Shaikh Istiak Khan
21204240
Fin425(2)
Part 1:Balance of Payment analysis of Bangladesh for the previous 20 years:
Trade Balance:
Trade balance is the difference between imports and exports. If a country’s export is greater than
import then the trade balance will be positive but if import is greater than export then the trade
balance will be negative. if we look at the chart we can see that the trade balance has always been
negative as Bangladesh is a major importing country. From 2016 the trade balance started to go
down significantly and rapidly, which caused a major impact on Bangladesh's current account
balance. Because of this negative trade balance, Bangladesh had to use foreign reserves to
compensate for it. From 2000–2005 the deficit started at −302 billion in 2000 and grew steadily,
reaching −680 billion in 2005. The growth rate of the deficit during these years is moderate. From
2006–2013 Deficits increased sharply, particularly after 2007, with significant jumps to −905
billion in 2007 and −1,484 billion by 2009. The years 2013 and 2014 see a peak at −2,369 and
−2,635 billion, respectively. From 2014–2023 There’s a slight improvement after 2014, with the
deficit reducing to −1,915 billion in 2016. However, from 2017 onwards, the deficit worsened
again, culminating in the largest value of −3,407 billion in 2023.
Primary Income:
The trade balance deficit is usually financed by the FDI and portfolio investments. but as we saw
Bangladesh's FDI and portfolio investment inflow are not sufficient enough, this trade balance
deficit is financed by taking loans from the IMF, the World Bank, and other countries. On these
loans, Bangladesh has to pay interest, and over the years this interest on loans started to grow.
From the chart, we can see that the balance of primary income went down significantly and
consistently on the negative side. In 2000 the primary balance was –302 but in 2023 the number
dropped to –3,407 which is a notable difference in the last twenty years. If Bangladesh runs a large
and persistent current account deficit over time, eventually it will experience an untenable rise in
debt owed to foreign investors. Which will lead to currency depreciation of BDT.
Secondary Income(Remittances):
Remittance is a transfer of money by a foreign worker to an individual in his or her home country.
Money sent home by migrants competes with international aid and is one of the largest financial
inflows to developing countries like Bangladesh. In the secondary income in Balance of Payment,
a big portion comes from remittance. the chart of remittance inflow we can see that from the year
2000 to 2023 the inflow of remittances has always been upward trending with no sign of going
down. In 2000 the remittance inflow was 2501 Million USD which raised to 23912 Million USD
in the last twenty years. This rise in the inflow of remittance is caused by Bangladesh's currency
depreciation. As the dollar-to-taka ratio increased over the years the migrant workers were more
encouraged to send remittances as they could get more taka with less dollar for their family.
Exchange Rate:
The chart above shows the average exchange rate of dollars to BDT in the last 20 years. In 2000
the dollar to taka rate was 52.2 taka per dollar. From that, it starts to increase over the years
reaching 106 per dollar in 2023. Depreciation of currency is normal for a country but for
Bangladesh, the currency depreciated at an alarming rate. from 2009 to 2012 Exchange rate rose
from 69.0 in 2009 to 81.9 in 2012, reflecting a major depreciation during this period. from 2020
to 2023 Exchange rate climbed steeply from 84.9 in 2020 to 106.3 in 2023. the value of the
Bangladeshi Taka (BDT) relative to foreign currencies has roughly doubled from 2000 to 2023,
increasing from about 52.2 to 106.3 per USD. This represents a depreciation of the Taka, meaning
it now takes more Taka to buy the same amount of foreign currency. This depreciation of the
Bangladeshi taka is caused by the trade deficit, rising import costs, and declining reserves rate. In
the last twenty years, the Bangladesh government followed a fixed exchange rate policy. Despite
the implementation of a fixed exchange rate policy, the currency of Bangladesh depreciated. In
recent years Bangladesh adopted a crawling peg exchange rate policy which can be a reason for
currency depreciation at an alarming rate.
Capital and Current Account:
The graph of the current account balance from 2000 to 2023 highlights significant fluctuations
over the years, reflecting changes in trade, investment flows, and economic conditions. When a
country imports more than it exports resulting in a negative current account, because of this the
country must attract foreign capital to finance this deficit, resulting in a surplus in the capital
account. On the other hand when a country exports more than it imports resulting in a positive
current account, it will have excess funds, which might flow out as investments abroad. The chart
The current account balance shows significant deficits of -557 million in 2005 and -18,196 million
in 2022. During these years, the capital account maintained a surplus of 163 million in 2005 and
610 million in 2022 to compensate for the deficit. Which is not enough to compensate for the huge
deficit in current account balance. To compensate for this deficit Bangladesh needs to attract
foreign investments or borrow funds. If Bangladesh continues to be in the current account deficit
and can not compensate for it by FDI and capital account then Bangladesh has to use its foreign
reserve to pay for its exports which will make the Bangladeshi taka (BDT) depreciate even more.
