2006-07 564 5978.47 24.50 41298.5 27.9
2007-08 981 7914.78 32.39 54293.20 31.46
2008-09 650 9689.16 22.42 66674.84 22.87
2009-10 427 10987.40 13.40 76109.67 14.11
2010-11 439 11650.32 6.03 82992.80 9.045
2011-12 691 12843.40 10.24 101882.9 22.7
2012-13 441 14461.15 12.60 78
115646. 13.56
2013-14 409 14228.30 -1.61 16
110582. 1-
2014-15 461 15316.91 7.65 37
118993. 4.38
7.60
2015-16 685 14931.14 -2.52 00
116856. -
2016- 551 9194.51 00
72176.9 1.79
Source:
17* Bureau of Manpower, Employment & Training and Bangladesh Bank. Note: 0
% change over the previous year
Note: *- Up to February 2017.

If we look at the table above then we can observe that there has been peaks of employment
abroad on 2007-08, 2008-09, 2011-12 and 2015-16. However, the resulting percentage change in
remittances has been dropping ever since 2009-10. The fall in recent years can be referred back
to the slump in oil prices in the international market which in turn has affected the resulting
wages of the people employed abroad. This has a severe effect as most of the employees living
abroad are based in Middle Eastern countries. Another reason why the remittances have fallen
short in comparison to previous years is because of lower exchange rate values. Finally

24
economic recession in those countries has also been a contributory factor in lowering
remittances.

Table4.2: Remittance as Percent of GDP and Export Earnings

F 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015-
Y 07 08 09 10 11 12 13 14 15 16
As percent
of GDP 8.72 9.95 10.83 11.00 10.55 11.11 11.14 8.20 7.90 6.74
As percent 49.09 56.09 62.25 67.80 50.64 52.92 53.52 47.10 49.00 43.60
of Export
Earnings

Source:* Bangladesh Bank, BBS and EPB

The above table shows the contribution of remittance to the Gross Domestic Product. The
importance of remittances can be comprehended once we consider the uses of that remittance.
According to above table 2006 survey most of the remittance sent to a country was spent on
education and saving. Therefore, this is supposed to have a ripple effect on the economy, by
improving the number of educated population and in turn providing more efficient human
capital, which in turn will help increase the GDP in the future.

Remittances and export earnings are two of the main sources of foreign currency. A rising
concern for the economy when remittances are almost as high as export earnings , the inflow
earned through remittances can very well be spent on imports, resulting in an outflow of funds in

25
an economy. However, we can see that after 2009-10, remittances have lowered in comparison to
export earnings.

The table above shows the data for inward remittances since 2006. We can see the peak point on
2013-14 when the inward remittance was around 10 Billion more than the past 10 years of time.
The highest remittances were received on 2014-2015. Another point to note is that the Kingdom
of Saudi Arabia has always been at the forefront of providing the most remittance; if we look at
2009-10 they have provided the highest remittance in the past decade with UAE and the USA not
far behind.

4.5 Foreign Exchange Reserve

In Bangladesh, Foreign Exchange Reserves are the foreign assets held or controlled by the
country central bank. The reserves are made of gold or a specific currency. They can also be
special drawing rights and marketable securities denominated in foreign currencies like treasury
bills, government bonds, corporate bonds and equities and foreign currency loans.

Below is the trend of foreign exchange reserve from 2000-01 –

26
 Gross Foreign Exchange Reserves (Million US$)
40,000

35,000 33,493
32,917

30,168
30,000

25,025
25,000
21,558

20,000

15,315
15,000

10,750 10,912 10,364

10,000
7,471
6,149
5,077
5,000 3,484
2,470 2,705 2,930
1,307 1,583

Reserve has been crossed 33 thousand million US$ in 2016-17 which was only 1.3 thousand in
the beginning of this century. It means reserve has been increased by 25 times in 18 years time
though last year growth is negative. Higher trade deficit is the reason of the negative growth in
reserve. In trade balance chapter we discussed about the reason of higher trade deficit because of
increased import as below –

- Increased import of Rice & Wheat by 212%

- The import of necessary machinery for setting up industries rose by about 35% during this
period.

- The import of fuel oil and raw material for industries increased by 28% and 15% respectively.

- The works of some big projects like Padma Bridge and metro rail are going on in full swing.
- The cost for importing necessary equipment for these projects is increasing.

International standards require a country to have reserves to meet import costs of at least three
months. With Bangladesh’s current reserves, it will be possible to meet foot import bills of more
than eight months.

27
As a country developing in a fast pace, Bangladesh needs to meet its import obligations through
foreign exchange, therefore, having other currencies available enables Bangladesh to pay for the
imports without imposing too much strain on its internal economies, because otherwise the
currencies would have to be borrowed, thus increasing the amount of debt.

On the other hand, holding foreign exchange reserves more than the optimal amount has its
opportunity costs. Moreover, this could lead to a tight monetary policy where Bangladesh can
use its reserves to sell BDT and buy USD to falsely depreciate the home currency to encourage
exports.

