• Thursday, November 27, 2014

Widening BoP surplus puts central bank in tight spot

Rejaul Karim Byron

Balance of payments surplus rose 6.67 percent year-on-year in the first 11 months of fiscal 2013-14, giving rise to a headache for Bangladesh Bank over keeping the exchange rate stable and curbing inflationary pressures.
The country's external balance stood at $4.97 billion in the surplus at the end of May on the back of a recovery in remittance in recent months, an increase in foreign aid and portfolio investment.
While net foreign direct investment dropped 10 percent during the period, portfolio investment shot up around 302 percent owing to the depressed share prices. Subsequently, the country received $757 million in the 11 months.
Although remittance slipped 2.53 percent year-on-year during the period, it started to pick up towards the tail end. For instance, it increased 10.58 percent in May and 22 percent in June.

The uptick in remittance pushed the foreign currency reserve to a historic high of $21.24 billion on July 15.
Meanwhile, the BOP surplus and the mounting foreign currency reserves mean the central bank has a tricky job in hand over keeping the exchange rate stable and containing inflationary pressures.
To stabilise the exchange rate such that the exporters and remitters are not adversely affected, BB has been purchasing dollars from banks almost every day, with the amount coming to $5.15 billion at the end of the fiscal year.
Conversely, the central bank's buying spree means the banks are flush with local currency, raising their tendency to lend to non-productive sectors and, in turn, increase inflation.
“In this context, the next monetary policy will be a major challenge for us. We have to keep the exchange rate stable and at the same time check inflation,” said a central bank official upon condition of anonymity.
Meanwhile, the other contributing factors to the rise in surplus were the increase in both long-term and short-term foreign loans and decrease in net trade credit and trade deficit during the period.
Trade deficit slid 1.88 percent to $6.18 billion, while net trade credit dropped by $1.29 billion.

Published: 12:01 am Monday, July 21, 2014

Last modified: 10:35 pm Monday, July 21, 2014

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