The Woe Called Current Account Deficit

A virus called Corona
Sweeps across China.
Damage to trade cannot be seen,
People want to know what it means
For economy, commerce and culture.
So the business as usual does not rupture.
The woe called current account deficit,
Lacking enough forex receipt,
Keeps growing bigger,
For the last three years.
Exports fall short
Of meeting the gap.
Even the forex warriors fail
To bring another feather to their cap.

 Another pandemic has brought the world to a standstill. Fear looms large that it may badly hit Bangladesh economy. News reports indicate that ongoing development projects (infrastructure) will be delayed several weeks as many China-financed projects witness their workers on leave are being stranded back home. In addition, many exporters and importers are also worried about their goods from China, one of the biggest trading partners of Bangladesh. Port operations and export and import operations are also crippled by flu pandemic.However, a closer look at the external trade data for the last one decade will reveal that things are already in bad shape for our external sector.Bangladesh Bank data on Balance of Payments say that for the last three years current account has experienced deficit. More worryingly, it has been growing since 2017.

Current account deficit is not a good sign for the economy as gap in trade deficit is no longer offset by remittances. Remittances, in the past,came as a savior to help Bangladesh's dire economy. Things have changed as many traditional destinations shut its door to Bangladeshi workers. Despite the surge in remittances in last couple of months, overseas employment market may take a hit in South East Asia. The region is close to the epicenter of flu outbreak and several Bangladeshis have been identified with the symptoms of having the flu with no cure.

Source:Bangladesh Economic Review 2018, BBS Pocket Book 2012,2018,Bangladesh Bank.

The risk is there that trade and overseas employment market of Bangladesh may be badly affected by the flu outbreak.

External trade is already in trouble before flu pandemic. Balance of payments data in the period between 2010 and 2018 say that there has always been trade deficit and it has been growing for the last one decade. It only underscores the role of remittances in our external sector. However, since 2017 we have been witnessing a current account deficit and it shows no sign to dissipate soon. Rather it is growing at an alarming rate. In 2019, our current account deficit stood at $15.49 billion. Though export has been growing steadily over the last one decade, import has outperformed it.

I ran a logit model to get an idea how the export increase raises the odds of having a current account surplus, analyzing data for the  period 2010-2019. For each export earnings level, I fetched the corresponding data for GDP and current account balance. Now the probability of a positive current account balance is current account balance for the corresponding export level divided by corresponding GDP. The odds ratio,P_i/(1-P_i) in favor of a positive current account balance is the ratio of the probability that there will be a current account surplus to the probability that there will be no current account surplus. Then I took the natural log of the odds ratio to  make it linear in parameters.

Now the logit model becomes
L_i=ln(P_i/1-P_i)= b₁+b₂X_i
where X_i is export earnings in million US $.
To get rid of heteroscedasticity, I transformed the model  as follows:
sqrtw_i L_i= b₁sqrtw_i+ b₂sqrtw_iX_i+sqrtw_iu_i.

Or

L*_i=b₁sqrtw_i+ b₂X*_i+v_i
where L*_i=sqrtw_i L_i,X*_i=sqrtw_iX_i  , v_i= sqrtw_iu_i  , w_i= GDP_iP_i(1-P_i)

Then I carried out the OLS regression on the transformed equation.The model appeared to be significant (F=253.21, p=0.0000002436,df=1,8). Both the intercept,b₁sqrtw_i,(t= -14.41, p=0.0000005241) and the slope coefficient, b₂, (t= -15.912, p=0.0000002436) turned out to be significant. The slope coefficient is -0.0000644841. Taking the antilog of slope coefficient yielded 0.999935. So for a unit increase in the weighted export earnings, X_i, the weighted odds in favor of a current account surplus increase by -0.00645 percent. So analyzing given data , the odds for a current account surplus in response to an increase in export earnings are minuscule. This underscores role of remittances in current account balance. Despite the fact that exports have grown remarkably, it does not play a dominant role in lifting up the current account deficit to a surplus level. Acceleration in export earnings is expected. For that, diverse bucket of goods and new destinations are must.

These stuffs have been chewed so much that they now sound cliché. But we still depend heavily on our remittance warriors to  fill up the gaps in current account. But the last three years, as the data show, increasing current account deficit should be a cause of concern. It is in fact pushed the overall balance negative in 2018.

Bad news keeps coming from the overseas employment market. Several traditional recruiting countries impose new restrictions, limiting further prospect of recruiting more Bangladeshi workers. Recent flu pandemic will further aggravate the problem. There is little room for optimism that remittances continue to play the role of savior in future.

Similarly, no good news surfaces for country's apparel sector.EU parliament has nodded affirmatively to a free-trade agreement with Vietnam, allowing the country to export duty-free apparel items to EU countries. This augurs ill for Bangladeshi apparel sector as its apparel items will face stiff competition in that market. Instead of widening the market, Bangladesh witnesses losing of its existing ones.

Overseas employment market and apparel export jointly fill up the forex reserve of the country. Government response to address the woes prevailing in these two sectors is not adequate. This is often manifested in the inhuman suffering of the remittance warriors and lack of policy support for apparel sector. Before the current account deficit turns worse, government should mobilize efforts to avoid a catastrophic situation.