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Submitted to Mr. M. Nasiruddin Professor and Course Instructor (F-505) Department of Finance Faculty of Business Studies University of Dhaka
Submitted by Imroz Mahmud ID # 23050 Department of Finance Faculty of Business Studies University of Dhaka
Letter of Transmittal
April 23, 2013 Mr. M. Nasiruddin Professor Department of Finance Faculty of Business Studies University of Dhaka
Subject: Prayer for acceptance of the Report on Global Financial Crisis and its Impact on BangladeshsEconomy.
Dear Sir, It is my great pleasure to submit my report on Global Financial Crisis and its Impact on Bangladeshs Economy. While preparing this report, I tried my level best to follow your directions. The entire report is based on personal observation, practical work, consulting from various articles and books. I have tried my best to provide what I have learned during the last two months. I shall be highly encouraged if you kindly receive this report. In case of any further query concerning this report, I would be very pleased to clarify that. Thank you for supervising me during this difficult transitional time of my career. Thanking you Sincerely yours, .. Imroz Mahmud ID # 23050 Department of Finance Faculty of Business Studies University of Dhaka
Acknowledgement
It is my great pleasure to prepare this report on Global Financial Crisis and its Impact on Bangladeshs Economy. I have found great help from many people during the preparation of it. At first, I would like to express my gratitude to the Almighty Allah for giving me strength to complete this report and then to my course instructor Mr. M. Nasiruddin, Professor, Department of Finance, University of Dhaka on this regard.
Executive Summary
The world economy experienced the worst global financial crisis in 2007.While major world economies have taken a massive hit resulting in negative growth rates in key countries or regions, including the US, EU and Japan, the contagion also spread to emerging developing countries like China, Brazil, India and South Africa, as well as to the countries of South East Asia and Latin America. The magnitude of impact seems to depend on the extent of integration with the rest of the world (or to use World Bank jargon, the extent of liberalization that has taken place). The impact on LDCs like Bangladesh has been muted in the first, and even the second round. However, there is growing evidence that third round impacts are making themselves felt, manifested in declining exports, declining migration of labor, growing number of sick industries, industrial unrest, and reduced growth. There are also fears that poverty and unemployment may be exacerbated and MDG targets could become jeopardized. Countries like Bangladesh are interested in understanding the socio-economic impact of the global financial and economic crisis as well as policy options to cope with emerging challenges. This study addresses itself to the task of assessing the unfolding impact of the GFC on Bangladesh. There is a consensus that the chief transmission mechanisms relevant for Bangladesh are quite limited, operating through the impact on exports, remittances and labor exports, and imports. These could also lead to second order effects operating through lowering of growth, balance of payment and budgetary effects, as well as micro effects on employment and poverty. Flows of FDI and ODI (including food aid) have dwindled as well, leaving LDCs like Bangladesh to deal with the crisis on their own. A saving grace has been
the lack of a liberalized capital account in Bangladesh, which prevented dramatic capital outflows, and has not contributed to increased vulnerability. The possibility of an adverse impact on agriculture has not been raised in the current debate. However, low world and Indian food prices arising from a volatile international market, has caused agricultural prices to be depressed, especially since Bangladesh imports significant quantities of agricultural produce, including cereals, from time to time. The current rice price situation suggests that the problem of farm incentives is a serious concern. The analysis of social impacts shows that the global economic crisis has adversely affected Bangladeshs progress toward achieving poverty reduction and social development goals including the MDGs. This highlights the need to re-launch more determined efforts in achieving the stipulated goals. Bangladesh thus faces difficult and complex challenges. Along with providing stimuli to growth, the government must also make efforts to strengthen safety nets and ensure that poverty reduction and key social development gains are not reversed.
Table of Contents
Serial # Chapter 1: Context 1.1 1.2 1.3 Objective of the Report Methodology of the Study Limitation of the Study 1 1 2 Particulars Page #
Chapter 2: Overview of Global Financial Crisis 2.1 2.2 2.3 2.4 Introduction Origin of the Crisis How the Crisis Did Spread Consequences for Developing Countries 3 3 7 9
Chapter 3: Global Financial Crisis and its Impact on Bangladesh Economy 3.1 3.2 3. 2.1 3. 2.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 Introduction Bangladesh: Export Performance Export Performance in 2008 11 13 15
RMG Sector
21
Stakeholder Perceptions Impact on Imports Impact on Remittance Global Financial Crisis Impact on Banking Global Financial Crisis impact on Capital Market Global Financial Crisis Impact on Unemployment Impact on Employment in Different Sectors Interest Rate
24 25 26 27 30 30 31 32
Exchange Rate Inflation Impact on DFI Impact on Agriculture Effect on GDP Growth Effect on Public Finance/Budget Impact on Foreign Aid Why Bangladesh remained Less Affected
33 35 36 36 37 38 39 40
Chapter 4: Findings & Recommendations 4.1 4.2 Key Findings of the Report Recommendations Conclusion Bibliography 43 43 45 46
Chapter 1: Context
1.1 OBJECTIVE OF THE REPORT
The overall objective of the study is to provide an exposure of real life situation to the students where they are expected to translate and adapt the knowledge gained from the MBA (Evening) courses into by the theoretical knowledge in practical field.
