Assignment on

The contributing reasons behind these positive figures of BOP of Bangladesh

(2005-2019)

Submitted by:

Zahida Haque: 801827021

Jeblin Khisa: 801930055

Tanvir Islam: 801930024

Submitted to:

Dr. Aditi Shams

Associate Professor
Department of International Business
 Balance of Payment (2005-2019)

Introduction

Balance of payment of any country is a systematic record of all economic transactions between the
residents of that country and of the residents of the rest of the world in an accounting period. The
balance of payment transactions include all the receipts of and payments by a country during a
given year.

The Bangladesh Bank follows a classificatory scheme for BOP presentation as per the 5th edition of
the IMF's Balance of Payments Manual (BPM5). The Balance of Payments is a statistical statement
for a given period showing Transactions in goods, services and income between an economy and
the rest of the world; Changes in the economy's monetary gold, special drawing rights (SDRs) and
other financial claims on and liabilities to the rest of the world; Transfers and counterpart entries
that are needed to balance, in an accounting sense, any entry for the foregoing transactions and
changes which are not mutually offsetting.

Components of balance of payment:

In the Bangladesh Balance of Payments statements are grouped under two major categories as
given below:

 Current Account
 Capital and Financial Account

Current Account

Current Account is the sum of the

 Goods and Services- Recording of goods implies provision or acquisition of real resources of
an economy to and from the rest of the world. Exports of goods are credited and imports
of goods are debited in the goods account and the net goods accounts are calculated by
subtracting the amount of imports from the amount of exports. In equation, Net goods
account= Value of goods exported - Value of goods imported
From the graph it can be seen that red one is export line & blue line is import. In our economy
import is more than export. Cash outflow is in higher rate than cash inflow. The overall balance of
trade is showing a deficit balance.

 Income- The Income component of the Balance of Payments is restricted to income earned
from the provision of two factors of production viz, labor and capital. Accordingly income
earned from the labor is called compensation of employees while income earned from the
capital is called investment income. Income paid to Bangladeshis from overseas sources are
credited in the income account and income paid by Bangladeshis to overseas sources are
debited in the income account.
In equation, Net Income Account= Income Credits - Income Debits

 Current Transfers- A third component of current account is transfer payments which

represent aid, grants, and gifts from one country to another.
 %
2017-18R 2018-19RP 2018-19P Changes
Items
July-June July-May July-June (4 over
2)
1 2 3 4 5
Trade balance -18178 -14657 -15494
Export f.o.b. (including EPZ) 36285 37190 39945 10.09
Of which: Readymade garments 30615 31734 34133 11.49
Import fob (including EPZ) 54463 51847 55439 1.79
Services -4201 -3473 -3715
Credit 4540 6310 6786 49.47
Debit 8741 9783 10501 20.13
Primary income -2641 -2673 -2930
Credit 146 161 178 21.92
Debit 2787 2834 3108 11.52
Of which : Official interest 597 757 833
payments
Secondary income 15453 15469 16885
Official transfers 51 22 23
Private transfers 15402 15447 16862 9.48
Of which: Workers' remittances 14982 15051 16420 9.6
inflows
Remittances excl. investments 14703 14844 16196
Current Account Balance (A) -9567 -5334 -5254
Source: Bangladesh Bank.

Capital Account

There are 3 major elements of capital account:

  Loans & borrowings – It includes all types of loans from both the private and public sectors
located in foreign countries.
 Investments – These are funds invested in the corporate stocks by non-residents.
 Foreign exchange reserves – Foreign exchange reserves held by the central bank of a
country to monitor and control the exchange rate does impact the capital account.

2017-18R 2018-19RP 2018-19P

Items
July-June July-May July-June
Capital account (B) 331 217 233

Capital transfers 331 217 233

Source: Bangladesh Bank.

