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Persistent headwinds and concerns in external sector
Amid the prevailing bleak macroeconomic scenario and the pressure on several fronts, the external sector performance during the first half of FY25 offers some much needed and welcome relief to the Bangladesh economy. The positive changes are underpinned by the robust performance of most of the atte
State of the Bangladesh Economy in H1 of FY2024-25
Persistent headwinds and concerns in external sector
Fahmida Khatun, Mustafizur Rahman, Khondaker Golam Moazzem, Muntaseer Kamal and Syed Yusuf Saadat
Published :
Jan 31, 2025 21:33
Updated :
Jan 31, 2025 21:33
Amid the prevailing bleak macroeconomic scenario and the pressure on several fronts, the external sector performance during the first half of FY25 offers some much needed and welcome relief to the Bangladesh economy. The positive changes are underpinned by the robust performance of most of the attendant correlates that inform the country’s external sector outcomes. Exports posted robust growth during the first half (July-Dec) of FY25 as did the earnings from remittance inflows. The slide experienced by the foreign exchange reserves was halted, and the exchange rate of Bangladeshi Taka (BDT) against major currencies stabilised, although some volatility in the reserve position continues to persist. Improved trade and current account balance, as also the overall balance of payments situation, allowed going for some de-restriction of import activities. To what extent the positive trends will continue over the second half of FY25 is, however, uncertain, particularly because some of the headwinds are becoming gradually discernible. The following sections elaborate on some of the pertinent issues in view of the above.
Robust Export Performance, But Mostly Volume-Driven: Against the backdrop of muted performance of the corresponding period of the previous year, Bangladesh’s export sector experienced an impressive growth rate of 12.8 per cent during the first half of FY25. However, the double-digit growth needs to be taken with a grain of salt since it was achieved on the relatively lower base of (-) 9.5 per cent over the first half of FY24.
One distinctive feature of the export performance in the first half of FY2025 was that both RMG (13.3 per cent) and non-RMG (11.0 per cent) sectors recorded impressive growth. Within the RMG, while knitwear continued to exhibit robust performance (13.0 per cent growth), the wovenwear was also able to catch up with similarly high growth (13.6 per cent). As noted, the non-RMG sector also performed well, overall, with some of the non-RMG traditional export sectors registering impressive growth.
What is encouraging to note is that, in spite of the significant disruptions in production in the first quarter (July-September) of the FY25, consequent to the student-citizens uprising and workers’ unrest, export sector was able to demonstrate remarkable resilience and to pick up quickly, and major brands and buyers continued to stay with, and procure from, Bangladesh.
Estimating value addition is important from the perspective of arriving at an understanding about net domestic forex retention from export activities and capturing the possible implications for the country’s forex reserves situation. Our estimates indicate that domestic value addition from export was about US$15.0 billion during the first half of FY25 as against US$13.2 billion for the corresponding period of FY24, posting a high growth of 12.6 per cent. This robust performance owed to the high growth of knitwear exports (for which the value addition is considered to be about 60 per cent of corresponding global exports, as against the wovenwear where this is taken to be about 50 per cent), and also of non-RMG exports (for which the average value addition is estimated to be about 85 per cent). The fall in the cotton price was to the advantage of exporters (this was US$ 1.79/ kg in July-December of FY25, compared to US$ 2.07/kg in FY24 and US$2.48/kg in FY23 for corresponding periods). However, as would be seen below, exporters did not benefit in the form of higher apparels prices.
With regard to the drivers of the export growth in the key markets of the European Union (EU) and the United States of America (USA), as Table 4.1 indicates, this was primarily on account of the high growth in volume (10.6 per cent in the EU and 16.2 per cent in the USA), rather than that of price which witnessed negative growth rate (-.05 per cent and -4.0 per cent respectively). This, however, depicts the overall trend as regards the imports by both the EU and the USA since the performance pattern was the same for all major sourcing countries such as Vietnam, and, to some extent, China as well. The significant fall in cotton price, by 13.3 per cent between July-December period of FY24 and FY25, noted above, could be one reason for the above. On the other hand, this also underscores the stranglehold the brands and buyers have on the buy-driven global value chain of apparels whereby they are strongly positioned to pass on the lower price of inputs and intermediates in the form of lower prices to producers and exporters of apparels in Bangladesh and other countries.
