Remittances, exports fall, putting more pressure on reserves

Despite the Bangladesh Bank's intense efforts, external sector performance continued to weaken as both the main foreign currency earning sources - export and remittance - declined substantially in September, widening the trade deficit and increasing pressure on foreign exchange reserves. 

Export earnings fell by 6.25% year-on-year in September after a strong comeback in August with 14% growth due to the deepening Ukraine-Russia crisis, while the US Fed hiked the interest rate to tame inflation. 

Meanwhile, remittance earnings, another lifeline of foreign reserves, was $1.5 billion, the lowest in seven months, as the decision of fixing dollar rate for remittance by banks backfired, prompting wage earners to send money home through illegal channels to get higher prices. 

On the other hand, the country's trade deficit, which had slowed down in July-August amid falling import expenditure, may now widen further in the coming months due to fall in remittance and export. 

The trade deficit grew by 6.30% to $4.28 billion in the first two months of the current fiscal year whereas it had grown by 35% in the first month of the year, according to the Bangladesh Bank data. 

The Bangladesh Bank in its quarterly report for April-June also forecast that external performance will worsen further in coming days.  

"With a continuous fall in remittance inflows together with increasing imports surge caused by persistent global commodity and fuel price hike, current account deficit is likely to widen in near term," according to the report.

Widening trade deficit brought down foreign exchange reserves to $36 billion in September this year from $46.4 billion at the end of June 2021.

Without an uptick in exports, the central bank's forecasts will come true sooner than expected. 

Infographic: TBS

Bangladesh Garment Manufacturers and Exporters Association (BGMEA) President Faruque Hassan told The Business Standard that due to high inflation and increased bank interest rates in export destination countries, orders had slowed over the last two months, while many are asking to hold shipments. 

Entrepreneurs are now looking for orders from new markets, especially Japan, Korea and India, the BGMEA president noted.

"We are approaching them to reduce dependency on the European market, and we have already had quite good growth in those markets last fiscal year," he added.

The BGMEA had shared early indications of growth slowdown from September onwards.

"The global retail market is disrupted by many challenges starting from post covid container freight and supply chain crisis, raw materials price hike, and then anticipated recession in the global economy which is halting retail sales and demand for clothing. Buyers are taking cautious steps to make their inventory and supply chain optimum, so some of them are even holding back production and orders," said BGMEA Director Mohiuddin Rubel.

 "Altogether it has been quite a fluid and vulnerable situation, where we have all the strengths and possibilities to grow given our strides in sustainability and competitiveness, yet the global economic outlook makes it difficult to foresee something bright for the final quarter of the year 2022," he added.

AB Mirza Azizul Islam, economist and former financial adviser to a caretaker government said, "If our trade deficit continues to grow, it will put pressure on reserves as our dollar income falls short of our dollar payments. Our reserves are at $36 billion, but still not an alarming situation as it can cover four months of import bills."

He said now was the time to increase export income and remittance from new markets.

"Now the Malaysian market has opened up a bit and South Korea is also showing interest. Besides, efforts should also be made to send skilled workers to countries in the Middle East."

Regarding remittances, he said the Bangladesh Foreign Exchange Dealers Association had given a single rate of remittances that could discourage expatriates, so this had to be taken into consideration.  

"We say our exchange rate is floating based on market demand and supply, but there has never been a fixed single rate of remittance," he said. 

Remittance performance 

Inward remittances fell by nearly 25% to $1.54 billion in September compared to the previous month as banks clamped down on dollar collection of remittances.

Data from the central bank showed that September saw the lowest remittances in the last seven months, which was $1.49 billion in February. 

Compared to August, remittance fell by about $500 million. 

In the first two months of the current fiscal year, the Bangladesh Bank received $2 billion in remittances. Altogether, total remittance in this financial year was $5.67 billion dollars, up from $5.41 billion in the same period last year.

Bankers said on the advice of the central bank on September 12, the banks fixed the dollar price of remittances at Tk108, which led to the fall. It was again reduced to Tk107.50 under pressure from the Bangladesh Bank. 

Banks had earlier been settling remittances at Tk111-112 before being forced to adapt the prices to the global volatility over the dollar.

The relation between dollar price and remittance can be seen in the central bank data.

In the last 13 working days of August, remittances came in at $1.12 billion, with an average of $86 million per day. 

On the other hand, remittances came in at $944 million in the 15 working days after the September rate hike, an average of $63 million. 

That is, daily remittances fell by $23 million, or 37%, due to the price cap.

Banks had earlier feared that remittances may decrease due to price fixing. 

The fear was warranted as exchange houses said less remittances came in the first week after the rate was fixed. 

They said due to price fixing, remitters cannot be given higher rates, which may make illegal channels such as hundi more active. 

Bank insiders said due to the low dollar price of remittances, hundi had already become the more preferred option. At present, remittance through hundi yields Tk113-114 per dollar. 

In a recent meeting of the expatriates ministry, their findings showed two reasons for the fall in remittance: people preferred the hundi option which settled dollars at Tk6-7 more than formal channels and as all countries were experiencing inflation, less money was being sent by expat workers who now had to spend more than before. 

Export performance registers negative growth 

Bangladesh's export earnings saw a 6.25% negative growth year-on-year in September, following a more than 14% growth a month ago.

According to data from the Export Promotion Bureau (EPB) released on Sunday, the country raked in $3.9 billion last month.

However, the earnings were $4.16 billion in the same period last year, said the EPB.

After a slump in July, the country's export earnings made a strong comeback in August with $3.38 billion, riding on apparel shipments, especially knitwear products.

In July and August combined, the earnings declined by 0.31% year-on-year, which was $6.87 billion in the same period last year and it remained 7.84% below the export target of $7.44 billion for the period. 

According to the EPB, after 13 months of much needed recovery of the apparel export from the pandemic, export declined by 7.52% in September 2022 compared to the same month last year. 

During the first quarter of FY 2022-23, apparel shipments reached $10.27 billion, which is 13.41% higher than the previous year's corresponding time.

Bangladesh Knitwear Manufacturers and Exporters Association Executive President Mohammad Hatem said, "Last month we saw 25% growth but this month it slipped by 9% due to the global crisis as well as gas shortages."

Requesting the government to import LNG for industries, he said his factories' production fell at least 45% due to gas shortages in September.

Sluggish imports eases widening deficit

The central bank has restricted the import of all types of daily essential products to keep the country's reserves normal, alongside other conditions.

In the first month of FY 2022, trade deficit increased by $73 million which is 35.09% compared to the previous fiscal year in July. 

In the second month, however, it increased by only 6.30%, compared to the first month showing the slowdown of deficit.

 The trade deficit was $4.55 billion in two months of the current fiscal year 2022-23, up from $4.28 billion in the same period last fiscal. 

It increased by $27 million compared to the previous year, according to central bank data.

Those concerned said the large deficit was due to abnormal increase in imports in the last fiscal year, but since the beginning of this one, imports had decreased which was reflected in the decreasing trade deficit.

The current account balance deficit stood at $1.50 billion in two months into the new fiscal year 2022-23, which was $1.41 billion during the same period in the previous fiscal year.

The current account deficit, however, widened by 142% compared to July. The deficit in July was $439 million, reaching $1.06 billion in September.

The current account deficit in the last fiscal year was also high at $18.69 billion, up from only $4.57 billion in the FY2020-21.

The focus is now what the impact of falling remittance, registered in September, will be on the trade deficit.