mba project report on impact of exchange rate on balance of payment (bop) by moez ansary

Impact of Exchange Rate on the Factors of Balance of Payment: Case Study on

Bangladesh

ii

Project Report

on

“Impact of Exchange Rate on the Factors of Balance of Payment:

Case Study on Bangladesh”

Supervised By:

Mr. Shahedul Alam Khan

Senior Lecturer

Department of Business Administration

Leading University, Sylhet

Submitted By:

Moez Al Azim Ansary

ID: 1511017038

Major in Accounting & Information Systems

MBA Program



Submitted To:


For the partial fulfillment of the requirements for the

Degree of Master of Business Administration (MBA)

Major in Accounting & Information Systems (AIS)

at

Leading University

Sylhet, Bangladesh

Date of Submission: September 30, 2016

iii

Letter of Transmittal

September 30, 2016


Senior Lecturer



Subject: Submission of Project Report

Dear Sir,

With the passage of time, I am now standing on the verge of Master of Business

Administration program, hence am finalized with my Project Report named “Impact

of Exchange Rate on the Factors of Balance of Payment: Case Study on

Bangladesh”. Vividly enough, my research comprises adequate endeavors. But no

doubt, my contribution will be best evaluated on your sharp scale of acceptance and

remarks.

Consequently, I am transmitting my Project Report to your very concern. Hopefully

you will discover my well-researched, informative and innovative approach as a

hallmark of exploration. Rather, in case of any further clarification or elaboration as

to my research work, I would welcome the opportunity to consult with you to explore

how my findings could best meet your needs.

Thanking you.

Yours Sincerely,

___________________________ Moez Al Azim Ansary

ID No: 1511017038

Major: Accounting & Information Systems

MBA Program



iv

Letter of Acceptance

September 30, 2016

This is to certify that Project Report titled “Impact of Exchange Rate on the Factors

of Balance of Payment: Case Study on Bangladesh” is submitted in partial

fulfillment of the requirements for the award of the degree in Master of Business

Administration from Leading University, Sylhet is a record of the research carried out

by Moez Al Azim Ansary, ID No-1511017038 under my active supervision and

guidance as the partial fulfillment for the award of MBA degree.

I wish his success in the future.

Supervisor

___________________________________


Senior Lecturer



v

Bonafide Certificate

Certified that this project report titled “Impact of Exchange Rate on the Factors of

Balance of Payment: Case Study on Bangladesh” is the bonafide work of Mr. Moez

Al Azim Ansary who carried out the research under my supervision. Certified further

that to the best of my knowledge the work reported herein does not form part of any

other project report or dissertation on the basis of which a degree or award was

conferred on an earlier occasion on this or any other candidate.

Project Supervisor

_______________________


Senior Lecturer



vi

Acknowledgement

First, I would like to express my gratitude to almighty ALLAH to give me the

strength to complete the study within the stipulated time.

I deeply thank to my honorable project supervisor Mr. Shahedul Alam Khan, Senior

Lecturer, Department of Business Administration, Leading University for assigning

me the project and for all his kind support to accomplish it. His valuable suggestions

and guidance helped me a lot to prepare the report in a well-organized manner. I

would like to thank our whole Department of Business Administration specially Head

of the Department Professor Md. Nazrul Islam, for facilitating me to do the project

work and preparing this report.

I also wish to thank and give the due respect to my family, friends and co-workers for

their cordial support and help they offered throughout the process of performing the

whole report.

vii

Abstract

Balance of payment is related to international business. Balance of payment refers

summary of all international transactions of a country with rest other countries

presented in numerical format generally in monetary unit. 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 concept about some components of BOP in Bangladesh. This analysis has

concentrated to export and import of goods and services, and investment from/to

Bangladesh with changes of currency exchange rate. From the analysis it is appeared

that the currency of Bangladesh is devaluating which is reasonable for a developing

country. That results the export of Bangladesh is increasing which is expected but the

import of Bangladesh is also increasing which is unexpected in the situation of

currency devaluation. However, it may be happen if the demand of the country

increasing in geometric way. If the overall circumstance of Bangladesh is considered,

it has been seen the demand of Bangladesh is increasing in geometrically and for

socio-economic development, Bangladesh needs to import heavy equipment from

abroad. Besides, the foreign investment in Bangladesh is also increasing with the

devaluation of currency power. As the currency power of Bangladesh is poor and as a

developing country, Bangladesh has become a lucrative location to foreign investors.

For this reason the foreign investment in Bangladesh is increasing which contributes

to create employment and other socio-economic development. Bangladesh’s trade

balance is negative, current account balance is poor and capital account balance and

financial account balance are positive and high. But, Bangladesh needs to maintain

positive current account balance and increase it and raises the current account balance

too high to comparing other accounts balance of BOP. Devaluation of currency for

Bangladesh as developing country is good for increasing export and foreign

investment but over devaluation of currency may make negative perception to other

countries about a particular country.

