Problem of Balance of Payment in Bangladesh
A balance of payments (BOP) sheet refers to the international monetary transaction
records between a country and the rest of the world, which includes the country’s
payments for its exports and imports, services, and financial capital and transfers. The
BOP is a summary of transactions for a specific period, usually a year, that is prepared
in a single currency and is commonly in the country’s domestic currency. Funds from
exports and receipts of loans and investments are recorded as positive or surplus
entries, while fund uses for imports or foreign investments are recorded as negative or
deficit entries. The sum of an overall BOP sheet must be zero with no surplus or deficit
when all of its components are included. When imports are more than exports, the
country’s trade balance will be in deficit, with the shortfall needing to be offset in other
ways such as earned funds from foreign investments, drawing from reserves or
receiving of loans. It is possible for Individual elements on the BOP, like the current
account, to be imbalanced. This can happen in countries with surplus accumulations of
wealth, while nations with deficits become increasingly indebted. There have been
varied approaches in correcting imbalances which are being addressed by policy
makers since 2009 since these were held as contributors to the 2007-2010 financial
crisis.[1]
Surpluses or deficits in individual elements of the BOP can lead to imbalances between
countries, with a general concern over deficits in the current account. Such imbalances
are conventionally viewed as being due to current account factors including the
country’s exchange rate, fiscal deficit and business competitiveness, and also seen as
being due to capital account factors, where a global savings glut in countries with
surpluses, runs ahead of investment opportunities, and is pushed into the US that
results in over consumption and price inflation. The US dollar has been the de facto
reserve asset after the end of the gold standard, with 65% of the world’s 6,800 billion-
dollar global reserves being held in US dollars as of 2009.[2]
When a country is unable to pay for essential imports and/or service its debt
repayments, a BOP or currency crisis occurs, which is typically accompanied by a
fast decline in the value of the country’s currency. This happens when the country’s
foreign investors become concerned on the level of debt their capital is generating and
decide to withdraw their funds. Once the country has exhausted its foreign reserves to
support its currency, it has limited options. While the country’s raising of its interest
rates to prevent further currency decline can help its debtors in foreign currencies, it
generally depresses the local economy.[3]
The methods of correcting BOP imbalances include adjustments of exchange rates,
adjustment of a country’s internal prices along with demand level, and adjustments
based on rules. In practice, some degree of combining the first two methods tends to be
used. Upgrading productivity and exports competitiveness can also help. The
challenges caused by BOP imbalances can be an opportunity for successful economic
reforms as was shown by India after the 1991 financial crisis.[4]
Bangladesh had a BOP problem in the early 1990s which had gradually been corrected
by the infusion of foreign aid and heavy short-term borrowing. The growth of garments
and knitwear exports in 1994 revived the country’s manufacturing sector. Bilateral quota
systems with developed country markets, few governmental regulations and the
allowing of foreign banks to finance raw materials inventories contributed to the garment
industry’s success. Bangladesh had to diversify its export base to improve its trade
imbalance and the increase of worker remittances has also helped build up its foreign
reserves.[5] Much later, the country’s overall BOP surplus reached a robust 4 million
in July of the 2009-10 fiscal year, with its trade deficit standing at 3 million from the
0 million of the same period from the previous year, mainly due to the surge in
worker remittances. The Bangladesh foreign reserves has also increased for the first
time to billion dollars by the end of July 2009.[6]
[1] “Balance of Payments”, Wikipedia, 19 June 2011, http://en.wikipedia.org/wiki/Balance_of_payments
[accessed 22 June 2011]
[2] ibid
[3] ibid
[4] ibid
[5] “Bangladesh – Balance of Payments”, Encyclopedia of the Nations, 2011, <http://www.nationsencyclopedia.com/Asia-and-Oceania/Bangladesh-BALANCE-OF-PAYMENTS.html>
[accessed 23 June 2011]
[6] “Bangladesh’s July Balance of Payments Surplus Reaches 4 mln”, D-8 Organization for Economic
Cooperation, 26 October 2009, <http://www.developing8.org/2009/10/26/bangladeshs-july-balance-of-payments-surplus-reaches-694-mln/> [accessed 23 June 2011]
Credit:ivythesis.typepad.com
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