Bangladesh’s economy showcases resilience amidst challenges, with significant shifts including increased remittances and export earnings, alongside reduced import costs and trade deficits
Bangladesh’s economy is experiencing significant shifts, marked by consecutive growth in remittances and rising export earnings, alongside a decrease in import costs, leading to a reduced trade deficit. However, the import of capital machinery has declined due to restrictions imposed by the Bangladesh Bank. Despite an account surplus of $1.92 billion in December, the foreign exchange reserve has dropped below $20 billion after paying a $1.29 billion import bill with the Asian Clearing Union.
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The introduction of a money-dollar swap facility by Bangladesh Bank has seen a $1 billion increase in reserves within 15 days, benefiting commercial banks. Although the total reserve is increasing, the real reserve remains stagnant as these funds are temporary and must be returned. Banks are taking advantage of the swap facility, investing in government treasury bills or lending out funds for higher returns.
The steady increase in reserves is attributed to ongoing currency swapping with banks, helping alleviate the dollar crisis to some extent. Export earnings in February surged by 12%, reaching $5.19 billion, while imports decreased by 19.80% in the first six months of the fiscal year, leading to a reduced trade deficit of $4.59 billion compared to the previous year’s $12.31 billion.
Bangladesh’s Remittances Inflow Scenario
The following discusses the surges of Bangladesh’s remittance inflows;
According to a Bangladesh Bank report, In February 2023, remittances stood at 2166.04 million US dollars.
Resilience Through Remittance Inflows
Remittances serve as a vital source of foreign exchange revenue for Bangladesh, ranking second only to the readymade garment (RMG) sector. During the initial eight months of the fiscal year 2023-24, remittances totaled 2166.04 million US dollars, marking almost a 5.5 percent increase compared to the previous year and constituting approximately 10 percent of the gross domestic product (GDP). These inflows of remittances play a crucial role in mitigating the country’s current account deficit, bolstering its foreign exchange reserves, and reinforcing its balance of payments.
Furthermore, remittances exert a significant influence on the well-being of numerous households in Bangladesh, particularly those residing in impoverished rural areas. They contribute to poverty alleviation, enhance nutritional intake, improve healthcare and educational outcomes, and foster higher levels of savings and investment. Research indicates that remittances can lower the poverty headcount ratio by 1.5 percentage points, elevate per capita income by 2.6 percent, and elevate the human development index by 0.06 points. Moreover, remittances enable households to weather unforeseen challenges such as natural disasters, health crises, and income fluctuations while simultaneously building resilience for future adversities.
What Causes Remittance Earnings to Increase?
Various elements have contributed to the upsurge in remittance earnings for Bangladesh in recent times. Among these, the escalation in both the quantity and earnings of expatriate laborers, predominantly engaged across the Middle East, Southeast Asia, and Europe, stands out. According to data from the Bureau of Manpower, Employment, and Training, a remarkable 13.05 lakh workers ventured abroad for employment opportunities in 2023, marking a 15 percent increase compared to the previous year. Despite the challenges posed by the COVID-19 pandemic and the global economic downturn, the demand for expatriate workers, particularly in the construction, manufacturing, and service domains, has remained robust.
Another contributing factor is the enhancement in the collection and reporting mechanisms pertaining to remittance flows, indicative of a heightened understanding and acknowledgment of the developmental prospects associated with remittances by both governmental and central banking institutions. The Bangladesh Bank has initiated several measures aimed at incentivizing remittance inflows through formal channels, including the provision of a 2 percent cash bonus, expansion of authorized dealer and money transfer operator networks, and facilitation of online and mobile banking services. These endeavors have effectively diminished transaction costs, bolstered convenience, and bolstered the security and transparency of remittance transactions.
A third influential factor is the strengthening of the Russian ruble vis-à-vis the US dollar, leading to an augmentation in the value of remittances from Russia to Bangladesh when denominated in dollar terms. Russia stands as a significant source of remittances for Bangladesh, contributing approximately 12 percent of the total inflows in 2023. The ruble’s appreciation can be attributed to the rebound in oil prices and the alleviation of geopolitical tensions within the region.
Current Reserve Scenario Of Bangladesh
After settling the import bill of $1.29 billion through the Asian Clearing Union (ACU), Bangladesh’s foreign exchange reserve dipped below $20 billion. The central bank reported a decrease to $19.99 billion after March 7, down from $21.15 billion on March 6. Meanwhile, the implementation of the money-dollar swap facility has bolstered Bangladesh Bank’s reserves by $1 billion in just 15 days. Despite the overall rise in the central bank’s reserve, the net reserve remains unchanged as these funds are temporary and must be repaid once the swap expires. Reports indicate that banks are taking advantage of the swap facility, paying a nominal 2.5% fee to access funds by depositing dollars. These funds can then be invested in government treasury bills yielding up to 11.5% interest or lent out at 13.11%. Consequently, commercial banks stand to profit from these low-cost funds.
Bankers noted that Bangladesh Bank initiated currency swaps with commercial banks on February 20, a move that has been instrumental in boosting reserves. The ongoing currency swaps with banks have contributed to the consistent increase in gross reserves, which stood at $20.85 billion on March 4.
In February Exports surged 12%
Meanwhile, exports in February amounted to approximately $5.19 billion, marking a 12% increase compared to February of the previous year. Export earnings in February last year saw a rise of $560 million compared to the same month the year before. However, January saw the highest export earnings in the country’s history, reaching $5.76 billion.
According to the Export Promotion Bureau (EPB), February’s exports witnessed a growth rate of 12.04% compared to the corresponding month of the previous year, marking the highest growth rate recorded in any month of the current fiscal year.
Data for the July-December period of the fiscal year 2023-24 indicates a 19.80% decrease in overall imports, amounting to $3.05 billion compared to the same period in the previous financial year. Meanwhile, exports increased by 0.64% to $2.59 billion, resulting in a reduced trade deficit of $4.59 billion. Last year, the trade deficit for the same period stood at $12.31 billion.
In conclusion, Bangladesh’s economy showcases resilience amidst challenges, with significant shifts including increased remittances and export earnings, alongside reduced import costs and trade deficits. Despite constraints like declining capital machinery imports, strategic measures by the Bangladesh Bank, and export growth, bolster the country’s foreign exchange reserves and economic stability.