While exports of jute and jute goods, and leather continued to struggle (-8.1 per cent and -11.6 per cent growth respectively), exports of leather and sports footwear posted very high growth of 30-45 per cent.
An analysis of export composition evinces that intra-RMG diversification continues to remain limited. Structural changes favouring the growing segment of the global RMG market- man-made and synthetic fibre-based apparels items- are yet not visible. To note, three-fourths of Bangladesh’s RMG exports are cotton-based, while more than three-fourths (and growing) of the global apparel market is non-cotton-based. There is a need to restructure export incentives in place to encourage investment in, and export of, man-made fibre-based apparel items. This would also help to raise the share of domestic value retention in total exports of Bangladesh which at present hovers around 60.0 per cent.
Indeed, both export concentration and market concentration persist. For example, the country’s export share in the growing markets of South Asia, East Asia, and ASEAN came down in the first half of FY2025 compared to the matched figure for FY24 (the share came down to 11.8 per cent from 12.7 per cent). Addressing the attendant challenges is particularly important also in anticipation of Bangladesh’s upcoming graduation from the Least Developed Country (LDC) status. Taking a cue from Vietnam, Bangladesh should aggressively pursue Free Trade Agreements (FTAs) and Comprehensive Economic Partnership Agreements (CEPAs) with countries of the region. A dedicated Trade Negotiating Cell needs to be set up, and the country’s offensive and defensive interests identified. Forward-looking trade strategies will need to be formulated and proactively pursued. Domestic tariff rates and regulatory policies will have to be adjusted in view of this in anticipation of Bangladesh’s future as a non-LDC developing country. Initiatives targeting the various trade-related measures, at the border and behind the border, must be put into action, and adequate preparation must be taken in anticipation of changing market access regime beyond the border.
Recent initiatives of the Bangladesh Investment Development Authority (BIDA) to attract export-oriented Foreign Direct Investment (FDI) to targeted sectors are timely, and need to be vigorously pursued. The proposed measures by BIDA include prioritising the setting up of selected Special Economic Zones (initially five SEZs and in ten years an additional ten) and identification of sectors that will be prioritised (19 sectors) in policies. The policies will need to be implemented by making available all the investment-related services as stipulated in the One Stop Service Act of 2018.
Proactive implementation of the Smooth Transition Strategy in view of LDC graduation is critically important if the current robust export performance is to be sustained in future, and the challenges of LDC graduation are to be adequately addressed. The discourse and proposal as regards deferment of LDC graduation (beyond 2026) and the possibility of availing of the Generalised System of Preferences (GSP) plus facility should not dissuade Bangladesh from doing the needful towards sustainable graduation. This is for a number of reasons. Firstly, as the CDP report (2021) indicates that Bangladesh is comfortably situated in view of all the three graduation thresholds and, as such, it will be a hard sell to argue for any deferment. Secondly, accessing the GSP plus preferential market access will be difficult (Bangladesh’s export share of RMG to the EU at present is above the ceiling proposed in the GSP Plus Scheme). Thirdly, the rules of origin for RMG in the GSP Plus proposed are onerous: two-stage conversion instead of one stage under the existing Everything But Arms (EBA) scheme. Fourthly, compliance requirements as regards labour, environment, CO2 emission and other standards are expected to become much more stringent once the new EU-GSP Scheme comes into effect in 2027. The task before Bangladesh will be to take all necessary initiatives and measures in view of the country’s graduation timeline of November 26, 2026.
Better and more efficient trade facilitation measures will be critically important in raising the export and trade competitiveness of Bangladesh. These included implementation of the recently formulated National Logistics Policy (2024), Paperless Trade Policy, Single Window System and cross-border Digital Commerce Policy (2024), and introduction of green trade facilitation measures. Putting in place the above will raise Bangladesh’s trade competitiveness and bring down trade-related costs and improve the business environment significantly.
