Bus 510: International Business

BRAC UNIVERSITY

Assignment Topic

Balance of Trade and Balance of Payment with

special reference of Bangladesh

Submitted to

Dr. Shah Ahsan Habib

Prepared by:

Student Name: Marshal Richard

Student ID# 10364057

Program: MBA

Course: BUS 510: International Business

Date of Submission: 22 April 2012

Bus 510: International Business

Introduction

Bangladesh is one of the fastest growing economic countries among the LDC’s country.

According to the International Monetary Fund, Bangladesh ranked as the 42rd largest

economy in the world in 2011 in PPP terms and 57th largest in nominal terms, among the

Next Eleven or N-11 of Goldman Sachs and D-8 economies, with a gross domestic product of

US$269.3 billion in PPP terms and US$104.9 billion in nominal terms. The economy has

grown at the rate of 6-7% per annum over the past few years. More than half of the GDP is

generated by the service sector; while nearly half of Bangladeshis are employed in the

agriculture sector. Other goods produced are textiles, jute, fish, vegetables, fruit, leather and

leath. An easy way to understand any country's economic scenario is through its Balance of

Trade (BOT) and Balance of Payment (BOP) figures. Balance of Trade shows the difference

between the total amount of incoming and outgoing currencies through import and export.

Balance of Payment (BOP) is a summary of economic activities between the residents of a

country and the rest of the world during a given period, usually one year. The main purpose

of keeping these records is to inform government authorities about the overall international

economic position of the country in order to assist them in arriving at decisions on monetary

and fiscal policy, on the one hand, and trade and payments policy on the other. Balance of

payments statistics are therefore helpful to government authorities charged with maintaining

macroeconomic stability.

BOT is a part of BOP, but it is significant for the economy because import and export is one

of the most important economic activities of a nation. Moreover the balance of trade shows

whether the external sector of a particular country is doing well or not. Along with BOT,

BOP depicts the overall economic balance of a nation and the health of foreign reserve of that

nation.

Objectives of the Assignment:

1. To discuss the theoretical aspect of Balance of Payment

2. To discuss balance of trade(BOT) and balance of payments(BOP)

Theoretical aspect of BOP:

BOP is the summary statement of all economic transitions of a nation with the rest of world.

These transactions include payments for the country's exports and imports of goods, services,

financial capital, and financial transfers. The Bop accounts summarize international

transactions for a specific period, usually a year, and are prepared in a single currency,

typically the domestic currency for the country concerned. Each transaction is recorded in

accordance with the principles of double-entry bookkeeping, meaning that the amount

involved is entered on each of the two sides of the balance-of-payments accounts.

Consequently, the sums of the two sides of the complete balance-of-payments

accounts should always be the same, and in this sense the balance of payments always

balances. Conceptually all economic transactions are bilateral in nature and thus these

Bus 510: International Business

transactions must balance in long run. In Bangladesh central bank (Bangladesh Bank)

maintains Bop in Bangladesh empowered by Foreign Exchange Regulation Act 1947.

Three accounts in BOP-

1. Current Accounts

2. Capital Accounts

3. Official Reserve Accounts.

In the process of main training BOP official reserve account is huge to adjust current and

capital account. Even after that if BOP not equal to zero, we make it zero by offering a

separate entry known as error and omission or we say statistical discrepancy.

If official reserve bears plus (+) sign, it means BOP deficit; that is foreign currency

inflows is lower than foreign currency outflows and reserve decreases that amount.

If official reserve amount bears minus (-) sign; it means BOP surplus. That is foreign

currency outflows and foreign exchange reserve increases by that amount.

In connection of BOP:

BOT = Balance of export and import of goods.

Current account balance = Balance of export and import goods and service. All Unilateral

transactions.

Capital account = Balance of FDI, Portfolio investment and external debt.

Overall balance = Balance of all the item of current and capital.

Current Accounts

Capital Accounts

Official Accounts

I. Export of goods

II. Import Of goods

III. Export of services

IV. Import of services

V. Unilateral transaction( Profit,

Dividend, Interest)

*Trade Flows.

