Assignment on

Balance of Payment Situation of

Bangladesh
Course Code: MBM 506
Section: 01
Submitted to
Professor Dr. Abdul Bayes
Submitted By

Md. Atiqul Islam

ID# 2014-3-90-007

Date of submission: 07-04-2016

Table of Contents
Executive Summary .............................................................................1
Introduction ................................................................................................ 2
Objectives of the Study ........................................................................3
Methodology of the Study ...................................................................4
Definitions and Explanations ................................................................. 4
Current Account ..................................................................................... 5
Capital Account ...................................................................................... .5
Financial Account ................................................................................... 5
Balance of Payments components........................................................6
Conclusion ............................................................................................... 10

Executive Summary:
The Bangladesh economy is experiencing disequilibrium in balance of payments due to
shortsighted policy decisions, internal economic imbalances and global economic crisis. The
BoP slipped into a deficit for the first time in a decade resulting in heightened risks to
Bangladeshs external position. The government agreed a three-year reform program with the
International Monetary Fund (IMF) styled Memorandum of Economic and Financial Policies
(MEFP) to access credit the IMFs Extended Credit Facility (ECF) arrangement to stave-off the
pressures on the BoP.
The access to IMF funds requires reduction in aggregate demand by employing mechanisms
such as depreciation of currency and cut in import demand and supply of investible funds to the
entrepreneurs. The central bank has already allowed the local currency to depreciate significantly
against the foreign currencies and put in place contractionary monetary policy to restrict money
supply to the private sector and import of goods and services.
The central bank may have to resort to further devaluation of taka and administer reduction in
imports, if supply of foreign currencies from sources such as remittances does not maintain
considerable growth momentum nor the government anticipated flow of foreign aid is
materialized.
The restrictive monetary targets, agreed in the IMF-MEFP, have in effect reduced the fiscal
space of the government, demonstrated in the recently approved national budget. The choice of
instruments of resource mobilization for deficit financing and public spending has been limited
to regressive instruments such as raise in value added tax (VAT) and Service duty (SD).
In the current fiscal year, the flow of foreign aid disbursement has witnessed a comparatively
lower amount in comparison with other fiscal years. In addition, the incremental foreign direct
investment (FDI) inflow and receipt of remittance has experienced a trend of deceleration.
Moreover, domestic private investment is facing difficulties due to ever increasing domestic
borrowing of the government from banking sector that holds back the expansion of productive
sector.
In recent fiscal years, trade deficit has widened at a staggering rate mainly because of soaring
import bills particularly for quick rental power plants and sluggish rate of export earnings. The
current imbalance of balance of payment (BoP) has occurred mainly due to the trade imbalances.
The continuous depreciation of the national currency against dollars has assisted to increase the
import payments. Accommodative policies coupled with global headwinds and firming oil prices
have widened the trade imbalances and also resulted in losses of foreign exchange reserve.
Foreign exchange reserve is increasing at a decreasing rate over the years due to soaring import
bills, the global financial crisis, economic slowdown and higher rate of inflation.

Introduction:
One countrys economic performance is reflected through its Balance of payment. Balance of
payments (BoP) accounts is an accounting record of all monetary transactions between a
country and the rest of the world. Bangladesh is not different so. The improvement of its
economy also depends on the performance of its Bop. According to a World Bank report
published in 2012, The Current account balance (BoP; US dollar) in Bangladesh is 926.19
billion (World Bank indicators).
Import dependence is one of the weaknesses of BoP. The growth of import is significantly
higher than that of export. If we can reduce the import dependency or increase the level of
export, then it will help reduce the pressure on of our BoP. As our growth of export is lower than
that of import most of the time our trade balance is negative. Bangladesh recorded a trade
deficit of
1076.01 USD Million in August of 2012 (Bangladesh Bank). Our balance of trade consists
of two components import and export. Our performance of export makes us both happy
and worried. Bangladesh exports mainly ready- made garments (RMG) including knitwear and
hosiery (75% of export revenue).
The economy of Bangladesh is branded worldwide because of its quality RMG products. As we
have massive export revenues from RMG sector, a slight change in this sector will have a
significant impact on our economy. Other exports include: Shrimps, jute goods (including
Carpet), leather goods and tea. Bangladesh main export partners are the United States (23% of
total), Germany, United Kingdom, France, Japan and India. Bangladesh imports mostly petroleum
product and oil, machinery and parts, soybean and palm oil, raw cotton, iron and steel and wheat.
Bangladesh main import partners are China (17% of total), India, Indonesia, Singapore and
Japan. We should not only diversify these export sectors but also improve our R&D wing.
Another strong component of BoP is remittance inflow. We know that our largest resource
is manpower and our remittance inflow demonstrated a satisfactory performance. Bangladeshs
overseas employment sector witnessed a boom in the recent period as 5,44,108 workers went
abroad with jobs in the last ten months. Bangladesh scored the seventh position as the
remittance earning nation, while it predicted remittances to developing countries to surpass $400
billion in 2012 (the latest issue of the Banks Migration and Development Brief)
.Bangladeshs more than seven million migrant workers sent home $12.84 billion in fiscal
2011-12, 10.32 per cent higher than the previous fiscal year as the outflow of migrant workers
surged 45 per cent to a two-year high in 568,000 due to the opening of new jobs. One most recent
event is-Bangladesh and Malaysia signed Memoranda of Understanding (MoU) on Monday
(November 26th), paving the way for Bangladeshi workers to begin rolling into Malaysia. The
country will send a total of 500,000 laborers, with 50,000 in the first batch that begins arriving
in January.