Imports Gain from Price Effect: The encouraging growth of exports, together with the robust inflow of remittances helped to stall the fall in the forex reserves experienced since June 2024, and stabilise it at about US$26.0 billion in more recent months. This facilitated the withdrawal of some of the restrictions on imports put in place earlier. This led to a rise of 2.0 per cent in imports during the July-October of FY25 period compared to the corresponding period of FY24 (when imports were -20.6 per cent lower when compared to the matched period of FY2023). However, the import structure indicates that the growth was mainly because of the growth of imports of raw cotton (15.4 per cent) and textiles and articles thereof (26.8 per cent), while import of key production-related intermediaries (e.g., crude petroleum; -46.7 per cent) and capital goods (e.g., capital machinery: -25.1 per cent) remained in the negative. L/C opening (-0.5 per cent) and L/C settlement (-1.0 per cent) were in negative terrain for the period between July-November, FY25. However, to note, the two indicators were deep in the negative during the previous two corresponding periods (-12.3 per cent and -26.8 per cent for the same period of FY24 against FY23). The slide downward, thus, has been arrested. In view of the fall in prices of major commodities in the global market (e.g., fuel cotton, etc.), imports in terms of volume were able to post a positive trend. Accordingly, the data on import L/C opening, and L/C settlement should be treated with some caution, and leave room for interpretation.
Encouraging Remittance Inflow but Composition Merits Closer Look: As was noted, the high growth of remittance inflow has contributed to restraining the slide in the availability of foreign exchange in Bangladesh. The year 2024 saw the highest amount of remittance flow to the country US$26.89 billion, which was 22.7 per cent higher than 2023. If the period under review (July-December of FY25) is considered, the growth in remittance flow was 27.6 per cent against the matched period of FY2024.
Over the past four years (between 2021 and 2024), about 4 million people have left Bangladesh for overseas jobs, mostly in the Middle-East countries. It was pointed out in the previous IRBDs that this was not reflected in the amount and origins of remittance inflows to Bangladesh. Remittance inflow figures for 2021, 2022, and 2023 were US$22.0 billion, US$21.3 billion, and US$21.9 billion respectively despite the fact that about three million people had left the country for overseas jobs over the corresponding period. The other disquieting development was the structure of the inflow- there was a significant shift from Saudi Arabia to the UAE, for example. This is clearly discernible from Figure 4.2.
The fall in remittances from Saudi Arabia (more than 50 per cent of migrant workers left for the country), and the parallel rise in the remittances from the UAE, allude to the suspicion about a shift towards informal channels in recent past years. This calls for more in-depth investigation. In this connection, one may recall the report of the White Paper Committee 2024 which was set up by the Interim Government. The report noted that Dubai has emerged as a major hub of the money laundered from Bangladesh in the recent past. A number of underlying factors were identified in this connection: Dubai real-estate regulations (dedicated areas earmarked for foreign buyers and not asking about the source of money); investment policies (attracting foreign investors without undertaking due diligence); easy ways for people to set up shell companies and aggregators purchasing foreign currency from remitters by paying a premium; distribution of ill-gotten money among remittance-receiving households in Bangladesh by using various mobile financial platforms; employing firms and agents specialised in handling laundered money; hiding the sources through multilayered transactions and setting up shell companies in tax havens.
It is hoped that the Task Force set up by the Bangladesh Bank for Recovery of Stolen Assets, with support from the re-energised Bangladesh Financial Intelligence Unit (BFIU) and a rejuvenated Anti-Corruption Commission (ACC), will go deeper into the attendant issues, undertake forensic investigation and identify the key players involved in the laundering of money and will lodge criminal cases to bring the perpetrators to justice. Efforts must be pursued in all earnest to bring back the stolen money to where it truly belongs (filing cases in Bangladesh; establishing paper trail to the ultimate beneficiary abroad; filing cases in overseas jurisdiction; getting court verdicts to sequester, freeze and seize assets and return the recovered money to Bangladesh). To facilitate this process, Bangladesh should become a full member of the Financial Action Task Force (FATF), and Global Forum (GF) on Transparency and Exchange of Information for Tax Purposes.
Balance of Payment Scenario: The robust performance of exports and remittances contributed to an overall improvement in the balance of payments situation towards the end of December 2024. While this is still not comfortable, the trend is, however, encouraging when compared with the corresponding period of FY24. As was noted, large inflow of export and remittance earnings have helped to stall the slide downwards in the forex reserves situation, and contributed to stabilisation of, to a certain degree, the exchange rate of BDT. The improvement is primarily on account of the significant reduction in the trade account deficit, and to a larger extent, to the declining current account deficit. The improvement in Bop is not primarily because of the debt-creating financial account balance (to note, in the July-November period of FY2022, this was US$4,599 million; underpinned by medium- and long-term loans worth US$3,013 million). This compositional shift is a positive trend. However, the dismal performance in terms of FDI and portfolio flows remains a nagging concern.