viii

Table of Contents

Chapter Title Page No. One Introduction 1 - 6

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Background of the Project

Statement of the Project Issue

Significance and Rationale of the Study

Objective of the Study

Scope of the Study

Limitations of the Study

Methodology of the Study

1.7.1: Research Method

1.7.2: Sources of Data

2

3

3

3

4

4

5

5

6

Two Theoretical Aspects 7 - 14

2.1

2.2

2.3

2.4

Definitions

Major Components of Balance of Payment Accounting

System

2.2.1: Current Account

2.2.2: Capital Account

2.2.3: Official Reserves Account

2.2.4: Errors and Omissions

Exchange Rate

Correlation

8

9

9

11

12

13

13

14

Three Study Results and Findings 15 - 24

3.1

3.2

3.3

3.4

3.5

Correlation of Currency Exchange Rate and Annual

Export of Goods & Services from Bangladesh

Correlation of Currency Exchange Rate and Annual

Import of Goods & Services in Bangladesh

Correlation of Currency Exchange Rate and Net Inflow by

Foreign Direct Investment (FDI)

Correlation of Currency Exchange Rate and Net Inflow by

Portfolio Investment

Export and Import Variance Analysis

16

17

18

19

20

ix

3.6 Balance of Payment (BoP) Statement Review 23

Four Recommendations and Conclusion 25 - 27

4.1

4.2

Recommendations

Conclusion

26

27

Acronyms

Bibliography

Appendix

28

29

31

x

List of Tables

Table No. Particulars Page No. 3.1 Correlation of Currency Exchange Rate and Annual

Export of Goods & Services from Bangladesh

16

3.2 Correlation of Currency Exchange Rate and Annual Import of Goods & Services in Bangladesh

17

3.3 Correlation of Currency Exchange Rate and Net Inflow by Foreign Direct Investment (FDI)

18

3.4 Correlation of Currency Exchange Rate and Net Inflow by Portfolio Investment

19

3.5 Export and Import of Bangladesh and their Variance 20

3.6 Balance of Payment Statement 23

List of Graphs

Graph No. Particulars Page No. 3.1 Export and Import Trend of Bangladesh during FY

2011-12 to FY 2014-2015

21

3.2 Trade Balance of Bangladesh during FY 2011-12 to FY 2014-2015

21

1

Introduction

Chapter One

Introduction

Impact of Exchange Rate on the Factors of Balance of Payment: Case Study on Bangladesh | 2

A country’s economic performance is reflected through its Balance of payment.

Balance of Payments is a term that is used to refer to an accounting record for all the

monetary transactions conducted by a country with other countries within a specified

period of time usually one year. Balance of Payments is actually a numerical

summary of all international transactions, and is preferably presented in the country’s

domestic currency. In a balance of Payments document, exports are recorded as

positive items, due to the fact that they earn revenue for the government. Imports and

other expenditures are recorded as negative items. The balance between these two is

very important, and is perhaps the reason why such a transaction is referred to a

balance of Payments. In a balance of Payments, all the items need to measure up to

each other, that is, they should all add up to zero in order for there to be a perfect

balance. Even if the country is in a deficit situation, where it is spending more than

what it is earning, this deficit ought to be countered by returns from investments,

utilizing of reserves, or borrowing of loans either from other sovereign nations or

from international financial institutions. In essence a balance of Payments is an

accounting statement, such like a balance sheet, and should be perfectly balanced.

Two primary components of a current account are a current account and a capital

account. A current account is essentially the recordings of the country’s financial

situation at that very moment, while the capital account is involved with the

exchange, or transfer of assets and items between that country and its trading partners.

Although there always has to be a perfect balance in a balance of Payments, it is

generally acceptable for there to be imbalances in either the capital account or the

current account of a country at any given moment in the economy.

1.1: Background of the Project

The project report on “Balance of Payment (BoP)” has been prepared for a

partial requirement for completing Master of Business Administration (MBA)

program of Leading University, Sylhet, Bangladesh. This report is prepared to

understand the net international trade and payments of Bangladesh. Here the

correlation of currency exchange rate and export, import and international

investments in Bangladesh were observed. As there was not enough report were

published on the issue of balance of payment in Bangladesh, it’s realized to


prepare the report on this issue. This report will be helpful to the international

trader and investors to recognize the trend of international business in

Bangladesh.

1.2: Statement of the Project Issue

As Bangladesh is a developing country its economy is greatly depending on

international trade and transactions. For economic development of Bangladesh,

foreign investment plays an important role. Export is important to increase

annual income and per capita income in Bangladesh. Hence, to support

increasing demand, maintaining proper nutation of people, improve medical

facility and continue industrial development, Bangladesh needs to import some

goods and services from abroad. Export and import or International trade and

currency exchange rate have a correlation. In this research, it would be observed

how currency exchange rate influences the international trade in Bangladesh.

1.3: Significance and Rationale of the Study

International business people need to pay close attention to countries’ BOP

statistic for several reasons, including the following:

BOP statistics helps identify emerging markets for goods and services.

BOP statistics can warn of possible new policies that may alert a country’s

business climate, thereby affecting the profitability of a firm’s operations in

that country.

BOP statistics can indicate reductions in a country’s foreign-exchange

reserves, which may mean that the country’s currency will depreciate in the

future.

As was true in the international debt crisis, BOP statistics can signal

increased riskiness of lending to particular countries.

1.4: Objective of the Study

General Objective:

To evaluate the impact of currency exchange rate change on the major

factors of balance of payment in Bangladesh.