Financial Account: The flow of funds from and to foreign countries through various investments
in real estates, business ventures, foreign direct investments etc is monitored through the financial
account. It includes-

 Direct foreign investment

 Portfolio investment

%
2017-18R 2018-19RP 2018-19P Changes
Items
July-June July-May July-June (4 over
2)
Financial account (C) 9011 5056 5628
Foreign direct investment (gross 3290 4325 4501 36.81
inflows)
Of which: Net FDI flows 1778 2427 2540 42.86
Assets 134 9 10
Liabilities 1912 2436 2550
Portfolio investment (net) 349 162 172
Of which: Investment by NRBs 279 207 224 -19.71
Other investment (net) 6884 2467 2916
Medium and long-term (MLT) loans 5987 4975 5954 -0.55
MLT amortization payments 1113 1111 1202 8
Other long-term loans (net) 141 719 666
Other short-term loans (net) 1508 455 209
Trade credit (net) -1270 -2706 -2903
DMBs and NBDCs (net) 1631 135 192
Assets -50 547 366
Liabilities 1581 682 558
Source: Bangladesh Bank.
Balance data was reported at 1.082 USD bn in 2020. This records an increase from the previous
number of -2.949 USD bn for 2019. BD: BOP: Current Account: Balance data is updated yearly,
averaging -272.837 USD mn from Dec 1976 to 2020, with 45 observations. The data reached an
all-time high of 3.556 USD bn in 2009 and a record low of -7.095 USD bn in 2018
% of GDP data was reported at 0.335 % in 2020. This records an increase from the previous
number of -0.974 % for 2019. BD: BOP: Current Account: Balance: % of GDP data is updated
yearly, averaging -0.573 % from Dec 1976 to 2020, with 45 observations. The data reached an
all-time high of 3.470 % in 2009 and a record low of -5.020 % in 1981.

Following the observation and discussion of different components of balance of payment in

previous parts, the summarized report of Bangladesh's balance of payment for the fiscal
periods 2014-18 is being evaluated, with a brief discussion of the crucial components of balance
of payment.

The trade balance, a primary driver of current account balance, was negative and had declined
to 10.68 percent FY 2014-15 to FY 2015-2016, according to the BOP statement from tables.
Various significant reasons in Bangladesh as a developing economy, which were described
below, are to blame for Bangladesh's poor trade deficit. Another section of the current account,
the primary source of income balance, was similarly negative, due to a large quantity of interest
paid by Bangladesh on loans received from other countries or international organizations each
year. Apparently, secondary income has created a surplus balance, with private transactions
and workers' remittances playing a critical role, particularly workers' remittances. The deficit in
the balance of trade and primary income were made irrelevant by the excess of secondary
revenue. It may be conceivable for Bangladesh to receive large amounts of overseas
remittances. The capital account and finance account balances are also positive, but this
positive balance will not aid Bangladesh significantly. Though foreign investment is vital for a
developing country like Bangladesh's economic growth, the main gain is for investor
countries. As a result, Bangladesh, as a developing economy, must devote greater attention to
current account components than to capital and financial account items. The real income of a
country is determined by its net earnings as measured by its current account balance.
Bangladesh's capital account position and finance account balance decreased by 3.63 percent
and 16.36 percent, correspondingly, from FY 2014-15 to FY 2015-16, indicating a reduction in
reliance on other nations.

Bangladesh's rate of exchange is low since it is a third world country, and it is losing its value
due to several causes such as capital inflows, financial inflows, and export-oriented economy.
Bangladesh's currency exchange rate is low due to its reliance on international donations, loans,
poor capital reserves, and reliance on foreign technologies. Exports will decrease as the
country's currency value rises.

Bangladesh is a rapidly developing country with a sizable foreign trade/services market. This
industry has shown signs of prospective development. According to our findings, exports
climbed by 12.81 percent, with a 14.51 percent growth in readymade garments during the
2017-2018 fiscal year. Imports have also climbed by 7.41 percent over the previous fiscal year,
but are lesser than the period from July to January of 2018, when Service income grew by 59.99
percent and Expense climbed by 31.51 percent. The Balance of Trade has been trending in the
same direction as last year. Although having a trade imbalance, the trade balance has improved
from -10077 to -9684, an almost 4% rise over the prior year. Primary income grew by 50%,
while secondary income rises by 10%, with workers' remittance inflow increasing by 9.31% over
the previous financial year. As a result of this consequence, the foreign reserve has increased.
As a result, the current account increased by 45.08 percent from 2017-2018 (July-June) to 2018-
2019 (July-June). However, this current account is continuing the pattern of the previous year,
implying that the current account deficit has decreased over time. The current account deficit
was US$ 9567 million in July-June 2017-18, whereas it was US$ 5254 million in July-June 2018-
19.

