Country's external position improves as trade deficit narrows by 21% in H1 FY23

Bangladesh's trade deficit narrowed by 21% in the first half of the current fiscal 2022-23 on the back of import curbs, giving the central bank great comfort in managing the country's external position.

The ease of balance of payment also helped to reduce the country's current account deficit by 36% in the July-December period of the current fiscal year, which gives an indication that the measures the Bangladesh Bank has taken – including substantial depreciation of the taka – have started to pay off to ease pressure on the country's external position.

Meanwhile, the central bank depreciated the taka again on Wednesday by raising its dollar price by Tk1 to Tk101, aiming at narrowing the gap with market rates.

On the same day, the Bangladesh Foreign Exchange Dealers Association (Bafeda) raised the dollar exchange rates for exporters to Tk103 from Tk102 to encourage exporters to encash their proceeds.

The Bangladesh Bank has also raised the interest rate on loans in foreign currency from the EDF (Export Development Fund) by 50 basis points to 4.5% with a view to reducing forex reserve expenditure, according to central bank sources.

Data obtained from the central bank show that the country's trade deficit declined to $12.30 billion in July-December of FY23 from $15.7 billion in the same period of the last year.

The trade balance in the first half of the fiscal year shows that it is likely to be in line with the central bank's monetary projection of a $20.9 billion deficit at the end of FY23.

The current account deficit narrowed to $5.2 billion in the first half of the current fiscal year as compared to $8.2 billion in the same period of the last year.

The Bangladesh Bank in its latest monetary policy for the next six months of the current fiscal year projected a $6.8 billion current account deficit for FY23.

An International Monetary Fund press release regarding the $4.7 billion loan approval for Bangladesh has projected a faster recovery of the external sector with forex reserves reaching $53.1 billion by FY27.

The high reserve will reduce pressure on the external position as the current account deficit will be 3%-4% of GDP during the period till FY27, which is considered a standard level.

The current account deficit figure for the first half of FY23 was 1% of GDP which is considered to be a comfortable level.

Rising exports and declining imports have helped the Bangladesh Bank bring the country's external position to a comfortable zone.

The country's exports grew 11% year-on-year in the July-December period of FY23, while imports logged negative 2% growth.

The Bangladesh Bank expects that dollar liquidity will increase once the first installment of the $4.7 billion IMF loan is released – likely this February.

The flip side of import decline

Even though negative import growth eased pressure on the country's external position, it disrupted private investments as businesses could not open LCs to import raw materials.  

Data from the Bangladesh Bank shows LC opening declined by 22% in July-December of the current fiscal year compared to the same period last year.

Import restrictions imposed by the central bank to save reserves caused a drastic fall in LC opening. Moreover, banks are reluctant to open LCs amid the dollar crisis.

Businesses could not keep producing at the same rate due to a shortage of raw materials.

In this situation, the Bangladesh Association of Banks, an organisation of private bank entrepreneurs and directors, on Wednesday during a meeting the central bank governor sought relaxation in the strictness imposed on LC opening.

Edimon Ginting, country director of the Asian Development Bank (ADB), recently commented that a slowdown in imports and the current dollar liquidity crisis will affect private sector investment down the line, which will contribute to the slow growth of the Bangladesh economy.

The IMF in its press release said Bangladesh's GDP growth rate would remain below the pre-pandemic highs of 7.9% for the next several years.

The global lender has projected a 6.5% GDP growth for Bangladesh in FY24, which is below the government's target of 7.5%.

Cenbank raises dollar rate

The Tk1 hike in dollar rate on Wednesday was the 12th instance of dollar price hikes by the central bank this fiscal year.

The Bangladesh Bank yesterday sold $89 million to state-owned banks at the new rate. With this, more than $8 billion have been sold from the reserve in the current financial year. The central bank's reserves stood at $32.19 billion at the end of Wednesday.

The Bangladesh Bank has dubbed the rate at which it sells dollars from the reserve as "Bangladesh Bank's selling rate" and the Tk1 increase is being called an "adjustment" with the market rates. Earlier, any hike in the dollar rate by the central bank was considered "devaluation of the taka".

According to the latest information available on the central bank's website, banks were buying and selling dollars among themselves at a rate ranging from Tk103.42 to Tk105.35 on Wednesday.

An official of the treasury department of a state-owned bank told TBS that the central bank was not providing them with the amount of dollars they were asking for, as a result of which they were not able to make LC payments for many government imports properly.

Exchange rate hike for export proceeds

The Association of Bankers Bangladesh and the Bafeda in a virtual meeting on Tuesday evening – attended by managing directors of public and private banks – decided to increase the dollar rate for exporters by Tk1, which took effect the following day. Early January this year, ABB and Bafeda fixed the dollar rate for export proceeds at Tk102.

However, Wednesday's meeting decided to keep the dollar rate for remittances unchanged at Tk107

EDF loans get costlier

The Bangladesh Bank issued a circular on Wednesday raising the interest rate on loans taken from the EDF to 4.50% from 4%. 

The circular said the interest rate on EDF loans to banks will be charged by the Bangladesh Bank at 3%, while banks will charge interest to manufacturer-exporters at 4.50% for disbursements until further instructions.

Earlier, the Bangladesh Bank used to charge banks 2.50% interest for taking out funds from the EDF, while banks were charging 4% interest on their loan disbursements to manufacturer-exporters.

A senior official of the central bank told TBS, "Now 8-9% interest has to be paid to take loans from international banks. From that point of view, the EDF loan is much cheaper even after the interest rate hike. Basically, this fund was created in foreign currency to boost our export sector. But, the demand for loans from these funds is gradually decreasing."