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Current account deficit could snowball into financial sector

The persistent current account deficit may now put strain on key macroeconomic indicators and experts say it could snowball into the financial arena.

The current account deficit soared to US$1.7 billion in the second quarter of the current fiscal, up by $400 million from level in the first quarter, according to central bank statistics.

The Bangladesh Bank (BB), in its latest quarterly publication, said this deficit is weakening the local currency against major currencies. The current account deficit has worsened due to the higher trade gap between the country and rest of the world.

Local currency had depreciated by 1.43 per cent year-on-year in Q2 to December as a result of the continued deficit, the central bank report said.

It said, “The BB continued its intervention in the foreign exchange market by net selling of foreign currency to avoid excessive volatility during the quarter under review.”

Given the recent movement in Taka against US Dollar, the shifts in major currencies’ movements and the inflation in the trading partner countries, NEER (nominal exchange rate) and REER (real effective exchange rate) appreciated by 3.5 and 6.4 per cent (y/y) respectively in Q2FY19.

Nominal exchange rate of the most peer countries appreciated, except Pakistan and Sri Lanka, the BB report said.

Meanwhile, foreign exchange reserves are dwindling due to market intervention by the central bank to handle the exchange rate.

The report said foreign exchange reserves slightly edged down to US$32.2 billion at the end of Q2.

Its coverage of import still remained at an adequate level of five months.

Economists familiar with the matter said the observation made by the central bank is true and this is a matter of concern.

They said there is no alternative but to raise the export volumes to combat the situation.

Executive director of the Policy Research Institute of Bangladesh Dr Ahsan H Mansur said for the full year, the current account deficit is expected to reach $8.0 billion at the end of June.

“To my mind, only boosting the export volume is the remedy.”

And for this reason there is need for further adjustment of the local currency with the dollar.

He said Bangladesh’s rate of inflation remained high against its peer nations, leading to the rise in the real effective exchange rate (REER).

Bangladesh should take the REER seriously as it is eroding the competiveness of the exportable products fast.

He suggested Bangladesh should follow some medium term strategy on how to increase competitiveness of the export sector.

“The lead time remained high here and many indicators of the port efficiency also remained poor for long,” he said.

Dr Mustafa K. Mujeri, executive director at the Institute for Inclusive Finance and Development (InM) said there is no doubt that the current account deficit is adversely impacting the foreign currency reserves.

“If the current account remained surplus, the foreign exchange reserve should have been around $35 billion,” he said.

He said the deficit may impact other macro-economic variables like the rate of inflation, especially the core inflation.

If it goes beyond control, then total macroeconomic scenario will be in an “imbalanced” situation.

Mr Mujeri said: “If we fail to manage the deficit immediately ,there are many more challenges coming.”

Dr Mujeri, who had served as the chief economist of the central bank, said that the deficit means the country is consuming higher than its capacity.

And the import is being financed through external borrowing.

He said, “If we fail to repay the money, its impact will snowball into the entire financial domain.”

jasimharoon@yahoo.com

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