Specific Objectives:

To observe the correlation between currency exchange rate and annual

export.

To observe the correlation between exchange rate and annual import.

To observe the correlation between exchange rate and net inflow of FDI.

To observe the correlation between exchange rate and net inflow of portfolio

investment in Bangladesh.

To observe the export and import variance of Bangladesh.

To observe the contribution of various factors of BOP in Bangladesh.

1.5: Scope of the Study

Though Balance of payment (BoP) is vast concept and it has lots of sub-units

which could be analyzed, this research is limited to some specific sub-units of

BOP. This report is based on analysis of export and import of goods and

services from or to Bangladesh, and net foreign direct investment (FDI) and

portfolio investment in Bangladesh. In this report, a correlation between

currency exchange rate and those sub-units have been analyzed and determined

link between them and consider other factors related to the units of BOP.

1.6: Limitations of the Study

I did my best and there has no dearth of sincerity on my part to make the report.

But, there were some limitations which I have faced in the research work. These

limitations are mentioned bellow.

As this research is not conducted on some specific firms or on any

population sample and it’s fully concerned to international business, it was

very difficult to analysis.

As BOP is related to international business, it would not possible to collect

primary data. This report has been prepared fully depending on secondary

data.

Though the secondary data were collected from reliable sources, they may

not be hundred percent accurate.


As data are collected from various sources, same data may differ for source

variation.

As BOP is a vast concept, it would not possible to consider all aspects of

BOP in this research. Some of the core factors were considered and discuses

in this report, but other factors affecting BOP were not considers in this

report.

Limitation of time and knowledge restrict to research and discuss deeply on

the project topic.

1.7: Methodology of the Study

1.7.1: Research Method:

Several types of research methods are used in studies depending on the field of

research. Generally four types of research methods are used in research work.

These are the following.

(i) Qualitative Method

(ii) Quantitative Method

(iii) Analytical Method

(iv) Descriptive Method

As this report is on Balance of Payment, and it’s based analysis of

international business and currency exchange rate, certain methods were

followed to fulfill the objectives of the report. In this report three of these

research methods were used.

Qualitative Method: Qualitative method is concerned with the quality

or kind and describing meaning. In this report the qualitative research

method was used to provide a clear concept about the research topic

and to maintain the standards of on research the elements of BOP were

discussed from various points of view.

Quantitative Method: Quantitative research is based on the

quantitative or numeric measurements of some characters. It is

applicable to phenomena that can be expressed in terms of quantities.

The quantitative approaches have been used in this report for some


statistical content analysis and to determine the significance of

findings.

Analytical Method: In analytical research, the researcher has to use

facts or information those already available, and analyze these to make

a critical evaluation of the material. This report is prepared by analysis

the available data of international business.

1.7.2: Sources of Data:

Data have been collected from secondary source of data. As collection of data

from primary source for the project report was difficult and secondary sources

were available, data were collected from secondary sources. The major

primary sources those used to collect data are listed below.

Annual Reports.

Website of Bangladesh Bank and World Bank.

Other websites and blogs.

Books and journals.

Above sources were used as secondary sources of data for the project report

on Balance of Payment.


2

Theoretical Aspects

Chapter Two

Theoretical Aspects


2.1: Definitions

Balance of Payments (BoP): Balance of Payments (BoP) is a statistical

statement that systematically summarizes the economic transactions of a country

with the rest of the world for a specific time period.

BOP Accounting System: The BOP accounting system is a double-entry

bookkeeping system designed to measure and record all economic transactions

between residents of one country and residents of all other countries during a

particular time period. It helps policy makers to understand the performance of

each country’s economy in international markets.

Four important aspects of the BOP accounting system need to be highlighted:

i) The BOP accounting system records international transactions made

during some time period, for example, a year.

ii) It records only economic transactions, those that involve something of

monetary value.

iii) It records transactions between residents of one country and residents of

all other countries. Residents can be individuals, businesses, government

agencies, or nonprofit organizations, but defining residency is sometimes

tricky. Persons temporarily located in country- tourists, students, and

military or diplomatic personnel- are still considered residents of their

home country for BOP purposes. Businesses are considered residents of

the country in which they are incorporated. Firms often conduct

international businesses by locating either a branch or a subsidiary in a

foreign country. A branch which by definition is an unincorporated

operation and thus not legally distinct from its parent corporation, is a

resident of the parent’s home country. A subsidiary, which by definition is

a separately incorporated operation, is a resident of the country in which it

is incorporated. In most cases the subsidiary is incorporated in the host

country to take advantage of legally being a resident of the country in

which it is operating.

iv) The BOP accounting system is a double-entry system. Each transaction

produces a credit entry and a debit entry of equal size. In most

international business dealings the first entry in a BOP transaction involves


the purchase or sales of something – a good, a service, or an asset. The

second entry records the payment or receipt of payment for the thing

bought or sold. Figuring out which is the BOP debit entry and which is the

BOP credit entry is not a skill that most people are born with. Many

experts compare a BOP accounting statement to a statement of sources and

uses of funds. Debit entries reflect uses of funds; credit entries indicate

sources of funds. Under this framework, buying things creates debits, and

selling thing produces credits.

