The Fiscal and Current Account Imbalances: An Empirical analysis of the Twin Deficits Hypothesis in Bangladesh

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The Fiscal and Current Account

Imbalances: An Empirical analysis of the Twin Deficits Hypothesis in Bangladesh

Murshed, Muntasir and Nijhum, Nawrin Khan

North South University, University of Dhaka

2019

Online at https://mpra.ub.uni-muenchen.de/97115/

MPRA Paper No. 97115, posted 26 Nov 2019 13:16 UTC

The Fi s c a l a nd Cur r e nt Ac c ount I mba l a nc e s : An Empi r i c a l a na l ys i s of t he Twi n De fic i t s Hypot he s i s i n Ba ngl a de s h

MuntasirMurshed

SchoolofBusiness and Economics,North South University,Bangladesh Nawrin Khan Nijhum

MasterofDevelopmentStudies,University ofDhaka,Bangladesh

Abstract

Thispaperaimstoanalyzethepossibility ofthetwin deficitshypothesisexisting in thecontextof Bangladesh using annualdatafrom 1980 to2017.VectorError-Correction approach istapped to estimatetheshortand long run coefficientswhilethepairwiseGrangercausality analysisis employed to understand thelong run causalassociations.Theresultssuggestthatbudgetand currentaccountbalancesin Bangladesh behaveasdistantcousinsratherthan twinsasperceived from a reversecausality thatisfound to bestemming from budgetdeficitto currentaccount deficit.Moreover,budgetdeficitisfound todeterioratethenationaltradebalancein Bangladesh.

JEL Classifications:E62,F32,F41,H62

Keywords:twin deficits,tradedeficit,budgetdeficit,currentaccountdeficit,VEC

1 . I nt r oduc t i on

Public expenditure is understood to play a central role in dictating socioeconomic developmentwithin a nation (Dieleman etal.2016;Shen,Yang and Zanna 2018;Lee and Gunderson 2018). The Keynesian, New Keynesian and Post-Keynesian schools of thoughthave also postulated the need for expansionary (contractionary)fiscalpolicies to restore long run equilibrium following a recessionary (inflationary)gap within the economy (Kronenberg 2010;Coddington 2013).Moreover,many empiricalstudies have often referred to the size of the government being correlated to the growth of the economy (Ram 1986;Lin 1994;Gwartney,Lawson and Holcombe 1998).However,the developing economies have often encountered revenue shortfalls whereby fiscal expansion forattainmentofgrowth purposes has alwaysstimulated deterioration ofthe budgetbalances within these nations.Thus,sustained BudgetDeficit(BD)seems to be a common characteristic ofallless developed economiesacrossthe globe (Klitgaard 1989). Furthermore,economists often refer BD to be one of the core reasons behind the completion ofpublic projects being deferred forindefinite period oftime which notonly increases the associated costbutalso slows down the overallgrowth momentum as well

(Corsetti and Roubini 1991; Fischer 1993). Under such circumstances when the governmentfails to bridge the fiscalgap via tapping the domestic financialinstitutions for funds,externalfinancing ofthe BD seems to be the lastresort(Dornbusch 1984;

Fischer and Easterly 1990;Osinubi,Dauda and Olaleru 2010).However,itis said that reliance on such foreign sources offunds notonly triggers the debt-servicing burdens of the governmentbutitalso tends to adversely affectthe overalleconomy,particularly via deteriorating the current account.Thus,economists often refer to this simultaneous deterioration in budgetand currentaccounts as the Twin Deficits Hypothesis (TDH) whereby a rise in the BD is alleged to stimulate a hike in the CurrentAccountDeficit (CAD)aswell(Abell1990;Islam 1998;Antonakakis 2019).

The TDH originated from the simultaneous deterioration ofthe United States’budget and current account balances in the 1980s and was therefore initially thoughtto be appropriate in the contextofthe developed economiesonly (Hutchison and Pogott1984;

Hutchison and Throop 1985;Fountas and Tsoukis 2004).However,empiricalevidence documented in the relevant macroeconomic discourse suggests that the TDH is prevalent within the less developed economies as well (Fidrmuc 2003; Kouassi, Mougoue and Kymn 2004).Thus,the persistentfiscaland currentaccountimbalances have always been in the economic spotlight particularly due to the keeping into consideration the policy implications that would foster long term growth strategies especially within the underdeveloped nations.

