Recent data released by Bangladesh Bank (BB) suggest that the pressure on the balance of payments (BoP) has subsided somewhat. The stock of international reserves that had dipped below $9.0 billion a few weeks ago recovered and temporarily crossed the 10 billion dollar mark.

This improvement has halted the slide in the dollar value of taka. The Tk/$ exchange rate had depreciated sharply to nearly TK 85/US$, but the replenished stock of international reserves has pushed it up to about TK 82/US$.

Although it is too early to be confident that the improvement will last long, the monetary authorities must have felt relieved at this turn of events after several months of unfavourable developments. Indeed they might interpret this, with some justification, as the outcome of the monetary policy.

There are at least three factors behind this improvement in the balance of payments. First, export earnings during the first six months of this fiscal year (July-Dec 2011) rose by 14.7 per cent.

Although this is much less than the very robust growth of 40.9 per cent during the corresponding period last year, it may be regarded as a good performance given the recessive international economic environment. The export sector has again proved its resilience and competitive strength.

Second, remittances from workers overseas have also grown well (9.3 per cent during July-Dec 2011) after recording the lowest growth rate of this millennium during the last fiscal year (6.0 per cent).

The recovery in remittances occurred despite there being little progress in reopening some of the major labour markets in Muslim countries. It has been attributed to a substantial increase in the number of workers going to other destinations and the depreciation of taka.

Third, import growth decelerated to 16.9 per cent during the July-December 2011 period compared to 36.6 per cent growth during the corresponding period of the previous year. The large depreciation of the exchange value of taka is believed to have played a role in this deceleration.

The value of exports goods and services and remittances during the first half of fiscal year (FY) 2011-12 exceeded that of imports such that the current account was in surplus during the July-December 2011 period after temporarily moving into a deficit in November 2011.

A reduction in the import demand is widely regarded as a good thing for the economy, especially among policymakers. It was explicitly stated to be an important objective of the current monetary policy. A slower import growth is usually interpreted as a switch to domestic goods and hence a boost to domestic production. However, this is not the full story.

A very robust empirical finding of macroeconomics is the positive relationship between import and income; many macroeconomic theories are based in an essential way on such a relationship. A substantial slowdown in import may then be indicative of a slowdown in income growth rather than being a boost to domestic output. This is especially relevant in the case of Bangladesh.

Table 1 below, drawn up from recent data provided by Bangladesh Bank, shows the structure of imports of the country. A striking feature of this structure is the unimportance of consumer products, which account for only about a ninth of the total import payments.

Furthermore, most of the products in this category comprise food items such as cereals, sugar and edible oil. When the domestic production of cereals is adequate, the import of cereals declines such that the total import of consumer goods may also decline, and conversely. Good harvests of rice crops during the last year have permitted a very substantial reduction of cereal imports (61.8 per cent) during July-December 2011.

These numbers together with the large reduction in the import of capital machinery and industrial raw materials and the increase in the loan rate would be indicative of a slump in investment relative to last year and a slowing economy. Much of the industrial growth is contributed by the export sector, but this sector has also decelerated. Its contribution to gross domestic product (GDP) growth will be less than what it was last year. A slowdown in industrial production is also suggested by a large reduction in the growth of value added tax (VAT) collection which declined from over 27 per cent last year to only 9 percent this year (domestic VAT declined from 31 to 13 per cent).

It has just been reported in the media that the aman output of this fiscal year was virtually unchanged from that of the last year. The US Department of Agriculture has predicted a slight fall in this year's boro output. Such a reduction in grain output is not altogether unexpected. Poor harvest prices and large increases in the prices of inputs such as fertilisers and diesel have greatly reduced the profitability of production. Since aman and boro crops are the mainstay of agriculture, it would seem that this year we cannot expect a high growth of total agricultural output. With stagnant grain output, import requirements could rise again in the future months. 

The performance of the economy during the first half of the current fiscal year does not suggest a robust growth. The economy seems to have lost the momentum gained during the previous two years. While the current international economic environment might have played a part, the main problem has been inappropriate domestic policies.

It will be difficult to achieve even a 6.0 per cent growth rate unless there is a turnaround. The government needs to take a hard look at its options. (The writer is Professor, Department of Economics, University of Dhaka.

Financial Express/Bangladesh/ 7th March 2012