Bangladeshi Aspect of Trade Balance and Balance of Payment

Submitted by

Md. Tahmidul Haq Ansari

abir_ansari@yahoo.com

Md. Tahmidul Haq Ansari

Introduction
In an open economy, one country trades with another. The country which exports (goods and services) more than it imports has a trade surplus. Whatever a country is carrying, a trade surplus or a trade deficit, does not matter rather what matters is the sustainability of surplus or deficit in the long run. Nothing can continue for long and a reversion is always expected for that reason. Basically, trade balance (deficit or surplus), is a function of several macroeconomic variables, including savings and investments. The country which saves more than its investments would have a trade surplus and vice versa. Bangladesh stands in the vice versa zone, i.e. gross domestic savings is lower than the investments. Our domestic savings are not adequate to meet the investments demand. Hence, capital inflow from trade surplus foreign countries fills the gap of the two, and that capital inflow forms the figure of capital account, the second broad terms of Balance of Payments (BOP). The relationship between current account and capital account is a well established equation, net exports (exports-imports)=savings-investments. This equation will always be true (identity). With this identity, we can explain the changes in trade balance. A change in net exports can be explained by a change either in national savings or in the level of investment, or both. For example, if the level of savings falls say because of an expanding government budget deficit - then, all else being equal, net exports will fall (that is, an existing trade deficit will expand). The same result will occur if, all else being equal, investment rises. In both cases, more capital must be attracted from abroad to fill the expanding gap between savings and investment. If investment falls while savings remains fixed, then net exports will rise (that is, an existing trade deficit will shrink).

Md. Tahmidul Haq Ansari

Theoretical Aspect
Balance of Trade. The balance of trade is the difference between the monetary value of exports and imports in an economy over a certain period of time. A positive balance of trade is known as a trade surplus and consists of exporting more than is imported; a negative balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade forms part of the current account, which also includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position. The Balance of Trade is identical to the difference between a country's output and its domestic demand - the difference between what goods a country produces and how many goods it buys from abroad; this does not include money respent on foreign stocks, nor does it factor the concept of importing goods to produce for the domestic market. Balance of Payment. A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa. Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency. This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investments and investments by foreigners.

Md. Tahmidul Haq Ansari

Bangladeshi Aspect of Trade Balance and Balance of Payment

The relationship between current account and capital account is a well established equation, net exports (exports-imports) = savings investments. Besides the savings and investments equation, there is also an important item that plays a significant role in trade balance, which is called the terms of trade index (ToT). ToT of Bangladesh is deteriorating over the periods. The index was 136.67 in 1980, 117.39 in 1990, 100.00 in 2000 (base year) and 64.54 in 2009. The speed of deterioration was severe from 2001 to 2008, represented by the sharp decline in that period. Despite a bullish trend in the export sector, the country's trade deficit has increased by an enormous proportion due to a massive import cost and a slow pace in remittance inflow. According to Bangladesh Bank's (BB) latest statistics on the balance of payment, the trade deficit in the first 11 months (July-May) of the fiscal 2010-2011 increased by 46 percent in comparison with the corresponding period of the previous fiscal. The BB released this information on 14 July 2011. Difference between Import and Export According to the BB information, the import cost during the July-May period of the fiscal 2010-2011 stood at $27.710billion. The export earning during the same period was at $20.610 billion. The difference between import and export that means the trade deficit stood $7.1 billion. The deficit during the corresponding period of the previous fiscal was $4.87 billion. And as a result, pressure has been created on the balance of payment because of the rise in the trade deficit. The balance in the current account surplus for the said period was only $610 million. The current account surplus for the same period of the previous fiscal year (2009-10) was at $2.970 million. On the other hand, a deficit of $750 million has been created in the overall balance. During the same period of the previous fiscal, there was a $2.66 billion surplus in the overall balance. Balance of Payment The BB while preparing the report on the balance of payment adjusts the export earning as the FOB (excluding transport cost of goods before loading ships and shipping cost). And as a result, the figure of export earnings in the BB report is comparatively lower than that of the Export Promotion Bureau (EPB).

