Financial account surplus exceeds $1b in Jul-Oct

Infographic: TBS

The country's financial account surplus exceeded the $1 billion mark in the first four months of the current fiscal year (FY25), driven by the inflow of overdue export proceeds and a reduction in short-term loan repayments.

According to a central bank report, the account had recorded an $873 million deficit during the same period of the previous fiscal year (FY24).

The financial account is a crucial component of the Balance of Payments (BOP) that tracks the flow of capital, including investments, loans, and financial assets between a country and the rest of the world.

Zahid Hussain, the former lead economist at the World Bank's Dhaka office, told TBS that the reduced trade credit deficit reflects the repatriation of stalled export payments, driving the financial account surplus and marking a key positive in the BOP.

Central bank data shows that the trade credit deficit dropped sharply from $504 million to just $3 million during July-October of FY25, a reduction of about 99.40% year-on-year.

However, Foreign Direct Investment (FDI) declined by 19.8% and medium- and long-term loans decreased by 35% during the same period.

Zahid Hussain said obstacles to FDI remain largely unaddressed since the government change in early August, requiring time for significant reform. Additionally, trade-related financing has declined, with fewer new foreign loans amid mounting pressure from existing loan repayments.

A senior central bank official told TBS that the US Federal Reserve has eased its policy rate hikes, slowing the outflow of investments by foreign banks and investors.

Trade deficit narrows by 12%

The trade deficit shrank by 11.72% at the end of October, driven by strong export growth and restrained imports compared to the same period last fiscal year.

Central bank data shows the trade deficit stood at $6.66 billion during July-October of FY25, down from $7.54 billion in the same period of FY24. During this time, exports grew by 8.3%, while imports increased by only 1%.

Zahid Hussain said that the shrinking of the trade deficit cannot be simply categorised as good or bad. However, the export growth during this period, despite the July uprising, is commendable.

"Our import growth, which was negative a few months ago, has turned slightly positive. However, it's important to examine where the imports have increased. The unrest in July and subsequent floods caused some production disruptions, which may have led to a slight rise in imports of daily necessities," he explained.

Senior officials from state-owned and private banks told TBS that while a reduced trade deficit is positive in some ways, minimal import growth is concerning for an economy like ours. 

A decline in imports often signals lower investment and production, which are critical for economic growth. If investment and production were robust, higher import growth would have been a healthier indicator, they said.

Current acc deficit shrinks by 76%

The country's current account deficit narrowed by 76% during July-October of FY25, driven by a significant rise in remittance inflows compared to the same period last fiscal year.

Central bank data shows the current account deficit stood at $752 million in the first four months of FY25, down from $1.16 billion in the same period of FY24.

An analysis reveals that remittance inflows reached $8.94 billion during July-October of FY25, marking a $2.06 billion or 30% increase compared to $6.88 billion received in the same period last fiscal year.

Zahid Hussain attributed it primarily to the growth in remittance inflows. He explained, "The rise in remittances is largely due to reduced capital flight and a narrowing gap between the dollar exchange rates in formal and informal channels."

He noted that the demand for dollars in the informal market has declined, leading to a drop in the dollar rate.

However, Hussain cautioned against complacency. "Historically, we have seen new money launderers emerge after a new government assumes office. It is crucial to ensure this pattern does not repeat itself," he added.

Overall BOP deficit shrinks

According to central bank data, the country's overall balance of payments deficit for the July-October period of FY25 stood at $2.14 billion, down from $3.83 billion in the same period of the previous fiscal year. 

The deficit is attributed to an "Errors and Omissions" figure of $2.14 billion, a sharp contrast to the positive $149 million recorded during the same period in FY24.

A senior central bank official explained that a bigger figure on "Errors and Omissions" reflects unrecorded outflows, meaning dollars have been spent from reserves without corresponding records in the official accounts.

Zahid Hussain said that the overall BOP deficit has decreased slightly, easing pressure on the country's foreign exchange reserves and providing some relief to the foreign currency market.

However, the economist said that the large "Error and Omission" figure is the biggest concern for the Balance of Payments. "A large Error and Omission figure often signals money laundering. While money laundering has decreased, it hasn't stopped entirely. Trade-based misvaluation is still occurring, and the central bank must focus on this issue," he added.