Assignment on Financial Crisis

Executive Summery

The financial crisis of 2007–2009 began in July 2007^[1] when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve, Bank of England and the European Central Bank.^[2][3] The TED spread, an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008,^[4] reaching a record 4.65% on October 10, 2008. In September 2008, the crisis deepened, as stock markets worldwide crashed and entered a period of high volatility, and a considerable number of banks, mortgage lenders and insurance companies failed in the following weeks.

Although America’s housing collapse is often cited as having caused the crisis, the financial system was vulnerable because of intricate and highly-leveraged financial contracts and operations, a U.S. monetary policy making the cost of credit negligible therefore encouraging such high levels of leverage, and generally a “hypertrophy of the financial sector” (financialization). 

2007-09 – The American financial crisis of 2007–2009 helped create the global financial crisis of 2008–2009, thus creating the late 2000s recession

The crisis in real estate, banking and credit in the United States had a global reach, affecting a wide range of financial and economic activities and institutions, including the:

• Overall tightening of credit with financial institutions making both corporate and consumer credit harder to get;^[6]
• Financial markets (stock exchanges and derivative markets) that experienced steep declines;
• Liquidity problems in equity funds and hedge funds;
• Devaluation of the assets underpinning insurance contracts and pension funds leading to concerns about the ability of these instruments to meet future obligations:
• Increased public debt public finance due to the provision of public funds to the financial services industry and other affected industries, and the
• Devaluation of some currencies (Icelandic crown, some Eastern Europe and Latin America currencies) and increased currency volatility,

The first symptoms of what is now called the late 2000s recession ensued also in various countries and various industries. The financial crisis, albeit not the only cause among other economic imbalances, was a factor by making borrowing and equity rising harder.

Historical background of the current financial crisis:

Share in GDP of US financial sector since 1860.  Short list of some major financial crises since 20th century

• 1910 – Shanghai rubber stock market crisis
• 1930s – The Great Depression – the largest and most important economic depression in the 20th century
• 1973 – 1973 oil crisis – oil prices soared, causing the 1973–1974 stock market crash
• 1980s – Latin American debt crisis – beginning in Mexico
• 1987 – Black Monday (1987) – the largest one-day percentage decline in stock market history
• 1989-91 – United States Savings & Loan crisis
• 1990s – Japanese asset price bubble collapsed
• 1992-93 – Black Wednesday – speculative attacks on currencies in the European Exchange Rate Mechanism
• 1994-95 – 1994 economic crisis in Mexico – speculative attack and default on Mexican debt
• 1997-98 – 1997 Asian Financial Crisis – devaluations and banking crises across Asia

The previous major financial crisis occurred in 1928 to 1933. A financial crisis occurs when there is a disorderly contraction in money supply and wealth in an economy. It is also known as a credit crunch. It occurs when participants in an economy lose confidence in having loans repaid by debtors. This causes lenders to limit further loans as well as recall existing loans.

The financial/banking system relies on credit creation as a result of debtors spending the money which in turn is ‘banked’ and loaned to other debtors. As a result a relative small contraction in lending can lead to a dramatic contraction in money supply. The Great Depression occurred after a dramatic expansion in debt and money supply in the roaring twenties. Total US private credit market debt as a percentage of GDP reached 250% in 1929. The next time debt exceeded this level in the USA was in 1999 reaching a peak of 350% prior to the bubble bursting.

A dramatic contraction then occurred between 1929 and 1933 as debt was defaulted upon and resulted in a ‘contraction’ in money and wealth. The debt deflation theory coined by Irving Fisher formed the basis of the regulation subsequently introduced by Congress.

The Glass-Seagull Act was passed by Congress in order to prevent this occurring again. It was found that financial firms encouraged debt to be invested in the stock market which then overheated the stock market. The act was designed to prevent this by separating the advising from the lending role of financial institutions. Following its repeal by Congress in 1999, institutions could advise and lend setting up a direct conflict of interest in many ‘deals’.

The framework which created the great depression from a regulatory point of view were ‘re-created’ by the repeal of this act. Financial firms could profit in the short term by simply setting up and lending on deals using others money.