BROAD OBJECTIVE
The prime objectives of the report are as follows: To identity the basic causes of Financial Crisis. To find out the effects of Financial Crisis. To identity the impact on export and import due to financial crisis. To identity the impact on economic indicators in Bangladesh. To analyze how does a global financial crisis spread all over the world.
countries elsewhere in terms of lower growth in their exports, and inflows of foreign direct investment, aid, and worker remittances. This paper addresses issues related to the crisis and seeks answers to the following questions: What the crisis is all about and what are its causes? What measures have been adopted to face the crisis, and to what effect? What are the lessons for financial institutions and governments? How does the crisis affect Bangladesh and what should be the policy response to avoid or minimize the impact of the crisis?
terrorist attacks, the US Federal Reserve began cutting interest rates to encourage borrowing, which spurred both consumption and investment spending in the country. At one stage, the Federal funds rate came down to as low as 1 percent. Such a low rate of interest was never experienced in the country since the regime of President Nixon. At the same time, in some fast growing countries like China as also in the Middle East, savings increased considerably, resulting partly from high economic growth and partly from increased fuel prices. These savings were channeled mainly to the US, greatly increasing the liquidity of US banks. Abundant liquidity and low interest rates increased the tendency to spend by US consumers and investors. This tendency was very high in the housing sector. The US Administration also played a big part as it encouraged mortgage companies to expand financing of affordable housing. President Bushs speech to the Congress around that time about the virtues of home ownership created frenzy among Americans to buy houses, chiefly with borrowed funds. Long before they were formally taken over, the two mortgage giants, Fannie Mae and Freddie Mac, had an implicit government guarantee. Obtaining housing loans was also very easy. A 1995 US Act allowed very liberal terms for banks mortgage lending. The slack regulatory system encouraged aggressive lending by banks and financial institutions. They gave mortgage loans to home buyers without checking their solvency status. Loans were given to people with no income, no job, or no collateral except the house on which the mortgage was given. They loosened even the primary conditions of loan giving, allowing low interest rates and easier schedules of repayment in the initial years of the loan, which made mortgages inexpensive and encouraged people to borrow and buy houses. The demand for houses thus increased, and with that the price of houses also rose. Between 1997 and 2006, house prices in the United States rose by 124 percent. As house prices rose, many people started to buy additional houses as profitable investment. Buying additional houses also became easier because as the house prices rose, the home owner could get additional loans against the same house. As more and more loans were easily available from banks and financial institutions, new houses began to be built in response to increased demand, thereby creating a bubble in the housing market.
A significant financial innovation of the time was the creation by commercial banks of attractive financial derivatives against the mortgage loans, which are known as mortgagebased securities (MBS) or collateralized debt obligations (CDOs). Quite interestingly, the financial innovation did not occur in a vacuum but in response to incentives created by governments. Many of the new-fangled instruments became popular among banks because they got around financial regulations, such as rules on banks capital adequacy. Banks created off-balance-sheet vehicles because that allowed them to carry less capital. The market for credit-default swaps enabled them to convert risky assets, which would demand a lot of capital, into supposedly safe ones, which did not. These artificial paper securities were traded in the secondary market. Large investment banks were major investors in these securities. As home prices were increasing, these banks did never properly assess the risks associated with these securities. They were hoping that house prices would never fall. In the event of any loan default, they would simply take possession of the house (foreclosure) and recoup the loan by selling the house. Investments in housing increased so greatly that by 2006 the supply of houses far exceeded demand. As a result, house prices plunged. At the same time, as the economy was registering recovery, the key interest rate was also raised. From 1 percent in 2004, interest rates were raised to as high as 5.25 percent in 2006.When the adjustable interest rates on mortgage loans were reset higher in 2007; it was found that many home buyers did not have the capacity to repay the loans. Loan defaults increased greatly in number and volume, and the lending institutions suffered heavy losses as a result. Foreclosure activity increased dramatically. The situation so created became what is known as sub prime crisis or the crisis of the low-quality mortgage loans, which triggered the global financial crisis through 2007 and 2008. However, as house prices began falling around the end of 2006 and loan defaults increased, the value of CDO securities started falling fast. The bubble burst in August 2007. Assets of companies like Fannie Mae, Freddie Mac, J.P. Morgan, AIG etc. were badly depleted. Investment banks that were primary investors in these securities were the major losers. One after another, these banks began to be insolvent. Buyers of CDO securities were not confined in the US alone. Many European banks and investors also bought these securities and suffered huge losses from the market collapse.
Because of the plight of the financial institutions, their bankruptcies, and the recessionary trend in the economy, the general people rushed to withdraw their bank deposits and invest in gold, oil and other commodities, as well as in the nearly risk-free US government treasury bills. A severe liquidity crisis thus emerged. Investment banks that did not have access to primary deposits were affected the most by the credit crunch. Gradually, the crisis spread to mutual funds, hedge funds, and even to commercial banks. As soon as the poor state of the banks and financial institutions became evident, shareholders of these companies became scared and started selling their shares. The panic sales led to widespread falls in share prices. On 29 September 2008, the Dow Jones Industrial Average plummeted 778 points. Wall Street losses on that single day were over $1.2 trillion. The financial crisis has had serious adverse effects on the US economy. Plunging house prices reduced the value of home owners assets. They were forced to cut down their consumption spending, which in recent times was the driving force behind US economic growth. The decline in consumer demand led to lower production, cuts in employment, and created a slump in the US economy. The unemployment rate climbed to a 14-year high in October 2008, with 10.1 million people out of work.
