Bangladesh’s trade trajectories are frequently praised because of the phenomenal growth in export profits from the ready-made garments (RMG) sector. In fiscal year 2021-22, export revenues hit a record high of US$52 billion. During the same fiscal, exports of woven garments increased by 33.82% to $19.40 billion, while knitwear garment exports increased by 36.88% year over year to $23.21 billion.
However, export revenues for chemical products, agricultural products, and frozen and live fish decreased by 30%, 14% and 7.2% respectively in the first quarter of FY 2022-23.
Most imports comprise expensive capital goods, including machinery, chemicals, and petroleum-based intermediate goods. The imbalance between imports and exports complicates the trade balance, which finally affects a significant component of the country’s balance of payments (BOP). As a result, between 2016 and 2021, Bangladesh’s trade balance deteriorated from 3.49% of gross domestic product to 6.40% of GDP.
Bangladesh still exports low-value manufactured goods, and the export basket has not changed significantly since 2000, unlike South Korea, China, and some of its Southeast Asian trade rivals, which were able to transition from exporting clothing and footwear to more complex commodities.
Knitwear, woven clothing, cotton T-shirts, and jute items, which make up the major chunk of Bangladesh’s exports, are now vulnerable to Vietnamese competition because of scale economies such as improved transportation infrastructure and electricity availability in the latter. In 2022, Bangladesh’s current-account deficit increased by 30%, from $4.57 billion to $18.69 billion.
Twin deficits
In light of this, it’s critical to remember that Bangladesh, like Sri Lanka, is a classic case of the “twin deficits hypothesis,” which highlights a causal relationship between the economy’s fiscal balance and current-account balance.
An empirical study conducted in 2021 reveals a one-way causality from the budget deficit to the trade deficit and, ultimately, the long-term current-account deficit. Therefore, maintaining a manageable budget deficit is essential to keeping Bangladesh’s current-account deficit and BOP stable.
Developing nations with consumption-driven economies, like Bangladesh, that have significant levels of debt on both the domestic and foreign fronts frequently experience this issue.
Two main factors may cause the twin deficits in the fiscal and current accounts.
First, according to the Keynesian perspective, rising budget deficits caused by increased government spending and low taxation stimulate domestic consumption, which in turn drives up imports and widens the current account deficits.
Second, based on the Mundell-Fleming model, higher budget deficits result in higher interest rates, and the opposite is also true. Rising interest rates make the domestic economy more enticing to foreign investors, which drives up capital-account surpluses but current-account deficits.
A current account can suffer from capital-account surpluses because rising liquidity increases consumer demand, necessitating more imports, thus deteriorating the current account.
Alternatively, capital inflows may strengthen the value of the national currency, which would lower import costs and boost domestic demand while raising the price of exports, which would cause export revenues to decline and widen current-account deficits.
The Bangladeshi taka has consistently declined in value over the past year; therefore, the latter alternative has not been the case for Bangladesh in recent times.
Foreign direct investment
When it comes to the capital account of the BOP, foreign direct investment (FDI) is a crucial part of the capital account that contributes to lowering Bangladesh’s total BOP deficits.
While FDI is crucial for boosting a nation’s capacity to withstand short-term shocks, it also strives to address technological shortcomings and foster innovation through investments in research and development, closing the savings and investment imbalance in the economy, etc.
But in Bangladesh, net FDI inflows as a share of GDP have steadily declined from a peak rate of 1.7% in 2013 to less than 0.4% in 2020. The capital-account balance plunged from $725 million to $213 million between 2013 and 2020.
Various export promotion zones and economic zones have been established in Bangladesh as part of the country’s FDI policy to attract investments. In the last four years, Bangladesh has taken several steps to encourage FDI – ease of launching a business, making finance more accessible, and access to power.
Although many infrastructure projects have been started, none have been able to attract significant FDI inflows, and no massive international businesses have been seen operating in the RMG or other sectors.
Bangladesh saw one of the lowest levels of FDI inflows in Asia in 2019, with net FDI inflows of $1.6 billion, or 0.53% of GDP. Despite the steps mentioned above, Bangladesh dropped eight places in the World Bank’s 2020 Ease of Doing Business assessment, to 168 out of 190 nations.
In a country with a complicated system for resolving disputes and transferring property rights, corruption, and restricted access to energy, starting a business is still seen as a challenging endeavor.
| Total Inward | 16,872 | 100 percent | Total Outward | 321 | 100 percent |
| The United States | 3,488 | 20.70 percent | The United Kingdom | 84 | 26.20 percent |
| The United Kingdom | 1,960 | 11.60 percent | Hong Kong | 72 | 22.40 percent |
| The Netherlands | 1,372 | 8.10 percent | India | 49 | 15.30 percent |
| Singapore | 1,254 | 7.40 percent | Nepal | 45 | 14.00 percent |
| Hong Kong | 869 | 5.20 percent | United Arab Emirates | 35 | 10.90 percent |
In December 2021, the Bangladeshi central bank’s monetary policy review predicted that real GDP growth would be 7.2% in FY 2022-23.
However, it appears less likely that the nation will be able to achieve the target given the current circumstances of rising inflation, diminishing foreign-exchange reserves and the declining value of the domestic currency, shortfalls in government tax, and non-tax revenue collections, widening trade balance, and declining FDI.
The government has also implemented some austerity measures to address this. For example, the Ministry of Finance has delayed cash distribution for projects falling within the so-called “C” category of lower importance.
The public policy discourse in Bangladesh is now focused on short-term solutions. Still, to achieve self-sustaining growth over the long term, it also needs to pay attention to the crucial factors that will lead to structural changes in the BOP and stabilize the government’s fiscal balances.
The author acknowledges Tushar Katiyar at the National Law School of India University in Bangalore for his research assistance on this article.