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 $
Changes in
Percent (%)
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)
Changes in
Percent (%)
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 $
Changes in
Percent (%)
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
USdollarinMillions
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
0.00
FY 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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507227-1; ISBN-10: 978-0-13-507227-1.
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 Bangladesh Bank (2016) Economic Data The overall position of export
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Appendix

MBA Project Report on Impact of Exchange Rate on Balance of Payment (BoP) by Moez Ansary

MBA Project Report on Impact of Exchange Rate on Balance of Payment (BoP) by Moez Ansary

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