The potentially crippling problem now is the short-term credit markets, where banks are hoarding whatever cash they have in an effort to get out of the crisis. Loans to businesses and even between banks have dried up. The decline in credit flows has affected every business that needs credit. The real sector has suffered the most from the credit crunch. The major concern in the US is now to prevent the migration of the crisis from the Wall Street to the Main Street (real sector) where the pain has begun to be felt. The government and the Fed are focusing on keeping money flowing in the credit system, and thereby limiting layoffs, shutdowns and bankruptcies.
The culprit is thus the American model of deregulation of the financial sector, which was blind to, or even facilitated, the unbridled growth of greed and deception of executives of large financial institutions and Wall Street manipulators. Greed of the top management of financial institutions to pocket fat bonuses motivated them to lend recklessly to subprime (unsecured high-risk) borrowers, particularly in housing, without assessing the borrowers repayment capacity. The investment banks did not care to assess the risks involved in the newly-developed mortgage-backed securities and CDO derivatives. Nor was there any monitoring of activities of investment banks regarding their CDO transactions because, unlike commercial banks, the investment banks were not under the jurisdiction of US and European central banks. These banks concealed the risks of the artificial securities connected with the loans they made recklessly, and when the market failed, the risks rose to a point where banks became insolvent. It must, however, be conceded that the bankers error did not lie in violat ing the rules that govern global banking. The truth is that these rules themselves are flawed and promote what has been branded as Casino Capitalism. The rules are set by the Basle Committee of Bank Supervisors, representing only 11 OECD countries. The Basle Consensus disfavors government regulation of banks and advocates market price based self -regulation. The lesson derived from the present global financial crisis is that there should be structural changes in the global financial system, including strict public regulation, capital controls, and coordinated monetary policy among countries.
The credit crisis has crossed the Atlantic to Britain and Europe. The migration of the crisis is the result of a huge increase in financial globalization in recent years basically since 1995. The rest of the worlds assets in the US have risen from around 10 percent in 1980 to over 50 percent now. In the same period, the US assets abroad as a percentage of non-US GDP have risen from 7 percent to 45 percent. The global financial system now is thus a lot more tightly linked, increasing the chances of contagion among big economies. In fact, many European banks and investment and pension funds bought many of the same toxic financial products that sank the US financial institution.
GFC 2008
V S
The gravity of the present financial crisis is acknowledged in all quarters, but rescue measures are underway in all major economies to combat the crisis. However, it will take time for the impact of these measures to be fully visible. In any case, another Great Depression like the one of the 1930s is unlikely. A comparison between the present crisis and what happened in the 1930s reveals the following: In the 1929 stock market crash, Dow Jones Industrial Average plunged 40% in just two months, compared to 22% over a year now. Unemployment rate in USA rose to 25% by 1933, as against only 6.1% today.
US GDP shrank by about a third during the early 1930s but it rose 3% in 2007. CPI fell by 30% between 1929 and1933, but it is rising now. House prices fell more than 30% during the Great Depression but only 16% today. By 1934, some 40% of all mortgages were delinquent as against only 4% today. More than 9000 banks failed in the 1930s, compared with fewer than 20 over the past couple of years. The Great Depression was not caused by the stock market crash alone but by monetary policy blunders. Instead of increasing the credit flow, the Federal Reserve in that era reduced it by nearly 33%. On the other hand, there are now automatic macroeconomic stabilizers like unemployment insurance, social security blanket, federal deposit insurance, and circuit breakers to keep stocks from falling too fast, which stand as safeguards. Moreover, there is strong and concerted cooperation among countries to tide over the crisis. A recession has perhaps set in, but policy makers worldwide are striving hard to make it less painful and short lived.
although present, were relatively subdued.3 Bangladesh was one of very few developing countries not to be affected to the extent expected. Although exports of primary products suffered early shocks through falling demand, at the aggregate level export performance continued with double-digit growth, driven by steady performance of apparels exports until the end of the first quarter of 2009. At the same time, despite cases of early retrenchment of workers abroad, remittance flows continued to be robust, thanks to the large stock of workers managing to stay overseas and continuing to send money home. However, a study on the impact of the crisis (Rahman et al., 2009a) cautioned that Bangladesh could face a lagged response, with further deepening of the crisis towards the second half of 2009. In fact, some indications of trouble began to be felt even in the second quarter of the year. This was reflected in the response of policymakers in terms of macroeconomic management, attempts at countercyclical measures and the stimulus packages put in place to address the emerging challenges. Thus, the main focus of this paper is to review the following issues: Impact of the global financial and economic crisis on the macro-economy, such as growth prospects, inflation, interest rate, level and composition of public expenditure, budget deficit, exports & imports, balance of payments, public debt, etc. Impact of GFC on different sectors of the economy like agriculture, manufacturing, construction, SME, trade etc. Micro level impact: on households, rural-urban poverty, inequality, gender issues Mitigation and policy: policies adopted, recommendations. The above analysis is likely to involve an examination of a number of indicators, e.g. Foreign capital flows/FDI and ODA flows Availability of credit Exports Global commodity price behavior GDP and investment Employment, unemployment, poverty
School dropout (especially of girls) Basic health care Widening fiscal deficit/ fiscal space Balance of payments Monetary stance Social safety nets It is widely recognized that in the case of Bangladesh, the direct transmission channels that are most relevant are exports, labor exports and remittances, and global commodity price changes and imports. The first task therefore is to assess what has been happening on these key fronts. However, it is useful to begin with a review of macro-economic performance in the backdrop of the GFC.