I. Foreign direct

investment(FDI)

II. Portfolio

Investments(Cross

border selling

securities)

III. External Debt

*Investments and financial

flows.

I. Foreign exchange rate

II. Special drawing

Rights(SDR) reserve

III. Gold reserve

Bus 510: International Business

Calculation Sample:

Export of goods & services ****

Import of goods & services (****)

BOT *****

Profit inflows ****

Profit outflows (****)

Current a/c balance ****

FDI inflows *****

FDI outflows (*****)

Portfolio investment abroad (****)

Portfolio investment inflows ****

External debt abroad (****)

Capital a/c balance ****

Overall Balance:

Current a/c balance ****

Capital a/c balance *****

Current balance *****

Statistical Discrepancy *****

OR *****

****

Balance of Trade of Bangladesh:

Foreign trade plays an important role in achieving rapid economic development of a country.

Bangladesh as a developing country, foreign trade can be considered of paramount

importance. However, trade balance of this country has never been in a favorable position.

Each year Bangladesh has to spend a huge amount of foreign currency for importing

consumer goods and materials, which is not a positive sign for our country. Bangladesh also

spends much more for importing industrial raw materials, but it is a positive signal for our

economy as it shows enhanced production of the economy. The country’s requirement of

petroleum products is entirely met by import.

Bangladesh had consecutive deficit balance of trade in the last 6 years and the gap is

increasing every year. Bangladesh imports mostly petroleum product and oil, machinery and

parts, soya bean and palm oil, raw cotton, iron and steel and wheat. Bangladesh main imports

partners are China (17% of total), India, Indonesia, Singapore and Japan.

Bus 510: International Business

Table 1: Cost of export, import and trade balance (In million USD)

Fiscal Year

Total Export

Total Import

Trade Balance)

2004-05 8573 11870 -3297

2005-06 10412 13301 -2889

2006-07 12053 15511 -3458

2007-08 14151 19481 -5330

2008-09 15581 20291 -4710

2009-10 16233 21388 -5155

2010-11 23008 30336 -7328

Source: Bangladesh Bank

Chart: Balance of trade in Bangladesh

Table 2: Export- Import ratio in term of Trade balance

On the above table we see that, last few fiscal years import ratio always higher then export

ratio; i.e. import is higher than export.

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

Total Export

Total Import

Trade Balance)

Fiscal Year Trade

Balance(million USD)

Export-Import Ratio

2004-05 -3297 1:1.38

2005-06 -2889 1:1.28

2006-07 -3458 1:1.29

2007-08 -5330 1:1.38

2008-09 -4710 1:1.30

2009-10 -5155 1:1.32

2010-11 -7328 1:1.32

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Export of Bangladesh

Bangladesh exports were worth 20313.8 Million USD in 2011. Bangladesh exports mainly

readymade garments including knit wear and hosiery (75% of exports revenue). Others

include: Shrimps, jute goods (including Carpet), leather goods and tea.

Bangladesh Exports: Commodities

Here are the major export commodities of Bangladesh:

Garments

Frozen fish and seafood

Jute and jute goods

Leather

Tea

Bangladesh Trade: Export Partners

The following were Bangladesh’s export partners as of 2011:

United States: 24%

Germany: 15.3%

United Kingdom: 10%

France: 7.4%

The Netherlands: 5.5%

Italy: 4.5%

Spain: 4.2%

Table 3: Total Export and Growth rate

Year Export (In Million

USD) Growth Rate

2004-05 8573 13.99%

2005-06 10412 21.45%

2006-07 12053 15.76%

2007-08 14151 17.41%

2008-09 15581 10.11%

2009-10 16233 4.18%

2010-11 23008 41.74%

Source: Statistics Department, Bangladesh Bank.

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Sector wise contribution in the export of Bangladesh:

Table 4: Export receipts from major commodities during the last three fiscal years.

