Current account balance in black but future may be grey

After three long years of languishing in the red, the return of the current account to a surplus at the beginning of this fiscal year provides a slight relief, but how sustainable will that be depends on a lot of external factors such as oil price and exports.

Economists feel policy measures need to be put in place to confront vagaries in the external front stemming from the US-China trade war, which is likely to continue for some time.

The latest upward trend in oil price has added to global concerns.

Major economies, while struggling to stop their external accounts balance from further dwindling, are also rebalancing their trade and monetary policies to stay afloat, amid growing tension in the global trade regime.

Among the reforms is appropriately adjusting local currencies to dollar to maintain global competitiveness in exports, an option deemed suitable for Bangladesh to stay ahead of others in trade. 

The current account, which measures the country's transactions with the rest of the world, saw a surplus of $240 million in July on the back of a slow import growth and rise in exports and inward remittance.

Bangladesh Bank figures show the 2015-16 financial year saw a $4.26 billion surplus in the current account of balance of payment.

Analysts say a surplus in external transaction is a good sign, but see no reason to be upbeat with just a month's figure, given the vagaries of global market, including the latest oil market upheaval.  

"It is a good news for an import-based country like ours. Now we need to see how the trend can be sustained," says Dr Fahmida Khatun, executive director at the Centre for Policy Dialogue.

She, however, said, surplus only in a month after a long period of deficit is not enough for assessing the long term impact on the overall external balance.

The July surplus came on the back of an impressive growth of workers' inward remittance and exports, while imports saw a slower growth.

The 8.11 per cent export growth was driven by readymade garments, while significant declines in import of food, fertilizer, yarn and capital machinery caused the lowest ever import growth of 2.26 per cent in July.

Food bills fell 71 per cent and fertilizer 63 per cent, compared to those a year before.

However, import of petroleum products surged in the period, 98 per cent in crude oil and 31 per cent in others.

The country imported petroleum products worth $516 million in July this year, accounting for 10 per cent of the month's import bills.

A 10 per cent rise in global oil price, as feared from shut down of Saudi Arabian oil facilities, will mean that oil import bills might inflate in the months ahead.

"This may be a concern for us. In fact, our external balance depends on global factors, be it export or import, which are beyond our control," said Fahmida Khatun.

She referred to depreciation of local currencies in Asian competitors, including India, which helped them stay ahead of Bangladesh in export proceeds.

"Our taka continues to remain strong against the dollar. Exporters want a weaker taka, while importers oppose it. There needs to be a trade-off."        

Former governor of the central bank Dr Salehuddin Ahmed said the current account had been more or less positive most of the time, but an 'unusual surge' in imports had pushed it into deficit in recent times.

Sudden jump in imports without visible reflection in manufacturing and employment gave rise to suspicion about money laundering, he said. Bangladesh Bank's tightened monitoring of imports might have resulted in the July surplus, the former central bank governor pointed out. 

"We don't know why imports continued to rise, though there was no visible growth in investment. You know money flows out of the country through routes like over-invoicing," he said.

Import growth has slowed because Bangladesh Bank has tightened its supervision, and the current account saw some surplus.

"But one month's figure doesn't speak much about the future. If imports go up, or if exports and inward remittance face a setback, then the trend will reverse," he said.

"We have to help export of goods and labour keep up their pace of growth," he added.

Salehuddin Ahmed does not see any immediate impact of the sudden jump in global oil price on Monday as a fallout of attacks on a Saudi oil facility.

"I think oil supplies will return to normal soon," he said.

 What does it mean for the economy?

What does current account surplus mean to an economy like ours when surging current account deficit does not stop big economies from growing even bigger.

Major economies are struggling to check current account shortfall, while some others are trying to cope with eroding surplus.

Japan's current account surplus shrank in the first half this year as exports to Asia turned sluggish.

India's deficit also grew this year.

Germany has been in surplus while the US current account is facing shortfall. Developed countries could manage to keep their economies growing by putting in place appropriate policies and reforms to overcome macroeconomic imbalances like current account deficit.

While China chose to keep its currency renminbi strong, Australian dollar continued to stay weak to reap benefit from US-China trade war.

Germany is being asked to invest its current account surplus to the benefit of the Eurozone and the global economy.

Australia has been in a current account deficit since 1975 until June this year, when it saw its earnings from global transactions exceed its payments. Upset by the deficit, a past treasurer had commented that Australia would become a 'banana republic.'

Yet Australians did not find much to celebrate in a record surplus after 44 straight years of deficit in current account.

"Yes, we've current account surplus. It would have once been a cause for celebration. Now that we've got it, it's not looking that special," writes an ABC news analysis.

After a hostile year of a stiff trade war with USA, China's current account has been under stress now. China has recorded surpluses since 1990s, with noticeable upswing after the country entered the World Trade Organisation in 2000s.

Concerns are there whether the huge surpluses will soon be a thing of the past and the world's second largest economy will enter a period of current account deficits. 

Economist Aidan Yao does not see any danger in it. 

"The common perception that a current account surplus is "good" and a deficit "bad" is misplaced. An entirely plausible scenario of China undergoing successful economic reforms and liberalisation could see its current account recording small, but persistent, deficits in the coming years," he writes in an article in the South China Morning Post.

Although International Monetary Fund cautioned against external vulnerability in its 'external sector report,' the Fund's chief economist said not all external imbalances are a cause of concern.

"There are good reasons for countries to run current account deficits or current account surpluses at certain points in time. It's natural for young fast-growing economies to run current account deficits as they borrow from ageing economies with weaker growth prospect," Gita Gopinath said while releasing the report in Washington in July.