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Current account falls into deficit

Rising imports widen trade gap

Sohel Parvez
The current account balance entered a negative terrain for the first time in the current fiscal year as exports receipts and remittances could not fill in the gap in trade deficit.
Soaring import bills, mainly for oil, widened the trade deficit.
The shortfall in the current account balance was recorded at $14 million in the July-November period this fiscal year against a surplus of $762 million in the same period the previous year.
Meanwhile, the country's trade deficit soared to $3,645 million in July-November of the current fiscal year from $2,754 million in the same period a year ago, according to Bangladesh Bank data.
Analysts said the increased payment pressure has widened the possibility of further depreciation of the taka against the dollar, making difficult for policymakers to curb inflation which crossed 10 percent in December.
The taka lost 11 percent in value against the greenback since July this fiscal year. An importer, who could buy a dollar at Tk 70 a year ago, now spendsTk82-Tk 83.
The fall of the taka will make imports of capital machinery and raw materials costlier and thus discourage domestic investments,
analysts warned.
The option for the policymakers is to ease the pressure by attracting higher foreign investment and expediting the process of getting the disbursement of funds from the $13 billion aids committed by donors.
"The government should focus on increasing foreign exchange reserves," said former Bangladesh Bank governor Salehuddin Ahmed.
"The policymakers should immediately take steps to discourage imports of non-essential and luxury items to ease the pressure," he said, "Efforts should be made to attract foreign investments and improve project implementation capacities to ensure faster release of aids."
Fund disbursement by donors has been slow because of the poor
project implementation capacity of the government.
"Nowit's time to take bold decisions and implement those."
The other options to ease the pressure include increasing exports receipts and remittances.
In the July-December period, the first six months of the current fiscal year, exports grew 14.72 percent to $11.78 billion compared with the same period of the previous fiscal year, according to Export Promotion Bureau.
However, export earnings in July-December were 4.98 percent short of the periodical target.
The former central banker said the government, involving all related agencies, will have to take coordinated decisions and action to get increased foreign resources.
With a thin flow of foreign currencies, the government will either
live with the challenge of import-induced inflation by allowing depreciation of the taka or sell from the reserves to boost the value of the local currency.
Both of the choices have consequences. A reduction in reserves due to the sale of the dollar may help curb depreciation of the local currency and contain inflation.
But the sale from the reserves will erode the country's capacity to maintain a reserve equivalent to at least three months' import bills.
Foreign exchange reserve, which was $10.91 billion at the end of fiscal 2010-11, slipped below $9 billion this week.
The current reserve is equivalent to less than three months' import bills, according to the analysts.
"The central bank should not sell from the reserve, "said Ahmed.
Zaid Bakht, research director of Bangladesh Institute of Development Studies (BIDS), said the increased cost of the dollar due to the depreciation of the taka may discourage imports of non-essential goods.
"But the prices of import-based essentials will rise and fuel inflation. The depreciation may also lead to a reduction in imports of capital machinery and raw materials, and thus affect production and growth of the economy," he said.
sohel@thedailystar.net