Commodity group 2010-2011 2009-2010 2008-2009

Amount % Amount % Amount %

Readymade garments 96440 77.1 67247 77.1 67257 79.7

Jute manufactures 4777 3.8 3655 4.2 2391 2.8

Fish, shrimps and

prawns

4149 3.3 3211 3.7 3123 3.7

Leather and leather

manufactures

3367 2.7 2430 2.8 1962 2.3

Furnace oil, naphtha

and bitumen

707 0.6 993 1.1 661 0.8

Raw jute 1977 1.6 1330 1.5 931 1.1

Handicraft 33 0.0 114 0.1 61 0.1

Tea 19 0.0 37 0.0 82 0.1

Fertilizer 181 0.1 237 0.3 711 0.8

Others 13356 10.8 8016 9.2 7245 8.6

Source: Statistics Department, Bangladesh Bank.

Import of Bangladesh:

Table: Importable commodities in 2011

Major Items Amount (Billion

USD) % of Total Import

Food Grains 1911 6%

Edible Oil 1067 3%

Sugar 654 2%

Crude Petroleum 923 3%

POL 3186 9%

Chemical 1254 4%

Fertilizer 1241 4%

Plastics And Rubber Articles Thereof 1302 4%

Raw cotton 2689 8%

Textile And articles Thereof 2680 8%

Iron, Steel And Other Base metals 2004 6%

Capital Machinery 2325 7%

Others (including imports for EPZ) 12422 37%

Total 33658 100%

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Table: Import payments of Bangladesh with top twenty countries in 2011

Major Countries

Taka in Crore

In million US $

% of Total

China, P.R. 42079.60 5905.70 19.70

India 32483.20 4560.00 15.20

Malaysia 12427.60 1738.80 5.80

Japan 9332.30 1306.60 4.40

Singapore 8586.10 1208.30 4.00

Korea, Republic of 7995.10 1118.30 3.70

Thailand 7353.20 1028.20 3.40

Indonesia 5999.60 840.70 2.80

Kuwait 5606.50 787.70 2.60

Hong Kong 5398.50 760.80 2.50

Taiwan 5232.50 730.50 2.40

Australia 5190.40 731.70 2.40

Germany 4933.00 691.00 2.30

Brazil 4848.20 677.70 2.30

U.S.A 4840.00 676.70 2.30

Pakistan 4783.50 669.30 2.20

Uzbekistan 4417.30 621.90 2.10

Canada 4096.30 573.10 1.90

Vietnam 3284.70 459.20 1.50

U.K. 2372.20 333.10 1.10

Other Country 32590.10 4573.00 15.40

Total 213849.9 29992.3 100

Source: Statistics Department, Bangladesh Bank.

Balance of Payments of Bangladesh:

Table: Balance of Payments of Bangladesh in the past six years:

(In Million $)

Fiscal

Year

Current

Account

Balance

Capital

Account

Balance

Financial

Account

Balance

Errors and

omissions

Overall Balance

of Payment

2004-05 -557 163 784 -323 67

2005-06 824 375 -141 -720 338

2006-07 936 490 762 -695 1493

2007-08 702 576 -457 -490 331

2008-09 2416 451 -825 16 2058

2009-10 3724 512 -651 -720 2865

2010-11 995 600 -1584 -646 -635

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Balance of payment of Bangladesh had been surplus for the past five years but in 2010-11 the

BOP account showed deficit balance which is due to huge import pressure and relatively low

inflow of foreign remittance as well as frequent depreciation of Taka.

Performance of remittance flows:

Remittances from Bangladeshis working overseas, mainly in the Middle East are the major

source of foreign exchange earnings. Bangladesh has emerged as a major exporter of

manpower, targeting particularly the labor-intensive sectors of the various developed and

developing economies. Over the past 5 years, a record number of Bangladeshi workers, 1.6

million 2009, have left the country in search of jobs abroad. Over the years, the contribution

of remittances to Bangladesh’s economy in terms of GDP has increased significantly (from

4.0% in 2000/01 to 10.8% in 2008/09). If remittances through informal channels were taken

into account, for which no official data are available, this would be even higher. Setting aside

the role of remittances in terms of beefing up Bangladesh’s forex reserves and enhancing its

ability to import, remittances sent from overseas also play a crucial role in strengthening the

social security of the family members of the remitters, who often come from low-income

households.

