Financial deficit followed by dollar crunch

The prevailing dollar crunch has pushed the country’s financial deficit into a dire condition. Foreign exchange expenditure has increased more than the inflow resulting in a gaping financial deficit. This is the first in over a decade and the highest deficit in history. The financial deficit has a direct impact on the country's foreign exchange reserves, which are gradually plummeting as a result.

Remittance is now being received within a day. A significant portion of the earnings from exports is used to import raw materials. Additionally, not all export earnings are received promptly. The country's inflow of dollars also relies on foreign loans, grants, and foreign investments. Furthermore, private sector entrepreneurs have obtained loans from foreign institutions for imports, known as buyer's credit. Local banks have also borrowed from foreign banks. However, all of these sources of inflow are currently experiencing a decline.

Conversely, there has been an increased inclination to repay foreign loans due to the rising dollar price. This has resulted in a decrease in the inflow of dollars into the country and has contributed to a financial deficit. As a consequence, the pressure on the dollar has not diminished, and the decline in foreign exchange reserves persists. Despite these circumstances, banks continue to exert control over the price of the dollar. It is uncertain how much this price will go up further.

The price of the dollar fixed by the government is now Tk 108, but it goes up to Tk 113 for imports. Meanwhile, the country's foreign exchange reserves have decreased from USD 41.74 billion a year ago to USD 29.77 billion.

Experts believe that keeping the financial accounts stable is more important for developing countries as the credit rating of a country depends on it. Foreign investors are also not interested in investing if there is financial deficit. Bangladesh Bank is also concerned about the issue.

Experts emphasise the significance of maintaining stable financial accounts, particularly for developing countries, as it directly impacts a country's credit rating. A financial deficit can deter foreign investors from considering investments in the country. Bangladesh Bank is also concerned about this matter.

The central bank governor Abdur Rouf Talukder said on two recent occasions that there has never been such a financial deficit in the last decade as now. The aim of Bangladesh Bank is to resolve this deficit. Bangladesh Bank will announce new monetary policy Sunday. This monetary policy is supposed to reduce the fiscal deficit.

Deficit after a decade

The financial account of a nation is derived from the assessment of its foreign financial assets and liabilities. This encompasses direct investment, portfolio investment, other investments, and reserve assets. The calculation of the financial account includes various categories of investments (both assets and liabilities) as well as the instruments used for investment, such as equities, bonds, notes, and loans.

According to Bangladesh Bank documents, the most recent financial deficit occurred in the fiscal year 2009-10, during the first tenure of the current government. At that time, the deficit amounted to USD 630 million. However, as of April in the current fiscal year of 2022-23, the deficit has reached USD 2.16 billion. Earlier a decade ago the deficit was driven by the increasing prices of commodities and the dollar in the global market. Similar factors have contributed to the deficit in the current year as well. However, due to maintaining the dollar rate during this period, this crisis is becoming more prevalent.

Why this much of deficit?

Domestic entrepreneurs have stopped taking foreign loans lest the dollar prices may go up. On the contrary, they speeded up repaying previous loans. They are even repaying loans that are overdue due to the fear of rising costs. Therefore, about USD 5 billion were sent abroad in the last year and a half.

According to Bangladesh Bank account, foreign debt in the private sector was USD 24.98 billion last March, which decreased to USD 24.30 billion at the end of the previous year. However, the debt in the public sector increased from USD 68.28 billion to USD 71.93 billion. As a result, foreign debt increased from USD 93 billion to USD 96 billion.

Due to the increased price of the dollar, entrepreneurs have ceased availing buyer's credit for importing capital equipment and raw materials. Consequently, there has been a decline in deferred payment facilities and back-to-back loan facilities. As a result, a deficit of USD 1.72 billion has been created in short-term loans.

Additionally, there has been a delay in receiving export payments even after the products have been exported. The time taken to receive export payments has increased compared to previous periods. As a consequence, this has led to a deficit of USD 3.6 billion as of last April. According to Bangladesh Bank, the total value of awaiting payment currently amounts to USD 1.32 billion.

The loans and credit limits taken by the local banks and financial institutions from foreign banks have also declined. As of last April, the deficit was USD 2.76 billion. This has resulted in the overall financial deficit in the country.

Bank officials claim that various decisions made by the central bank regarding the dollar market have conveyed a negative message to foreign banks. Consequently, many banks have reduced their loan limits. Moreover, the pace of receiving export earnings has slowed down, and the remittance inflow is hindered by high prices. These factors have had a detrimental impact on the economy due to the financial deficit. Businessmen continue to face challenges in opening required letters of credit. Besides, the increase in the dollar has contributed to higher prices of food products as well.

When will the deficit come down?

Bangladesh Bank is currently hopeful that foreign loans for budget support and development projects will help improve the situation and alleviate the deficit. The focus is on the release of loans promised by organisations such as the World Bank and the Asian Development Bank (ADB).

Officials from Bangladesh Bank involved in foreign trade have observed that the financial deficit resulting from reduced reliance on private loans is beneficial for the future, despite causing temporary difficulties. This is because it will alleviate the pressure of repaying dollar debts in the future. However, to transition from the current situation, it is essential to eliminate control over the dollar rate and remove the relaxations in policies that have been implemented. This will attract foreign banks and investors, ultimately restoring normalcy in the dollar market.

According to Ahsan H. Mansur, the executive director of the Policy Research Institute (PRI), a financial deficit of this magnitude has not occurred in the country for a long time. Maintaining a favourable financial account is crucial for the developing countries as it maintains a good credit rating.

Ahsan H. Mansur further emphasised that the current challenge lies in maintaining a positive financial account, even if it requires borrowing. He highlighted that foreign loans are not inherently negative, as they contribute to improving the business environment and credit ratings. Furthermore, foreign investment can be attracted through this.

Mansur pointed out that the crisis could have been avoided if the dollar price had been determined by the market and if the foreign exchange market had been allowed to operate within established regulations. However, this has not been followed. As a result, a year has passed with increased prices of commodities, leading to further hardship for the people.