As per formula BOP must be zero, but component of BOP can be positive or

negative separately. If we talk about the major two major component of BOP-

Current Account and Capital Account, it would be seen that net balance of both

accounts will be positive (credit) or negative (debit).

Double Entry System: It’s a bookkeeping system where transactions are

recorded in terms of debits and credits. Since a debit in one account will be offset

by a credit in another account, the sum of all debits must therefore be exactly

equal to the sum of all credits. The double-entry system of bookkeeping or

accounting makes it easier to prepare accurate financial statements directly from

the books of account and detect errors.

2.2: Major Components of Balance of Payment Accounting System

The BOP accounting system can be divided conceptually into four major

accounts.

(i) Current Account

(ii) Capital Account

(iii) Official Reserves Account

(iv) Errors and Omissions

2.2.1: Current Account: Current account records exports and import of goods

and services, investment income and unilateral transfer or gift. Current account

balance measures the net balance resulting from merchandise trade, service trade,

investment income and unilateral transfers.


The current account records four types of transactions among residents of

different countries.

(i) Export and Import of Goods (or merchandise)

(ii) Export and Import of Services

(iii) Investment Income

(iv) Unilateral Transfer (or gift)

(i) Exports and Imports of Goods: When the residence of one country sell the

merchandises or goods to the residence of other countries is export of goods.

When the residence of one country purchase goods from the residence of other

countries is import of goods.

(ii) Export and Import of Services: The service account records sales and

purchases of such services as transportation, tourism, medical care,

telecommunications, advertising, financial service and education. The sale of a

service to a resident of another country is service export, and the purchase by a

resident of a service from another country is a service import.

(iii) Investment Income: The third type of transaction recorded in the current

account is investment income. Income earned from investment in foreign

country is called Investment Income.

(iv) Unilateral Transfers: The fourth type of current account is unilateral transfer

of gifts between residents of one country another country. Unilateral transfers

include private and public gifts. For example, Bangladeshi-born residents in

America who send a part of their earnings back home to their relatives are

engaging in private unilateral transfers. In contrast, governmental aid from the

United Kingdom used for a flood control project in Bangladesh is a public

unilateral transfer. In both case, the recipients need not provide any

compensation to the donators.


The Current Account Balance measures the net balance resulting from merchandise

trade, service trade, investment income, and unilateral transfers.

The mathematical equation of Current Account Balance (CAB): -

CAB = X - M + NY + NCT

X = Exports of goods and services

M = Imports of goods and services

NY = Net income abroad

NCT = Net current transfers

In the current account, receipts from export of goods, services and unilateral

receipts are entered as credit or positive items and payments for import of goods,

services and unilateral payments are entered as debit or negative items. The net

value of credit and debit balances is the balance on current account.

1. Surplus in current account arises when credit items are more than debit items.

It indicates net inflow of foreign exchange.

2. Deficit in current account arises when debit items are more than credit items. It

indicates net outflow of foreign exchange.

2.2.2: Capital Account: Capital accounts records the purchases and sales of

assets between residents of one country and those other countries. Capital

accounts transactions can be divided into two categories.

(i) Foreign Direct Investment (FDI)

(ii) Foreign Portfolio Investment

(i) Foreign Direct Investment (FDI): FDI is any investment made for the

purpose of controlling the organization in which the investment is made,

typically through ownership of significant blocks of common stock with

voting privileges.

(ii) Foreign Portfolio Investment: A foreign portfolio investment is any

investment made for purposes other than control. Foreign portfolio


investments are divided into two subcategories: short-term investments

and long-term investments. Short-term foreign portfolio investments

are financial investments with maturities of one year or less. It includes

commercial paper, checking accounts, time deposits and certificate of

deposit held by the residents of a country in foreign banks. Long-term

foreign portfolio investments are stocks, bonds, and other financial

instruments issued by private & public organizations that have maturities

greater than one year and that are held for purposes other than control.

Balance on Capital Account:

The transactions, which lead to inflow of foreign exchange (like receipt of loan

from abroad, sale of assets or shares in foreign countries, etc.), are recorded on

the credit or positive side of capital account. Similarly, the transactions which

lead to outflow of foreign exchange (like repayment of loans, purchase of assets

or shares in foreign countries, etc.), are recorded on the debit or negative side.

The net value of credit and debit balances is the balance on capital account. It

should be noted:

Surplus in capital account arises when credit items are more than debit items.

It indicates net inflow of capital.

Deficit in capital account arises when debit items are more than credit items. It

indicates net outflow of capital.

In addition to current account and capital account, there is one more element in

BOP, known as ‘Errors and Omissions’. It is the balancing item, which reflects

the inability to record all international transactions accurately.

2.2.3: Official Reserves Account: Official reserves account records the level of

official reserves held by a national government of a country. Therese reserves are

used to intervene in the foreign-exchange market and in transactions with other

central banks. Official reserves comprise four types of assets:

i. Gold

ii. Convertible currencies


iii. SDRs

iv. Reserve positions at the IMF

2.2.4: Errors and Omissions: The errors and omissions account is used to make

the BOP balance in accordance with the following equation:

Current Account + Capital Account + Official Reserve Account + Errors and

Omissions = 0

When all actual balance of payments entries are totaled, the resulting balance will

almost inevitably show a net credit or a net debit. That balance is the result of

errors and omissions in compilation of statements. Some of the errors and

omissions may be related to recommendations for practical approximation to

principles.

