He said unfavourable trade balance and slow growth in the remittances do not affect the BoP due to the surplus in the financial account. He, however, said this source is not dependable as it may fall at any time. “In my view, current account balance is rather a much dependable source,” he added.
Published in The Financial Express on Saturday, 17 October 2015.
Financial account surplus continues to support BoP
Jasim Uddin Haroon
The surplus in the financial account, one of the key components of the balance of payments (BoP), in recent years has emerged as the lifeline for keeping the record of net external trades in a positive domain.
Historically, the financial account had been maintaining a negative trend until 2011-12. Then it turned positive.
Even in the past fiscal year (2014-15) when the current account balance was posted in the negative zone, it recorded $5.2 billion surplus leading to overall surplus of the BoP in that year.
In the two months — July-August period of this fiscal year — it recorded $255 million surplus.
Economists who work on financial matters say this has helped keep the overall BoP in the surplus in 2014-15.
The financial account mainly consists of foreign direct investment, medium and long-term amortisation, portfolio investment and corporate borrowing by the private business organisations.
But economists say ‘carry trade’ has been playing a pivotal role in it although the central bank does not mention it separately.
They argue that ‘carry trade’ might involve loans of corporate bodies and foreign direct investment and other short-term loans.
‘Carry trade’ is a trading strategy that involves borrowing at a low interest rate and investment in an asset that provides a higher rate of return.
A ‘carry trade’ is typically based on borrowing in a low-interest rate currency and converting the borrowed amount into another currency with these proceeds either (a) placed on deposit in the second currency if it offers a higher rate of interest, or (b) deployed into assets — such as stocks, commodities, bonds, or real estate — that are denominated in the second currency.
‘Carry trades’ are strategies that are only appropriate for deep-pocketed entities because of two major risks — the risk of a sharp decline in the price of the invested assets, and the implicit exchange risk when the funding currency differs from the borrower’s domestic currency.
Ahsan H Mansur, executive director with the private think-tank Policy Research Institute of Bangladesh (PRI) said many Bangladeshi expatriates who purchased apartments in the USA, Canada and European countries, mortgage those and with the amount they get they purchase savings certificates back home.
He said this source has been expanding on the back of differences in rates of interest between Bangladesh and the rest of the world.
Dr Zahid Hussain, lead economist at the Dhaka office of the World Bank (WB) does not fully agree with the Dr Ahsan arguing that this needs to be examined.
“The interest and yield regime are supportive in Bangladesh for ‘carry trade’ but I cannot say this is the only reason behind surplus in the financial account,” Dr Hussain said.
He, however, said higher aid disbursement and inflow of credit have contributed to this.
In the past two months ending August 2015, net FDI was recorded at $ 316 million, portfolio at US$19 million, medium and long term loan at $242 million and trade credit at $ 96 million.
Dr Khandker Golam Moazzem, additional director with private think-tank Centre for Policy Dialogue (CPD) said financial account surplus has emerged as new lifeline for keeping the BoP in comfortable zone.
He said unfavourable trade balance and slow growth in the remittances do not affect the BoP due to the surplus in the financial account.
He, however, said this source is not dependable as it may fall at any time.
“In my view, current account balance is rather a much dependable source,” he added.