They will have eight-month visas and will be chosen from a pool of applicants who register
online.
The World Bank in a report last month, however, said Bangladesh needed to accelerate GDP
growth to 7.5-8 per cent and sustain 8 per cent remittance growth to reach Middle Income
Country Status by next decade. We can increase our remittance in two ways by exploring
new labor markets and increasing the skills of existing manpower working abroad. Bangladesh
will be one of the most powerful economies of the world if it can utilize its vast potential
manpower. The second art and technique of developing our remittance inflow is generation
of skilled people. Experts say, the remittance inflow of Bangladesh will be double if, only if
our existing manpower learn the language of the country where they work.
Foreign Direct Investment (FDI) has been an important part of the economic transition. It is
another important aspect of things relating to our BoP .One countrys attractive FDI is an
example of how a number of corrective measures could go a long way in promoting economic
growth. Bangladesh received FDI of
$1.13 billion last year compared to $910 million in 2010. This increase of about 25% is
higher than the average 23% worldwide growth of FDI. According to the 2012 World Investment
Report (WIR) of the UNCTAD, the garment sector attracted the highest amount of FDI
followed by the banking, energy and telecommunication sectors, respectively.
We have two dimensional problems in case of poor FDI performance. Firstly, lack of branding
of our investment potential along with a poor R&D wing for FDI. Secondly, we have poor
infrastructural facilities, insufficient gas and power supply and an unstable political setting.
We need to brand our best qualities, traits or attributes to the global community properly for
utilization of our full investment potential. And also, we have the third best cost-effective
Export Processing Zones (EPZ) in the world. We have two deep international sea ports to
facilitate the carriage of goods and services worldwide

Objectives of the Study:

In Bangladesh, import, export, and exchange rate, are the most important economic variables in
recent times as they help in balancing the balance of payment. The world is getting globalized,
which means that it has both good and bad effects on an economy. But every developing or lesser
developed country is concerned about it and tries to take part in the global competition
The key objectives of the study are as follows:
To find out the impact of trade liberalization on export growth and import growth.

To find out the impact of terms of trade on trade balance.

act of GDP and exchange rate on trade balance.
f trade liberalization on trade balance and balance of payment.
t liberalization and exchange rate on growth.
es for the improvement of trade policy.

Methodology of the Study:

Source of Data: This study covers the period of 2003-2014. Data required for the study are
taken from different sources i.e. World Investment Bank Report (WIR), Yearly Publications
of UNCTAD, UNO, ESCAP, SANEI and Key Development Indicators and Yearly
Publications of the Asian Development Bank (ADB). Relevant data are also collected from
Annual Reports of Bangladesh Bank, Bangladesh Economic Review, and Published
documents from Board of Investment (BOI).
Technique of Analysis: The study is descriptive in nature. In order to review the performance
of FDI in Bangladesh, all component of Balance of Payment is described thoroughly also show
the changes in every sector periodically.

Definitions and Explanations:

The balance of payments is compiled according to the rules recommended by the International
Monetary Fund (IMF) (Balance of Payments Manual, 5th Ed. International Monetary Fund,
Washington D.C., USA, 1993) and is defined as a systematic record of all economic transactions
carried out in a given period between the domestic economy and the rest of the world. Since the
1999 Statistical Abstract, the balance of payments is shown in a new format. This format adopted
by international statistics agencies and by most countries, allows convenient international
comparisons of balance of payment flows. Additionally, the definitions and classifications in the
new format of the balance of payments have been harmonized with those

customary in the National Accounts, thereby obtaining consistency between the international
flows and transactions and those in the National Accounts.
Data since 1967 include estimates of economic transactions between residents of Israel and nonIsraeli residents of Judea, Samaria and the Gaza Area (and Sinai until 1982).
The Balance of Payments consists of three main sections:
a.
b.
c.