Financial account(FDI):
In financial accounts, foreign direct investment has the most significant impact. The chart shows
the Initial Fluctuations from 2000 to 2004. With minor fluctuations, FDI levels were relatively low
during this period, ranging from $276 million to $550 million. This indicates a period of modest
investor confidence or limited investment opportunities. We can see a significant growth from
2005 to 2008. FDI rose substantially, peaking at $961 million in 2009. This growth reflects
increased global investor interest, possibly due to a favorable investment environment.FDI dipped
to $775 million in 2011, possibly due to the global financial crisis, which affected FDI inflows. A
sharp increase to $2,628 million in 2019 marked the highest FDI level in the last twenty years. FDI
dropped sharply to $1,271 million in 2020, reflecting the impact of the COVID-19 pandemic. A
moderate recovery is observed, with FDI stabilizing at $1,649 million in 2023 As of 2023,
Bangladesh ranks 168th out of 190 economies in the World Bank's Ease of Doing Business Index.
In recent years, the outflow of FDI has been greater than the inflow because of the market
downturn, currency depreciation, and regulations on the free market economy. Usually trade
balance deficit is financed by FDI but Bangladesh's FDI is not significant enough to cover the huge
trade deficit.
Overall Balance:
The Overall Balance of Payments (BoP) for Bangladesh over the years 2000-2023 shows
significant fluctuations, reflecting the country’s economic stability, and trade patterns. The overall
balance was initially stable from 2000 at 179 million dollars to 232 million dollars in 2008. After
this stable period, we can see extreme volatility ranging from 2008 to 2018, finally reaching a
negative 857 million dollars.in 2020 despite global disruptions due to the COVID-19 pandemic,
the overall balance remained positive at 3169 due to strong remittance inflows and reduced
imports. A significant improvement to 9274 million dollars was observed in 2021, because of postpandemic export recovery and continued strong remittances. After this significant improvement,
we can see in 2022 the overall balance collapsed to a negative 6656 million dollars and in the
following year, the overall balance decreased even more to a negative 8222 million dollars. If the
overall balance is in deficit then it will negatively affect the foreign exchange reserve because
Bangladesh has to compensate for this deficit from the FX reserve. Because import payments are
made in dollars, which are taken from the FX reserve because Bangladesh regularly experiences a
trade deficit, the value of the Bangladeshi currency will depreciate if the FX reserve starts to fall.
Part 2:
Balance of payment (BOP) analysis of Bangladesh, Sri Lanka, Pakistan, and India over the past
five years:
In the balance of payment, there are three main accounts, current account capital account, and
financial account. If we want to analyze Bangladesh, Sri Lanka, Pakistan, and India's balance of
payment for the last five years, first, we have to look at their trade balances. These four countries
show a similar pattern of trade deficits, which has caused their current accounts to be in deficit as
well. To compensate for this current account deficit. Their service balance is mostly negative but
the amount is minimal which is not very significant. For the deficit of the current accounts, the
countries need to get capital transfers from capital accounts as well as foreign direct investment,
and foreign portfolio investments from financial accounts. If we look at the data for the last five
years we can see that there is not enough FDI or FPI inflow to compensate for the current account
deficit except for India. Despite having a massive current account deficit, India receives large
inflows of foreign direct investment (FDI) and foreign private investment (FPI), which balances
the balance and makes it positive in overall balance in most years. Which ultimately increases the
FX reserve resulting in domestic currency appreciation. But India's currency didn't appreciate. It
depreciated at a lower rate and this could be because of inflation or the recent pandemic which
affected the whole world. If we look at Pakistan Bangladesh and Sri Lanka we can see a similar
pattern for the overall balance of BOP which is negative in most of the years. This is because the
countries couldn't compensate for the current account deficit with FDI and FPI. As the overall
balance is negative the FX reserve decreases over time because the country needs to pay for its
trade deficits from its FX reserve. This causes the currency of that country to depreciate. As
currency depreciated remittance inflow rate rose as well because the migrant workers were more
encouraged to send remittances as they could get more domestic currency with fewer dollars for
their families. However, this increase in remittance was not enough to compensate for the huge
trade deficit.
To overcome the challenges in the Balance of Payments (BoP) the following strategies can be
implemented:
Import restrictions: Import restrictions can reduce the trade deficit, ultimately reducing the
current account balance. Tariffs can be charged to imports in order to collect duties that can
compensate for the trade deficit.
Improve Business Environment: Simplify regulations, reduce bureaucratic policy, and create
investor-friendly policies to attract FDI and FPI.
Increase export: The government should simplify the process of exporting goods to encourage
people.
Boost Remittance Inflows: Investing in training programs to help people get better-paying jobs
abroad.
Debt Management: Avoid excessive short-term borrowing, which can reduce reserves during
repayments.
Regional trade agreements: Trade agreements can help a country import essential goods with
fewer trade restrictions, ultimately lowering the cost of imported goods.