2.3: Exchange Rate

Exchange rate is the number of units of one currency that may be purchased

with one unit of another currency. To evaluate exchange rate every country

follow a common currency with which a country compares and measures its

currency to understand exchange rate. Most of the countries use US Dollar ($) as

a standard currency unit to measure exchange. For example US $1=BDT 78/-,

means 78 units of BDT may be purchased with 1 (one) unit of USD ($).

When a country’s currency is devalued, it needs more units to be exchanged with

another unit of currency. Again, when a country’s currency is overvalued, it

needs fewer units to be exchanged with another currency. For developing

countries devaluation of currency will increase export and decrease import.

Because, when currency is devalued, foreign buyers can purchase more units of

products or service by one unit of dollar, so they increase their purchases. Beside,

when the currency is devalued, the importers of a country need to pay more

money to import goods or services as previous amount they imported from

abroad, so importers decrease their purchase. On the other hand, overvaluation of

currency will decrease export and increase import. Because, when a country’s

currency is overvalued, foreign buyers need to pay more money to purchase as

previous quantity of goods or services from the country, so they decrease their


purchases and imports of a country can purchase more units of goods or services

by paying previous amount of money.

2.4: Correlation

Correlation addresses the relationship between two different factors (variables).

The statistic is called a correlation coefficient. A correlation coefficient can be

calculated when there are two (or more) sets of scores for the same individuals or

matched groups.

Correlation is a statistical technique that can show whether and how strongly

pairs of variables are related. Correlation works for quantifiable data in which

numbers are meaningful, usually quantities of some sort. It cannot be used for

purely categorical data, such as gender, brands purchased, or favorite color.

Balance on Current Account vs. Balance on Capital Account:

Balance on current account and balance on capital account are interrelated.

A deficit in the current account must be settled by a surplus on the capital

account.

A surplus in the current account must be matched by a deficit on the capital

account.

When all accounts are merged in a single ledger then the balance of payment will

be zero. Because, a country support its deficit balance of capital account by loan

from other countries through capital account or deficit balance creates loans which

affect the capital account in credit side. Another thing surplus of current account

balance creates capital to invest in foreign country or supports to repayment of loan

which affect the capital account. That the net balance of BOP become zero.

Further, it can be said when a country suffers deficit balance in trade with rest

countries then this deficit balance creates loans for the country form rest countries

which treated as liability and transfer to the capital account of the country.


3

Study Results and

Findings

Chapter Three

Study Results and

Findings


In this report as the objectives, currency exchange rate is correlated with the Export,

Import, and Foreign Direct Investment (FDI) and Foreign Portfolio Investment. These

correlations are shown and analyzed in this chapter.

3.1: Correlation of Currency Exchange Rate and Annual Export of

Goods & Services from Bangladesh:

Currency power and export have negative relation. When currency power of a country

is devaluated then the export increases. Here currency exchange rate of BDT against

USD and export of goods and services from Bangladesh over ten years have observed,

and the changes of the factors over ten years are correlated. This correlation is shown

in the following table.

Year Exchange Rate of BDT against per USD ($ 1)

Changes in Percent (%)

Export of Goods & Services in

Million $


Correlation Result

2005 ৳ 64.33 9,994.81

0.90

2006 ৳ 68.93 7% 11,744.91 18%

2007 ৳ 68.87 0% 13,530.31 15%

2008 ৳ 68.60 0% 16,181.04 20%

2009 ৳ 69.04 1% 17,359.87 7%

2010 ৳ 69.65 1% 18,472.45 6%

2011 ৳ 74.15 6% 25,627.35 39%

2012 ৳ 81.86 10% 26,886.64 5%

2013 ৳ 78.10 -5% 29,304.95 9%

2014 ৳ 77.64 -1% 32,830.36 12%

2015 ৳ 77.95 0% 33,820.15 3%

Table: 3.1: Correlation of Currency Exchange Rate and Annual Export of Goods

& Services from Bangladesh

From table- 3.1, two sets of variables- currency exchange rate (independent variable)

and export of goods and services (dependent variable) have been taken to correlate.

The devaluation of currency of a country compare to the standard currency such as

Dollar has positive relation with Export. In table- 3.1 it is seemed that Bangladeshi

currency (Taka) was being devalued in exchanged with US Dollar ($) and on the

other hand, the export of goods and services were increasing in most of the cases by

the sequence of time. In this regard, the correlation result shows a positive value of

0.90. The correlation between exchange rate and annual export 0.90 indicates that


when the exchange rate of taka against dollar is devaluated then the amount of export

is tending to be increasing. Because of devaluation of BDT foreign buyers can

purchase more by paying each dollar. So, buyers have moved to Bangladesh for their

purchase and its results boosting the export.

3.2: Correlation of Currency Exchange Rate and Annual Import of

Goods & Services in Bangladesh:

A country’s import of goods and services depends on various factors. Currency

exchange rate pays a vital role in import decision of a country. Generally when a

country’s currency power is increased then the country imports more and when its

currency is devaluated then the country decreases its import. In this discussion, it is

observed how the change of currency exchange rate of BDT against USD affects the

import of goods & services in Bangladesh.