Md. Tahmidul Haq Ansari

However, a 10 percent deduction on account of insurance and shipping cost is made from the statistics of import cost received on the basis of C and F (shipping fare and other cost) to include the import cost in the statistics of balance of payment on FOB basis. About this state of the balance of payment private research organization, Prof Mustafizur Rahman, executive director of the CPD (Center for Policy Dialogue), said that though there has been a big growth in the export the import cost also increased very significantly due to a rise in the prices of commodities in the international market. He said that a big chunk of our export earning is spent for importing the raw materials of the export items. He said that the current account balance has come under a tremendous pressure due to a rise in the trade deficit side by side with a slow pace in the remittance inflow. He said this pressure will continue in the coming says in the wake of the present state of commodity prices in the international market. To overcome this situation, he suggested diversification of the export items and export market in one hand and taking effective measures for increasing remittance inflow on the other. According to the BB statistics, the deficit in the service sector has also increased side by side with the trading sector. In the first 11 months of the last fiscal year, the trade deficit in the service sector stood at $2.23 billion. The figure was $1.58 billion during the same period of the previous fiscal. At present there is a surplus of $11.14 billion in the current transfer account. Of the amount, remittance inflow was $10.61 billion. A 5 percent growth was registered in the remittance inflow in the first 11 months of the last fiscal year. On the other hand, a deficit of $1.1 billion was recorded during the same period. The deficit in the previous fiscal was $290 million. FDI Decreasing According to information in the BB report, in the first 11 months of the last fiscal year a $720 million net Foreign Direct Investment (FDI) came to the country. The net FDI in the previous fiscal was $820million. Meanwhile, a $22 million portfolio foreign investment was withdrawn from the share market. During the same period of the previous fiscal, the portfolio foreign investment withdrawal was $85 million. Pressure Mounted on Reserve Pressure has been mounted on foreign exchange reserve because of a rise in the trade deficit and a overall negative impact on the balance of payment. The reserve at the end of May 2011 was increased by a minor proportion in comparison with the same period of the previous fiscal. But the situation has 5 Md. Tahmidul Haq Ansari

been deteriorated in consideration of the ability of meeting the import cost. The reserve at the end of May 2011 stood at $10.43 billion, which is equivalent to meeting the import cost for 3.6 months. The reserve had the capacity of meeting the import cost for 4.9 months in the previous fiscal.

Md. Tahmidul Haq Ansari

Overview We have seen that the trade balance is negative; investments are higher than savings, so we need foreign funds to exploit the investment opportunities. Why a trade surplus country would make investments in our country? Among the several reasons, important incentives are earning interests and revenues and also promoting their businesses in new markets. But we have seen that the factor payments of Bangladesh are growing at over 20 per cent per year with a positive acceleration rate. That means the more we are borrowing from abroad, the larger the burden we have to bear in the long run. If this situation continues for a very long time, the foreign investors might feel that the investment risk in that country (Bangladesh) is high; hence they may refrain from making new investments. With no more new investments, the GDP growth rate would become slow and the percentage share of factor income payments would become larger. By this time period, Bangladesh must improve its terms of trade index to survive for the next part (if investment inflow stops); otherwise, our living standards would fall. Bangladesh must utilize its present foreign investments to achieve the optimum level of benefit. Particulars Gross Domestic Savings (GDS) Gross Investments (GI) Goods Export (X) Goods Import (IM) Services Export (SRX) Services Import (SRIM) Trade Balance (BoT) Factor Income Receipts (FIR) Factor Income Payments (FIP) Net Current Transfer (NCT) Arithmetic Growth Rate (AGR) 13.4224% 12.8937% 15.0359% 14.1718% 14.4102% 13.4352% 13.3106% 8.8554% 24.9663% 18.4766% Geometric Growth Rate (GGR) 13.3358% 12.8671% 14.7223% 13.8746% 13.8416% 12.9469% 11.7256% 1.5792% 20.6184% 17.8601% Acceleratio n Rate (AR) -0.3859% -0.0965% -1.4186% -0.4398% 0.8740% -0.6337% 1.0973% -5.6414% 0.5842% 0.7437% % of GDP 1996-97 2009-10 15.90% 20.72% 18.99% 10.4236% 15.1833% 1.5513% 2.9137% -6.1220% 0.2097% 0.4634% 5.0737% 24.96% 16.2202% 21.4551% 2.1839% 3.7019% -6.7530% 0.0671% 1.3835% 11.2126%

Economic trend of Bangladesh.

Md. Tahmidul Haq Ansari

Concluding remarks
Disequilibrium in the balance of payments is a general economic phenomenon of most of the developing countries. The central bank of a country has a policy option for maintaining equilibrium in the balance of payments. From the above discussion we can conclude that the reserve flow experience of Bangladesh has been broadly in conformity with the monetary theory to the balance of payments. This strongly suggests that the monetary authorities in Bangladesh can attain their desired stock on international reserves, for any given demand for money, through their control on domestic credit. The government should minimize subsidy in fuel from its current level. This would help to increase the savings both in the public sector a lot and also in the private sector (higher fuel price would lead to lower private consumption of fuel). Moreover, the tax revenue of government should increase. As a part of that, the NBR is working on reshaping the tax rules, by which government would be able to earn more taxes. Government should bring more sectors under the tax system, as Bangladesh's tax to GDP ratio is only 8.5 per cent, one of the 22 countries whose tax to GDP ratio is lower than 9.0 per cent. Of the 178 countries, 90 countries have tax to GDP ratio of over 20 per cent. The remaining countries are in between of 9.0 per cent to 20 per cent. If the tax revenue is increased, holding the government purchase constant, national savings would increase, which is a crucial need to meet the investment demand domestically. When the condition, "domestic savings > investments" is satisfied, Bangladesh would be able to turn itself from a debtor to a creditor and this would ensure the sustainability of our economy.

Md. Tahmidul Haq Ansari