There are a number of issues which, however, will need to be kept in the perspective in view of the likely BoP scenario over the near-term future: (a) with increasing de-restriction of imports, import payments are expected to go up; consequently, the trade balance could come under further pressure. Sustaining current robust export performance will be critically important in view of this; (b) maintaining the ongoing high growth of remittances will not be easy. It could be that the rise in remittance flow is because of the evident disruption of hundi/hawala and other informal channels of illicit financial flows in the aftermath of the August uprising. This could as well be a one-time phenomenon; (c) while the fall in reserves has been halted, the demands of higher imports and growing debt servicing liabilities could accentuate the pressure on forex reserves (the grace periods- when only interests have to be made- as regards a number of megaprojects are coming to an end; when the repayment period will commence, both interest and principal amount will need to be paid). Fourthly, true, the BDT, in view of the higher availability of the foreign currency in the country, has somewhat stabilised (for example, at about BDT 120-121 vis-a-vis USD). However, if forex demand on account of import and debt servicing payments goes up, BDT could slide further under an open market regime. This would then likely have implications in the form of imported inflation.
Exchange Rate Movement and Stabilisation of BDT: After the sharp decline of almost 40 per cent over the last three years, the value of the BDT appears to be stabilising in recent months. The BDT exchange rate against USD appears to be at the equilibrium level, as of now. As is known, at present the Bangladesh Bank is pursuing a crawling peg policy (within a limited range). However, a move towards a fully market-based exchange rate regime is anticipated over the near-term future. The exchange rate movement will need to be closely monitored. At the same time, the Bangladesh Bank may consider gradually phasing out (or withdrawing) the additional money being given to remitters to incentivise remittance flow and discourage sending money through informal channels (at 2.5 per cent). In 2024, against the remittance flow of US$26.88 billion, about US$0.67 billion was paid to remitters as incentives (equivalent to more than 80 billion taka at the current exchange rate of US$1=BDT 120). Given the revenue situation, the prevailing policy in this regard ought to be carefully weighed, and if justified, changed. Maintaining the exchange rate stability and holding comfortable forex reserves are the twin challenges that the central bank will have to deal with in the near-term future.
Concluding Remarks: The performance of the external sector during the July-December 2024 period transmits some hopeful messages. However, headwinds in the form of the global trading environment (likely US trade policy changes under the Trump administration), demand-side pressure on forex against the backdrop of import and investment pick-up, the growing pressure of Public and Publicly Guaranteed (PPG) debt servicing, and the challenges of implementing the smooth and sustainable LDC graduation strategy should keep policymakers alert and on their toes. The external sector situation and BoP scenario in June 2025 will hinge on how policymakers are able to deal with these emergent challenges, and take advantage of the drivers and accelerators of external sector performance. How the key external sector correlates evolve in the coming months of FY25 will hinge critically on this. In the context of LDC graduation, the smart way to go forward would be to implement the Smooth Transition Strategy in all earnest and take the needed initiatives to transform the economy from one of preference-driven competitiveness to skills and productivity-driven competitiveness.
The discourse about deferment of graduation should not dissuade Bangladesh from taking the needed measures. It is also to be noted that, in the end, the issue of requesting a deferment of Bangladesh’s LDC graduation is a political call. Whether Bangladesh will be comfortable to remain an LDC beyond 2026, with the war-torn Afghanistan, being the only other LDC in the region, demands careful strategic and political consideration.
Efforts to bring back the laundered money from abroad must be pursued in all earnest. Measures need to be geared to undertaking energetic initiatives concerning prosecution, investigation, collaboration with relevant global initiatives and platforms, and filing of criminal/ civil cases in foreign jurisdictions to recover the stolen assets and the evaded taxes.
Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Mr Muntaseer Kamal and Mr Syed Yusuf Saadat, Research Fellows, CPD. moazzem@cpd.org.bd; avra@cpd.org.bd
[Abu Saleh Md Shamim Alam Shibly, Tamim Ahmed and Helen Mashiyat Preoty, Senior Research Associates; M Tanjim Hasan Khan, Resource Mobilisation Associate; Afrin Mahbub, Preetilata Khondaker Huq, Anika Tasnim Arpita, Jannath Sharmin Chowdhury, Anindita Islam, Abrar Ahammed Bhuiyan, Nuzaira Zareen, Ayesha Suhaima Rab, and Safrina Kamal, Programme Associates of CPD provide research assistance.]