Two main sources of economic growth have been manufacturing and services, both crucially dependent on the RMG sector. Thus, any impact on the countrys export processing sector, and in particular on the large RMG sector, will adversely affect economic performance.
The main driver of our exports sector is the ready-made garments industry (RMG) which accounts for almost four fifth of our total export earnings. Almost two and half million people, ninety percent of them women, are employed in the RMG sector; while a large but undetermined number of people are involved in various ancillary and support services e.g.
banking, insurance, transport etc. to this sector. The workers are largely drawn from the poorer sections of society. Any adverse effects on the RMG sector will thus have farreaching implications for the entire economy and society.
The export sector was potentially vulnerable to the financial crisis as it heavily depends on the EU and US markets which have been badly hit. Almost half of Bangladeshs exports go to the EU, while another quarter goes to the US. High export
concentration is a source of vulnerability for Bangladesh exports, especially in the context of the current recession.
There are at least two channels through which the crisis can hurt Bangladesh. Declining wealth and earnings in the USA and EU has reduced import demand and may reduce demand for Bangladeshi exports. Another impact could be through the banking system, reducing trade credit to buyers involved in imports from Bangladesh. This may in turn affect our exports.
However, a closer look at export trends suggests that by the end of the year, quarterly export growth was beginning to decline. This may be an early indication of the impact of the recession.
Bangladeshs positive export performance in the US market, for example, contrasts sharply with that of many other countries in the region (table 1.4). It will be seen that export
growth has become negative for India, Philippines and Sri Lanka although China and Vietnam have managed to post positive growth rates. Nevertheless, Bangladeshs performance would appear to be the best in this particular grouping.
Bangladesh registered a 12.5 percent export growth in woven products and 25.9 percent export growth in knit products to the US market at a time when US imports of these items actually shrank by 3.6 and 1.6 percent. Overall exports to the US grew by 13.6 percent in the face of a mere 2 percent growth in total US imports over the July-December, 2008 period. This basically indicates that Bangladesh has been increasing its market share in the US apparel market at the expense of competing countries, despite the recession (or perhaps because of it). Some Bangladeshi exports have been adversely affected in the US market, including frozen fish, headgear and jute products.
By the end of 2008 (4th quarter) we note that the quarterly growth of exports from China dropped to 0.06 percent; India posted negative growth; and US imports nose-dived to a negative 8.8 percent Against all this adversity, total Bangladesh exports climbed to 18.1 percent and Vietnam did slightly better, achieving a growth rate of 20 percent - further evidence of rising market share for Bangladesh.
However, Bangladesh has been facing problems in the EU market. Its exports to the EU grew by 3.6 percent in July-December 2008 while all other countries, with the exception of Sri Lanka, out-performed Bangladesh. In particular, Bangladesh has experienced problems in exports of shrimp, headgear, jute goods and rawhide registering a drop in exports of these products in the range of 16-25 percent. Most unusually, even woven exports registered a negative growth. China, on the other hand, experienced positive export growth for all the sectors except rawhides and leather products. The poor performance of Bangladesh in the EU market is largely attributable to the exchange rate situation that led to a sharp Depreciation of the Euro against the USD and BDT.
The main advantage of Bangladesh over its competitors is its price. Exporters from Bangladesh have been cutting back on prices further in trying to cope with the crisis. Indeed, unit prices, calculated by dividing value by quantity for the top ten RMG products exported by Bangladesh, reveal that except category numbers 340, 659 and 239, there is a downward price trend for all other categories. This has helped Bangladesh to remain competitive in the US market.
The following figure shows the quantity change of RMG exports for the top ten MFN categories to USA from Bangladesh, China and India. Out of the ten products, Bangladesh experienced negative export growth for three categories; while china and India experienced negative growth for two and seven categories respectively. China is experiencing positive growth in all categories in which Bangladesh is experiencing positive growth, except for category 239. Generally it is argued that Bangladesh is exporting low end products to the US markets. Because of income fall due to the financial crisis, it is expected that consumers are substituting their consumption of high-end products with these low end products the two following figure lends credibility to this view. While, Bangladesh and China are experiencing positive growth for these categories of products despite the recession, high-end products from China have actually been in decline. Thus, out of the top five Chinese RMG products exported (which are high-end), four items have been severely hit by falling demand. China has responded (somewhat surprisingly) by increasing exports of lower end products.
