Problem of Balance of Payment in Bangladesh

Problem of Balance of Payment in Bangladesh

 

A balance of payments (BOP) sheet refers to the international monetary transaction

records between a country and the rest of the world, which includes the country’s

payments for its exports and imports, services, and financial capital and transfers. The

BOP is a summary of transactions for a specific period, usually a year, that is prepared

in a single currency and is commonly in the country’s domestic currency. Funds from

exports and receipts of loans and investments are recorded as positive or surplus

entries, while fund uses for imports or foreign investments are recorded as negative or

deficit entries. The sum of an overall BOP sheet must be zero with no surplus or deficit

when all of its components are included. When imports are more than exports, the

country’s trade balance will be in deficit, with the shortfall needing to be offset in other

ways such as earned funds from foreign investments, drawing from reserves or

receiving of loans. It is possible for Individual elements on the BOP, like the current

account, to be imbalanced. This can happen in countries with surplus accumulations of

wealth, while nations with deficits become increasingly indebted. There have been

varied approaches in correcting imbalances which are being addressed by policy

makers since 2009 since these were held as contributors to the 2007-2010 financial

crisis.[1]

 

Surpluses or deficits in individual elements of the BOP can lead to imbalances between

countries, with a general concern over deficits in the current account. Such imbalances

are conventionally viewed as being due to current account factors including the

country’s exchange rate, fiscal deficit and business competitiveness, and also seen as

being due to capital account factors, where a global savings glut in countries with

surpluses, runs ahead of investment opportunities, and is pushed into the US that

results in over consumption and price inflation. The US dollar has been the de facto

reserve asset after the end of the gold standard, with 65% of the world’s 6,800 billion-

dollar global reserves being held in US dollars as of 2009.[2]

 

When a country is unable to pay for essential imports and/or service its debt

repayments, a BOP or currency crisis occurs, which is typically accompanied by a

fast decline in the value of the country’s currency. This happens when the country’s

foreign investors become concerned on the level of debt their capital is generating and

decide to withdraw their funds. Once the country has exhausted its foreign reserves to

support its currency, it has limited options. While the country’s raising of its interest

rates to prevent further currency decline can help its debtors in foreign currencies, it

generally depresses the local economy.[3]

 

The methods of correcting BOP imbalances include adjustments of exchange rates,

adjustment of a country’s internal prices along with demand level, and adjustments

based on rules. In practice, some degree of combining the first two methods tends to be

used. Upgrading productivity and exports competitiveness can also help. The

challenges caused by BOP imbalances can be an opportunity for successful economic

reforms as was shown by India after the 1991 financial crisis.[4]

 

Bangladesh had a BOP problem in the early 1990s which had gradually been corrected

by the infusion of foreign aid and heavy short-term borrowing. The growth of garments

and knitwear exports in 1994 revived the country’s manufacturing sector. Bilateral quota

systems with developed country markets, few governmental regulations and the

allowing of foreign banks to finance raw materials inventories contributed to the garment

industry’s success. Bangladesh had to diversify its export base to improve its trade

imbalance and the increase of worker remittances has also helped build up its foreign

reserves.[5] Much later, the country’s overall BOP surplus reached a robust 4 million

in July of the 2009-10 fiscal year, with its trade deficit standing at 3 million from the

0 million of the same period from the previous year, mainly due to the surge in

worker remittances. The Bangladesh foreign reserves has also increased for the first

time to billion dollars by the end of July 2009.[6]

 

 

[1] “Balance of Payments”, Wikipedia, 19 June 2011, http://en.wikipedia.org/wiki/Balance_of_payments

[accessed 22 June 2011]

[2] ibid

[3] ibid

[4] ibid

[5] “Bangladesh – Balance of Payments”, Encyclopedia of the Nations, 2011, <http://www.nationsencyclopedia.com/Asia-and-Oceania/Bangladesh-BALANCE-OF-PAYMENTS.html>

[accessed 23 June 2011]

[6] “Bangladesh’s July Balance of Payments Surplus Reaches 4 mln”, D-8 Organization for Economic

Cooperation, 26 October 2009, <http://www.developing8.org/2009/10/26/bangladeshs-july-balance-of-payments-surplus-reaches-694-mln/>  [accessed 23 June 2011]

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