Shawdesh Desk:

The country’s financial account deficit soared to $7,354 million in July-January, the first seven months of the current financial year 2023–24, against a deficit of just $812 million in the same period of FY23.

The surge in deficit reflects a significant challenge in managing the country’s foreign exchange reserves, dollar rate, and external financial inflows and outflows, financial experts said.

A large deficit in the financial account can have immediate impacts, such as currency depreciation, higher borrowing costs, capital flight, building up foreign debt, raising inflation, and affecting economic growth.

The financial account in the balance of payments is like a record of a country’s financial transactions with other countries, economists said.

It shows things like investments going in and out, loans being given and received, and changes in the country’s financial reserves.

It helps people understand how money moves between countries and how it can affect the economy, according to economists.

The financial account recorded a deficit of $5.2 billion in the July–December period, which reached its current level in just one month.

The deficit was $2.14 billion in FY23, against a surplus of $15.45 billion in FY22.

However, other indicators in the balance payment, including trade deficit and current account balance, were improving.

Ahsan H Mansur, Executive Director of the Policy Research Institute, said that due to the deficit in the financial account, foreign exchange reserves would not increase, imports would decline, and exchange rate instability would persist, which might worsen the current macroeconomic situation.

Therefore, the deficit in the financial account needs to be fixed for the sake of the country’s economic stability, he said.

He highlighted that the deficit in the financial account was escalating due to a surplus of dollar outflows over inflows. He explained that businesses were paying more dollars than they were receiving.

Mansur highlighted a decline in the demand for foreign loans, which he attributed to the significant appreciation of the dollar and an unstable exchange rate.

This situation has made foreign currency costly for businesses, leading to a kind of reluctance to take on additional foreign debt.

Moreover, Mansur pointed out that foreign institutions were hesitant to provide loans to Bangladesh’s businesses citing perceived risks.

According to bankers, the deficit was primarily driven by a decline in foreign direct investments, reduced net foreign loans and grants, and a drop in foreign portfolio investments.

In July-January, the gross inflow of foreign direct investments declined by 13.36 per cent to $2.43 billion.

They said that the situation was further aggravated by the fact that the repayment of existing foreign loans exceeded the influx of new loans in foreign currency from various sources.

Besides, foreign portfolio investments were $107 million negative in the July–January period, compared to $46 million negative in the same period of the past financial year.

This contributed not only to the financial account deficit but also led to an imbalance in the overall balance of payments, bankers said.

Mustafizur Rahman, Executive Director of the Centre for Policy Dialogue, echoed Mansur’s concerns about the adverse impact of the negative financial account on foreign reserves and the overall balance of payments.

He observed that the negative financial account had made it challenging for the central bank to maintain a stable exchange rate.

Rahman said that to address the financial account crisis, there should be an acceleration in the disbursement of foreign loans for government projects. He also emphasized the need to make foreign direct investment more attractive.

Responding to a severe dollar crisis, the Bangladesh Bank sold nearly $30 billion to banks over the past 32 months.

Of this amount, $9 billion was allocated to banks in July-January of FY24, $13.5 billion in FY23, and $7.62 billion in FY22.

The country’s foreign exchange reserves, as per IMF guidelines, reached $20 billion as of March 11.

Despite the interbank dollar rate set by the Bangladesh Foreign Exchange Dealers’ Association and the Association of Bankers, Bangladesh at Tk 110 per dollar, the actual market rate for the greenback was fluctuating between Tk 122 and Tk 126.

Foreign loan inflows declined due mainly to the ongoing economic crisis, substantial deferred payments, and a downgrade in sovereign and bank ratings by Moody’s.

These factors led to a challenging environment for attracting foreign investments and loans.

The deficit in trade services expanded to $2,767 million in July-January of FY24, compared with $2,389 million in the corresponding period of the previous financial year.

However, the trade balance saw a positive shift, with the trade deficit narrowing to $4.62 billion in July–January of FY24 compared with that of $13.39 billion in the same period of the previous year due mainly to reduced imports.

Recent measures by the government and the central bank to restrict imports amid a dollar crisis have contributed to the reduction in the trade deficit.

The country has made notable progress in addressing the current account deficit, with a surplus of $3.14 billion recorded in July-January of FY24, a significant improvement from the $4.64 billion deficit in the same period of FY23.

In the first seven months of FY24, the country’s import payments declined by 18.17 per cent to $36.02 billion compared with those of $44.02 billion in the same period of the previous year.

Bangladesh’s export earnings in July-January of FY24 rose by 2.5 per cent to $31.39 billion compared with those of $30.63 billion in the same period of FY23.

The country’s trade deficit reached a record high of $33.25 billion in FY22, up from $23.78 billion in the previous financial year.