-2000

-1000

0

1000

2000

3000

4000

Balance of Payment

Current Account Balance

Capital Account Balance

Financial Account Balance

Errors and omissions

Overall Balance of Payment

Year Foreign Remittance

Inflow (in million USD)

Growth Rate

2004-05 3848 14%

2005-06 4802 25%

2006-07 5979 25%

2007-08 7915 32%

2008-09 9689 22%

2009-10 10987 13%

20010-11 11650 6%

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0%5%

10%15%20%25%30%35%

Remittance Growth Rate

Remittance Growth Rate

In the recent years, the growth of foreign remittance has become lower due to global

economic recession which results in BOP deficit balance in the year 2010-11.

Performance of Foreign Direct Investment:

BB is encouraging our private firms to finance from foreign investments. Some of the firms

such us Apex and Pran already have green signal from BB. In 2010- 2011, net Foreign Direct

Investment (FDI) stood at $768 million. Let us have a closer look at the countries providing

us FDI. According to BB, FDI inflows for the period January-June, 2011 from major

countries were: Egypt ($116.41 million) , U K ($ 77.97 million), UAE ($72.27 million),

Switzerland ($61.11 million), Singapore ($28.77 million), USA ($23.78 million), South

Korea ($23.50 million), Hong Kong (US$ 18.69 million),

Year FDI (in million

USD)

Growth

Rate

2004-05 800 190%

2005-06 743 -7%

2006-07 793 7%

2007-08 748 -6%

2008-09 961 28%

2009-10 913 -5%

20010-11 768 -16%

In 2011 Bangladesh, sector-wise a total of US$ 359.14 million came to the

telecommunication sector, US$ 145.19 million to Textile & Wearing, 163.07 million to

Banking, US$ 92.06 million to Power, Gas & Petroleum, US$ 12.77 million to Food

Products, US$ 13.63 million to Agriculture & Fishing, US$ 126.78 million to the other

sectors

Bus 510: International Business

Conclusion:

The Balance of Trade and Balance of Payment of Bangladesh indicates economic scenario of

Bangladesh. The balance of trade has been deficit for the past many years and the gap is

increasing considerably. Export growth has been satisfactory though the major portion of

export income comes from RMG sector but major portion of raw materials for RMG sector

are imported goods; so there is no positive change in BOP. To increase export growth, the

export oriented industries should be diversified and variety should also come. Balance of

payment had been surplus for the past 5 years, but it has been deficit in the year 2011, due to

the low rate of foreign remittance inflow, low FDI and foreign aids. The overall scenario of

the economy reflects the impact of global recession, huge import payment pressure and

scarcity of foreign currency reserve through the Balance of trade and Balance of payment of

Bangladesh.

= 0 =

Bus 510: International Business

References:

Bangladesh Bank’s Website:

http://www.bangladesh-bank.org/econdata/bop.php?txtPeriod=1

http://www.bangladesh-bank.org/econdata/bop/bop_bb.php

http://www.bangladesh-bank.org/econdata/bop/imp_pay_marchandise.php

http://www.bangladesh-bank.org/econdata/import/imp_pay_overall.php

http://www.bangladeshbank.org/econdata/import/imp_pay_majorcommodity_yearly.p

hp

http://www.bangladesh-bank.org/econdata/import/imp_pay_country_commodity.php

http://www.bangladesh-bank.org/econdata/import/imp_pay_country_yearly.php

http://www.bangladesh-bank.org/econdata/export/exp_rcpt_overall.php

http://www.bangladesh-bank.org/econdata/export/exp_rcpt_comodity.php

http://www.bangladesh-bank.org/econdata/export/exp_rcpt_country_commodity.php

Bangladesh board of investment’s website:

http://boi.gov.bd/about-bangladesh/investment-and-trade/foreign-direct-investment-

in-bangladesh

http://boi.gov.bd/component/content/article/433

Bangladesh Economic Review 2011

Class Lectures of Dr. Shah Ahsan Habib.