Trade deficit heads to historic high

Bangladesh's trade deficit escalated by 80 per cent in the first eight months of the ongoing fiscal year in the wake of a surge in import payments against lower exports receipts.

Between July and February, the trade deficit, which occurs when the value of imports exceeds the value of exports, totalled $22.30 billion in contrast to $12.35 billion during the same period a year ago, data from the Bangladesh Bank showed.

The shortfall may surpass the previous peak of $23.77 billion, registered last fiscal year, as import payments are expected to maintain the current momentum to feed the growing economy since global commodity prices are showing little signs to cool off anytime soon.

The widening of the trade gap has intensified pressures on the exchange rate of the taka against the US dollar, which will ultimately reduce the foreign exchange reserves as well.

Against the backdrop, the country may have to increase its borrowing from foreign sources to a large extent as the ballooning trade deficit has already created a record deficit in the current account.

Imports stood at $54.37 billion in the first eight months of FY2021-22, an increase of 46.7 per cent year-on-year. Exports grew 30 per cent to $32.07 billion.

The trade deficit might hit $35 billion at the end of the fiscal year if the ongoing trend continues, according to Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue.

As the trade deficit swelled, remittance has also remained at the lower than expected level, sending the current account deficit to a record high of $12.83 billion during the July-February period in contrast to a surplus of $825 million a year ago.

The previous widest deficit in the current account was $9.56 billion recorded in FY18. It was $4.57 billion last fiscal year.

"The central bank should discourage the imports of non-essential consumer items in a bid to narrow the gap in the trade and current accounts," Rahman said.

The deficit in the current account might double to nearly $20 billion in FY22, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

This means the government will have to either take on foreign loans or adjust the deficit in the current account by taking funds from the foreign exchange reserves.

"But, this is not the solution. We should cut the domestic demand, or else a macro-economic instability may occur," he said.

In February, the foreign exchange reserves stood at $45.94 billion, enough to cover import payments for 5.1 months.

According to Mansur, the depreciation of the local currency against US dollars will play a major role in reining in the higher imports.

The taka has been weakening against the American greenback gradually for the last several months amid the rising demand for US dollars to pay import bills. The exchange rate now stands at Tk 86.20 per US dollar from Tk 84.80 a year ago.

Shah Md Ahsan Habib, a professor at the Bangladesh Institute of Bank Management, recommended paying special heed to the balance of payments as the rise in import payments was unusual.

The external trade sector will become stable once the global market gets respite from the supply chain disruption, he said.