The following shows that China is facing a severe fall in export quantity of its major RMG export items to USA. This scenario has confirmed that consumers in USA are using low end RMG products from Bangladesh and China, instead of high-end RMG products.
In the EU, Bangladesh is experiencing negative export growth for rawhides, jute and frozen fish. For rawhide, China as well as India is also experiencing negative growth. Figure 1.15 rules out the possibility of substitution in the case of EU. Exchange rate has important implications for export performance as it directly influences the price competitiveness of exporting countries, although it must be noted that the exchange rate is not the sole determinant of a countrys export competitiveness. Figure 1.16 illustrates the appreciation
and depreciation of major foreign currencies against the dollar in 2008. Indian Rupee, Euro and pound have experienced sharp depreciation while Bangladeshi taka and Chinese Yuan have been stable. Sharp depreciation of Euro and Pound Sterling; and stability of the Bangladeshi taka eroded Bangladeshs competitiveness in Europe to an extent, reflected in the slowdown of Bangladesh exports to EU
However, depreciation of the Indian Rupee has improved the competitiveness of Bangladeshi RMG export to USA to some extent, as a significant portion of yarn that is used as input are being imported from India.
share of knitwear increased, while that of woven fell. Within the RMG sector there has been diversification into different products: Bangladesh started as an exporter of shirts, and has subsequently diversified into trousers, jackets, T-shirt and sweaters. The share of shirts declined sharply, offset largely by rising contribution from trousers. The shift was made on the back of the emerging backward-linkage primary textile sector. Since 2006-07, jackets have emerged as a significant product and may start to replace trousers in the future. Within knitwear, both T-shirt and sweaters started to grow after 2005. Thus, the trend in the last few years is towards greater diversification and a distinct shift away from the lower end of the low end product range towards the upper end of the lower range - indicating Bangladeshs emerging confidence and competitiveness in the market.
Global recession may generate two possible opposing forces towards export of RMG: Decline in order due to recession. Many countries which import our RMG have begun to delay sending the orders due to recession. Prices for Bangladeshi garment products have fallen 20 to 25 percent in the global market and the situation is taking a "serious turn". Increase in order due to substitution of orders towards cheaper products and low cost source. The importers responded to the reduction in clothing sales with a search for low cost producers. As RMG is a buyers market, the buyers strategy was price reduction to boost sales volume. Due to this strategy, it may be noted that far from plunging, Bangladesh clothing exports was very strong in 2008. US retail clothing sales declined by 8.05 percent in the fourth quarter of 2008, and consequently US imports of apparel declined by 3 percent. But US imports from Bangladesh increased by 18.5 percent during the fourth quarter raising its market share from 4 to 5 percent in 2008. Over the years, Bangladesh diversified its exports both in woven and knitwear. The share of knitwear increased, while that of woven fell. Within the RMG sector there has been diversification into different products: Bangladesh started as an exporter of shirts, and has
subsequently diversified into trousers, jackets, T-shirt and sweaters. The share of shirts declined sharply, offset largely by rising contribution from trousers The whole situation of recession partly favors Bangladesh in a short run of our economy. But in a long run Bangladesh may suffer a lot because when other competitors will start producing RMG at low cost.
problems with timely repayment to banks and even payment of wages to workers. Even reputed buyers like H&M had placed orders and confirmed and then asked to wait. Industry insiders estimated that up to 3 percent of orders will be cancelled.
POL recorded the highest share, around 9.52 per cent of total import. The second highestimport share (in value terms) was of textile and articles thereof, accounting for about 8.75per cent of total import. Imports of food grains posted a staggering growth of 142.64 percent (6.52 per cent of total import), with rice registering a phenomenal increase of 4.9times and wheat 1.3 times. Import growth was high to moderate for all major non-food items excluding capitalmachineries, which posted negative growth rate of (-) 13.74 per cent. Import growth ofcrude petroleum was high at 32.71 per cent, fuelled by the rise in global oil prices. By thethird week of May 2008, crude oil price/barrel has already hit USD132. But in morerecent times (22 October 2008), oil price has come down to USD70.60/barrel. Import of POL also posted a huge growth of 20.43 per cent. The bill for this was to the tune ofUSD2058.00 million. High import growth of intermediate inputs such as raw cotton (41.10 per cent) would indicate further strengthening of backward linkage in textiles;yarn (18.65 per cent) and iron, steel and other base metals (19.73 per cent), also postedsignificant increase.
consequence, out-migration and remittances could follow historical trends in2008-09.the slowdown degenerates into recession; it had impact on both migration and remittance. Remittance inflows from Bangladeshi migrants abroad have reached 10 percent of GDP, which was only 3 percent in 1995, putting Bangladesh among the top ten remittancereceiving countries in the world. In 2008, nearly 6 million workers were employed overseas. During FY2009, Bangladesh received US$ 9.7 billion as remittances, which was 22.4 percent higher than the remittance inflow of FY2008. The growth rate, however, shows considerable monthly variations (Figure 4). Out-migration in FY2009 was 30 percent lower than that in FY2008 (Figure 5). Since no reliable data are available on returnee migrants, the impact of global recession in terms of job loss of Bangladeshis abroad cannot be assessed. There has, however, been some report (e.g. in newspapers) on return of migrants due to job loss resulting from recession.
