Reserves under pressure as financial account deficit tops $9b in Jul-Mar

The deficit in the country's financial account continued to widen – crossing $9 billion in the first nine months of the current fiscal year – amid a higher outflow of greenback than inflow, intensifying pressure on foreign exchange reserves.

In July-March of FY24, the deficit stood at $9.25 billion, more than three times higher compared to the $2.9 billion in the same period of FY23, according to Bangladesh Bank data released on Monday.

The financial account, which consists of the secondary income of a country – foreign direct investment, short-term and long-term loans, aid, and trade credit – has remained negative for the past two years, compelling the central bank to make foreign payments directly from the reserves.

The financial account plays a role as the secondary source from which a country can make foreign payments. When a country's current account balance turns negative, it uses the financial account for foreign payments. If the financial account becomes negative, payments are made directly from reserves.

A top official at the central bank said the gap between official and unofficial dollar rates was above Tk7, which is one of the major reasons behind the low inflow of the greenback.

He said exporters are retaining dollars in their accounts maintained abroad, expecting the adjustment of the official dollar rate with market demand, which has had a negative impact on the financial account.

Bangladesh Bank data shows that trade credit, a major component of the financial account, became negative at $12.2 billion in July-March of FY24 compared to $3.9 billion in the corresponding period a year earlier.

The trade credit figure reflects that $12.2 billion in export proceeds remained pending with buyers, indicating that exporters' repatriation is slow.

The Bangladesh Bank has recently adjusted the dollar rate by raising Tk7 in a day, setting the official rate at Tk117 through the introduction of the crawling peg system. The move is expected to help increase export repatriation in June, narrowing the deficit in the financial account, according to the central bank executive.

Among other components of the financial account, foreign direct investment declined by nearly 5% during the period, while short-term foreign loans continued to be negative.

The central bank official, wishing not to be named, said fluctuations in the dollar rate are a major reason behind slow foreign direct investment. Moreover, multinational companies have been facing difficulties sending their dividends back home.

As a result, they are declaring low dividends and reinvesting their earnings to meet their working capital requirements instead of bringing in fresh investment from abroad, he added.

Dhaka Stock Exchange data shows the cash dividend payout of ten multinational companies in Bangladesh dropped by 31% in 2023 compared to the previous year, as they faced difficulties in foreign currency transactions for remitting money to foreign shareholders.

Bangladesh Bank's balance of payment data shows that short-term loan inflow was negative at $1.7 billion in the July-March period, which means banks paid back more than they received as private sector businesses were not willing to take foreign finance amid import restrictions.

Although the inflow was in negative territory, foreign loan payments grew by more than 20% during the same period, which is evident of the higher outflow than the inflow contributing to the widening deficit in the financial account.

How current account surplus crossed $5.7 billion

Though the financial account remained in the red, the country's current account surplus crossed $5.7 billion in July-March of FY24, thanks to a drastic cut in import expenditures.

The current account – considered the primary account of a country and consisting of remittances, exports, and imports – turned surplus from a deficit of $3.29 billion in July-March of FY23, central bank data shows.

The primary income, comprising export and remittance earnings, grew by 5.53% and 6.48%, respectively, during the period, while import expenditure declined by 15.42%, thereby turning the current account into a surplus.

This surplus current account significantly contributed to narrowing the country's trade deficit by 67% during this period.

However, the surplus current account could not stop reserve erosion, as gross foreign exchange reserves fell to below $19 billion on Monday from $27 billion in December last year, central bank data shows.

This is because the surplus amount from the current account is used for import payments, while other foreign loan payments are covered by the financial account. Given that the financial account is in deficit, the central bank makes payments directly from reserves. Therefore, reserves will not be rebuilt until the financial account turns positive.

What hope

In its recent monetary policy committee meeting, the central bank addressed reserve erosion as one of the major challenges. The authorities moved for the biggest devaluation of the taka in a single day by raising the dollar price by Tk7, aiming to ease pressure on reserves by increasing remittance inflow and export repatriation.

Additionally, according to bankers, the Bangladesh Bank recently held a meeting with private banks, instructing them to promote offshore banking abroad to bring foreign deposits and turn the financial account positive.