Persistent headwinds and concerns in external sector
Fahmida Khatun, Mustafizur Rahman, Khondaker Golam Moazzem, Muntaseer Kamal and Syed Yusuf Saadat
Published :
Jan 31, 2025 21:33
Updated :
Jan 31, 2025 21:33
Amid the prevailing bleak macroeconomic scenario and the pressure on several fronts, the external sector performance during the first half of FY25 offers some much needed and welcome relief to the Bangladesh economy. The positive changes are underpinned by the robust performance of most of the attendant correlates that inform the country’s external sector outcomes. Exports posted robust growth during the first half (July-Dec) of FY25 as did the earnings from remittance inflows. The slide experienced by the foreign exchange reserves was halted, and the exchange rate of Bangladeshi Taka (BDT) against major currencies stabilised, although some volatility in the reserve position continues to persist. Improved trade and current account balance, as also the overall balance of payments situation, allowed going for some de-restriction of import activities. To what extent the positive trends will continue over the second half of FY25 is, however, uncertain, particularly because some of the headwinds are becoming gradually discernible. The following sections elaborate on some of the pertinent issues in view of the above.
Robust Export Performance, But Mostly Volume-Driven: Against the backdrop of muted performance of the corresponding period of the previous year, Bangladesh’s export sector experienced an impressive growth rate of 12.8 per cent during the first half of FY25. However, the double-digit growth needs to be taken with a grain of salt since it was achieved on the relatively lower base of (-) 9.5 per cent over the first half of FY24.
One distinctive feature of the export performance in the first half of FY2025 was that both RMG (13.3 per cent) and non-RMG (11.0 per cent) sectors recorded impressive growth. Within the RMG, while knitwear continued to exhibit robust performance (13.0 per cent growth), the wovenwear was also able to catch up with similarly high growth (13.6 per cent). As noted, the non-RMG sector also performed well, overall, with some of the non-RMG traditional export sectors registering impressive growth.
What is encouraging to note is that, in spite of the significant disruptions in production in the first quarter (July-September) of the FY25, consequent to the student-citizens uprising and workers’ unrest, export sector was able to demonstrate remarkable resilience and to pick up quickly, and major brands and buyers continued to stay with, and procure from, Bangladesh.
Estimating value addition is important from the perspective of arriving at an understanding about net domestic forex retention from export activities and capturing the possible implications for the country’s forex reserves situation. Our estimates indicate that domestic value addition from export was about US$15.0 billion during the first half of FY25 as against US$13.2 billion for the corresponding period of FY24, posting a high growth of 12.6 per cent. This robust performance owed to the high growth of knitwear exports (for which the value addition is considered to be about 60 per cent of corresponding global exports, as against the wovenwear where this is taken to be about 50 per cent), and also of non-RMG exports (for which the average value addition is estimated to be about 85 per cent). The fall in the cotton price was to the advantage of exporters (this was US$ 1.79/ kg in July-December of FY25, compared to US$ 2.07/kg in FY24 and US$2.48/kg in FY23 for corresponding periods). However, as would be seen below, exporters did not benefit in the form of higher apparels prices.
With regard to the drivers of the export growth in the key markets of the European Union (EU) and the United States of America (USA), as Table 4.1 indicates, this was primarily on account of the high growth in volume (10.6 per cent in the EU and 16.2 per cent in the USA), rather than that of price which witnessed negative growth rate (-.05 per cent and -4.0 per cent respectively). This, however, depicts the overall trend as regards the imports by both the EU and the USA since the performance pattern was the same for all major sourcing countries such as Vietnam, and, to some extent, China as well. The significant fall in cotton price, by 13.3 per cent between July-December period of FY24 and FY25, noted above, could be one reason for the above. On the other hand, this also underscores the stranglehold the brands and buyers have on the buy-driven global value chain of apparels whereby they are strongly positioned to pass on the lower price of inputs and intermediates in the form of lower prices to producers and exporters of apparels in Bangladesh and other countries.
While exports of jute and jute goods, and leather continued to struggle (-8.1 per cent and -11.6 per cent growth respectively), exports of leather and sports footwear posted very high growth of 30-45 per cent.