specific factors, several common elements appear in most crisis countries :( 1) Volatility in the macro economy (2) The inheritance of structural weaknesses in the economy and financial system (3)Hazardous banking practices(4) Hazardous incentive structures and moral hazard within the financial system(5) Ineffective regulation(6) Weak monitoring and supervision by official agencies(7) The absence of effective market discipline on banks( 8 ) Structurally unsound corporate governance mechanisms within banks and their borrowing customers. Causes of such crises are complex and a myopic focus on single factors misses the essential feature of interrelated and multidimensional causal factors. Although macroinstability has been a common feature, and may often have been the proximate cause, banking crises usually emerge because instability in the economy reveals existing weaknesses within the banking system. According to news report published in Business Times (25 September, 2009) Bangladesh Bank decided to follow accommodative monetary policy, aimed at boosting growth and shielding the economy from the global crisis. The monetary policy stance between July and December, 2009 is designed to support attainment of the highest sustainable output growth without triggering escalation of inflation. Banking system of the country is not free from the danger. Difference between the crisis of developed nations and Bangladesh is that their crisis originated from the financial sector and worst impact felt in the real sector. On the other hand in case of Bangladesh crisis has been originated in the real sector due to the problem arise from financial sector. Due to financial crisis, not only exporters will face the problem, but the banking sector will also face problem due to non-recovery of advances against export financing. Moreover, liquidity surplus is prevailing in the commercial banks. According to ADB report (2009) it is Bangladesh Taka 347.6 Billion on 30th June, 2009. Foreign Exchange reserve at Bangladesh Bank is very high. Irony is that at this stage they are taking loan from the International Monetary fund. For last three years investment has declined substantially and borrowing from the banking sector by the investors has reduced substantially. Rather default culture is crippling the economy. Recently the Central Bank Governors and Heads of Supervision decided to strengthen the banking rules and regulations under the guidance of the Bank for international settlements: Raise the quality, consistency and transparency of the Tier 1 capital base; Introduce a leverage ratio as a supplementary measure to the Basel II risk based framework ; Introduce a minimum global
standard for funding ; Introduce a framework for countercyclical capital buffers above the minimum requirement; Issue recommendations to reduce the systemic risk associated with the resolution of cross border banks(Source:http://www.abbl.lu/articles/comprehensiveresponse-global banking-crisis). The global financial crisis is not likely to have any adverse effect on Bangladesh B anks foreign exchange reserves, because the Taka is not freely convertible for capital account transactions. Moreover, Bangladesh Bank has taken several initiatives to avoid any impact of the global financial turmoil on the financial sector. The currency composition of its foreign exchange reserves has been altered significantly to protect the real value of the reserves. At present only 50 percent of the Bangladesh Banks reserves are held in US Dollar, and the rest in other currencies. Furthermore, to avoid risks of any possible losses, both Bangladesh Bank and commercial banks holding reserves abroad have withdrawn funds from problem banks that were merged or taken over or are likely to be merged or taken over soon and placed them in central banks of respective countries. The countrys banking system has no toxic derivative involvements. It is, therefore, highly unlikely that external shocks will increase the risk of asset quality problems or precipitate a credit crunch in Bangladesh. However, to forestall the occurrence of any financial crisis, the financial sector should be properly regulated. Banks and financial institutions will need to take necessary caution while extending credit, by ensuring the quality of assets to avoid any financial risk. They should invest mainly in the productive sectors instead of lending to non-productive sectors, in particular consumer financing, which increased by over 100% in the past one year. Bangladesh may also consider guaranteeing bank deposits as a defensive measure. All major countries in America, Europe and Asia have in recent days moved to guarantee all their bank deposits to shore up investor confidence. Such guarantees may induce a shift of deposits from Bangladeshs banking system to countries elsewhere. There is, therefore, a need for defensive action. In a time where there is a lot of uncertainty, investor risk aversion is very high, and there is a lot of nervousness, there are possibilities to have contagion to banking systems anywhere. Banks and financial institutions in Bangladesh will need to strictly comply with the existing regulations. They need to be extra-cautious in running their business, taking lessons from the collapse globally. They should also take appropriate measures to overcome the various
ailments of the banking sector such as capital inadequacy, provision shortfall, declining trend in loan recovery, and the increase in bad loans.
manufacturing. Private sector employers may be forced to cut jobs. Worker remittances may also be affected by the crisis. Nearly a third of inward remittances currently come from US and Europe, while about 60 percent comes from the Middle East, and the rest comes from countries in East and Southeast Asia. A deep and prolonged recession in the West may hurt the Middle-Eastern and other countries as well where migrant workers may lose jobs and therefore remittances from these countries may decline. Government will therefore need to keep a constant vigil on manpower exports and remittance earnings, facilitate emigration of workers, and, through official contact, ensure continuity of jobs of migrant workers abroad.
The demand for import of Bangladeshi apparels decelerated or in extreme case, entrepreneurs searched for new ways for the reduction of cost of production. Further investigation required to understand the extent of impact of the crisis on enterprises and on workers in this sector.
