Making sense of revisions in balance of payments

Bangladesh Bank's latest data on the balance of payments has remarkably altered the narrative on the drivers of external stress without changing the signal on the overall stress. The bottom line on persistent external imbalance remains pretty much the same but the composition is palpably different. The corrections made by the BB were long overdue. Hopefully, BB would appropriately correct the entire historic series to make sure the BOP data remain comparable over time.

The most significant correction is in the merchandize export data. The Export Promotion Bureau numbers on monthly exports in FY24 showing significant growth have been raising eyebrows among the exporters. The media did several stories highlighting the discrepancy between EPB, NBR and BB data. Stories on multiple counting of exports and discrepancies between data from different customs documentations proliferated. It appears BB has finally made a laudable attempt to present export values plausibly close to reality.

Surplus is deficit

Contrary to what was hitherto believed, merchandize exports declined 6.8% in July-April FY24 relative to the same period in FY23, driven primarily by a 6.7% decline in RMG exports. Note that EPB reported 3.9% growth in exports during the same period, driven by 5% growth in garments. Exporters as well as economists tortured their hairs trying to explain such growth amidst weak global demand and severe gas shortage, loadshedding and import controls. The corrected BB numbers may not restore the lost hairs, but they have alleviated the head aching puzzles.

The correction has dramatically altered the lay of the land on the subcomponents of external balance. The most remarkable is the transformation of the current account surplus into a large current account deficit. BB's previous data release reported a current account surplus of $5.8 billion during July-March of FY24. The latest data release shows a current account deficit of $4.1 billion during the same period, a correction of nearly $10 billion, reflecting almost entirely the difference in export data between the corrected and uncorrected data releases.

So much for the complacent claims of having resolved the current account deficit problem through import compression. The latter helped reduce the current account deficit that exceeded $10 billion in July-March FY23, but the deficit, which grew to over $5.7 billion in July-April, is still large. It would not have been worrisome if driven by a surge in investment induced imports. But the deficit came from a decline in exports, notwithstanding a 12.3% decline in merchandize imports. The decline in imports in turn reflected not just a 6.3% decline in RMG related goods but also 20.7% decline in import of capital goods. Weaknesses in both exports and investments make the current account deficit a big concern.

Deficit is surplus

The correction in export data had a countervailing effect on the financial account. It transformed the previously reported $9.25 billion financial account deficit in July-March FY24 to $653 million surplus! How did that happen?

The answer is in the trade credit line in the financial account. The standard practice is to treat the excess of the shipment value of exports over the payments received against exports as a debit entry in the trade credit account. The over-reporting of the shipment value of exports resulted in huge debit entries in the trade credit account, amounting to $12.2 billion (net outflows) during July-March. The correction in exports has reduced this to slightly over $2.1 billion (net outflows), a decrease of about $10 billion that closely matches the size of the correction in exports.

The cumulative net outflows via trade credit narrowed to $1.68 billion during July-April as exports in April amounted to $2.72 billion, well below the nearly $3.4 billion monthly average in the first ten months of FY24. Exports receipts in April may have exceeded export shipments. Additionally, import shipments--$5.67 billion in April (above the monthly $5.24 billion average during July-April)—may have exceeded import payments. Both result in outflow reducing credit entries in the trade account.

Deficit is deficit

The opposing changes in the current and financial account balances washed each other, leading to virtually no change in the overall deficit in the balance of payments. It increased slightly from $4.44 billion in the uncorrected to $4.75 billion in the corrected BOP during July-March, FY24. The overall deficit increased to over $5.5 billion during July-April, compared with $8.8 billion during the same period of FY23. The decrease relative to the previous fiscal year is attributable entirely to the decrease in the current account deficit.

Does this mean that all the hue and cry about the external payment pressures and capital flight were just statistical artifacts? The answer is both yes and no.

It is yes in that the size of the problem pertaining to the non-repatriation of export receipts is a lot less than previously thought. The 6.6% increase in net aid flows despite a 21.7% increase in amortization payments also helped cutting the overall BOP deficit.

The answer is no because the $2.4 billion net inflows on account of trade credit in July-April FY23 morphed into net outflows of $1.68 billion in July-April FY24. So, the problem of non-repatriation of export proceeds has not disappeared. Net outflows on account of other short-term loans remained large and slightly higher in FY24, indicating the drying out of new short-term loans. Unaccounted outflows have remained persistently large at around $2.4 billion, symptomatic of capital flight.

Implications

The most pressing implication of the correction of the shipment value of exports is for the GDP growth estimate. Recall that BBS has projected GDP growth at 5.8% for FY24. In making this calculation, they projected 5.63% growth in the real exports of goods and services. According to the corrected BOP data, the fob value (in US dollars) of the exports of goods and services declined by 7.5% during July-April in FY24 relative to the same period in FY23. If the decline in the real value of export of goods and services equals the decline in dollar value, and remained at 7.5% for the entire FY24, it means GDP growth is about 1 percentage point lower than BBS's preliminary estimate. Thus the 5.8% GDP growth could be 4.8% due to the shortfall in actual export growth relative to the export growth projected, other things equal.

There is also the possibility of under invoicing for exports motivated by capital flight and/or undervalued official rate for export dollars. The best way of detecting under invoicing is to check the data from the export destination countries.

According to the US Census Bureau data, the dollar value of US imports from Bangladesh during January-April 2024 was 13.7% lower than the corresponding period of 2023. US imports from Bangladesh was 23.8% lower in 2023 relative to 2022. One suspicion is that more apparel imports came into the US through the de minimis (the minimum value of goods below which no duties are charged by customs). According to Euromonitor, about 40% of US apparel retail sales were achieved through e-commerce in 2023, a substantial increase from 9.4% in 2010. However, US customs tightened controls on "small package shipments leading to entering through the standard procedure in recent months.

I could not readily find similar data on EU imports from Bangladesh except that their imports from Bangladesh declined 21.2% in FY23. Imports of textiles and clothing into the EU from countries outside the EU declined in value and volume in 2023 calendar year as well, according to Textiles Intelligence. There is therefore no patently obvious evidence of export under invoicing. Capital flight may nevertheless have happened through other channels and the exporters are likely to have managed the exchange rate undervaluation problem through other means. The point is BB's corrected export data seem quite credible.