Trade deficit hits historic high despite rising exports, foreign aid

Infographic: TBS

An increase in foreign aid and growth in export earnings, a boon under any other circumstance, has done little to allay fears over the growing trade deficit, which reached the historic high of $27.56 billion in the first 10 months of the current fiscal year.

At the same time, volatility in the dollar market and a prolonged Russia-Ukraine conflict has stoked worries that any growth in export earnings would be temporary, with cancellations and deferrals of shipments having already begun.

Against this backdrop, the Bangladesh Bank on Thursday made a U-turn on their earlier decision of having a prescribed dollar rate, instead allowing banks to quote the rate based on market demand.

A floating exchange rate is expected to encourage the inward flow of remittance through formal banking channels and help exporters.

Exports posted 23% growth in May, bringing home $47 billion so far in the current fiscal year. Inflow of foreign assistance also increased 59% year-on-year to $7.7 billion until April.

These positive trends appeared at a time when the country's trade deficit widened the most as export growth is far exceeded by runaway import bills due to global price hikes.

Remittance inflow dropped 13% in May, adding to the concern about the safe level of the foreign exchange reserve standing at $42.11 billion as of 1 June.

The trade deficit, the gap between the country's export incomes and import expenditures, widened by 53% higher from July-April of last fiscal year, according to the Bangladesh Bank data released on Thursday.

Current account deficit ballooned to $15.31 billion in July-April of the current fiscal year, more than 9 times the level seen a year ago.
However, net foreign direct investment and capital transfers posted impressive growth during the period, according to the latest data of the central bank.

Now, the growth figures in export and external finance are seen as a relief for the country's overall balance of payment (BoP) situation.

Growing foreign aid comes as a relief

The amount of foreign aid, including budget support, increased by 59% during July-April of the current financial year, spelling relief for strained foreign reserves.

According to the Economic Relations Department (ERD), development partners disbursed  $7.7 billion during the period.

In the current financial year, $1.85 billion has been allocated for budget support and purchase of vaccines, with the money coming from the World Bank, Asian Development Bank (ADB), AIIB, JICA, Korea and OPEC funds.

Of this, $956 million is the discount for buying vaccines, while $895 million is for budget support.

In addition, $250 million in budget support from the World Bank will be released this month based on an agreement the government signed on April 18.

Dr Zahid Hussain, former lead economist, the World Bank, Dhaka office said, the budget support will come as a relief given the current global situation as it will be deposited directly into the reserve. On the other hand, the fund for buying vaccines would ease pressure off the reserve as otherwise it would have to be used to procure the inoculations.

In the last fiscal year, the budget support was $1.09 billion. Earlier, Bangladesh received $1 billion in budget assistance in the 2019-20 fiscal year to address the Covid-19 situation. The annual budget support was below $300 million in the previous 10 years.

ERD officials said the government expects to receive budget support from a number of development partners in the next financial year as well.

The World Bank, ADB and AIIB are expected to give $500 million each in assistance. Besides, the government is expecting huge budget support from JICA as well.

ERD officials, meanwhile, said the foreign aid had been $4.85 billion in July-April, although it rose to $8.95 billion at the end of the year.

On the other hand, with two months left in the current fiscal year, the ERD expects foreign funding to exceed $8 billion by the end of the current fiscal year, the highest since independence.

In the first 10 months of the current financial year, ADB released the most money - $1.98 billion - followed by JICA's $1.7 billion.

Meanwhile, according to the Department of Implementation Monitoring and Evaluation (IMED), the allocation of foreign aid to the Annual Development Program (ADP) towards the end of the current fiscal year has led to a slight increase in spending.

As of April, various ministries and departments had spent 32.35% of their foreign aid on ADP. At the same time last year, the rate was 30%.

Some projects, however, are slowing down due to the global crisis.

In terms of debt servicing, the government has already paid $1.75 billion for interest and the principal amount by April. Last year during the same period, the government had paid $1.6 billion.

Exports earnings grow by 23%

Despite factory closures for more than a week due to Eid holidays, Bangladesh's export earnings grew by more than 23% in May in the current 2021-22 fiscal year, inching closer to the coveted $50 billion target set by the government.

Bangladesh has already posted export earnings of $47 billion in the first 11 months of the current fiscal year.

AHM Ahsan, vice chairman of the Export Promotion Bureau (EPB), told The Business Standard that Bangladesh's export earnings could easily cross the $50 billion milestone if the pace of exports is maintained.

The situation in Russia and Ukraine, however, has added some doubt about the pace of exports in the coming months as the turbulence has led to a decrease in the purchasing power of buyers due to inflation in Bangladesh's major export markets.

Meanwhile, the central banks of Europe and the United States have raised interest rates to control inflation, which has dampened purchasing power in those markets as well. 

Apparel export might fall

Engineer Kutubuddin Ahmed, chairman of Envoy Textile Ltd, the world's first LEED-platinum certified denim textiles, said apparel exports might face some cancellations and deferred shipments in the coming days as stores are facing falling sales.

"We had a pressure of orders after the Covid-19 recovery period in our export markets, as almost every store was empty. But the Russia- Ukraine war changed everything."

He said high inflation in the EU and the USA would lead to people cutting expenses which may hurt apparel demand.

Ahmed also said on top of deferred shipment, one buyer had already asked for a 2.5% discount, with the situation expected to worsen if the war didn't stop immediately.

EPB analysis shows lowest export earnings in May

According to data released by the Export Promotion Bureau (EPB) on Thursday, Bangladesh recorded exports amounting to $3.83 billion in May this year.

The EPB's statistical analysis, however, shows that last month was also a period of the second lowest export earnings in the last 11 months.

Earlier in August, exports were slightly lower than in May. And since last September, export revenue had crossed $4 billion for eight consecutive months.

This was not the case in May, although it is higher than the $3.10 billion last May.

Although export receipts couldn't surpass the $3.89 billion target set for the month, it reached $3.83 billion.

Talking with The Business Standard, Fazlul Hoque, managing director of Plummy Fashions Ltd, one of the greenest knitwear manufacturers in the world, said, "Due to Eid vacation, apparel shipments were a little bit lower in May, as it was a shorter month to do business".

He also mentioned that the export volume still remains good compared to last year, although it might fall in the coming months as the order placement has slowed.

The EPB data shows that the country's exporters posted 34.09% year-on-year growth in export earnings in the July-May period of the current fiscal year.

In April, exports clocked at $4 billion with 51% year-on-year growth, raking in $43.34 billion in 10 months of the current fiscal year.

4 sectors crossed $1 billion in exports

According to EPB figures, the garment sector accounted for about 82% of total exports in the 11 months under review. Out of this, four sectors crossed the $1 billion mark during the period under review. These are home textiles, leather and leather products, agricultural products, jute and jute goods.

Despite the growth in exports of three of the four sectors, exports of jute and jute products declined compared to the same period of the previous financial year.

Meanwhile, the EPB expects to have lower growth next year.

"It seems to us that next fiscal year, there will be not more than 15% to 20% growth in exports compared to the current year," said AHM Ahsan, vice chairman of EPB.

Earlier, the finance ministry had also reduced its export projections for next year.