An analysis of export composition evinces that intra-RMG diversification continues to remain limited. Structural changes favouring the growing segment of the global RMG market- man-made and synthetic fibre-based apparels items- are yet not visible. To note, three-fourths of Bangladesh’s RMG exports are cotton-based, while more than three-fourths (and growing) of the global apparel market is non-cotton-based. There is a need to restructure export incentives in place to encourage investment in, and export of, man-made fibre-based apparel items. This would also help to raise the share of domestic value retention in total exports of Bangladesh which at present hovers around 60.0 per cent.
Indeed, both export concentration and market concentration persist. For example, the country’s export share in the growing markets of South Asia, East Asia, and ASEAN came down in the first half of FY2025 compared to the matched figure for FY24 (the share came down to 11.8 per cent from 12.7 per cent). Addressing the attendant challenges is particularly important also in anticipation of Bangladesh’s upcoming graduation from the Least Developed Country (LDC) status. Taking a cue from Vietnam, Bangladesh should aggressively pursue Free Trade Agreements (FTAs) and Comprehensive Economic Partnership Agreements (CEPAs) with countries of the region. A dedicated Trade Negotiating Cell needs to be set up, and the country’s offensive and defensive interests identified. Forward-looking trade strategies will need to be formulated and proactively pursued. Domestic tariff rates and regulatory policies will have to be adjusted in view of this in anticipation of Bangladesh’s future as a non-LDC developing country. Initiatives targeting the various trade-related measures, at the border and behind the border, must be put into action, and adequate preparation must be taken in anticipation of changing market access regime beyond the border.
Recent initiatives of the Bangladesh Investment Development Authority (BIDA) to attract export-oriented Foreign Direct Investment (FDI) to targeted sectors are timely, and need to be vigorously pursued. The proposed measures by BIDA include prioritising the setting up of selected Special Economic Zones (initially five SEZs and in ten years an additional ten) and identification of sectors that will be prioritised (19 sectors) in policies. The policies will need to be implemented by making available all the investment-related services as stipulated in the One Stop Service Act of 2018.
Proactive implementation of the Smooth Transition Strategy in view of LDC graduation is critically important if the current robust export performance is to be sustained in future, and the challenges of LDC graduation are to be adequately addressed. The discourse and proposal as regards deferment of LDC graduation (beyond 2026) and the possibility of availing of the Generalised System of Preferences (GSP) plus facility should not dissuade Bangladesh from doing the needful towards sustainable graduation. This is for a number of reasons. Firstly, as the CDP report (2021) indicates that Bangladesh is comfortably situated in view of all the three graduation thresholds and, as such, it will be a hard sell to argue for any deferment. Secondly, accessing the GSP plus preferential market access will be difficult (Bangladesh’s export share of RMG to the EU at present is above the ceiling proposed in the GSP Plus Scheme). Thirdly, the rules of origin for RMG in the GSP Plus proposed are onerous: two-stage conversion instead of one stage under the existing Everything But Arms (EBA) scheme. Fourthly, compliance requirements as regards labour, environment, CO2 emission and other standards are expected to become much more stringent once the new EU-GSP Scheme comes into effect in 2027. The task before Bangladesh will be to take all necessary initiatives and measures in view of the country’s graduation timeline of November 26, 2026.
Better and more efficient trade facilitation measures will be critically important in raising the export and trade competitiveness of Bangladesh. These included implementation of the recently formulated National Logistics Policy (2024), Paperless Trade Policy, Single Window System and cross-border Digital Commerce Policy (2024), and introduction of green trade facilitation measures. Putting in place the above will raise Bangladesh’s trade competitiveness and bring down trade-related costs and improve the business environment significantly.
Imports Gain from Price Effect: The encouraging growth of exports, together with the robust inflow of remittances helped to stall the fall in the forex reserves experienced since June 2024, and stabilise it at about US$26.0 billion in more recent months. This facilitated the withdrawal of some of the restrictions on imports put in place earlier. This led to a rise of 2.0 per cent in imports during the July-October of FY25 period compared to the corresponding period of FY24 (when imports were -20.6 per cent lower when compared to the matched period of FY2023). However, the import structure indicates that the growth was mainly because of the growth of imports of raw cotton (15.4 per cent) and textiles and articles thereof (26.8 per cent), while import of key production-related intermediaries (e.g., crude petroleum; -46.7 per cent) and capital goods (e.g., capital machinery: -25.1 per cent) remained in the negative. L/C opening (-0.5 per cent) and L/C settlement (-1.0 per cent) were in negative terrain for the period between July-November, FY25. However, to note, the two indicators were deep in the negative during the previous two corresponding periods (-12.3 per cent and -26.8 per cent for the same period of FY24 against FY23). The slide downward, thus, has been arrested. In view of the fall in prices of major commodities in the global market (e.g., fuel cotton, etc.), imports in terms of volume were able to post a positive trend. Accordingly, the data on import L/C opening, and L/C settlement should be treated with some caution, and leave room for interpretation.
