External deficit falls 89% in H1 of FY25 despite instability

Infographics: TBS

Bangladesh's overall balance of payment (BoP) deficit dropped by nearly 89% in the first half of FY25 compared to the same period last fiscal year, according to Bangladesh Bank data.

The improvement comes despite the macroeconomic instability from the political turmoil in August, subsequent floods, and continuous protests over various demands.

According to the data, the overall deficit in the balance of payments – also known as the external balance – stood at $384 million in July-December of FY25, a sharp decline from $3.45 billion in the corresponding period of FY24 – reflecting an improvement of approximately $3.07 billion.

Welcoming the significant reduction, Zahid Hussain, former lead economist at the World Bank's Dhaka office, told The Business Standard, "The first three months of this fiscal year were not particularly favourable for Bangladesh. Moreover, continuous protests over various demands persisted.

"Yet, despite these challenges, the country has seen notable progress in trade balance, current account balance, and financial account balance. This has eased pressure on foreign exchange reserves and exchange rates."

However, despite positive indicators, economist Zahid pointed out a concerning rise in the "Error and Omission" category, which grew 168% year-on-year, reaching $2.01 billion in July-December FY25 from $751 million in the same period of FY24, according to the central bank data.

He noted that if this figure were lower, there would be no BoP deficit at all. The central bank also said the primary reason for the remaining deficit in the first six months of FY25 is the negative balance of Error and Omission.

Zahid explained that a negative "Error and Omission" balance indicates unrecorded outflow – dollars spent from reserves without proper accounting.

"Previously, a rising negative balance in this category indicated increasing capital flight. However, we are not currently observing heightened demand in the hundi market, nor do we expect capital flight to increase post-political transition. Therefore, the reason behind this substantial increase needs further investigation," he added.

The economist further noted that accounting discrepancies at the central bank might be contributing to the problem, where some outflows might be under-captured and certain inflows are over-captured.

Whichever is the cause, the central bank must address this issue, he added.

Expressing optimism about further improvements in the country's external balance over the next six months, Zahid said that if the balance had not improved in recent months, the government would have had to impose even stricter import restrictions. "Fortunately, that was not necessary."

He also said while the country's macroeconomy suffered significant disruptions in July-August, similar disruptions are unlikely in the coming six months.

Trade deficit narrowed by 10%

Bangladesh's trade deficit shrank by 10.22% in July-December FY25 compared to the previous fiscal year, driven by higher export growth than import growth.

The central bank data shows the trade deficit stood at $9.64 billion at the end of December FY25, compared to $10.88 billion in the same period last fiscal year. The country's exports grew by 11%, while imports rose by only 3.5% in the first half of FY25.

According to the data, Bangladesh has been able to reduce its trade deficit as export earnings increased by approximately $2.22 billion, whereas imports grew by only $1.09 billion.

Zahid noted that while a shrinking trade deficit is generally positive, it does not always signal a healthy economy. 

"The increase in imports was mainly due to higher imports of food products and raw materials for export-oriented industries. However, imports of capital machinery, which is crucial for investment, continued to decline. Without investment, job creation stagnates, which is a negative sign for the economy," he explained.

The central bank data shows that capital machinery imports fell by 30%, dropping below $1.5 billion in July-December FY25. Moreover, import expenses for sugar, fertiliser, and petroleum also declined compared to the previous fiscal year.

Current account turns surplus

A surge in remittance inflows helped Bangladesh's current account balance turn into a surplus during the first half of FY25.

According to the Bangladesh Bank data, the current account surplus stood at $33 million at the end of December FY25, a significant improvement from the $3.47 billion deficit recorded in the same period of FY24.

The data shows that remittance inflows reached $13.78 billion in the first six months of the current fiscal, compared to $10.8 billion during the same period last year, projecting a growth of $2.98 billion or 27.59%.

Zahid attributed this improvement to higher remittance inflows and a lower trade deficit. He said this is positive for the economy. 

However, he noted that the service and income account deficit increased, primarily due to rising transportation payments.

According to officials from several banks, reduced capital flight and a narrowing gap between formal and informal exchange rates contributed to higher remittance inflows.

Financial account surplus crosses $1 billion

Due to the inflow of overdue export proceeds and aid from various donor agencies, the financial account – one of the key components of the balance of payments – recorded a surplus of $1.38 billion during the July-December period of FY25.

According to a report from the central bank, the financial account surplus stood at $604 million at the end of the July-December period in the previous fiscal year. This means the surplus has increased by approximately $775 million in the current fiscal year.

Despite this improvement, foreign direct investment (FDI) inflows dropped sharply from $744 million in July-December FY24 to $213 million in FY25. 

However, the trade credit deficit, which reflects delayed payments for exports, shrank significantly from $2.03 billion in FY24 to $145 million in FY25. This suggests that exporters are now bringing in payments more quickly than before.

Additionally, medium- and long-term loans have also declined in the first six months of the fiscal year.

A senior central bank official noted that US Federal Reserve policy rate adjustments have slowed capital outflows from international investors. However, new foreign investments remain sluggish.

Zahid Hussain highlighted that most of the reported FDI consists of reinvested earnings rather than fresh capital inflows. "This means that earlier investments are generating profits, which are being retained as liquid assets rather than reinvested into new projects. Thus, while it appears as investment, it does not necessarily create new economic growth."

Commenting on the shrinking trade credit deficit, he added, "Previously, exporters held onto foreign payments in anticipation of a higher dollar rate. However, with the introduction of crawling peg exchange rate adjustments and recent central bank measures, speculative currency trading has diminished, leading to a more stable inflow of export proceeds."