Year Exchange Rate of BDT against per USD ($ 1)


Import of Goods & Service in Million $

Changes in Percent

(%)

Correlation

Result

2005 ৳ 64.33 12,972.30

0.92

2006 ৳ 68.93 7% 15,055.37 16%

2007 ৳ 68.87 0% 16,783.83 11%

2008 ৳ 68.60 0% 19,553.27 17%

2009 ৳ 69.04 1% 25,167.72 29%

2010 ৳ 69.65 1% 23,072.75 -8%

2011 ৳ 74.15 6% 29,470.81 28%

2012 ৳ 81.86 10% 37,878.11 29%

2013 ৳ 78.10 -5% 37,748.95 0%

2014 ৳ 77.64 -1% 41,568.40 10%

2015 ৳ 77.95 0% 45,176.62 9%

Table: 3.2: Correlation of Currency Exchange Rate and Annual Import of Goods

& Services in Bangladesh

From table- 3.2, two set of variables- currency exchange rate and import of goods

and services are taken to correlate. Generally the devaluation of currency decreases

import of a country. Because of devaluation of money, a country has to pay more to

consume a constant amount of goods and services. But, in table- 3.2 it has seen that

the import of goods and services into Bangladesh was not decreasing regularly with

the devaluation of money and the correlation result is a positive value of 0.92 that

means when the exchange rate of taka devaluated then import is increased which is


not expected. Again in the year-2013 the currency power of Bangladesh was

increased but import was decreased which is contradictory with general logic and in

the year-2014 the import of goods and services was reasonably increased with the

increase of currency power of Bangladesh which is logical and expected. From the

analysis it has been appeared the import of goods and services in Bangladesh

followed hedging approach. In Bangladesh import is not depending only on currency

power. Like other developing countries Bangladesh’s import is depending on

national demand, infrastructures and industrial development. Bangladesh cannot

restrict or change its import with the change of currency power without ensuring

sufficient domestic production and enough industrial development to support the

increasing needs of growing population.

3.3: Correlation of Currency Exchange Rate and Net Inflow by Foreign Direct Investment (FDI):

FDI is benediction for socio-economic development and creating employment

opportunity in a developing country. As Bangladesh is a developing country, FDI

has remarkable contribution to create employment opportunity and socio-economic

development in Bangladesh. Here, it has been observed how the changes of

currency exchange rate of BDT influence the FDI in Bangladesh and what the will

be correlation between these two factors.

Year

Exchange Rate of BDT against per USD ($ 1)

Changes in Percent

(%)

Amount in Million $

Changes in Percent

(%)

Correlation Result

2005 ৳ 64.33 760.50

0.75

2006 ৳ 68.93 7% 456.52 -40%

2007 ৳ 68.87 0% 651.03 43%

2008 ৳ 68.60 0% 1,328.42 104%

2009 ৳ 69.04 1% 901.29 -32%

2010 ৳ 69.65 1% 1,232.26 37%

2011 ৳ 74.15 6% 1,264.73 3%

2012 ৳ 81.86 10% 1,584.40 25%

2013 ৳ 78.10 -5% 2,602.96 64%

2014 ৳ 77.64 -1% 2,539.19 -2%

2015 ৳ 77.95 0% 3,380.25 33%

Table: 3.3: Correlation of Currency Exchange Rate and Net Inflow by Foreign

Direct Investment (FDI)


A positive correlation of 0.75 between Currency Exchange Rate and Net Inflow by

FDI in Bangladesh is appeared from the table- 3.3. The positive correlation of 0.75

between devaluation of exchange rate of taka and net inflow from FDI indicates when

currency is devaluated then FDI is increase. When a country’s currency is devalued

then foreign investors increase their investment. They may get higher output by

spending fewer dollars. As Bangladesh is a developing and labor intensive country, it

is a green field for foreign investors. They can get labor at lower wages compared to

their country. For that reason foreign investors are interested in direct investment into

Bangladesh. On the other hand Bangladesh has not much capital to invest in foreign

country, however it invests fewer in underdeveloped countries, but it’s too low. So

most of the time the net FDI in Bangladesh is positive. It means Bangladesh gain

more foreign direct investment than it pay. So, the net inflow by FDI in Bangladesh

is positive over last ten years compared to currency exchange rate.

3.4: Correlation of Currency Exchange Rate and Net Inflow by

Portfolio Investment:

Portfolio investment indicates non-controlling investment or financial investment

only. In this section, it has been examined the correlation between currency exchange

rate of Bangladeshi currency and net inflow by portfolio investment which shown in

following table.