A sequence of rapid debt expansion occurred including a dot-com bubble, which was followed by equity and housing bubble and then a commodity bubble. Without the debt expansion which measured $14 Trillion USD some analysts have argued that there would have been no economic growth in the USA between 1996 and 2006.

The Global financial crisis is the unwinding of the debt bubbles between 2007-2009

What is financial crisis?-

Definition

A situation in which the economy of a country experiences a sudden downturn brought on by a financial crisis. An economy facing an economic crisis will most likely experience a falling GDP, a drying up of liquidity and rising/falling prices due to inflation/deflation. An economic crisis can take the form of a recession or a depression. Also called real economic crisis

The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults

Sources of financial crisis:-

Strategic complementarities in financial markets

It is often observed that successful investment requires each investor in a financial market to guess what other investors will do. George Soros has called this need to guess the intentions of others ‘reflexivity’.^[10] Similarly, John Maynard Keynes compared financial markets to a beauty contest game in which each participant tries to predict which model other participants will consider most beautiful.^[11]

Furthermore, in many cases investors have incentives to coordinate their choices. For example, someone who thinks other investors want to buy lots of Japanese yen may expect the yen to rise in value, and therefore has an incentive to buy yen too. Likewise, a depositor in Indy Mac Bank who expects other depositors to withdraw their funds may expect the bank to fail, and therefore has an incentive to withdraw too. Economists call an incentive to mimic the strategies of others strategic complementarily.

It has been argued that if people or firms have a sufficiently strong incentive to do the same thing they expect others to do, then self-fulfilling prophecies may occur. For example, if investors expect the value of the yen to rise, this may cause its value to rise; if depositors expect a bank to fail this may cause it to fail.^[14] Therefore, financial crises are sometimes viewed as a vicious circle in which investors shun some institution or asset because they expect others to do so.

Leverage

Leverage, which means borrowing to finance investments, is frequently cited as a contributor to financial crises When a financial institution (or an individual) only invests its own money, it can, in the very worst case, lose its own money. But when it borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has. Therefore leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy. Since bankruptcy means that a firm fails to honor all its promised payments to other firms, it may spread financial troubles from one firm to another (see ‘Contagion’ below).

The average degree of leverage in the economy often rises prior to a financial crisis. For example, borrowing to finance investment in the stock market (“margin buying”) became increasingly common prior to the Wall Street Crash of 1929.

Asset-liability mismatch

Another factor believed to contribute to financial crises is asset-liability mismatch, a situation in which the risks associated with an institution’s debts and assets are not appropriately aligned. For example, commercial banks offer deposit accounts which can be withdrawn at any time and they use the proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks’ short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reasons bank runs occur (when depositors panic and decide to withdraw their funds more quickly than the bank can get back the proceeds of its loans).^[14] Likewise, Bear Stearns failed in 2007-08 because it was unable to renew the short-term debt it used to finance long-term investments in mortgage securities.

In an international context, many emerging market governments are unable to sell bonds denominated in their own currencies, and therefore sell bonds denominated in US dollars instead. This generates a mismatch between the currency denomination of their liabilities (their bonds) and their assets (their local tax revenues), so that they run a risk of sovereign default due to fluctuations in exchange rates.

Uncertainty and herd behavior

Many analyses of financial crises emphasize the role of investment mistakes caused by lack of knowledge or the imperfections of human reasoning. Behavioral finance studies errors in economic and quantitative reasoning. Psychologist Torbjorn K A Eliazonhas also analyzed failures of economic reasoning in his concept of ‘œcopathy  istorians, notably Charles P. Kindleberger, have pointed out that crises often follow soon after major financial or technical innovations that present investors with new types of financial opportunities, which he called “displacements” of investors’ expectations.

Early examples include the South Sea Bubble and Mississippi Bubble of 1720, which occurred when the notion of investment in shares of company stock was itself new and unfamiliar,^[20] and the Crash of 1929, which followed the introduction of new electrical and transportation technologies.^[21] More recently, many financial crises followed changes in the investment environment brought about by financial deregulation, and the crash of the dot com bubble in 2001 arguably began with “irrational exuberance” about Internet technology.