Againstthis backdrop,this paper aims to probe into the dynamics attached to the BD and CAD in the contextofBangladesh,an emerging South Asian economy thathas experienced persistentgrowth in its BD and trade deficits.Bangladesh is claimed to be one ofthe rapidly growing developing economies in the world thathas managed to sustain an average economic growth ofmore than 6% in the lastdecade (Amin and Murshed 2017;Murshed 2018).However,in spite ofsuch impressive growth trajectories, the nation has faced stern difficulties in mobilizing its domestic revenues which has resulted in aggravation ofthe BD over the past(Murshed and Yusuf2018).Itis to be noted thatalthough Bangladesh has displayed a somewhatfavorable performance in its currentaccount,exhibiting positive trends in the pasttwo decades or so,ithas always registered sustained deficitsin itstrade balance (Roy and Gupta 2013;World Bank 2018). However,despite the nation accounting for negative netexports,the currentaccount remained positive which can largely be attributed to the robustgrowth in the nation’s internationalremittance inflows (Ahmed 2010;Chowdhury 2011).However,recently Bangladesh has gone on to registering CAD which has raised concerns amidst the policy makers in anticipating a possible TDH in the future being validated in the contextofBangladesh.Moreover,the growth in the remittance inflows has also slowed

down which further points outtowards the ineffectiveness ofsuch inward sources of foreign currencies in bailing outBangladesh’sCAD in the future (The Economist2017). Although there has a number ofstudies addressing the TDH issue in the contextof Bangladesh,the novelty ofthis paper lies in its robustapproach to analyze the TDH using both the absolute value ofthe currentaccountbalance and the trade balance as a proxy measure ofCAD in Bangladesh.Annualtime series data stemming across 1980 to 2017 has been used to perform rigorous regression and causality analyses.The results from econometric analyses suggestthatBD and CAD behave as distantcousins while BD and TD move togetherin the same direction.

The remainder ofthis paper organized as follows.Section 2 presents the analysis of selected macroeconomic trends in Bangladesh.A review ofthe theoreticalframework and empiricalliterature addressing the TDH is provided in section 3.The methodology ofresearch is highlighted in section 4 while the empiricalmodeland data are discussed in section 5.The results from the econometric exercises are reported and discussed in section 6.Finally,section 7 outlines the concluding remarks and recommends the policy implications based on the results obtained in the paper.

2.Selected MacroeconomicTrendsin Bangladesh during post1990s

Mobilization ofdomestic public revenue has always been a concerning issue for the governmentofBangladesh (Murshed and Saadat2018).According to localreports,more than two-thirds of the population within the taxable income bracket refrained from filing tax returns in 2018 (The Daily Star 2018,November 09).Thus,the nation has historically exhibited persistentBD as shown in Figure 1.Within the time frame of1990 and 2017,the nation registered its poorestfiscalshortfallworth almost175 million US dollars in 1995. On the other hand, the current account balances projected comparatively better trends, depicting positive figures from the early 2000s that sustained almost one and a half decades before experiencing a sharp fall in 2015.

Recently,the nation has accounted for the worstperformance in its current account balance which was around 2.5% ofthe GDP.Thus,the sudden inversion ofthe current accountbalance,along with the predominantly deficitbudgetbalance in Bangladesh, has become a matterofconcern forthe policymakers.

Although,the currentaccountdid turn negative very recently in Bangladesh,the trade account has always been subject to deficits due to the monetary value of imports outweighing the corresponding exportearnings figures.The trade deficitin Bangladesh increased from 1.89 billion US dollars in 1990 to almost17 billion US dollars by the end

of2017,implying increase in the deficitby almost10 times during the three decades or so. The narrow export basket of Bangladesh and the loss of preferential export treatments can be referred to as the two major reasons behind such aggravation ofthe trade deficitfigures.A closer look into Figure 1 shows thatalthough BD and CAD do notfollow similartrends,similartrends can be associated between BD and trade deficit in patches between 1990 and 2017 which tendsto pointouttowards a possible causation between these macroeconomic aggregatesin Bangladesh.

3.Review ofLiterature

This particular section has been classified into two subsections with the former laying down a conceptualframework addressing the TDH while the latter shedding lighton the relevantstudies documented in the empiricalliterature.

3.1.ConceptualFramework

The nationalincome accounting can framework can be tapped to understand how a simultaneous deterioration in the BD and CAD can take place in the economy:

Y=C+I+G+(X−M) -----------------(1)

where Y refers to the nationalincome;C denotesprivate consumption demand;Irefers to the private investment;G comprisesofpublic expenditure and X-M refers to the net exports.Itis to be noted thata negative value ofX-M can also be viewed asCAD due to trade balance being one ofthe two componentsofthe nationalcurrentaccount.

