Current account deficit shrinks 93% in Jul-Sep, thanks to remittances
Remittances from August to October totalled $7.03b, up from $4.9b in the same period last year, marking an increase of $2.13b or 43% since the interim government took office
Infograph: TBS
Thanks to the surge in remittance inflows, Bangladesh’s current account deficit, a key component of the country’s Balance of Payments (BOP), narrowed by 93% in the first quarter of FY25 compared to the same period in the previous fiscal year.
Central bank data shows that the deficit at the end of the July-September quarter stood at $127 million, a significant drop from $1.83 billion during the same period last fiscal year.
Economist Moinul Islam, a former professor at Chittagong University, said the increase in remittances following the government change played a key role in significantly reducing the current account deficit.
An analysis of central bank data reveals that remittances during the three months from August to October totalled $7.03 billion, up from $4.9 billion in the same period last year, marking an increase of $2.13 billion or 43% since the interim government took office on 9 August.
At this pace, remittances in FY25 could increase by $4 billion year-on-year, Moinul said, noting that the current account could shift to a surplus if the trend continues.
“Additionally, the improvement in our trade balance is another factor contributing to the reduction of the current account deficit,” said the economist.
Trade deficit decreases
The central bank data shows a decrease in the country’s trade deficit in Q1 of FY25 compared to the same period of FY24 indicating a narrowing of the gap between exports and imports.
The trade deficit at the end of July-September FY25 was $4.63 billion, down from $5.01 billion in the previous fiscal year.
During the first three months of this fiscal year, export growth was 5.1% while import growth was 0.9%.
“We need to increase vigilance over imports to better control over-invoicing and under-invoicing. Money laundering under the guise of imports has already decreased, but it must be further reduced. This will help further lower the trade deficit,” Moinul Islam added.
He said boosting exports quickly is challenging in the current situation. The previous government provided misleading export data to highlight success, while the interim government is focused on accuracy, which is why figures for export growth seem limited.
Several senior officials from state-owned and private banks told TBS that while the reduction in the trade deficit is positive, limited import growth could be harmful to the economy. A decline in imports signals reduced investment and production.
Financial account in surplus
According to central bank data, the country’s financial account surplus stood at $560 million at the end of July-September, compared to a deficit of $1.23 billion at the same time in FY24.
Moinul Islam explained, “Our financial account is usually in surplus. However, due to some flawed policies of the previous government, it turned negative. The current government is addressing these issues which are impacting the financial account positively.”
Central bank data shows a 15% decrease in Foreign Direct Investment in July-September of FY25 compared to the previous year. The trade-credit deficit has dropped from $991 million to $114 million, indicating exporters are repatriating outstanding proceeds.
A senior central bank official said the US Federal Reserve’s policy rate cut has slowed the decline in foreign investment, while confidence in Bangladesh’s trade financing has gradually improved among foreign banks.
Overall balance
According to central bank data, the country’s balance of payments deficit for the July-September period of FY25 was $1.45 billion, down from $2.86 billion in the previous fiscal year. The primary reason for the FY25 deficit is a $2.05 billion negative balance in Errors and Omissions, compared to a positive $162 million at the same time in FY24.
“The negative balance in Errors and Omissions indicates unrecorded outflows, meaning dollars have been spent from reserves but are not accounted for,” said the senior central bank official.
Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), told TBS, “The error and omission figure has reached an alarmingly high level, possibly due to laundering. The central bank must investigate the destinations of the missing dollars.”
She also noted the need to improve exchange rate management to strengthen the balance of payments.
“There is still potential to increase remittances, so reducing hundi – an informal money transfer channel – is essential. Additionally, FDI remains volatile, reflecting a lack of foreign investor confidence. We also face challenges such as corruption and inefficiencies. At the moment, restoring law and order should be prioritised to boost investors’ confidence,” she added.
Originally posted in The Business Standard on 7 November 2024