The economic performance of a country is reflected in its balance of payment (BoP) The balance of payment (BOP) refers to a method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. 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.
Bangladesh is an emerging economy in the world. The improvement of its economy also depends on the performance of its BoP.
In Bangladesh Balance of Payments statements are grouped under two major categories as given below:
1. Current Accounts
2. Capital and Financial Accounts
1. Current Accounts: The current account can be defined as a summary of the flow of funds between one specified country and all other countries due to purchase of goods and services or the provision of income on financial assets.
In Bangladesh although a continuous trade deficit is there, the current account balance (CAB) recorded a positive trend from Fiscal Year 2001-02 to Fiscal Year 2003-04. After that, it started to increase from Fiscal Year 2005-06 till Fiscal Year 2010-11. However, the incremental growth rate of current account balance is following an irregular trend over the years. In Fiscal Year 2010-11, current account surplus was USD 995 million although which was 73.37 percent lower than that of the corresponding previous fiscal year.
Negative trade balance with a deficit of USD 7328 million was the reason behind where imports surpassed the export earnings. In addition, receipt of workers’ remittance and foreign domestic investment (FDI) was 6.03 percent and 15.9 percent respectively lower than that of Fiscal Year 2009-10.
The main weakness of our BoP is that it is import-dominated. The growth of import is significantly higher than that of export. If we can reduce the import dependency or increase the level of export, then it will help reduce the pressure on of our BoP, generated from import dependence.
2. Capital and Financial Accounts: 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. Key components of the financial account are payments for a. Direct Foreign Investment: Represents investments in fixed assets in foreign countries that can be used to conduct business operations. b. Portfolio Investment: Represents transactions involving long term financial assets between countries that don’t affect the transfer of control. c. Other Capital Investment: Represents transactions involving short term financial assets between countries.
Capital account tends to show an upward trend over the years. It was USD 561 million in FY 1999-00, which was 44.96 percent higher than that of FY 1998-99. However, in subsequent fiscal year it did fall down drastically 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.
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.
Although foreign direct investment (FDI) is an important aspect of things relating to our BoP, yet the amount of FDI inflow to Bangladesh has not been at the desired level. After the fiscal year 2004-05, the growth of FDI flow to Bangladesh on an average decreased except the FY 2008-09. Again after that fiscal year, it has decreased. In FY 2004-05 the contribution of FDI to the country’s gross domestic product (GDP) was 1.33% and in FY 2010-11 it is only 0.70%.
There are mainly two dimensional problems in case of poor FDI performance which are needed to overcome. One is lack of branding of our investment potential and the other is our poor infrastructural facilities, insufficient gas and power supply and an unstable political setting. We have to determine how much FDIs we need and in which sectors. We have to set our limit and try to attract FDI within that.
Portfolio investment is another significant component of BoP. 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. The infrastructural facilities at Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) should be improved to such an extent so that online trading for the foreigners is possible. When it comes to attracting foreign portfolio investment in the country, our political instability becomes an obstacle and steps should be taken to improve this situation. Credible financial reporting, quality research and good corporate governance can serve as catalysts to improve the portfolio investment in the Bangladesh capital market.
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. Increasing import bills, the global financial crisis, economic slowdown and higher rate of inflation causing foreign exchange reserve to increase at a decreasing rate over the years. 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.
Increasing import bills and lower rate of export earnings has widened trade deficit in the recent fiscal years.
Depreciation of local currency against USD, low foreign exchange reserve and downward trend of incremental growth rate of remittance receipt have created more pressure on the balance of payment of the country.
Therefore, a better coordination should be there among different policy making bodies and economic policy instruments for maintenance of a healthy condition of our BoP.