Similarly,referring to domestic absorption,nationalincome can also be written as:

Y=C+S+T -----------------(2)

where S refers to the nationalsavings thatis derived from the summation ofprivate and public savings,while T refers to public revenue.Thus,equating equations (1)and (2) gives us:

(X−M)=(T−G)+(S−I) -----------------(3)

whereby X-M,as mentioned earlier,can be described as the CAD while the BD is given by (T-G),assuming both importand governmentexpenditure outweighing exportand government revenue respectively. Hence, assuming the domestic savings and investmentgap (S-I)to be constant,a rise (fall)in the BD is likely to be reflected through

a one-to-one rise (fall)in the CAD,thus,explaining the TDH.However,in explaining the TDH correctly,the nature of causality between the BD and CAD is of critical importance.

The TDH can also be primarily understood from the nature ofthe correlative and causal associations between the BD and CAD.For instance,in the case of the causation running from BD to CAD without any feedback can be viewed as the TDH as economists referthe TDH being caused by deterioration in the currentaccountbalance thatis triggered by a worsening ofthe budgetbalance,butnotthe other way round.

Thus,the case ofa reverse causation stemming from CAD to BD cannotbe claimed as an evidence of the TDH.On the other hand,bidirectional causality can also be associated with the BD and CAD whereby these macroeconomic deficits can influence one another.In such circumstances,the TDH is also said to hold.

3.2.EmpiricalEvidence

Empiricalworks investigating twin deficits in light of the RE and the FHP revealed multifarious results from differentcountries.Although a good number ofstudies have concluded in favor ofthe validity ofthe TDH,there is stillambiguity regarding the nature ofthe association between these two macroeconomic deficits.

Saleh,Nairand Agalewatte (2005)explored the interlinkage between SriLanka’sBD and CAD using the Autoregressive Distributed Lag (ARDL) methodology.Annualtime series data between 1970 to 2003 was employed in the econometric analysis which resulted in the BD being positively correlated to the CAD.Moreover,the authors also concluded in supportofthe a unidirectionalcausality running from BD to CAD in the long run as the causality test results did provide statisticalevidence regarding the validity ofthe TDH in the case ofSriLanka.

In a study by Onafowora and Owoye (2006),the TDH in the contextofthe small,open and oil-dependenteconomy ofNigeria was empirically examined using annualdata stemming across 1970 and 2001.The authors used a wide array ofeconometric tools including time series cointegration and vector error-correction model techniques, Granger long-run causality tests and the generalized impulse response analysis to comment on the validity of the TDH. In line with the estimations, the authors concluded in favor ofthe TDH holding to be true in Nigeria.However,although the authors did unearth a positive correlation between BD and CAD,a reverse causation was found to be running from CAD to BD in the country.Thus,they recommended in

favoroffiscalconsolidation through which the BD can be reduced which in turn would also puta hold on the CAD aswell.

In a study on the macroeconomic impacts ofBD in Uganda,Lwanga and Mawejje (2014) used Vector Error-Correction modeling tapping quarterly data from 1999 to 2011.The authors also used pairwise Granger causality testto understand the long run causal association between the macroeconomic aggregates considered in their paper.The results confirm the validity ofthe TDH both in the long and the shortrun.Furthermore, using variance decomposition analysis,the authors also found thatthe variance in the nation’s current account balance was mostly explained by its budget balance that remained negative all throughout the aforementioned data period. Based on the aggregated findings,deterioration ofthe BD was inferred to be the core phenomenon behind Uganda’sdeteriorating currentaccount.

Halicioglu and Eren (2017)empirically tested the validity ofthe TDH in the contextof Turkey using annualtime series data from 1987 to 2004.A bounds testing cointegration procedure had been implemented in this paper along with the causality tests between the concerned variables augmenting the regression model.According to the empirical results,a weak positive correlation between the currentaccountand fiscaldeficits was concluded by the authors,providing statisticalsupportto the existence ofthe TDF in Turkey.

Therefore itcan be seen thatthere exists quite a bitofambiguity with regard to the validity ofthe TDH across the globe.A summary ofother relevantempiricalstudies shedding lighton the TDH is provided in Table 1 (see appendix).