Unfamiliarity with recent technical and financial innovations may help explain how investors sometimes grossly overestimate asset values. Also, if the first investors in a new class of assets (for example, stock in “dot com” companies) profit from rising asset values as other investors learn about the innovation (in our example, as others learn about the potential of the Internet), then still more others may follow their example, driving the price even higher as they rush to buy in hopes of similar profits.

If such “herd behavior” causes prices to spiral up far above the true value of the assets, a crash may become inevitable. If for any reason the price briefly falls, so that investors realize that further gains are not assured, then the spiral may go into reverse, with price decreases causing a rush of sales, reinforcing the decrease in prices.

Regulatory failures:

Governments have attempted to eliminate or mitigate financial crises by regulating the financial sector. One major goal of regulation is transparency: making institutions’ financial situations publicly known by requiring regular reporting under standardized accounting procedures. Another goal of regulation is making sure institutions have sufficient assets to meet their contractual obligations, through reserve requirements, capital requirements, and other limits on leverage.

Some financial crises have been blamed on insufficient regulation, and have led to changes in regulation in order to avoid a repeat. For example, the Managing Director of the IMF, Dominique Strauss-Kahn, has blamed the financial crisis of 2008 on ‘regulatory failure to guard against excessive risk-taking in the financial system, especially in the US’.^[23] Likewise, the New York Times singled out the deregulation of credit default swaps as a cause of the crisis.

However, excessive regulation has also been cited as a possible cause of financial crises. In particular, the Basel II Accord has been criticized for requiring banks to increase their capital when risks rise, which might cause them to decrease lending precisely when capital is scarce, potentially aggravating a financial crisis.

Fraud :

Fraud has played a role in the collapse of some financial institutions, when companies have attracted depositors with misleading claims about their investment strategies, or have embezzled the resulting income. Examples include Charles Ponzi’s scam in early 20th century Boston, the collapse of the MMM investment fund in Russia in 1994, the scams that led to the Albanian Lottery Uprising of 1997, and the collapse of Madoff Investment Securities in 2008.

Many rogue traders that have caused large losses at financial institutions have been accused of acting fraudulently in order to hide their trades. Fraud in mortgage financing has also been cited as one possible cause of the 2008 subprime mortgage crisis; government officials stated on Sept. 23, 2008 that the FBI was looking into possible fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers, and insurer American International Group.

 Contagion

Contagion refers to the idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk.

One widely-cited example of contagion was the spread of the Thai crisis in 1997 to other countries like South Korea. However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages.

Cause of the financial crisis:-

In August 2002 an analyst identified a housing bubble. Dean Baker wrote that from 1953 to 1995 house prices had simply tracked inflation, but that when house prices from 1995 onwards were adjusted for inflation they showed a marked increase over and above inflation-based increases. Baker drew the conclusion that a bubble in the US housing market existed and predicted an ensuing crisis. It later proved impossible to convince responsible parties such as the Board of Governors of the Federal Reserve of the need for action. Baker’s argument was confirmed with the construction of a data series from 1895 to 1995 by the influential Yale economist Robert Shiller, which showed that real house prices had been essentially unchanged over those 100 years.

A common claim during the first weeks of the financial crisis was that the problem was simply caused by reckless, sub-prime lending. However, the sub-prime mortgages were only part of a far more extensive problem affecting the entire $20 trillion US housing market: the sub-prime sector was simply the first place that the collapse of the bubble affecting the housing market showed up.

The ultimate point of origin of the great financial crisis of 2007-2009 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. ^[12] The failure rates of subprime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses.

For many months before September 2008, many business journals published commentaries warning about the financial stability and risk management practices of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.

Beginning with failures caused by misapplication of risk controls for bad debts, collateralization of debt insurance and fraud, large financial institutions in the United States and Europe faced a credit crisis and a slowdown in economic activity. The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities and commodities. Moreover, the de-leveraging of financial institutions further accelerated the liquidity crisis and caused a decrease in international trade. World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued.

At the end of October a currency crisis developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund.

Impact of various world financial crises:-

I found it encouraging that the economy is not trashed everywhere.  