Year

Exchange Rate of BDT against per USD ($ 1)

Changes in Percent

(%)

Amount in Million $


Correlation Result

2005 ৳ 64.33 (4.29)

0.18

2006 ৳ 68.93 7% (19.95) 365%

2007 ৳ 68.87 0% 515.60 -2685%

2008 ৳ 68.60 0% (130.69) -125%

2009 ৳ 69.04 1% (73.89) -43%

2010 ৳ 69.65 1% (220.40) 198%

2011 ৳ 74.15 6% 401.12 -282%

2012 ৳ 81.86 10% 1,179.68 194%

2013 ৳ 78.10 -5% 0.70 -100%

2014 ৳ 77.64 -1% (126.53) -18274%

2015 ৳ 77.95 0% (967.90) 665%

Table: 3.4: Correlation of Currency Exchange Rate and Net Inflow by Portfolio Investment


From the table- 3.4 it has been appeared the up-down of currency exchange rate has

little effect on portfolio investment in Bangladesh. But, exchange rate and portfolio

investment have a positive correlation. In this regards, the correlation result from

table- 3.4 is 0.18. This result indicates the devaluation of Exchange rate of taka

increases the net portfolio investment in Bangladesh. In table 3.4, it has been seen

that most of the time the net inflow of portfolio investment in Bangladesh is negative

and fewer times the inflow is positive. But, over eleven year the sum of net portfolio

inflow provides positive value of $ 553.44 million. The years of positive inflow of

portfolio investment provides massive inflow of capital investment which obsolete

the negative flow of portfolio investment in other years. From the table 3.4, it has

been seen the highest devaluation of taka against dollar in year 2012 about 10% and

in this year the net inflow of portfolio investment in Bangladesh is also in the highest

position from year 2005 to year 2015.

3.5: Export and Import Variance Analysis:

As current account elements export and import play a vital role in BOP to indicate a

country’s actual strength and development. These two factors basically determine

how the other accounts of BOP or trade balance will change and how the balance of

payment will be treated. The export and import data of Bangladesh over last four

financial years are given below which were collected from available data of

Bangladesh Bank.

Financial Year

Total Export (US dollar in

Millions)

Total Import (US dollar in

Millions)

Trade Balance (US dollar in

Millions)

2011-12 22,843.50 29,973.12 (7,129.62)

2012-13 23,757.60 38,736.10 (14,978.50)

2013-14 27,454.30 40,731.90 (13,277.60)

2014-15 29,157.30 40,579.30 (11,422.00)

Table: 3.5: Export and Import of Bangladesh and their Variance

From the table- 3.5 it has been observed that the imports of Bangladesh were always

higher than its exports over the four financial years which had considered in this

study. For this reason the trade balance or of Bangladesh has been seen in negative

figure over all of the years which is unexpected for any country.


Graph-3.1: Export and Import Trend of Bangladesh during FY 2011-12 to FY 2014-2015

The graph-3.1 indicates both export and import of Bangladesh is in rising trend, but

the export cannot obsolete the increasing import. So, a negative trade variance or

trade deficiency is being existed in the current account balance in case of balance of

payments. The significant trade deficiency affects other accounts of BOP and is

increasing the payable or liability account of Bangladesh in international business.

The import of Bangladesh is high because of its too much dependency on foreign

countries. Bangladesh can not to support the growing needs of its population by

itself, thus the country has to depend on the other countries.

Graph-3.2: Trade Balance of Bangladesh during FY 2011-12 to FY 2014-2015

Though Bangladesh has significant trade deficiency by comparing of export and

import, it trying to minimize the trade deficiency which is appeared in graph-3.2

where from FY 2012-14 the trade deficiency were decreasing to the following years.

Bangladesh trying to minimize the trade deficiency and overcome the import but it

cannot overcome the trade deficiency for various factors. Some of the major factors

are increasing population, increasing demand, demand for advanced technology,

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

45,000.00

2011-12 2012-13 2013-14 2014-15

US

do

llar

in

Mil

lio

ns

Financial Years

Export and Import Trend of Bangladesh

Export

Import

-7,129.62

-14,978.50 -13,277.60

-11,422.00

-20,000.00

-15,000.00

-10,000.00

-5,000.00

0.00FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15

Trade Balance


continuous development, shortage of heavy industries etc. for these reasons

Bangladesh needs to import more than it exports.

The positive export and import variance is important in international payments for

any countries, but for various causes Bangladesh’s export and import variance is

extremely negative which increases the liability of the country to match the balance

of international payment or BOP. Thus, Bangladesh is need to more concerned to

minimize import and maximize export to make strong position in balance of

international payment as well as fulgent profile in the world.


3.6: Balance of Payment (BoP) Statement Review:

As various factors of balance of payment were observed and discussed in previous

sections, now the summary statement of balance of payment of Bangladesh for the

financial years 2014-15 and 2015-16 is being reviewed, briefly discuss the important

elements of balance of payment. The statement of BOP is given below.

Balance of Payment (BoP)

(In million US$)

1 2 3 4

Items

2014-15 July-June

2015-16 July-June

% Changes 3 over 2

Current Account

Export of Goods

30697 33441

8.94%

Export of Services

3084 3530

14.46%

(A) Export Balance

33781 36971

9.44%

Import of Goods

37662 39715

5.45%

Import of Services

6270 6323

0.85%

(B) Import Balance

43932 46038

4.79%

(C) Trade Balance (A-B)

-10151 -9067

-10.68%

Primary Credit (D)

76 103 35.53%

Primary Debit including Interest Payments (E)

2945 2685 -8.83%

(F) Primary Income Balance, Cr./-Dr. (D-E)

-2869 -2582 -10.00%

(G) Official transfers

75 68 -9.33%

(H) Private transfers & Workers' remittances

15820 15287 -3.37%

(I) Secondary income (G+H)

15895 15355

-3.40%

(J) Current Account Balance (C+F+I)