Encouraging Remittance Inflow but Composition Merits Closer Look: As was noted, the high growth of remittance inflow has contributed to restraining the slide in the availability of foreign exchange in Bangladesh. The year 2024 saw the highest amount of remittance flow to the country US$26.89 billion, which was 22.7 per cent higher than 2023. If the period under review (July-December of FY25) is considered, the growth in remittance flow was 27.6 per cent against the matched period of FY2024.
Over the past four years (between 2021 and 2024), about 4 million people have left Bangladesh for overseas jobs, mostly in the Middle-East countries. It was pointed out in the previous IRBDs that this was not reflected in the amount and origins of remittance inflows to Bangladesh. Remittance inflow figures for 2021, 2022, and 2023 were US$22.0 billion, US$21.3 billion, and US$21.9 billion respectively despite the fact that about three million people had left the country for overseas jobs over the corresponding period. The other disquieting development was the structure of the inflow- there was a significant shift from Saudi Arabia to the UAE, for example. This is clearly discernible from Figure 4.2.
The fall in remittances from Saudi Arabia (more than 50 per cent of migrant workers left for the country), and the parallel rise in the remittances from the UAE, allude to the suspicion about a shift towards informal channels in recent past years. This calls for more in-depth investigation. In this connection, one may recall the report of the White Paper Committee 2024 which was set up by the Interim Government. The report noted that Dubai has emerged as a major hub of the money laundered from Bangladesh in the recent past. A number of underlying factors were identified in this connection: Dubai real-estate regulations (dedicated areas earmarked for foreign buyers and not asking about the source of money); investment policies (attracting foreign investors without undertaking due diligence); easy ways for people to set up shell companies and aggregators purchasing foreign currency from remitters by paying a premium; distribution of ill-gotten money among remittance-receiving households in Bangladesh by using various mobile financial platforms; employing firms and agents specialised in handling laundered money; hiding the sources through multilayered transactions and setting up shell companies in tax havens.
It is hoped that the Task Force set up by the Bangladesh Bank for Recovery of Stolen Assets, with support from the re-energised Bangladesh Financial Intelligence Unit (BFIU) and a rejuvenated Anti-Corruption Commission (ACC), will go deeper into the attendant issues, undertake forensic investigation and identify the key players involved in the laundering of money and will lodge criminal cases to bring the perpetrators to justice. Efforts must be pursued in all earnest to bring back the stolen money to where it truly belongs (filing cases in Bangladesh; establishing paper trail to the ultimate beneficiary abroad; filing cases in overseas jurisdiction; getting court verdicts to sequester, freeze and seize assets and return the recovered money to Bangladesh). To facilitate this process, Bangladesh should become a full member of the Financial Action Task Force (FATF), and Global Forum (GF) on Transparency and Exchange of Information for Tax Purposes.
Balance of Payment Scenario: The robust performance of exports and remittances contributed to an overall improvement in the balance of payments situation towards the end of December 2024. While this is still not comfortable, the trend is, however, encouraging when compared with the corresponding period of FY24. As was noted, large inflow of export and remittance earnings have helped to stall the slide downwards in the forex reserves situation, and contributed to stabilisation of, to a certain degree, the exchange rate of BDT. The improvement is primarily on account of the significant reduction in the trade account deficit, and to a larger extent, to the declining current account deficit. The improvement in Bop is not primarily because of the debt-creating financial account balance (to note, in the July-November period of FY2022, this was US$4,599 million; underpinned by medium- and long-term loans worth US$3,013 million). This compositional shift is a positive trend. However, the dismal performance in terms of FDI and portfolio flows remains a nagging concern.
