Bangladesh’s trade trajectories are frequently praised because of the phenomenal growth in export profits from the ready-made garments (RMG) sector. In fiscal year 2021-22, export revenues hit a record high of US$52 billion. During the same fiscal, exports of woven garments increased by 33.82% to $19.40 billion, while knitwear garment exports increased by 36.88% year over year to $23.21 billion.
However, export revenues for chemical products, agricultural products, and frozen and live fish decreased by 30% , 14% and 7.2% respectively in the first quarter of FY 2022-23.
Most imports comprise expensive capital goods, including machinery, chemicals, and petroleum-based intermediate goods. The imbalance between imports and exports complicates the trade balance, which finally affects a significant component of the country’s balance of payments (BOP). As a result, between 2016 and 2021, Bangladesh’s trade balance deteriorated from 3.49% of gross domestic product to 6.40% of GDP.
Bangladesh’s balance of trade (in US$ billion and percentage of GDP) in 2010–2021. Source: Macrotrends, data from the world bank. Bangladesh still exports low-value manufactured goods, and the export basket has not changed significantly since 2000, unlike South Korea, China, and some of its Southeast Asian trade rivals, which were able to transition from exporting clothing and footwear to more complex commodities.
Knitwear, woven clothing, cotton T-shirts, and jute items, which make up the major chunk of Bangladesh’s exports, are now vulnerable to Vietnamese competition because of scale economies such as improved transportation infrastructure and electricity availability in the latter. In 2022, Bangladesh’s current-account deficit increased by 30%, from $4.57 billion to $18.69 billion.
Twin deficits
In light of this, it’s critical to remember that Bangladesh, like Sri Lanka, is a classic case of the“twin deficits hypothesis,” which highlights a causal relationship between the economy’s fiscal balance and current-account balance.
An empirical study conducted in 2021 reveals a one-way causality from the budget deficit to the trade deficit and, ultimately, the long-term current-account deficit. Therefore, maintaining a manageable budget deficit is essential to keeping Bangladesh’s current-account deficit and BOP stable.
Developing nations with consumption-driven economies, like Bangladesh, that have significant levels of debt on both the domestic and foreign fronts frequently experience this issue.
Two main factors may cause the twin deficits in the fiscal and current accounts.
First, according to the Keynesian perspective, rising budget deficits caused by increased government spending and low taxation stimulate domestic consumption, which in turn drives up imports and widens the current account deficits.
Second, based on the mundell-fleming model , higher budget deficits result in higher interest rates, and the opposite is also true. Rising interest rates make the domestic economy more enticing to foreign investors, which drives up capital-account surpluses but current-account deficits.
A current account can suffer from capital-account surpluses because rising liquidity increases consumer demand, necessitating more imports, thus deteriorating the current account .
Alternatively, capital inflows may strengthen the value of the national currency, which would lower import costs and boost domestic demand while raising the price of exports, which would cause export revenues to decline and widen current-account deficits.