2875 3706

28.90%

Capital Account

Capital transfers (net)

496 478

-3.63%

(K) Capital Account Balance

496 478

-3.63%

Financial Account

Foreign direct investment (net)

1830 2001

9.34%

Portfolio investment (net)

379 124

-67.28%

Other investment (net)

-284 -515

81.34%

(L) Financial Account Balance

1925 1610

-16.36%

(M) Errors and omissions

-923 -758

-17.88%

(i) Overall Balance (J+K+L+M) 4373 5036 15.16%

(ii) Reserve Assets (net) -4373 -5036

Balance of Payment (i+ii) 0 0

Table-3.6: Balance of Payment Statement


By reviewing the BOP statement from table- 3.6, it has seen that the trade balance a

significant instigator of current account balance was negative and it had decreased to

10.68% FY 2014-15 to FY 2015-16. Behind this negative trade balance of

Bangladesh various strong factors are liable in Bangladesh as a developing country

which was discussed in section 3.5. Another account of current account, primary

income balance was also negative, because a giant sum of interest on loan taken from

foreign country or international institutions paid by Bangladesh in every year. On the

other hand, the secondary income has provided surplus balance where private

transfers and workers' remittances were played vital role specially workers’

remittance has the remarkable contribution. By the surplus of secondary income, the

deficiency in trade balance and primary income were obsoleted. It could be possible

for huge foreign remittance of Bangladesh. The capital account balance and financial

account balance are positive, but this positive balance will not create major benefit

for Bangladesh. Though foreign investment is important for economic development

of a developing country like Bangladesh, the major benefit is for investor countries.

For capital investment and financial investment by foreign country, domestic country

needs to the profit or interest for use of the fund as investment or loan. So,

Bangladesh as a developing country needs to give more consecration on current

account items than the capital account and financial account. A country’s net income

through current account balance is considered as its actual income. Bangladesh’s

capital account balance and financial account balance were decreases from FY 2014-

15 to FY 2015-16 to 3.63% and 16.36% respectively which indicate diminishing the

dependency on other countries.

As a developing country Bangladesh’s currency exchange rate is low and devaluating

for various factors such as capital inflow, financial inflows and export oriented

economics. For dependency on foreign donation, foreign loan, low capital reserve and

dependency on foreign technology Bangladesh’s currency exchange rate is low. If the

country increases its currency value then export will fall.


4

Recommendations and

Conclusion

Chapter Four

Recommendations and

Conclusion


4.1: Recommendations

Balance of payment reflects the economic performance of a country during a

particular period. The BOP position is not enough good in Bangladesh. As

developing country, Bangladesh needs to be more concerned about the vital

factors those direct the BOP account. Thus the country aware about to the

following matters.

In a developing country currency devaluation promotes the export of the

country, but excessive devaluation of currency exchange rate may create

inflation. So, currency exchange rate of BDT should be change in a controlled

manner.

Bangladesh needs to decrease the dependency on other countries by increasing

domestic productions or GDP for minimizing import.

Bangladesh has to keep at least positive trade balance and should try to

increase it gradually.

The country should increase the facilities to manpower export and for

immigrant in fund transfer. Because, the positive current account balance of

Bangladesh has been possible for workers’ remittance or foreign remittance.

This sector has great contribution on GNP as well as BOP of Bangladesh.

Bangladesh has to concern about increase the current account balance rather

than capital account and financial accounts. Increasing capital account balance

and financial account balance may increase liabilities of the country. The

country should minimize the inflow through capital account and financial

account and keep low the balance of these accounts as well as possible. Hence,

Bangladesh should increase the current account balance as high as possible.

The country can think about the above mentioned factors in its international

businesses to create positive increment of its balance of payment account.


4.2: Conclusion

Balance of Payment (BoP) represents the total balance sheet of a country. It

balances the deficit side and surplus side of trade balance and capital investment

balance of a country through obsoleting the negative/deficit side by

positive/surplus side. As developing country Bangladesh’s economy and overall

development is depending on international trade. A country’s international trade

is influenced by the currency exchange rate. Bangladeshi currency has low value

then its buyer and investor countries. So, Bangladesh’s export and foreign

investment into the country is still increasing. Hence, these factors of BOP are

increasing with the increasing rate of devaluation of BDT. On the other hand,

Bangladesh’s import is increasing year by year which is not expected for

devaluating currency, but the increasing of import cannot be stopped to response

the growing demand of people inside the country and keep continue

infrastructural and industrial development of the country. To increase export,

foreign investment and donation, Bangladesh may need to more devaluate its

currency, if necessary. But, this devaluation should be kept on a balanced

position which would not shrinkage the image of Bangladesh in the world and

reduce the purchasing power of the people in Bangladesh.


Acronyms

BOP: Balance of Payment

BoP: Balance of Payment (this format of the acronym is used in bracket

following/ beside full form)

IB: International Business

BDT: Bangladeshi Taka

US: United State

USD: United State Dollar

BOT: Balance of Trade

FDI: Foreign Direct Investment

CAB: Current Account Balance

SDR: Special Drawing Rights

IMF: International Monetary Fund

FY: Financial Yeas

GNP: Gross National Product

GDP: Gross Domestic Product


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Appendix