4 . Me t hodol ogy

As partofthe econometric methodology,the Augmented Dickey-Fuller(ADF)unitroot testis considered to check whether the variables considered in the regression models are mean reverting or not.This is followed by the Johansen testfor cointegration in order to assess whether or notthe variables move together in the long run.This paper employs the VectorError-Correction (VEC)approach to predictthe shortand long run correlations between the concerned variables while the Grangercausality testis tapped to deduce the direction ofcausality between the macroeconomic deficits considered in this paper.

4.1.VectorError-Correction Approach

A VEC modelis a restricted Vector Autoregressive (VAR)modelstructured to employ non-stationary series thatare known to be cointegrated.Itis restricted in the sense that the VEC modelhas cointegrating relations builtinto the specification so thatitrestricts the long-run behavior ofthe endogenous variables to converge to their cointegrating relationships while allowing forshort-run adjustmentdynamics.The cointegration term is known as the Error Correction Term (ECT)which provides the pace atwhich any deviation from the long-run equilibrium in the previous lag is corrected in the nextlag through a series of partial short-run adjustments.This is referred to as the error- correction mechanism.

Engle and Granger(1987)showed thata VEC modelis an appropriate method to model the long-run as wellas short-run dynamics among the cointegrated variables.However, in context of a multivariate regression analysis,the VEC approach is preferred to provide only the short-run causality among the variables.Causality inferences in the multi-variate framework are made by estimating the parameters ofthe following VEC equations:

ΔY=α+

∑

i=1 m

βiΔYt−i+

∑

j=1 n

γjΔXt−j+

∑

k=1 0

δΔ M^s+

∑

l=1 p

ζΔN+θZt−1+εt

…………

(1)

ΔX=a+

∑

i=1 m

bⁱΔY+

∑

j=1 n

c^jΔX^t−j+

∑

k=1 0

dΔ M^s+

∑

l=1 p

eΔN+fZ^t−1+ξ^t

………… (2) z t-1is the error-correction term which is the lagged residualseries ofthe cointegrating vector.The error-correction term measures the deviations ofthe series from the long run equilibrium relation.For example,from equation (13),the nullhypothesis thatX does notGranger-cause Y is rejected ifthe setofestimated coefficients on the lagged values ofX is jointly significant.Furthermore,in those instances where X appearsin the cointegrating relationship,the hypothesis is also supported if the coefficient of the lagged error-correction term is significant.Changes in an independentvariable may be interpreted as representing the shortrun causalimpactwhile the error-correction term provides the adjustmentofY and X toward theirrespective long-run equilibrium.Thus, the VEC modelrepresentation allows us to differentiate between the short-and long- run dynamic relationships.The Chi-Square teststatistic is used to determine the short run causalities between pairsofvariables in the model.

In the contextofa panelofN countries,three regressors (X,Y and Z)across T time period,the VEC modelcan be given by:

[

]

[

]

^∑

[

][

]

[

]

[

]

where ∆denotesfirstdifference transformation ofthe variables. 5.EmpiricalModeland Data

This paper considers a linear regression modelto express CAD as a function of its lagged value,BD and othercontrolvariables:

t−1+¿ε1t

∆ CAD_t=α+∑_i=1 k−1

β_i∆ CAD_t−1+∑_j=1 k−1

ρ_j∆ BD+∑_m=1 k−1

ρ_m∆ Z_t−m+λ ECT_¿ ^…….(4)

where ∆represents the difference operator,k-1 is the one period reduced lag length k, the subscripttrefers to the particulartime period ofdata,λ isthe speed ofrestoration of equilibrium following a deviation from the equilibrium in the previous lag and ECT is the error-correction term.The variable Z contains a set of controlvariables which include public borrowing from localfinancialsources (PBOR),realexchange rate (RER), GDP growth rate (GDPG),inflation (INF),globalization index (GI)and terms oftrade (TOT).The CAD and BD are expressed as percentages ofGDP.For robustness check, trade deficit (TD),also measured as a percentage of GDP,is used as an alternative aggregate forCAD in Bangladesh due to the trade balance being an integralpartofthe nation currentaccount.The TD modelisgiven by:

t−1+¿ε1t

∆ TD_t=α+∑_i=1 k−1

β_i∆ TD_t−1+∑_j=1 k−1

ρ_j∆ BD+∑_m=1 k−1

ρ_m∆ Z_t−m+λ ECT_¿ ^…….(5)

Annualtime series data from 1980 to 2017 is accumulated from differentsources and incorporated into the econometric analyses.The BD variable is sourced from the Bangladesh Economic Review (2000,2005,2010,2017)reports published by the Ministry ofForeign Affairs ofthe People’s Republic ofBangladesh.The GIdata is compiled from the KOF Swiss Economic Institute database (KOF Globalization Index 2017).The restof the variables are sourced from the World DevelopmentIndicatorsdatabase ofthe World Bank (2018).

