As a nation, our debts are piling up. We need to grow worried. However, it has never been reached to worrying level. Government always feels complacent by citing our debt-GDP ratio, which is much lower and declining as per official statistics. Many are not happy the way they are being calculated. Just take a look at the level of our outstanding external debt stock, In 2012, it was $22.095 billion. In 2017, it became $ 28.33 billion. And last year it increased to $33.11 billion. Our outstanding debt as percentage of GDP in 2012 was 16.6. In 2017, it declined to 11.3. But in 2018, it increased to 12.1. (Source: Bangladesh Bank)
Many of our development and infrastructure projects are being financed by foreign credits. In FY2016-17, we took a $3.21 billion worth of medium and long term loans. In FY2017-18, the amount rose to $5.78 billion.
Our repayment record is pretty good. In 2014, repayments of MLT were $1.2 billion. In 2017, we paid back $1.1 billion of MLT loans with interest. In 2018, we paid back even more: $ 1.4 billion. Eventually we have to make adjustments in our expenditures to do this kind of payments. For instance, we could have spent this money on education, health and social safety net programs.
Perhaps as a country our earnings are not enough to meet our spending. Current account captures economic activity of a country with the rest of the world and its ability to pay spending on foreign goods.
A closer look at the Balance of Payments reveals that our overall balance is negative in 2017-18. Moreover, our current account balance has been negative since 2016-17. Last year ,I wrote an analytical piece on our negative overall balance, titled "Address The Imbalance". Data published by Bangladesh Bank and Bangladesh Economic Survey insinuate that we have a current account deficit of $1.3 billion in FY 2016-17. This deficit has grown to $ 9.7 billion in FY2017-18.
Our trade balance has always been negative. It has always been a one sided story: import dominates export. In 2017-18, our export grew by 6.43%. Private transfers, which incorporated remittances sent by workers, grew by 16.28%. Meanwhile, import grew by 16.28% during the same period. So, two major sources of receipt did not jointly outweigh the major source of payments. Import spending is growing at a greater pace. A regression run on trade data collected in the periods between 2004-05 and 2017-18 revealed that a 1 percent increase in export decreases the trade imbalance by 3.12 percent whereas a 1 percent increase in import increases the trade imbalance by 4.1 percent.
Remittances popped up the current account balance, which was positive till 2016-17. In fact the deficit in CA in 2016-17 is largely attributed to fall in remittances in that period.In 2015-16, we received $14.72 as remittances. In 2016-17, it declined to 12.76 billion. In 2017-18, it increased to $ 14. 7 billion. Despite the increase in remittances, we incurred a current account deficit due to large import expenditure in 2017-18. Many of the recruiting countries have already stopped hiring Bangladeshi workers or started sending back the laid-off workers. There has been no rapid increase in remittances. What role remittances could play to improve our current account deficit and the overall balance that is about to see.
A positive overall balance withered away the worries in all these years. Balance of Payments say along with FDI, medium and long term loans have kept the overall balance positive all these years. It is anticipated that the medium and long term loans will grow more as we are implementing a greater number of projects with foreign loan. And we have to pay them back along with interest. As I said earlier we have to slash somewhere else to repay those loans. What rings the alarm bell is a negative overall balance in 2017-18.
Growing current account deficit, rising foreign debt and a diminishing reserve remain genuine cause for concern. In 2017-18(Jul-Feb) we received $3.1 billion MLT loans and in 2018-19(Jul-Feb) it increased to $ $3.9 billion, a 21.30 percent increase. During the same period, our reserve declined from $33.0 billion to $32.3 billion.
Remedial measures include pursuing an expansionary monetary policy, which will increase output and depreciate Taka. Thereby our competitiveness in export market will grow resulting in improved current account balance.
Things are complicated in reality.Any depreciation of local currency deteriorates the current account balance in the short run but it eventually improves it in the long run. Because market responds slowly to such changes.