If you happen to be living in Bhutan, Namibia, or Belarus, times is great!  The wealthiest 1% of these countries are even lighting cigars with one dollar bills.  I suspect some of these countries are benefiting from one-off events that have helped them.  While most of Southern Africa is doing poorly, I expect Namibia is seeing an up tick from the Brangelina baby effect.  Similarly, the favorable dollar to corpse exchange rate is doing wonders for Democratic Republic of Congo’s dead body based economy.  Unfortunately for the rest of the world, the old saying is true… as goes Greenland, so goes the world.

After eight years of being pummeled with the Bush Doctrine, we’ve gotten used to ignoring the rest of the rest of the world in favor of USA, USA, USA .  Futura at cFAP has made a beautiful chart showing the job losses by state:

Global economic recession:-

Number of U.S. residential properties subject to foreclosure actions by quarter (2007-2008).

Sub prime lending is the practice of lending, mainly in the form of mortgages for the purchase of residences. These mortgages departed significantly from the usual criteria for borrowing at the lowest prevailing market interest rate. The departures in criteria pertained to “nontraditional”, higher-risk structure of the loans (such as “option ARMs”), poor loan documentation, low levels of collateral, the borrower’s credit score, credit history and other factors. When real estate prices fall, the value of the collateral securing the mortgage drops and the risk of loss to the lender increases significantly. If a borrower is delinquent in making timely mortgage payments to the loan service (a bank or other financial firm), the lender may be forced to take possession of the property, in a process called foreclosure.

The value of USA sub prime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien sub prime mortgages outstanding. Between 2004-2006 the share of sub prime mortgages relative to total originations ranged from 18%-21%, versus less than 10% in 2001-2003 and during 2007. In the third quarter of 2007, sub prime ARMs making up only 6.8% of USA mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter. By October 2007, approximately 16% of sub prime adjustable rate mortgages (ARM) were either 90-days delinquent or the lender had begun foreclosure proceedings, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21%. and by May 2008 it was 25%.

The value of all outstanding residential mortgages, owed by USA households to purchase residences housing at most four families, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008. During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. As of August 2008, 9.2% of all mortgages outstanding were either delinquent or in foreclosure. Between August 2007 and October 2008, 936,439 USA residences completed foreclosure. Foreclosures are concentrated in particular states both in terms of the number and rate of foreclosure filings. Ten states accounted for 74% of the foreclosure filings during 2008; the top two (California and Florida) represented 41%. Nine states were above the national foreclosure rate average of 1.84% of households.

Today’s world is integrated with product & market due to globalization. Very few countries have lowered barriers to international trade in the era of globalization. The global economic slow down has drastic consequences on developing countries like Bangladesh. The countries that wear dependent on the USA, EU and Japan as export markets for their products and tourism faced sever constrainers in maintaining their growth and economic levels. This is turning adversely affected foreign exchange earnings, employment generation, and govt. tax revenues in developing countries.

How to fight recessions?

Most of the countries in the world use two major tools in fighting economic reasons in their own countries i.e. one is Monetary policy and another are Fiscal Policy. A Government can use its monetary policy, the regulation of the money supply or interest’s rate in order to influence economic growth. The impact of the monetary policy would reflect on the interest rate and investments. Providing adequate liquidity to the market could be controlled through Statutory Reserve Requirements (RSS). The Central Bank can use open market operation through changing Discount and Rediscount rate. The other tool a Government could use to stimulate economic growth is the Fiscal policy. Excise duty, customs duty and corporate tax rates could be used as an incentive to industries in an economy. Fiscal policy could lead to a decrease in income tax or an increase in spending.

 Fair trade could be an instrument to fight recession in a free market economy. The private sectors through its firm play a key role in economic development. In order to continue within the business, enter into expansion programmers and invest more capital into industries, carry out research and developments and enter into global market, firms must have at least normal profits. In order for them to earn normal profits, the government should create an environment and no unfair trade practices should upset the equilibrium of the firm.

Europe and the financial crisis:-

In Europe, a number of major financial institutions failed. Others needed rescuing. n Iceland, where the economy was very dependent on the finance sector, economic problems have hit them hard. The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy. In the end, public dissatisfaction at the way the government was handling the crisis meant the Iceland government fell. A number of European countries have attempted different measures (as they seemed to have failed to come up with a united response).

For example, some nations have stepped in to nationalize or in some way attempt to provide assurance for people. This may include guaranteeing 100% of people’s savings or helping broker deals between large banks to ensure there isn’t a failure.