Frozen Food
Although export of frozen food, particularly shrimp, has declined duringJuly-December, 2008 period, there is no evidence that shrimp processing factories have closed down due to the crisis. However, because of lack of availability of raw materials (57,000 m.ton of the total required 0.3 million m.ton in FY2007-08) and infection in cultured shrimps (known as microforon disease) only 77 mills are now operating out of the 140 mills, where about 77,000 workers are working.
Leather and Footwear
Export of footwear has performed well during July-December,2008 period; however, export of processed and finished leather has sharply declined over time. There was no report in the national dailies as regards laying off of workers in this industry. Further investigation is needed in order to understand the extent of impact on workers working in this sector.
Ship Building
The shipbuilding sector was under pressure because of reduced orders and,in some cases, deferment/cancellation of some previous orders.
Impact on Migrant Workers
Due to slowdown of the Singapore economy, especially in the shipping and construction sectors, 55 Bangladeshis employed by construction sub-contractor Tunnel & Shaft have returned home after working there for seven months or less. The workers were recruited last year in anticipation of two major projects estimated to be worth $20 million, which were expected to be launched later. Since 2006, UAE and Malaysia had been two key destinations for Bangladeshi workers followed by Saudi Arabia. It is important to mention here that currently Saudi Arabia and
Kuwait have stopped issuing work permits to Bangladeshi workers, while these two destinations comprises of 39.7 per cent of total migrant workers.
However, the business community was pursuing for a higher cut in the lending rate. This demand was being voiced afresh by the business community in view of the global meltdown of financial markets. Ensuring better returns on deposits would be one way to improve the liquidity situation. The lending rate (calculated on a quarterly basis) of scheduled banks was 12.29 per centin June, 2008 as compared to 12.75 per cent in December, 2007. Their deposit rate (alsocalculated on a quarterly basis) stood higher at 6.95 per cent in June, 2008 as compared to 6.77 per cent in December 2007.
3.12 INFLATION
The commodity price boom of 2006-08 was due to strong growth in global demand.As opposed to an unprecedented increase of commodity price during the FY08, the prices had taken a downward in the face of global financial crisis. Except for soybean oil, prices of all other major commodities including rice, wheat and crude oil suffered a falling price since September 2008. The benefits of lower world prices have been reaped by Bangladesh, especially through lower inflation, including lower food and energy prices. Another channel that can help lower the inflation rate of Bangladesh is the declining trend of inflation in major trading partners. The headline inflation rate of Bangladesh already started to decline from 10.82 percent in July08 to 6.03 percent in December08, currently hovering at around 5 percent (in July 2009). The inflation rate of the major trading partners like India, China, and Hong Kong has declined significantly in recent months as well (See CEIC database & ADB website).
a drop in Bangladeshs exports and thereby a slowdown in overall economic growth. According to gght, the projected growth rate should be easily achieved. However, a prolonged recession in the rich world may still have a negative impact on domestic output growth. Considering the probable effects of the global financial turmoil on exports and remittances, the IMF has recently said that Bangladeshs GDP growth may fall to 6.19 percent this year. The World Bank has warned of a much lower growth rate as low as 4.8 percent, as it fears that the growth of exports and remittances will decelerate significantly.
international forces, first stemming from the sharp rise in food and fuel prices (causing Bangladesh to reduce duties on many food items), and secondly, in the wake of the GFC, which led to a collapse in world commodity markets and reduction in import-based duties and taxes (which account for more than 40 percent of tax collection). Collection of import duty is estimated at 2.3 percent in 2008-09 against a target of 13.1 percent. Similarly, achievement by way of supplementary duties was very poor. However, these losses were compensated to an extent by growth in income tax collection (over 20 percent compared to a target of only 11 percent). On the basis of projected revenue earnings and expenditures for 2008-09 and 2009-10, the size of the budget deficit is estimated to be 3.19 percent of GDP in 2008-09 (down significantly from 4.18 percent in the preceding year) rising to 4.5 percent in 2009-10. This suggests that the government would need to be ready to deal with a significantly larger deficit in 2009-10, because of a large budget designed to meet the challenges of the global economic crisis. It would be important to carefully balance financing the budget from bank and non-bank sources and through foreign financing. While the government has generally opted to go for more non-banks financing, its ability to use foreign financing has tended to be poor.
Budget expenditures for 2008-09 have also been well below target. The major expenditure accounts are interest (19.8%), education (17.7%), public services ((14.6%), agriculture (11.5%), defense (8.8%) and public order and safety (8.6%). In the light of the
GFC it will be important to scale up expenditures and improve utilization of the ADP during the next fiscal. A concerted effort is urgently needed to improve utilization rates.