As our imports and MLT loan payments are growing , any depreciation of local currency has adverse impact on current account deficit and overall balance.
So far domestic investment remains sluggish and export growth does not hint that it will surpass import in future. So there is no reason to be optimistic about current account deficit and overall balance.
And it is the time we become serious about our external debt. Unless it is absolutely necessary, we should abstain ourselves from taking foreign loans. There are ample of examples how bad foreign debt not only drove wedge in relations between countries but precipitated political crisis at home.
Many at home often put forward our debt-to-GDP ratio as a reason to borrow more from abroad. Wise people say austerity is good when the economy is in good shape.
Many of our development and infrastructure projects are being financed by foreign credits. In FY2016-17, we took a $3.21 billion worth of medium and long term loans. In FY2017-18, the amount rose to $5.78 billion.
Our repayment record is pretty good. In 2014, repayments of MLT were $1.2 billion. In 2017, we paid back $1.1 billion of MLT loans with interest. In 2018, we paid back even more: $ 1.4 billion. Eventually we have to make adjustments in our expenditures to do this kind of payments. For instance, we could have spent this money on education, health and social safety net programs.
Perhaps as a country our earnings are not enough to meet our spending. Current account captures economic activity of a country with the rest of the world and its ability to pay spending on foreign goods.
A closer look at the Balance of Payments reveals that our overall balance is negative in 2017-18. Moreover, our current account balance has been negative since 2016-17. Last year ,I wrote an analytical piece on our negative overall balance, titled "Address The Imbalance". Data published by Bangladesh Bank and Bangladesh Economic Survey insinuate that we have a current account deficit of $1.3 billion in FY 2016-17. This deficit has grown to $ 9.7 billion in FY2017-18.
Our trade balance has always been negative. It has always been a one sided story: import dominates export. In 2017-18, our export grew by 6.43%. Private transfers, which incorporated remittances sent by workers, grew by 16.28%. Meanwhile, import grew by 16.28% during the same period. So, two major sources of receipt did not jointly outweigh the major source of payments. Import spending is growing at a greater pace. A regression run on trade data collected in the periods between 2004-05 and 2017-18 revealed that a 1 percent increase in export decreases the trade imbalance by 3.12 percent whereas a 1 percent increase in import increases the trade imbalance by 4.1 percent.
A positive overall balance withered away the worries in all these years. Balance of Payments say along with FDI, medium and long term loans have kept the overall balance positive all these years. It is anticipated that the medium and long term loans will grow more as we are implementing a greater number of projects with foreign loan. And we have to pay them back along with interest. As I said earlier we have to slash somewhere else to repay those loans. What rings the alarm bell is a negative overall balance in 2017-18.
Growing current account deficit, rising foreign debt and a diminishing reserve remain genuine cause for concern. In 2017-18(Jul-Feb) we received $3.1 billion MLT loans and in 2018-19(Jul-Feb) it increased to $ $3.9 billion, a 21.30 percent increase. During the same period, our reserve declined from $33.0 billion to $32.3 billion.
Remedial measures include pursuing an expansionary monetary policy, which will increase output and depreciate Taka. Thereby our competitiveness in export market will grow resulting in improved current account balance.
Things are complicated in reality.Any depreciation of local currency deteriorates the current account balance in the short run but it eventually improves it in the long run. Because market responds slowly to such changes.
As our imports and MLT loan payments are growing , any depreciation of local currency has adverse impact on current account deficit and overall balance.
So far domestic investment remains sluggish and export growth does not hint that it will surpass import in future. So there is no reason to be optimistic about current account deficit and overall balance.
And it is the time we become serious about our external debt. Unless it is absolutely necessary, we should abstain ourselves from taking foreign loans. There are ample of examples how bad foreign debt not only drove wedge in relations between countries but precipitated political crisis at home.
Many at home often put forward our debt-to-GDP ratio as a reason to borrow more from abroad. Wise people say austerity is good when the economy is in good shape.
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