The current account: includes trade in goods and services, income and expenditure from
production factors - capital and labor and current transfers;
Capital account: includes capital transfers (mainly by immigrants),
Financial account: includes direct investments, tradable portfolio investments, other investments
and net reserve assets.

Current Account:
This account includes four secondary accounts:
1. Goods Account: transfer of ownership of goods between Israeli and foreign residents.
2. Services Account: provision of services between Israeli and foreign residents.
3. Income Account: income and expenditure between Israeli and foreign residents, such as
investments and labor compensation. Income and expenditure on investments include
interest, dividends and undistributed profits.
4. Current Transfers Account: current transfers between Israeli and foreign residents that do

Capital Account
Capital Account and Current Account is the mirror image for one another. When current account is
zero then we dont need capital account but when current account is -1 then we need capital account
to recover. The capital account includes capital transfers.

Financial Account
The components of the financial account are classified by types of investments (domestic and
foreign). A subsidiary classification is by sector of the economy, which is further classified by the
legal repayment date for liabilities and redemption of foreign assets.

1.

2.

3.

4.

This account includes 4 secondary accounts:

Direct investment: The criterion that distinguishes between direct investment and portfolio
investment is the share of equity held by investors. The rule defined by international institutions
is that ownership of one-tenth of equity or more makes the investment a direct one. Ownership of
less than one- tenth of equity is considered a portfolio investment.
Portfolio investment: This category reflects activity in the Israeli stock exchange or in a foreign
stock exchange. It includes bonds issued abroad by the Government of Israel, in addition to
investments at less than one-tenth of equity, as mentioned. Financial derivatives instruments are
also included here.
Other investment: This subgroup includes remaining types of capital flow such as loans
from various sources, deposits, commercial credit, and advance payments on account of
transactions.
Net reserve assets: Includes changes in the balance of foreign currency, which is held by the
Central Bank abroad (not revalued).
Balance of Payments components
Bangladesh - Balance of Payments Capital & financial account - Net capital account
(BoP, current US$)
Net capital account records acquisitions and disposals of non-produced non- financial assets,
such as land sold to embassies and sales of leases and licenses, as well as capital transfers,
including government debt forgiveness. The use of the term capital account in this context is
designed to be consistent with the System of National Accounts, which distinguishes between
capital
transactions and financial transactions. Data are in current U.S doller.
Date
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005

Value
360,673,000
725,459,280
500,259,874
512,409,496
621,856,316
351,760,752
572,170,002
586,556,238
366,597,883
263,345,872

Change, %
-50.28 %
45.02 %
-2.37 %
-17.60 %
76.78 %
-38.52 %
-2.45 %
60.00 %
39.21 %

Bangladesh - Balance of Payments Current accounts - Current account balance (BoP,

current US$)
Current account balance is the sum of net exports of goods, services, net income, and net current
transfers. Data are in current U.S. dollars. - 1,677,258,362(Bop, current US$) in 2014

Date
2014
2013
2012
2011
2010
2009
2008

Value
-1,677,258,362
2,058,473,420
2,575,500,681
161,842,539
1,168,042,394
3,836,865,009
1,242,282,485

Change, %
-181.48 %
-20.07 %
-1,691.36 %
-113.86 %
-113.86 %
208.86 %

Bangladesh - Balance of Payments Capital & financial account - Net financial

account (BoP, current US$)
The net financial account shows net acquisition and disposal of financial assets and liabilities. It
measures how net lending to or borrowing from nonresidents is financed, and is conceptually
equal to the sum of the balances on the current and capital accounts. Data are in current U.S.
dollars
Date
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005

Value
432,252,519
1,472,778,000
2,396,617,155
-820,707,638
1,388,384,725
3,491,498,201
1,497,016,505
942,109,752
763,868,114
3,420,244

Change, %
-70.65 %
-38.55 %
-392.02 %
-159.11 %
-60.24 %
133.23 %
58.90 %
23.33 %
22,233.73 %

Bangladesh - Balance of Payments Capital & financial account - Foreign direct

investment, net (BoP, current US$)
Foreign direct investment are the net inflows of investment to acquire a lasting management
interest (10 percent or more of voting stock) in an enterprise operating in an economy other
than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term
capital, and short-term capital as shown in the balance of payments. This series shows total net,
that is, net FDI in the reporting economy from foreign sources less net FDI by the reporting
economy to the rest of the world. Data are in current U.S. dollars.
Date
2014
2013
2012