areas. The governments policy of providing subsidy to fertilizer and diesel for irrigation enhanced profitability and helped the farmers to go for higher production. The informal sector, being the largest source of employment and income for the majority of households, also flourished with support of high agricultural growth. Given the overwhelming dominance of RMGs in the export basket, the impact on RMGs has determined the impact on Bangladesh's exports. Since Bangladesh's RMG exports mainly cater to the low-price segment of the apparel market where income elasticity is lower than that in the high-price segment, the country's RMG exports remained less affected. With incomes falling, even some diversion of demand from high-end garment segment to low-end segment probably took place in the developed country markets counterbalancing the otherwise negative impact. Also recession driven fall in prices of imported industrial raw materials helped domestic RMG industries to maintain low production cost. Moreover, in view of the country specific nature of changes resulting from the crisis, RMG importers in advanced economies (especially in the US and EU) introduced adjustments in sources of procuring apparel products (e.g. diversion of orders from countries like China to Bangladesh) which compensated, at least partly, Bangladesh's loss in RMG exports and enabled it to capture greater market shares in these countries. In case of imports, the changes favored Bangladesh through lowering the growth of the import bill. In the international market, prices of commodities for which Bangladesh is a net importer (especially food, oil, fertilizer, and other essential products) experienced significant decline since the global recession. In particular, sharp fall in prices of oil, fertilizer, imported raw materials, and machinery/equipment helped in reducing production costs and improving competitiveness. The remittance inflow was not much affected since bulk (around 64 percent) of the inflows originates in the Gulf region where recession has been less severe and growth prospects marginally declined. Remittances from advanced economies (especially from USA, UK, and Germany which together account for
nearly 30 percent of the total) were also not affected to a significant extent. The net impact so far has been steady growth in remittance inflows especially since the low-skilled jobs in which Bangladeshi migrant labor is mostly concentrated are unlikely to be much affected due to growth slowdown. In addition, the resilience remittance inflows to past changes in economic growth in major remittance sending countries and the compulsion of remitters to send money to meet family obligations helped in maintaining growth of remittance inflows. The measures to reduce the cost of remittance and bring more efficiency in remittance related operations also encouraged more migrant workers to send money through official channels.
During the time of preparing this report we find that the negative impacts o f global financial crisis are beginning to show on the increasingly globalizing economy of Bangladesh: a. Bangladeshs export growth rate experienced has turned negative. b. Export of non-apparels items has seen a significant deceleration.
c. Depreciation of currencies by competing countries ranging from 6-30 per cent over the last one year and their stimulus packages that provide wide ranging incentives to export-oriented sectors, have led to erosion of Bangladeshs competitive strength in the global market d. Remittance earnings could be adversely affected in near future as number of jobseekers going abroad halved as some countries have either revoked earlier job-contracts or have stopped issuing new visas. e. The adverse effects are likely to have negative implications for GDP growth, labor market and consequently attainment of poverty alleviation targets and MDGs by Bangladesh. f. There are clear indicators of weakening macroeconomic performance
4.2 RECOMMENDATIONS
While Global recession did not hurt much our economy so far except some early mark, some measures should be taken to protect the economy from the global shock as the recession may sustain a while. This includes:
a. Financial support to RMG and other export sector in the event of any liquidity crisis due to delayed payment or lower price b. Temporary enhancement of cash incentive to the promising export sectors which are currently facing hard times c. Reducing price of diesel further to reduce transport cost and cost of operating diesel based generators in the event of inadequate supply of electricity and gas. d. Targeted subsidy on food items to bring food price down and also to help export oriented industries from the pressure of wage hike. e. Central Bank should go with a moderate monetary policy so as to maintain a respectable growth of local demand and stimulate local investment.
f. NBR should continue its effort to strengthen the tax administration further so as to maintain revenue growth even with sluggish import performance. Government may think of increasing import taxes on import of selected luxury items that will help retaining foreign exchange without negative impact on tax revenue. g. In the event that recession brings severe impact on our export with implication of job cut, the government should come with adequate safety net programs h. How aggressive would be the policy measures depend on the extent of impact of the recession. Hence the high profile taskforce constituted by should strongly monitor the events and come up with timely implementation of required policy measures.
CONCLUSION
Although the impact has not been as severe as in many other developing countries, Bangladesh has been experiencing the adverse impact of the global economic crisiswhere the most obvious areas are exports, remittances, and economic growth affecting social equity and poverty. Much of the sensitivity resulted from the export-led development strategy that the country follows creating a situation of slackened export-related production and investment as well as softened domestic demand. So far Bangladesh has successfully coped with the crisis through appropriate adjustments in monetary policy supported by an expansionary fiscal policy stance focusing on boosting domestic demand and promoting more competitive markets. The strategic thrust of the governments policy is on spending more on education, health care, social protection and social safety nets that would not only help boost domestic demand but also support broader social objectives like inclusive growth and poverty reduction. The analysis of social impacts shows that the global economic crisis has adversely affected Bangladeshs progress toward achieving poverty reduction and social development goals including the MDGs. This highlights the need to re-launch more determined efforts in achieving the stipulated goals. Bangladesh thus faces difficult and complex challenges. Along with providing stimuli to growth, the government must also make efforts to strengthen safety nets and ensure that poverty reduction and key social development gains are not reversed. While the government is the key actor, a shared paradigm is necessary in which global and regional partnership could foster technology diffusion and capacity building for inclusive and sustainable growth. Also this is the time for the developed countries to keep their commitment to share required resources for achieving the MDGs from which the developed countries have as much to gain as the developing countries like Bangladesh.
Bibliography
Book
Beyond the Crash: Overcoming the First Crisis of Globalization, 1st Free Press hbk, New York - By Gordon Brown
Website
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