The capital contribution has been reduced from 331 million to 233 million dollars. In other
words, Bangladesh sold 29.6 percent less assets in July-June 2018-2019 than it bought in July-
June 2017-2018.

In relation to financial account, FDI climbed by 36.81 percent from the prior quarter, but
Portfolio Investments declined dramatically. It was US$ 349 million in July-June 2017-2018, but
it fell to US$ 172 million in July-June 2018-2019. NRB investments have decreased by 19.71
percent from US$ 279 million in 2017-2018 to US$ 224 million in 2018-2019. Other Investments
were reduced by 57.64 percent, from US $6884 million in 2017-2018 to US $2916 million in
2018-2019. The amount of medium and long-term loan financing has also decreased by.55
percent, from US $5987 million in 2017-2018 to US $5954 million in 2018-2019. Medium and
long term loans depreciation payments increased by 8% in July-June 2018-19 compared to
prior quarters.

Recommendations:

The balance of payments indicates a country’s economic growth rate over a certain time frame.
Despite the fact that Bangladesh's economy is expanding, that should take advantage of the
resources available to it. Bangladesh, as a developing country, has to be more focused about
the critical issues that influence the BOP accounts. As a result, the country is subject to the
following issues:

Currency depreciation helps a developing country's exports, but too much depreciation can
lead to inflation. As a result, the BDT currency rate of exchange must be changed in a
regulated way.
Although exports have grown, it is critical to maintain the current pattern. To grow exports
and compete in the worldwide market, alternative sources must be explored. Since
readymade apparel sector provide a significant contribution to the growing export market,
other sectors should be prioritized.
Bangladesh must reduce its reliance on other countries of the world by growing local
productivity or GDP in order to reduce imports. Bangladesh must maintain a decent and
positive trade balance and work to continuously improve it.
Increasing the current account balance is more important to Bangladesh than increasing the
capital account or financial accounts. Rising the capital and financial account balances may
raise the country's debts. The government should reduce capital and financial account
inflows as much as necessary, and maintaining such accounts balances as minimal as
possible. As a result, Bangladesh's current account must be as strong as feasible. The
 country might consider the following aspects in its foreign trade to boost its balance of
payment accounts.

Conclusion:

Last but not least, in the Balance of Payments, errors and omissions are taken into account. In
Bangladesh, the difference between the current situation and the previous one is inaccuracies
and omissions account, as well as capital and financial accounts. If we are successful in reducing
errors and If there are any omissions, the overall balance will be increased new products, such
as Exporting handicrafts and cottage goods should be implemented. It'll be a good time a
foreign revenue source Bangladesh has the potential to put the plan into action. The beach of
Cox's Bazaar will attract foreign visitors, and it will also be a valuable source of revenue. At the
moment, Bangladesh must give the essential incentives for FDI will boost the capital account
and, as a result, the overall balance. Bangladesh must also find a new nation to send labor
overseas As we all know, remittances are Bangladesh's most important source of current
transfer, and they contribute significantly to the country's overall balance.

References:

Bangladesh Bank. (2006). Economic Data. Retrieved from Bangladesh Bank:

https://www.bb.org.bd/econdata/index.php

Bangladesh Bank. (2008).Economic Data. Retrieved from Bangladesh Bank:

https://www.bb.org.bd/econdata/index.php

Trading Economics. (2018). Bangladesh Balance of Trade. Retrieved from Trading Economics:
https://tradingeconomics.com/bangladesh/balance-of-trade

Bangladesh Bank (2019) Economic Data Balance of payments, Bangladesh, Bangladesh Bank.
Available from: https://www.bb.org.bd/econdata/bop.php [Accessed 27th February
2022].