Critically evaluate strengths and weaknesses of Bangladesh in international financial transactions from balance of payment data of the country. Explain possible impact of declining remittance on the balance of payment situation of Bangladesh.
Balance of payments
Balance of payments is a summary of transactions between domestic and foreign residents for a specific country over a specific period of time. It accounts for transactions by business, individuals and the government.
A balance of payment can be broken down into three components :-
Current account – represents a summary of the flow of funds between one specified countries and all other countries due to purchase goods or services or provision for income on financial assets. The main components of current account are –
- Trade in good or merchandise
- Trade on service- freight, royalty, insurance, consulting service.
- Factor income – investment income, interest and dividend, remittance.
- Transfers- aid, grants and gifts.
Financial account- The financial account is one of the two major components under the financial and capital account. The major components of the financial account are:
– portfolio investment, lodgment investment, share investment, bonds investment, derivatives investment, direct investment, other investment, reserve assets
Capital account- includes the value of financial assets transferred across country borders by people who move to a different country. Such as patents, trademarks, debt, inheritance tax, transfer of financial assets by migrant, sales of physical assets, sales of intangible assets.
Strength and weakness of Bangladesh in international financial transaction from balance of payment –
According to Bangladesh Bank, Remittances in Bangladesh increased to 1285.59 USD Million in March (Tk 100.81 billion) from 1136.26 USD Million in February of 2016. Though there is the on-going political disorder in Middle East, our remittance inflow demonstrated a satisfactory performance. We can increase our remittance in two ways, by exploring new labor markets and increasing the skills of existing manpower working abroad.
Low labor costs
Bangladesh has some of the lowest wage costs in the world, which make it the main location for the production of cheap clothing in Asia, besides China. The generally positive attitude of the government towards foreign investors supports the sector. The garment sector is at times criticized by western countries for the poor labor and safety standards.
Fairly healthy external (liquidity) position
The current account is generally in surplus, FX reserves cover about 5 months of imports and external debt is low at 20% of GDP.
Higher growth of import-
the growth of import is significantly higher than export. As our growth of export is lower than import most of the time our trade balance is negative.
Political instability and polarization
A polarized political spectrum and personal animosity between the leaders of the two main blocks create political instability and hinder effective policy implementation. In the past, the military has stepped in on more than one occasion.
Very weak infrastructure and poor business climate
Economic development is hindered by poor public institutions, low level of infrastructure, regular power outages, annual floods in vast areas of the country and endemic corruption. As a result, poverty is widespread, with more than 40% of the population living on less than USD 1.25 a day.
Poor Foreign direct investment –
The amount of FDI inflow to Bangladesh has not been at the desired level. We have two dimensional problems in case of poor FDI performance. Firstly lack of branding of our investment potential along with a poor Research and development (R&D) wing for FDI. Secondly, we have poor infrastructural facilities, insufficient gas and power supply and an unstable political setting, besides the red-tapism of bureaucracy.
The strongest component of Bangladesh balance of payment is remittance inflow. Bangladesh will be one of the most powerful economies of the world if it can utilize its vast potential manpower. The main weakness of Bangladesh balance of payment is import-dominated. If we can reduce the import dependency or increase the level of export then it will help reduce the pressure on of our Balance of payment. The most important things that we need is better coordination among different policy- making bodies and economic policy instruments for maintenance of a healthy condition or our Bop.
Impact of declining remittance on the balance of payment-
A World Bank analysis said: “Remittance has been a key driver of economic growth and poverty reduction in Bangladesh.” Remittances in Bangladesh increased to 1285.59 USD Million in March from 1136.26 USD Million in February of 2016. Remittances in Bangladesh averaged 1212.08 USD Million from 2012 until 2016
Remittances help Bangladesh in making the balance of payments favorable, or make up the deficit between total export and import. For example, in 2008, Bangladesh exported $13.97 billion worth of goods and services and in turn imported $19.59 billion worth of goods and services. This gave a deficit of $5.62 billion in Bangladesh’s Balance of Payment (BOP).
However, in 2008, the amount of remittances that Bangladesh received from its migrant workers abroad amounted to $9.02 billion and that helped Bangladesh correct its BOP deficit to a surplus of $3.4 billion.
If remittance is declining we cannot overcome Balance of payment deficit. As a result investment for industrial development, improvement of educational facilities and services, and extend and improve its health services is decreased. Also reduced investment in the field of industrial development, modernizes its industries by importing high-tech machineries for export-oriented manufacturing, modernize its agriculture, invest in education, etc. Unemployed rate is increased because these factors create more employment in the country and, on the other, help the country to increase its export of manufactured goods as opposed to agricultural products, raw materials, low quality finished products etc.