Balance of payments Bangladesh

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ISSN 2286-4822,

Bangladesh’s Balance of Payments:
an Econometric Analysis
Department of Economics
Jatiya Kabi Kazi Nazrul Islam University
Trishal, Bangladesh

The study was conducted at the Department of Economics,
University of Chittagong, Bangladesh between December 2010 and April 2011. Balance of payments plays the most important role in a country’s economy. As a developing country, Bangladesh cannot claim that its performances are satisfactory. The objective of this analysis is to develop some ideas about the balance of payments of Bangladesh. It is expected that trade liberalization would promote economic growth from the supply side by leading to a more efficient use of resources. Trade liberalization could lead to faster import growth than export growth and hence the supply side benefits may be offset by the unsustainable balance of payment position. This study uses 36 year observation of GDP, import, export and exchange rate of Bangladesh to estimate their effect on trade balance. Our conclusion is that Bangladesh should relax restrictions on imports more slowly than barriers to exports.

Key words: trade balance, export, import, terms of trade, GDP

Balance of payment is a statistical statement designed
to provide, for a specific period of time, a systematic record of an economy‟s transactions with the rest of the world. Its major components are the current account and the financial account. The spending of foreign currency is debit and it is a negative item. If a transaction earns foreign exchange for the nation, it is 337

M.S.Rahman Chowdhury – Bangladesh’s Balance of Payments: an Econometric Analysis

recorded as a plus item and it is a credit. Generally speaking, imports are debits and exports are credit.
If credits are more, i.e. exports are more, than it is a
positive sign for the economy and it is known as a favorable balance of payment. If debits are more, i.e. imports are more, than it is a negative sign for the economy and it is known as an unfavorable balance of payment. Bangladesh has had an

unfavorable balance of payment for many years due to its
dependency on imports.
Apart from the dependency on imports, there are some
other reasons:
 Global Recession since 2008
 Deteriorating law and order situation which stops
 Slow growth of production
 Low exports
 Electricity shortage/Mismanagement which result in low
 Energy crisis causing low output and closure of many
industrial units, which reduces the exports
 Political instability
 Fiscal policies
 Trade restrictions in developed countries
 Limitless export of primary commodities
 Depreciation of Bangladeshi Taka.
 Inflation
 Low foreign exchange remittances
Balance of payments
A balance of payments (BOP) sheet is an accounting
record of all monetary transactions between a country and the rest of the world. These transactions include payment for the country‟s exports and imports of goods, services and financial capital, as well as financial transfers. The BOP summarizes

international transactions for a specific period of time, usually a year, and is prepared in a single currency, typically the
domestic currency of the country concerned. Sources of funds for a nation such as exports or the receipts of loans and
investment are recorded as positive or surplus items. Uses of



M.S.Rahman Chowdhury – Bangladesh’s Balance of Payments: an Econometric Analysis

funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit.
When all components of the BOP sheet are included, it
must sum to zero, and there can be no overall surplus or deficit. For example, if a country imports more than it exports, its
trade balance will be in deficit,...
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