Balance of payments problems in Bangladesh

Bangladesh’s balance of payments current account is a casualty of rising world energy prices. The country’s import expenditure on oil and gas has increased dramatically as the price of both commodities has increased significantly in the last 12 months. According to the Bangladesh Central Bank, the country’s current account deficit increased to $10.06 billion in the last 6 months which is nearly 3 percent of its GDP.

Bangladesh is a net importer of oil and gas which means it imports a greater value of oil and gas than it exports. The demand for oil and gas is price inelastic because energy is a necessity good and there are only limited substitutes available. This means an increase in the price of imported oil and gas will lead to an increase in import expenditure because there is a less than proportionate fall in the quantity demanded for oil and gas when their price rises.

The conflict in Ukraine has made Bangladesh’s trading situation worse because it has accelerated the increase in the oil and gas price. The depreciation in the value of the Bangladesh currency the Taka has added to the country’s trading problem because the fall in the value of the Taka makes the price of imported oil and gas even more expensive. The depreciation of the Taka will, however, make Bangladesh’s major exports (clothing and footwear) more competitive in global markets.

A current account deficit is a problem for Bangladesh because is it needs to be financed by inflows of foreign exchange on the financial account or by the central bank funding the deficit using gold and foreign exchange reserves. The central bank is confident the $45 billion reserves if currently holds should be enough to deal with the current deficit but there are concerns about the country’s reserves if there were further increases in oil and gas prices.

One positive note on Bangladesh’s current deficit situation is the amount of import expenditure there is on machinery and equipment that can be used to build up the country’s productive capacity which could generate more exports in the future. For example, the main suppliers of machinery and equipment for Bangladesh's textile industry are China and India. This imported capital will be used to produce clothing that Bangladesh will export.

Points for discussion with a class

1. Why is the demand for oil and gas relatively price inelastic?

2. When the price of oil and gas rises why does expenditure on oil and gas increase in Bangladesh?

3. What are the components of the balance of payments current account?

4. Why has the rise in the price of oil and gas increased the deficit in Bangladesh’s trade balance?