6.Resultsand Discussion

Selection ofthe optimallags for the regression modelis very important.Thus,the lag optimality was checked forboth the regression models using the VAR lag ordersection method.The corresponding results are tabulated in Table 2.The optimal lags are selected using multiple information criteria.According to the estimates,the information criteria almostunanimously suggesta 2-period lag to be optimalforboth the models. The stationarity ofallthe variables comprised in the datasetis then checked using the ADF unitrootanalysis.According to the estimates,reported in Table 3,itis seen thatall the variables considered in the dataset are mean reverting at their respective first differences with GIbeing the only exception as itis seen to be stationary atits levelas well.Thus,these results nullify the possibility ofthe regression analyses to follow being spurious.

The long run associations between variables are then checked using the Johansen cointegration analysis.Table 4 reports both the trace and the maximum Eigen value statistics for model (4) and (5).According to the estimates,it is seen that all the variables,in both the models,are associated in the long run asindicated by the presence ofcointegrating equations.These findings also provide justification behind the use of the VEC approach ratherthan simply estimating the models in VAR framework.

The shortand long run coefficients estimated from the VEC approach are reported in Table 5.In the contextofmodel(4),BD is found to be negatively correlated to CAD which is notin line with the notion ofthe TDH.The long run estimate ofthe coefficient attached to BDtimplies that,on average,a 1% rise (decline)in the BD attributes to more than 5% decline (rise)in Bangladesh’s CAD in the long run ceterisparibus.Thus,this finding is notconsistentwith the notion ofthe TDH which voices in favorofa positive relationship between these two deficits.The results also pointouttowards an important finding thatRER appreciations mitigate the CAD in the long run which tends to suggest thatprecautionary measures are to be taken to controlthatattribute to reduction in the RER,and thereby improve the net exports,which ultimately would be effective in curbing the CAD as well.Moreover,on average,the marginaleffectofa 1% rise in the GI is found to accountfora 0.06% fallin the CAD,ceteris paribus.A plausible explanation behind this key finding could be provided in the sense thatas the nation becomes more financially integrated globally,there are opportunities to be soughtin enhancing the net income from abroad balance,particularly via the channel of remittances from the

internationalmigrants,which can ultimately off-setthe negative impactofthe deficitin the currentbalance to a large extent.Finally,the statistically significanterror-correction term indicates thatany distortion from the equilibrium in the previous lag is corrected ata rate of18.5% in the currentperiod.

In contrast to the VEC model estimates in the context of model (4),when TD is considered as a proxy to the CAD in model(5),itis found to be positively associated to BD both in the shortand in the long runs.The estimates imply thata 1% rise (fall)in the BD contributes to a corresponding rise in Bangladesh’s TD on average by 0.45% and 10.25% in the short and the long runs respectively, ceteris paribus. These findings coincide with the concept of the TDH,subject to meeting the appropriate causality criteria.The results also revealthe long term economic growth impacts on the trade balance ofBangladesh exhibiting a 0.006% rise in the TD following a 1% rise in the GDPG.This isa concerning finding forthe economy since the benefits ofgrowth are not being translated into export growth in Bangladesh which can be detrimentalto the credibility ofthe export-led growth strategies pursued by the nation.Furthermore,the government’s reliance on funds from the domestic sources are found to curb the TD in both the time horizons which tend to imply thatpublic borrowing in Bangladesh does not crowd out private investment, particularly in the context of the industries specializing in producing the exportgoods.The error-correction term isalso found to be negative and statistically significantand predicts thatthe disequilibrium in the previous period is corrected ata rate of47.3% in the subsequentperiod.

Table 6 and Figure 2 (in the appendix)provide the diagnostic testresults ofthe VEC models.The results broadly imply thatthe models are notsubjectto serialcorrelation and normality problems and are also stable to some extent.The Cumulative Sum (CUSUM) plots of the models,as shown in Figure 3 (in the appendix),confirm the stability ofthe regression models aswell.