4.7. Balance of Payments

Balance of payment
5483
5128

5036
6000
4373

5000

4000
2865

2449
2058

3000
1493

2000 Balance of payment

494
331

1000
-656

0
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17*

-1000

From the above graph it is shown that balance of payment in Bangladesh changes in every fiscal
year. In the year 2012 -13 it is 5128 followed by later year 5483 than the next year 4373 million.
Again it increases in the year 2015 -16 and raises in 5036 million.

28
 Chapter Five

Recommendations & Conclusion

5.1 Recommendations:
Shortage Balance of payment isn't generally terrible for a nation which for the most part happens
because of shortfall trade balance. A relentless deficit balance for a nation is adversely
corresponded with financial development, economic growth, business, currency value and
foreign direct investment.

Bangladesh government should try to make policies in such away which actually reduce balance
of trade deficit. Suggested policies are:

Increase Production:

Imports are expected to decrease. - Bangladesh must expand its generation with the goal that
surplus can be sent out. On the off chance that a nation's aggregate creation of merchandise and
administration increment, at that point installment for imports will go down and exchange
shortfall will be adjusted.

Increase Export: By increasing export current account can also reduce its deficit. Export
increases the inflow of cash that offset excess payment for import.

Government Policies: To support up the export, government has taken diverse activity, for
example,

 50% income tax rebate on export earnings

 Tax at source on all export earnings shall be deducted at the rate of 0.25%

29
  Duty free import facility of capital machinery has been extended to the 100% export
oriented industries outside the EPZ
 Should jute clothes and bags be used in the packing of export goods VAT paid on such
products will be refunded
 20% of the rejected goods of the 100% export-oriented industries including leather
goods and readymade garments will be admissible for sale in the local market subject
to payment of usual duties and taxes.
 Reduced Air fare for the export of specially privileged products including Fruits and
Vegetables
 Withdrawal of royalty for the expansion of cargo facilities of foreign airlines for export
Purposes
 Issuance for multiple entry visa
 The possibility of providing tax exemption and subsidy in service sectors such as
electricity, water and gas, instead of cash incentives, will be examined
 Maintaining low inflation rate: A high inflation exerts downward pressure on export
earnings. Bangladesh is maintaining a consistent and stable inflation rate around 6% over
the last years.
 Trade deficit can also be reduced by attractive and competitive export price which is
desired by foreign importers. Attractive export price can be resulted from internal
competition and high production.
 Less government expenditure is also a factor for eliminating trade deficit.
 Government should try to increase Foreign direct investment (FDI) to create political
stability
 If the IMF, World Bank and Asian Development Bank release their loans for Bangladesh
as promised, then our balance of payment will improve.
 To ensure good relationship with friend’s country of Bangladesh to have promised
significant monetary support, which will certainly have a positive effect.

30
5.2 Conclusion:

To deal with the Balance of Payment, Bangladesh should take systems and approaches for
neighborhood exporter, in general economy and framework. New things, for example,
handiwork and cabin merchandise ought to be actualized to send out. It will be a decent
wellspring of outside income. Bangladesh have additionally a decent potential chance to make
tourism as an industry, it will likewise turn into a decent wellspring of income. Another division
is data innovation and propelled PC learning where Bangladesh has a high potential to contribute
and procure outside money, however security is a major issue here. At Present Bangladesh needs
to give fundamental motivators to the FDI that will build the capital record and subsequently by
and large adjust. Likewise Bangladesh needs to look new nation to send out work. As we
probably am aware the settlement is the most elevated wellspring of Current exchange of
Bangladesh which assumes a critical part in expanding the general adjust.

However, if a country has a negative current account balance, it should have a positive capital
and financial account balance. This implies that while it tends more money out of the country
than it receives from other countries for trade and factor income, It receives more money from
other countries for trade and factor income, it receives more money from other countries than it
spends for capital and financial account components, such as investments. In fact, the negative
balance on the current account should be offset by a positive balance on the capital and financial
account. However, there is not normally a perfect offsetting effect because measurement errors
can occur when attempting to measure the value of funds transferred into or out of a country.

31
 Reference

Alo, J. (2017). Remittance sees big fall in 2016. Dhaka Tribune. Retrieved 15 August 2017, from
http://www.dhakatribune.com/business/2017/01/06/remittance-sees-big-fall-2016/

Bangladesh Bank Statisitcs. (n.d.). Retrieved from https://www.bb.org.bd/

Bangladesh Bureau of Statistics. (n.d.). Retrieved from .http://www.bbs.gov.bd/

Bangladesh Export Promotion Bureau. (n.d.). Retrieved from .http://www.epb.gov.bd/

Bangladesh Economic Review 2017 (n.d.). Retrieved from .https://www.mof.gov.bd

Harmachi, A.R. (2017) Bangladesh's Balance of Payment deficit increases -bdnews24.com. (2017).
Bdnews24.com. Retrieved 15 August 2017, from
http://bdnews24.com/economy/2017/02/13/bangladesh-s-balance-of-payment-deficit-increases

Wakayama, Y. (2017). Can Remittances be the Source of GDP Growth in the Developing
Countries?, from http://www.tufs.ac.jp/education/yushuronbun/doc/yusyu22_wakayama.pdf

32
33