Balance of Payments is a record of official estimates of all transactions between two countries during a year. It shows the sum total of all external transactions arising from export and import of goods and services and transfers, such as remittances and capital inflows and outflows (transactions on capital account). Bangladesh has experienced deficits in its balance of trade since its independence and the problem became chronic because of the country's heavy dependence on imports and at the same time, its requirement for running development programmes. The sharp increase in oil prices during the early 1970s enhanced the import payments for crude oil, petroleum products and fertilisers.

Due to crop failures caused by devastating floods that occurred off and on during the last three decades, Bangladesh had to import large amount of foodgrain, which resulted in further deterioration of the balance of payments situation of the country. In addition, the terms of trade consistently deteriorated due to rising import prices and instability in export earnings, causing continuous deficits in trade accounts of balance of payments. Despite adoption of various export promotion measures and rising trend in wage earners remittances, the disequilibrium in the balance of payments position persisted. The increased liberalisation of the external sector during the 1990s might have worked as reason for widening the gap in the trade balance of the country.

The bangladesh bank prepares balance of payments positions (BOP) of the country following the IMF Balance of Payments Manual. The data are derived from various sources such as foreign exchange transaction records of authorised dealers, documents of the Ministry of Food on import of food grain by the government, documents of Ministry of Finance on imports financed through foreign loans and grants, and custom records for the preparation of BOP. The deficit in the current account of balance of payment in 1972-73 was $370 million. It rose to a record level at $1,003 million in 1974-75 or 7.08% of GDP.

Bangladesh received a substantial amount of assistance under various facilities of the International Monetary Fund to correct her balance of payment disequilibrium position. The amount drawn by Bangladesh from IMF under a stand-by arrangement in June 1974 and July 1975 stood at SDR 93.75 million. Bangladesh received SDR 62.50 million under Compensatory Financing Facility for export shortfall in December 1972. This stand-by programme was attributed to declines in the current account deficit of $881 million or 12.33% of the GDP in 1975-76, to $439 million or 6.42% of the GDP in 1976-77.

Devaluation of Bangladesh currency in terms of US dollar by 61% in May 1975 and further, by 10% and 11% within June to December 1975, and January to December, 1976, had a positive impact on the balance of payments situation of the country. Bangladesh also undertook other internal corrective measures during that period like adoption of restrictive monetary and fiscal policies. These were reflected in the raising of bank rate from 5% to 8%, reduction of subsidies, and upward adjustment of prices of some public utilities. Along with these measures, policies for export promotion and import substitution were undertaken by the government to correct imbalances in payments situation.

The current account deficit of BOP of Bangladesh reached $1,436 million or 11.23% of the GDP in 1979-80, but gradually declined to $1,055 million or 6.85% of the GDP in 1985-86, and further to $981 million, or 4.19% of the GDP in 1990-91. Bangladesh's drawings from the IMF continued to increase. These drawings during the period from 1976 to 1982 amounted to SDR 689.39 million under various facilities viz., Compensatory Financing Facilities, Oil Facilities, Trust Fund Facilities, Stand-by Arrangements and Extended Fund Facilities. The adjustment policies that Bangladesh pursued under various facilities of the IMF brought about some positive changes in the economy. The aggregate demand management policies initiated by IMF through streamlining fiscal and monetary systems proved largely successful. The exchange rate and interest rate policies of Bangladesh brought about positive results. The Fund's arrangements for high conditional loans also worked as a 'seal of approval' for enhanced foreign assistance to Bangladesh. Bangladesh entered into Structural Adjustment Facility with IMF in February 1987 and into Enhanced Structural Adjustment Facility in August 1990 to improve her balance of payments position. Bangladesh also received emergency assistance from IMF in November 1998.

The current account deficit during the 1990s did not pose a serious problem for Bangladesh. The deficit in the current account declined from $981 million, or 4.19% of the GDP in 1990-91, to $664 million, or 2.28% of the GDP in 1994-95, but rose to $1,291 million, or 4.05% of the GDP in 1995-96. Thereafter, this deficit continued to decline till 1999-2000. Notable developments that have taken place in Bangladesh during the 1990s include a continued trade liberalisation policy and implementation of the Financial Sector Reforms Programme. A liberal Import Policy Order for 1995-97 was put into effect to remove quantitative restrictions on imports. A fairly liberal five-yearly trade policy became effective from July 1998. Average nominal tariff rate declined from 57% in 1991-92 to 20% in 1997-98 and further, to 16% in 1999-2000. The highest decline in tariff rate was from 90% in 1991-92 to 37.5% in 2000-2001.

Despite liberalisation of import trade of the country, improvements in current account deficit continued during the late 1990s due mainly to increase in export receipts, decline in deficits in services account, and increase in wage earner's remittances. The net position under services' account became positive in 1996-97 and continued to be so till 1999-2000. The wage earners remittances recorded increase from $555 million in 1985-86 to $764 million in 1990-91, to $1,217 million in 1995-96, and further to $1,947 million in 1999-2000.

Table Balance of Payments of Bangladesh (in million US dollar)

Source Bangladesh Bank

[Syed Ahmed Khan and A. Samad Sarker]