WHEN a country exports its goods and services, it receives payment usually in its own currency unless it prefers payment in some other currency. When that same country imports goods and services, it must pay for those in the currency of the country from which the goods and services are imported. The export of goods and services provides income for the country and imports are expenditure items. Like any individual a country cannot spend more than it earns in the long run. In the short run, any expenditure that exceeds income can be covered by a country's reserves (savings) or by borrowing from other countries or the International Monetary Fund (IMF). But in the long run the reserve will run out and the IMF and other nations will refuse to lend any more money. It is because of this it is very important for a country to ensure that in the long run its expenditure (import) does not exceed its income (export). In order to monitor this situation, the government must keep a record of country's transactions with the rest of the world. This is called the balance of payment (BoP) on current account. It is an accounting record of all exports and imports of goods and services.
The further aspect of the balance of payment in its current account is its role in the aggregate demand (expenditure) equation. The aggregate demand equation: Y=C+I+G+(X-M), has a component that accounts for the BoP on current account.
If imports (M) are greater than exports (X), a balance of payment deficit results, which reduce, aggregate demand and could create unemployment. The entire structure of the economy could be influenced by the BoP.
When deficits and surpluses are discussed with respect to the BoP, it always concerns the current account. A current account deficit occurs when the import of visibles and invisibles exceeds the export of visibles and invisibles.
A deficit means that an economy is spending more than it is earning. The significance of a deficit is that a country cannot continue to live with it in the long run. Occasional deficits are acceptable but constant deficits imply that the structure of the economy needs to be changed.
The widening of current account deficit is not necessarily a bad thing. But the real worry lies in the domestic economy.
Dollar crisis is a common phenomenon in South Asia, especially when we are in a floating exchange rate regime. 'Sonali Bank is the main supplier of dollar in our economy. But instead of the largest supplier of US dollar, the bank also requires to purchase dollars from other scheduled bank to meet up its internal import payments." a senior banker said.
Dollar crisis in the market due to increased fertiliser import, the import payments of petroleum, oil and lubricants (POL) by BPC (Bangladesh Petroleum Corporation), the price of other finished goods etc. In the international market, the price of petroleum product increased. That is why we have paid more dollars for meeting the BPC's import payment requirements than that of any other period. The commercial banks opened L/Cs worth $582.00 million for the import of petroleum products during July-October period of financial year (FY) 2005-2006. This is almost a 28% or $ 129 million increase from the amount in the previous financial year.
At the present situation greenback is now almost 72.00 against Bangladesh Taka (BDT) and private banks are bound to meet up their claims by cross currency selling. In this situation, they have to pay more. This will be impact on as the prices of imported goods go up. When prices of imported goods and services increase, then the ultimate consumers suffer.
"Sonali, Janata and Agrani -- these three nationalised commercial banks -- had been the major suppliers of the green back in the interbank foreign exchange market but two of them have already turned into buyers and Agrani bank is now selling a limited number of dollars in the foreign exchange market." a market analyst was quoted as saying.
The release of USD200.00 million as loans by World Bank will be delayed. And USD70.00 million by the IMF and the ADB may be released sooner. All these are expectations. But if these dollars are not released in time, the situation will be more difficult. The central bank will not release any dollar if they do not receive any dollar from the WB, IMF or ADB.
Remittances by the overseas, Bangladeshi workers form now a permanent and substantial part of Bangladesh's BoP. Wage-earners remittance inflow in the month of January was US$ 420.36 million and the international reserve of foreign exchange was US$ 2886.00 million on February 15, 2006. These two figure show good signs.
During the last five years BDT has depreciated significantly. There is no sign of panic. Asian central banks have built up huge war chests of foreign exchange reserve and they are today in a far better position to defend speculative attacks against their currencies. The worry, however, may be a more fundamental one for Bangladesh.
"Dollar price continues to soar widening the export-import deficit. The government was forced to spend more on importing petroleum products. The government should look for alternative ways to manage funds from foreign banks or Islamic Development Bank (IDB). Otherwise, dollar crisis would not ease" said Kh. Ibrahim Khaled, Managing Director of Pubali Bank Ltd.
Trade imbalance during July-Oct 2004 was $696.00 million, which increased to $739.00 million during the same period in 2005
However, in the short run, an increase in the price of imported goods will not increase domestic supply unless excess capacity exists which can be brought to use. This aspect is particularly important for the policy-planners in a developing country like Bangladesh where devaluation is often seen as a ready answer to the problem of BoP adjustment.
Although unemployment is high in the developing countries, an increase in the domestically produced goods will not bring forth additional supply because unemployment is largely due to structural factors rather than lack of demand.
Rise of current A/C deficit is mainly due to higher domestic consumption by government and households, not investment. This is definitely a problem. Nevertheless, a good number of people still believe that financing the deficit is not a problem. Due to deficit financing, government needs fund to meet up deficit figure. It can raise fund by increasing revenue or can borrow from banking sector. But when government borrows from banking sectors, the growth of private sector may be hampered. For the sake of sustainable development, it is necessary to ensure a healthy economic environment and this job has to be done by the government.
However, too much reliance on external debt could be a problem. Inflow from debt raised abroad by corporate accounted for 20% of the growth in the foreign exchange reserve in 2004-2005.
A popular Keynesian method of curing a deficit was to deflate the economy. An economy is deflated by reducing the amount of aggregate demand. This can be done by increasing direct tax or reducing Government expenditure (fiscal measures) or by the use of monetary policy such as raising interest rates, enforcing quantitative and quantitative controls and reducing the bank's ability to create credit. Import controls decrease the volume of imports and can be used selectively if required. It is an easier solution than trying to increase exports. The problem is that import barriers invite retaliation. Once this happens, trade wars can escalate the whole philosophy of GATT.
There is no denying that a country like Bangladesh cannot run a balance of payments deficit on the current account forever. Thus, it becomes clear that some policies must be applied prudently to solve the problem. The symptoms are the deficit but the cause lies within the economy. The policies that are used depend upon the political and economic viewpoints of the government and what they believe to be the problem.
The writer is a banker, working with Bank Asia Ltd.