There are a number of issues which, however, will need to be kept in the perspective in view of the likely BoP scenario over the near-term future: (a) with increasing de-restriction of imports, import payments are expected to go up; consequently, the trade balance could come under further pressure. Sustaining current robust export performance will be critically important in view of this; (b) maintaining the ongoing high growth of remittances will not be easy. It could be that the rise in remittance flow is because of the evident disruption of hundi/hawala and other informal channels of illicit financial flows in the aftermath of the August uprising. This could as well be a one-time phenomenon; (c) while the fall in reserves has been halted, the demands of higher imports and growing debt servicing liabilities could accentuate the pressure on forex reserves (the grace periods- when only interests have to be made- as regards a number of megaprojects are coming to an end; when the repayment period will commence, both interest and principal amount will need to be paid). Fourthly, true, the BDT, in view of the higher availability of the foreign currency in the country, has somewhat stabilised (for example, at about BDT 120-121 vis-a-vis USD). However, if forex demand on account of import and debt servicing payments goes up, BDT could slide further under an open market regime. This would then likely have implications in the form of imported inflation.
Exchange Rate Movement and Stabilisation of BDT: After the sharp decline of almost 40 per cent over the last three years, the value of the BDT appears to be stabilising in recent months. The BDT exchange rate against USD appears to be at the equilibrium level, as of now. As is known, at present the Bangladesh Bank is pursuing a crawling peg policy (within a limited range). However, a move towards a fully market-based exchange rate regime is anticipated over the near-term future. The exchange rate movement will need to be closely monitored. At the same time, the Bangladesh Bank may consider gradually phasing out (or withdrawing) the additional money being given to remitters to incentivise remittance flow and discourage sending money through informal channels (at 2.5 per cent). In 2024, against the remittance flow of US$26.88 billion, about US$0.67 billion was paid to remitters as incentives (equivalent to more than 80 billion taka at the current exchange rate of US$1=BDT 120). Given the revenue situation, the prevailing policy in this regard ought to be carefully weighed, and if justified, changed. Maintaining the exchange rate stability and holding comfortable forex reserves are the twin challenges that the central bank will have to deal with in the near-term future.
Concluding Remarks: The performance of the external sector during the July-December 2024 period transmits some hopeful messages. However, headwinds in the form of the global trading environment (likely US trade policy changes under the Trump administration), demand-side pressure on forex against the backdrop of import and investment pick-up, the growing pressure of Public and Publicly Guaranteed (PPG) debt servicing, and the challenges of implementing the smooth and sustainable LDC graduation strategy should keep policymakers alert and on their toes. The external sector situation and BoP scenario in June 2025 will hinge on how policymakers are able to deal with these emergent challenges, and take advantage of the drivers and accelerators of external sector performance. How the key external sector correlates evolve in the coming months of FY25 will hinge critically on this. In the context of LDC graduation, the smart way to go forward would be to implement the Smooth Transition Strategy in all earnest and take the needed initiatives to transform the economy from one of preference-driven competitiveness to skills and productivity-driven competitiveness.
The discourse about deferment of graduation should not dissuade Bangladesh from taking the needed measures. It is also to be noted that, in the end, the issue of requesting a deferment of Bangladesh’s LDC graduation is a political call. Whether Bangladesh will be comfortable to remain an LDC beyond 2026, with the war-torn Afghanistan, being the only other LDC in the region, demands careful strategic and political consideration.
Efforts to bring back the laundered money from abroad must be pursued in all earnest. Measures need to be geared to undertaking energetic initiatives concerning prosecution, investigation, collaboration with relevant global initiatives and platforms, and filing of criminal/ civil cases in foreign jurisdictions to recover the stolen assets and the evaded taxes.
Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Mr Muntaseer Kamal and Mr Syed Yusuf Saadat, Research Fellows, CPD. moazzem@cpd.org.bd; avra@cpd.org.bd
[Abu Saleh Md Shamim Alam Shibly, Tamim Ahmed and Helen Mashiyat Preoty, Senior Research Associates; M Tanjim Hasan Khan, Resource Mobilisation Associate; Afrin Mahbub, Preetilata Khondaker Huq, Anika Tasnim Arpita, Jannath Sharmin Chowdhury, Anindita Islam, Abrar Ahammed Bhuiyan, Nuzaira Zareen, Ayesha Suhaima Rab, and Safrina Kamal, Programme Associates of CPD provide research assistance.]