The EU is also considering spending increases and tax cuts said to be worth €200bn over two years. The plan is supposed to help restore consumer and business confidence, shore up employment, getting the banks lending again, and promoting green technologies.

One of the first victims was Northern Rock, a medium-sized British bank. The highly leveraged nature of its business led the bank to request security from the Bank of England. This in turn led to investor panic and a bank run in mid-September 2007. Calls by Liberal Democrat Shadow Chancellor Vince Cable to nationalize the institution were initially ignored; in February 2008, however, the British government (having failed to find a private sector buyer) relented, and the bank was taken into public hands. Northern Rock’s problems proved to be an early indication of the troubles that would soon befall other banks and financial institutions.

Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial. Financial institutions which had engaged in the securitization of mortgages such as Bear Stearns then fell prey.

Later on, Bear Stearns was acquired by JP Morgan Chase through deliberate assistance from the US government. Its stock price plunged to $3 in reaction to the buyout offer of $2 by JP Morgan Chase, well below its 52 week high of $134. Subsequently, the acquisition price was raised to $10 by JP Morgan. On July 11, 2008, the largest mortgage lender in the US, Indy Mac Bank, collapsed, and federal regulators seized its assets after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac, which it did by placing the two companies into federal conservatorship on September 7, 2008 after the crisis further accelerated in late summer.

The media have repeatedly argued that the crisis then began to affect the general availability of credit to non-housing related businesses and to larger financial institutions not directly connected with mortgage lending. While this is true, the reasons given in media reporting are usually inaccurate. Dean Baker has repeatedly explained the actual, underlying problem:

“Yes, consumers and businesses can’t get credit as easily as they could a year ago. There is a really good reason for tighter credit. Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since the Great Depression. This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt.

They will draw on this equity rather than lose their car and/or have a default placed on their credit record. On the other hand, a homeowner who has no equity is a serious default risk. In the case of businesses, their creditworthiness depends on their future profits. Profit prospects look much worse in November 2008 than they did in November 2007 (of course, to clear-eyed analysts, they didn’t look too good a year ago either). While many banks are obviously at the brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. The problem with the economy is the loss of close to $6 trillion in housing wealth and an even larger amount of stock wealth.

The New York City headquarters of Lehman Brothers.

Economists, economic policy makers and economic reporters virtually all missed the housing bubble on the way up. If they still can’t notice its impact as the collapse of the bubble throws into the worst recession in the post-war era, then they are in the wrong profession.

At the heart of the portfolios of many of these institutions were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, threatened an increasing number of firms such as Lehman Brothers, AIG, Merrill Lynch, and HBOS.^{[43][44][44][45]}

Other firms that came under pressure included Washington Mutual, the largest savings and loan association in the United States, and the remaining large investment firms, Morgan Stanley and Goldman Sachs.

The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities^[48] and commodities.^[14] Moreover, the de-leveraging of financial institutions further accelerated the liquidity crisis and caused a decrease in international trade. World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued. At the end of October a currency crisis developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund.^[22][23]

Risks and regulations:

As financial assets became more and more complex, and harder and harder to value, investors were reassured by the fact that both the international bond rating agencies and bank regulators, who came to rely on them, accepted as valid some complex mathematical models which theoretically showed the risks were much smaller than they actually proved to be in practice ^[50]. George Soros commented that “The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.”

 World Financial Crisis: India’s Hurting, Too:

It’s been one action-packed week in India. The Bombay Stock Exchange Index, or Sensex, tumbled 6% to a two-year low. For the first time in five years, the central bank cut the cash reserve ratiothe amount of funds that banks have to keep with the Reserve Bank of India—by 50 basis points, to 8.5%, on Oct. 6. The same evening, the Securities & Exchange Commission of India eased some restrictions on foreign portfolio investors—such as registering in India before buying shares and limits on offshore derivatives—it had imposed in 2007. And finance minister Palaniappan Chidambaram made yet another television appearance that day to say that India was safe from the global turmoil, and “the only fear is fear itself.”

There’s no mistaking that the global financial crisis has found its way to India’s shores at a time when the country is in no shape to weather it. The stock market is choppy, there’s been a credit squeeze, interest rates are up, and banks continue to rein in loans as inflation hovers at 12%.

