Bangladesh's external sector is set to pass through turbulence in 2018 given the anticipated surge in food import, petroleum price in the international market and private sector foreign loans, and election-focused expansionary fiscal policy.
Foreign reserves may deplete further and the taka may continue its slide against the US dollar.
For instance, in the first half of this month, $1.36 billion will have to be paid to the Asian Clearing Union, which is the highest yet, according to Bangladesh Bank officials.
The ACU is a payment arrangement for transactions made between Bangladesh, Bhutan, Iran, India, the Maldives, Nepal, Pakistan, Sri Lanka and Myanmar.
As a result, foreign currency reserves will come down to less than $32 billion, from $33.21 billion on December 28.
Besides, foreign loans by the private sector, which are given for six months to one year through commercial banks' offshore units, soared by $2.7 billion to $7.6 billion in the eleven months to November, according to BB statistics.
Many of these loans will mature this year, meaning there will be a further assault on the foreign exchange reserves.
In the international market, the price of petroleum products is now more than $60 per barrel, in contrast to less than $50 six months back. As a result, the import cost for petroleum will balloon in 2018.
The shortfall in rice production in Bangladesh has caused a surge in food grain imports.
In the first four months of the fiscal year, the cost of food grain imports more than doubled to $874 million, according to the central bank's letters of credit settlement statistics.
Furthermore, during the period LCs opened for future import amounted to $1.86 billion, in contrast to $545 million a year earlier.
This suggests, in the coming months about $1.3 billion in foreign currency will have to be spent on food imports.
Besides, imports increased 28.71 percent in the first four months of the year. In comparison, export and remittance growth was slim.
Since the national election is approaching, the speed of implementation of various mega projects will pick up.
As a result, the government will have to make down payment against the foreign loans it will take from development partners to bankroll them.
The infrastructure projects being implemented with the government's own resources like the Padma bridge will add to the import bill.
In another worrying development for the balance of payments, private sector credit growth stood at 19.06 percent in November, which is far beyond the target of 16.2 percent set by the BB for the first half of the fiscal year.
Given its trend, it could fuel a rise in import of consumer goods and thus exacerbate the pressure on the exchange rate.
At the import level, the exchange rate crossed the Tk 85 mark in September. Following a number of steps by the central bank, the exchange rate decreased slightly. On Thursday, it was Tk 83.20.
After the first four months of fiscal 2017-18, the overall deficit in the BoP stood at $225 million, in contrast to $2.04 billion in the surplus a year earlier.
In this context, the monetary policy for the second half of the fiscal year, which is scheduled to be announced this month, has to be tightened, said Zahid Hussain, lead economist of the World Bank's Dhaka office.
Pressure on the BoP rose in 2017 primarily because of an increase in import payments.
Although exports and remittances turned around in the second half of 2017, it was not enough to prevent a large increase in the current account deficit so much so that the overall BoP also turned into deficit.
In the last six months, the central bank injected $1.06 billion.
Consequently, the exchange rate came under pressure, resulting in continued depreciation of the taka in November and December. The BB intervened by selling dollars, which helped smoothen the adjustment of the exchange rate.
“If the pressure on the BoP rises further in 2018, the central bank should continue the policy stance of allowing the exchange rate to depreciate smoothly,” Hussain said.
At the same time, it will need to tighten the monetary policy somewhat to keep guard against excessive expansion of commercial credits to the private sector.
“The orderly depreciation of the exchange rate will help correct overvaluation of the taka experienced in recent years that adversely affected the competitiveness of exports and weakened incentives for remitting money through formal channels.”
As exports and remittances respond to the exchange rate correction, the pressure on the current account can be expected to ease, Hussain said.
The central bank will also need to exercise stronger vigilance in financial intelligence: capital flight tends to increase in an election year, as seen in the past.
“Coordination with the National Board of Revenue will be important to catch over-invoicing and under-invoicing in trade transactions to move money abroad,” Hussain added.
Already, the export development fund has been expanded to $3 billion from $2.5 billion from where banks are being given foreign exchange loans continuously.
Some 26 banks have been issued warning letters for wrongdoing in the inter-bank foreign exchange market.
This year, more steps will be taken to maintain the stability in the external sector, the BB official added.