Finally,the pairwise Grangercausality tests are performed to understand the nature of causalassociations between the concerned variables in both the model.According to the estimated F-statistics reported in Table 7,a reverse causality is found to be stemming from CAD to BD which furtherprovides statisticalsupportto the invalidity ofthe TDH in the context of Bangladesh.Among the other factors,the CAD is found to be influenced by domestic financing ofthe fiscaldeficitand TOT.However,the results tend to change upon the consideration of the TD as a proxy to the CAD.The causality estimates show thata unidirectionalcausalchain is extends from BD to TD which is pretty much in line with the conceptofthe TDH where both the deficits tend to move in the same direction.Therefore,such contrasting results tend to once again portray the

emphatic role played by the nation’s robustgrowth in the netincomes from abroad, overthe years,and thereby relieving the adverse impacts ofdeficittrade balancesoff the economy.

7 . Conc l us i ons

The simultaneous worsening ofthe budgetand currentaccountbalances has attracted globalattention over the years.Thus,economists and academician have endeavored their time in unearthing the dynamics adhering to these key macroeconomic deficits whereby contrasting country-specific and regionalfindings have been documentin the relevant literature.The analysis of the TDH is more appropriate for the developing economies in particular due to these nations experiencing persistentdeficits in their budgetbalances and also in mostcases the respective currentaccountbalances seem to projectsimilar trends.Thus,taking the adversities of the TDH into cognizance,this paper aimed to empirically investigate the possibility of the TDH existing in Bangladesh.This analysis is pertinent in the context of Bangladesh following the nation’s aggravating BD and TD.Although the nation did manage to exhibitpositive currentaccountbalances over quite a long period oftime in the post-2000 period,the recentinversion ofthe currentaccountseem to have raised a concern amidstthe policy makers.Thus,the results from this paper are expected to draw critically important policy implications forthe government.

The statisticalestimates from the econometric analyses performed in this papertend to broadly suggestthe invalidity ofthe TDH in the contextofBangladesh as perceived from the reverse causation between BD and CAD.However,upon disaggregation ofthe nation’s currentaccountbalance and using the TD as a proxy instead,the results seem to be mirroropposite in certain cases.Statisticalevidence from both the regression and causality tests implied thatthe nation’s budgetand trade balances move togetherin the same directions which tend to have provided support to the validity of the TDH.

Therefore,in lightofthe results,itcan be concluded thatBD and CAD in Bangladesh are more ofdistantcousins ratherthan being twins.

Therefore,the key policy implications from overallfindings in this paper could be that the governmentshould ideally strategize to ensure simultaneous mitigation ofthe BD and the TD while addressing the recentdeterioration ofthe overallcurrentaccount balance separately.Itis believed thatthe contemporary CAD in Bangladesh can largely be attributed to the recent slowing-down of the nation’s growth in international remittance inflows.Thus,along with public policies to boostexportsand thereby reduce the gap between the imports and the exports,the governmentshould also look forward

to take effective steps in formalization ofthe informalchannelofremittances flowing into Bangladesh.Efficientmeasures to reverse this trend would notonly be effective in raising the government’s revenue butitwould also play a crucialrole in alleviating the nation’s foreign exchange reserves and also improve the balance ofincome from abroad accountaswell.

As faras the easing ofthe budgetshortfallis concerned,the governmentis expected to reconsider its income tax policy in order to ensure greater mobilization ofdomestic revenue.The government,truly speaking,should gradually prove its credibility to the people which notonly would prolong the politicalregime butwould also enhance the tax compliance rates in the country.In addition,imposition ofwealth taxes into the taxation policy would also be effective in spawning greateramounts ofrevenue and also reduce the obnoxiously high income and wealth inequalities thatexistin Bangladesh.

On the otherhand,broadening the nation’s exportbasketcan be key to closing the gap between imports and exports.Following the nation’s eligibilities for twin graduation into the groups ofdeveloping and lower middle-income countries,preferentialtrade arrangements can be expected to be diminishing with time which could aggravate the TD in Bangladesh further.Thus,diversification of the exportbasket can be idealin dealing with these limitations whereby the woes of the deficit trade balance can addressed to a large extent.

Data constraintis the major limitation faced in this paper whereby longer time series could not be incorporated into the econometrics analyses. Moreover, due to unavailability ofdata some key variables could notbe incorporate into the models.As partofthe future scope ofresearch,this study can extended to understand the behavior ofthe macroeconomic aggregatesthatcontribute to the BD,TD and CAD in Bangladesh which could provide betterinsightson the possible policy implications.

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