Value
-1,577,756,794
-1,593,295,295
-1,256,371,170

Change, %
-0.98 %
26.82 %
10.73 %

2011
2010
2009
2008
2007
2006
2005

-1,134,654,834
-858,448,053
-804,456,858
-1,023,431,798
-650,180,629
-728,615,342
-758,530,217

32.18 %
6.71 %
-21.40 %
57.41 %
-10.76 %
-3.94 %

Bangladesh - Balance of Payments Capital & financial account - Changes in net reserves
(BoP, current US$)
Changes in net reserves is the net change in a country's holdings of international reserves
resulting from transactions on the current, capital, and financial accounts. Reserve assets are
those external assets that are readily available to and controlled by monetary authorities for
meeting balance of payments financing needs, and include holdings of monetary gold,
special drawing rights (SDRs), reserve position in the International Monetary Fund (IMF),
and other reserve assets. Also included are net credit and loans from IMF (excluding reserve
position) and total exceptional financing. Data are in current U.S. dollar.
Date
2013
2012
2011
2010
2009
2008
2007
2006
2005

Value
5,214,893,792
4,810,538,994
-718,738,383
-36,163,442
4,095,343,551
1,258,709,430
1,068,262,714
1,069,372,109
-103,648,255

Change, %
8.41 %
-769.30 %
1,887.47 %
-100.88 %
225.36 %
17.83 %
-0.10 %
-1,131.73 %

Bangladesh - Balance of Payments Current accounts - Goods exports (BoP, current US$)
Goods exports refer to all movable goods (including non-monetary gold and net exports of goods
under merchandising) involved in a change of ownership from residents to nonresidents. Data are
in current U.S. dollars.
Date
2014
2013
2012
2011
2010
2009

Value
29,928,564,626
28,638,191,700
24,904,204,338
24,537,200,415
21,081,692,868
15,477,032,394

Change, %
4.51 %
14.99 %
1.50 %
16.39 %
36.21 %
-0.52 %

2008
2007
2006

15,558,163,152
13,028,248,268
11,543,392,855

19.42%
12.86%

Bangladesh - Balance of Payments Current accounts - Goods imports (BoP, current US$)

Goods imports refer to all movable goods (including non-monetary gold) involved in a change
of ownership from nonresidents to residents. Data are in current U.S. dollars.
Date
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005

Value
40,099,143,582
35,000,571,811
32,170,683,011
32,607,377,241
27,970,252,136
20,077,326,528
21,228,382,551
17,926,402,118
14,814,864,908
12,758,069,961

Change, %
14.57 %
8.80 %
-1.34 %
16.58 %
39.31 %
-5.42 %
18.42 %
21.00 %
16.12 %

Bangladesh - Balance of Payments Current accounts - Goods exports (BoP, current US$)
Goods exports refer to all movable goods (including non-monetary gold and net exports of goods
under merchanting) involved in a change of ownership from residents to nonresidents. Data are in
current U.S. dollars.
Date
2014
2013
2012
2011
2010
2009

Value
29,928,564,626
28,638,191,700
24,904,204,338
24,537,200,415
21,081,692,868
15,477,032,394

Change, %
4.51 %
14.99 %
1.50 %
16.39 %
36.21 %
-0.52 %

CONCLUSION:
Soaring import bills particularly for quick rental power plants and sluggish rate of export earnings
has widened trade deficit in the recent fiscal years. The declining import of capital machineries
and intermediate goods has further aggravated the growth prospects of the country. Depreciation
of local currency against USD, low foreign exchange reserve and downward trend of incremental
growth rate of remittance receipt have also exerted pressure on the balance of payment of the
country.
Deficits of trade and primary income, lower value of net FDI, negative value of portfolio
investment and the continuously declining trend of other investments along with negative errors
and omissions contribute to the overall account balance deficits in previous fiscal years, which
might increase further in the upcoming year.

References:
1. https://www.bb.org.bd/pub/research/policynote/
2. https://www.bb.org.bd/econdata/bop/bopindex.php
3. http://euacademic.org/UploadArticle/25.pdf
4. http://www.investopedia.com/
5. http://www.antiessays.com/free-essays/Balance-Of-Payment-In-Bangladesh-430167.html
6. https://macroeconomicslab.wordpress.com/2012/12/22/current-balance-of-paymentsbop-

position-of-bangladesh/
7. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2668829
8. Bangladesh, BIBM Bulletin, Vol.6, No. 1 & 2, pp. 1-4.
9. Reza, S. Rashid, M.A. and Alam, M (1987). Private Investment in Bangladesh, The

University Press Ltd.:Dhaka. UNCTAD (2000). World Development Report, UN

publications, USA.
UNCTAD (2007). UNCTAD Investment Brief, Investment Issues Analysis Br., UN
publications, USA. (2000)