Bangladesh has witnessed a significant decline in its imports in the first half of the current fiscal year (FY24). According to the latest statistics of the Bangladesh Bank (BB), the settlement of letters of credit (LCs), which indicates the actual imports, stood at $33.68 billion in July-December 2023, down by 18.19% from the same period of the previous fiscal year. This article will analyze the background, causes, and implications of this import drop for the Bangladeshi economy.
Bangladesh has been experiencing steady growth in its gross domestic product (GDP) for the last decade, reaching 8.15% in FY193. However, the Russo-Ukrainian War severely disrupted the economic activities and trade flows of the country. Driven by a shocking increase in global energy and grain prices; Bangladesh’s forex reserves came under pressure.
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Before the war, the pandemic also caused a sharp decline in the country’s foreign exchange reserves, which fell from $32.94 billion in June 2020 to $20.01 billion in June 2021. The reserves were mainly used to finance the import payments and service the external debt obligations of the country. The BB, in its bid to boost the reserves, has taken various measures to discourage non-essential imports, such as raising the policy rate, tightening the credit conditions, and imposing higher tariffs and taxes.
Current State of Export and Import of Bangladesh
The BB data showed that the overall import orders, officially known as the opening of LCs, also declined by 5.33% year-on-year to $32.93 billion in July-December 2023, compared to $34.78 billion in the same period of the previous fiscal year. This indicates a lower demand for imported goods and services in the domestic market. The major import items of Bangladesh include petroleum, machinery, raw materials, intermediate goods, and capital goods.
On the other hand, the country’s exports increased by 10.79% year-on-year to $23.24 billion in July-December 2023, compared to $20.98 billion in the same period of the previous fiscal year. This indicates a higher demand for Bangladeshi products in the international market, especially in the European Union and the United States, which are the main destinations for the country’s exports. The major export items of Bangladesh include ready-made garments, knitwear, leather, jute, and pharmaceuticals.
As a result of the diverging trends of export and import, the country’s trade deficit narrowed by 54.76% year-on-year to $10.44 billion in July-December 2023, compared to $23.06 billion in the same period of the previous fiscal year. This implies an improvement in the country’s balance of payments and external position.
Possible Causes of Import Decline
Several possible factors may have contributed to the import decline of Bangladesh in the first half of FY24. Some of them are:
The Russo-Ukrainian war caused massive economic pressures as energy, fertilizer, and food grain prices increased significantly. The shift in resources to support Ukraine by the West also affected import priorities. The consequent Red Sea crisis also contributed to this situation.
The government’s fiscal policy stance had been expansionary and supportive since 2020, aiming to mitigate the adverse impacts of the pandemic on the economy and the people. The government announced several stimulus packages, totaling about 13.25% of the GDP, to provide relief and assistance to the affected sectors and groups.
The government also increased its public expenditure on infrastructure, education, and social welfare, creating more domestic demand and employment opportunities. These fiscal measures have reduced the reliance on imported goods and services and increased domestic production and consumption.
However, as the Russo-Ukrainian war began affecting the economy; the BB’s monetary policy stance became hawkish and vigilant since January 2021, aiming to curb the inflationary pressures and stabilize the exchange rate of the local currency, the taka, against the US dollar.
The BB has increased its policy rate by 25 basis points nine times in the past 20 months, reaching 8% in January 2024. The BB has also tightened the credit conditions and imposed higher reserve requirements for the banks and financial institutions, making it more difficult and costly for the importers to access foreign exchange and finance their import activities.
The global commodity prices have increased significantly in the past year, driven by supply disruptions, demand recovery, and inflation expectations in the major economies. The prices of crude oil, metals, food, and agricultural products have risen by 50%, 30%, 25%, and 20%, respectively, in 2023. These price hikes have increased the import costs and reduced the import volumes of Bangladesh, especially for essential and intermediate goods.
Why Declining Imports is a Favorable Outcome
The import decline of Bangladesh in the first half of FY24 can be considered a favorable outcome for the economy, given the present condition, for the following reasons:
The import decline has helped to improve the country’s trade balance and current account balance, which are the main components of the balance of payments. The trade balance measures the difference between the export and import of goods and services, while the current account balance measures the difference between the inflow and outflow of foreign exchange from trade, income, and transfers. A lower trade deficit and a higher current account surplus indicate a stronger external position and a lower vulnerability to external shocks.
The import decline has helped to increase the country’s foreign exchange reserves. The reserves are used to intervene in the foreign exchange market, to maintain the stability and competitiveness of the exchange rate, to service the external debt obligations, and to finance the import payments. A higher level of reserves provides more confidence and credibility to the investors, creditors, and traders, and enhances the country’s creditworthiness and rating.
The import decline has helped to reduce the country’s inflation rate, which is the general increase in the prices of goods and services over time. The inflation rate is influenced by both the demand-side and supply-side factors, such as money supply, aggregate demand, production costs, and import prices.
A lower import volume and a lower import price reduce the cost of production and consumption and thus lower the inflation rate. A lower inflation rate preserves the purchasing power and the real income of the people and supports economic growth and stability.
What Effect might Reduce Imports have on Inflation?
As mentioned above, the reduced import of Bangladesh might have a positive effect on inflation, as it lowers the cost of production and consumption, and thus lowers the inflation rate. However, this effect may not be uniform or consistent across different sectors and groups, as some imported goods and services may have more influence on inflation than others.
For example, the import of petroleum products, which account for about 10% of the total import of Bangladesh, may have a significant impact on inflation, as they are used as inputs for various industries and transport sectors, and affect the prices of many other goods and services. Therefore, a lower import of petroleum products may lower the inflation more than a lower import of other goods and services.
Moreover, the effect of reduced imports on inflation may also depend on the demand and supply conditions in the domestic market, as well as the exchange rate movements in the foreign exchange market. For instance, if the domestic demand for a certain imported good or service exceeds the domestic supply, the price of that good or service may increase, despite the lower import volume, and thus increase inflation. Similarly, if the exchange rate of the taka depreciates against the US dollar, the price of the imported goods and services may increase, despite the lower import cost, and thus increase inflation.
Therefore, the effect of reduced import on inflation may vary depending on the type, quantity, and quality of the imported goods and services, as well as the market forces and policy interventions that affect the prices and quantities of the goods and services.
In conclusion, Bangladesh’s imports have dropped by 18.19% in the first half of FY24, due to the COVID-19 pandemic, the BB’s monetary policy, the government’s fiscal policy, and the global commodity prices. This import decline has been a favorable outcome for the economy, as it has improved the trade balance, the current account balance, the foreign exchange reserves, and the inflation rate. However, the effect of reduced import on inflation may not be uniform or consistent across different sectors and groups and may depend on the demand and supply conditions in the domestic market, and the exchange rate movements in the foreign exchange market.