The balance of payments deficit falls by almost USD 5 billion in FY24 compared to the previous year
Infographic: TBS
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Infographic: TBS
The country’s financial account surplus increased by nearly $2.5 billion in June, the last month of the 2023-24 fiscal year, mainly due to inflows of bilateral and multilateral loans.
According to the central bank, the financial account surplus reached $4.55 billion at the end of the fiscal year, up from just over $2 billion at the end of May. However, the surplus amount decreased slightly compared to fiscal year 2023, when the financial account recorded a surplus of about $7 billion.
The financial account balance is the main source of a country’s external payments. When a country’s current account balance becomes negative, external payments are made from the financial account. When the financial account becomes negative, payments are made directly from reserves.
In fiscal year 2024, the country’s trade deficit narrowed by nearly $5 billion compared to the previous year. The current account deficit also narrowed by about the same amount compared to fiscal year 2023.
Central bank data show that the increase in medium and long-term loans contributed significantly to the increase in the capital account surplus. In fiscal year 2024, medium and long-term loans amounted to $9.68 billion, about 11% higher than the previous year.
A senior central bank official said the inflow of foreign loans was even better a few years ago, but the extension of short-term loans has declined. Due to factors such as rising dollar interest rates in the international market and exchange rate risks, borrowers’ interest in new loans has declined, he said.
“Instead, they are more focused on repaying existing loans. In addition, the decline in imports has also contributed to reducing credit demand,” he said.
Professor Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue, told The Business Standard: “The raising of bilateral and multilateral loans, including budget support loans, in June helped increase the surplus in the financial account. However, one must not forget that these loans entail payment obligations for the future.”
Trade deficit falls by 18 percent
Due to various measures taken by the Central Bank, imports have declined significantly, resulting in an 18% reduction in the country’s trade deficit in fiscal year 2024 compared to fiscal year 2023, despite the lack of export growth. As a result, the trade deficit amounted to $22.43 billion.
The trade balance is the difference between a country’s exports and imports.
According to central bank data, the country’s import expenditure in fiscal year 2024 was $63.24 billion, while export earnings were $40.81 billion. Both imports and exports declined in fiscal year 2024 compared to the previous year.
Another senior central bank official said import payments in fiscal 2024 had declined due to Bangladesh Bank’s efforts to control imports. Moreover, banks had been grappling with a dollar shortage throughout the year, which prevented companies from opening letters of credit for imports when needed, he said.
However, there has also been a slight decline in demand from companies for the opening of import LCs, he added.
Infographic: TBS
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Infographic: TBS
Current account deficit narrows
In fiscal year 2024, remittances increased by $2 billion compared to the previous year. This, combined with a reduction in the trade deficit, resulted in a reduction in the current account deficit by almost 44%, now at $6.51 billion.
The current account, which includes the trade balance (exports less imports of goods), net income from abroad and net transfer flows, is crucial as a key component of the broader balance of payments.
Professor Mustafizur Rahman said: “A decline in the current account deficit indicates some improvement in our balance of payments. However, we have not yet reached a comfortable position.”
The economist added: “Once we have had a current account surplus and before we return to that stage again, it is important to prevent an excessive increase in imports.”
According to central bank data, errors and omissions, known as unaccounted balances, amounted to $2.89 billion at the end of fiscal year 2024, a decrease of more than $1 billion from the previous fiscal year.
“A few years ago, the numbers of errors and omissions were not so high. We need to investigate why these numbers have become so high and whether there is a plausible explanation for this increase,” said Prof. Mustafiz.
The Central Bank has reported that the overall balance of payments deficit at the end of fiscal year 2024 decreased by about 48% compared to fiscal year 2023, amounting to $4.3 billion. Normally, the overall balance of payments deficit is paid from the country’s foreign exchange reserves. As a result, the country’s foreign exchange reserves have decreased by over $3 billion in the past year, according to the BPM6 guidelines.
The CPD distinguished fellow said that although pressure on reserves had eased somewhat, it still existed.
He stressed the need to focus on increasing remittances by restricting the Hundi and increasing exports of goods and services.
“In the short term, maintaining normal transportation of goods both domestically and internationally is crucial, while in the medium term, efforts should be focused on increasing business productivity and reducing business costs,” said Prof. Mustafiz.
The economist also stressed the importance of accelerating the implementation of development projects and releasing planned foreign loans in order to strengthen reserves and ensure exchange rate stability.
