Worrying rise in current account deficit

Dhaka,  Wed,  23 August 2017
Published : 14 Jul 2017, 19:40:12

Worrying rise in current account deficit

The comfort zone of the country's balance of payments (BoP) is increasingly coming under threat. The widening trade deficit and falling remittance inflows have been causing much of the damage. And if the trend in both the cases persists during the current financial year and beyond, the current account deficit would goes further up, leading to a sort of BoP crisis after a long period. The problem that has been triggered by external factors is showing all the signs of deepening in the coming days. The problems started surfacing some years back, though the policymakers were hopeful that there would be a turnaround. But the expectation remained largely unmet. 

The trade deficit, according to a report published in this paper last Tuesday, soared by about 42.5 per cent to $9.0 billion during the July-May period of the last financial year over that of the corresponding period. The merchandise export in the past fiscal recorded less than 2.0 per cent growth, the lowest in past 15 years.  The lacklusture performance of the apparel sector was primarily responsible for a dip in export revenue earning. But the growth of import in the last fiscal was substantial. That was quite an interesting development, if seen in the context of growth of export and manufacturing. The import of capital machinery in particular has been rising consistently in recent years. Many, however, suspect that substantial volume of capital is being taken out of the country illegally through such import that does not have much relevance to domestic output growth. 

The decline in remittance earning is yet another major factor responsible for widening the deficit in the current account balance. As in the case of exports, remittance inflow from major destinations of Bangladeshi workers has been falling consistently in recent years. Despite a notable rise in the outflow of manpower to the Middle Eastern countries for the last couple of years, the situation has not improved. Bangladesh has little control over some of the factors such as fall in workers' wages as a sequel to the decline in oil revenue and economic slowdown in the oil-exporting Middle Eastern countries. 

The healthy surplus in the capital account, however, remains a cushion against the rising current account deficit. The higher inflow of foreign investment and the reduced pressure on debt repayment have helped the capital account to remain in a comfortable state. But that is not anyway an ideal situation. The overall balance comes under stress and strain if the current account deficit widens to an unsustainable level. 

Since there are no short-term options to diversify export basket and beef up remittance inflow immediately, the government should employ some proven measures such as exchange rate management and tightening of import credit growth to help improve the current account balance. The depreciation of Taka up to a modest level against the greenback is likely to provide an incentive to the exporters and help contain the surge in imports. True, the country's foreign exchange reserve is now quite healthy and is enough to meet import requirement for about eight months. But the situation may not remain so comfortable, if appropriate measures are not taken to improve the current account situation.

Editor : A.H.M Moazzem Hossain
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