Bangladesh Grapples with Widening Financial Account Deficit Amid Forex Pressure

Bangladesh faces mounting challenges as its financial account deficit continues to widen, signaling persistent pressure on the foreign exchange regime in the coming days.

Data from the Bangladesh Bank reveals that during the July to February period of this fiscal year, the financial account of the balance of payments (BoP) recorded a deficit of $8.36 billion, a significant increase from $2.32 billion in the same period last fiscal year.

The financial account encompasses various components such as foreign direct investment, loans, trade credit, aid flows, portfolio investments, and reserve assets. Industry insiders attribute the growing deficit to reduced short-term foreign borrowing by the private sector and declining balances in nostro accounts maintained by commercial banks with foreign banks.

A major contributor to the widening deficit is the ‘other investment (net)’ segment of the BoP, which stood at a staggering negative $9.40 billion during the July to February period, compared to $3.37 billion in the same period last year.

Despite a slight increase in the gross flow of foreign direct investment, the net portfolio investment remained negative. Experts express concerns over stagnant investment and its potential impact on employment.

While the current account deficit narrowed in FY23 and showed a surplus in the first seven months of FY24 due to import suppression measures, the persistent financial account deficit is attributed to increasing outflows of trade credit and short-term loans.

Although the trade deficit has narrowed, mainly due to austerity measures aimed at conserving forex reserves, concerns remain over the depletion of reserves by 25% over the last year.

While export growth has been modest, import payments have significantly decreased, reflecting the government and central bank’s efforts to address forex reserve depletion.

Despite these measures, the overall balance remains in negative territory, underlining the need for sustained efforts to address the widening financial account deficit and stabilize the foreign exchange regime in Bangladesh.