Growth has slowed from the heady 9% of a year ago to 7.9% for the three months ended in June, and it’s forecast to grow only at 7.5% for the fiscal year ending next March. Meanwhile, an already weak currency ended Oct. 8 at 48 rupees to the dollar, its lowest level in 5½ years. The rupee has taken a 21% dive since January. The central bank’s rate cut, which the bank statement calls “ad hoc and temporary,” is likely to infuse $4 billion in domestic liquidity and shore up the rupee by selling dollars.

As the global financial crisis began unfolding in the first nine months of 2008, foreign institutional investors pulled out close to $10 billion from India, dragging the capital market down with it. The liquidity crisis, coupled with the credit squeeze and a weak currency, is already hurting various sectors. Banks have reined in retail financing, affecting home and auto loans. Car loans account for 70% of consumer auto purchases now, down from 85% a year ago. Meanwhile, consumers are deferring other purchases while financiers have been logging a drop in loan disbursal rates. “We are tightening our lending norms to certain customer segments,” says N.R. Narayanan, general manager of vehicle financing at ICICI Bank (IBN), India’s largest private-sector bank. Industry insiders say ICICI expects a 35% dip in disbursals this year, far underperforming the industry average of 16%. Narayanan says it plans to increase auto loan rates by 75 basis points to 100 basis points soon, which will further crimp sales. In August, industry wide sales fell 5%.

 Corporate Money-Raising Efforts:

The corporate sector is struggling, too, as expansion plans and merger activity are pushed to the back burner. With the capital markets drying up, and curbs imposed on external commercial borrowings, corporate India has been looking at alternate routes to raise money.

Private equity players say listed and unlisted companies are approaching them for finance, offering 20% to 30% returns from the first year. And big Indian conglomerates such as Tata Group and Birla Group are looking at rights issues to raise money.

The weak rupee is of little help to exporters. Just last November, the textile and apparel industry was reeling from an 11% appreciation of the rupee, as U.S. and European clients were negotiating contracts and looking for cheaper alternatives to source garments. This time, though, the rupee has depreciated 21% in the past nine months, but the industry is still struggling. “What can we do when we are struck by a triple whammy?” asks Rajendra Hinduja, managing director of Bangalore-based Gokaldas Exports, India’s largest apparel exporter, which was bought out by Blackstone (BX) in August 2008. The gains from a weak rupee are offset by rising input costs—cotton prices have increased 30% in the past year—the high cost of borrowing, and the financial turmoil in their main export markets, the U.S. and Europe. Gokaldas’ clients include Nike (NKE), Reebok, Aidas (ADSG.DE), and Tommy Hilfiger.

Bloody Monday September 15, 2008 

Bloody Monday, September 15, 2008.  The Dow Jones industrial average (DJIA) declined by 504 points  (4.4%), its largest drop since Sept. 17, 2001, when trading resumed after the 9/11 attacks.

The financial slide preceded unabated, leading to an 800 point decline of the Dow Jones in less than a week. The World’s stock markets are interconnected “around the clock” through instant computer link-up. Volatile trading on Wall Street immediately “spills over” into the European and Asian stock markets thereby rapidly permeating the entire financial system.

The Most Serious Financial Crisis since the 1929 Wall Street Crash

When viewed in a global context, taking into account the instability generated by speculative trade, the implications of this crisis are far-reaching. The crisis, however, has by no means reached its climax. It could potentially disrupt the very foundations of the international monetary system. The repercussions on people’s lives in America and around the world are dramatic.

The crisis is not limited to the meltdown of financial markets, the real economy at the national and international levels, its institutions; its productive structures are also in jeopardy. As stock values collapse, lifelong household savings are eroded, not to mention pension funds. The financial meltdown inevitably backlashes on consumer markets, the housing market, and more broadly on the process of investment in the production of goods and services.

Impact of global economic crisis on Bangladesh:-

The financial crisis that started in the US in March of this year has now turned into a full-fledged economic crisis that has pushed the European Union, Japan, Hong Kong and others into recession there is a saying that when America sneezes, countries around the world get flu. This has been evident from the fact that the American financial crisis has left everyone in a state of shock.

Bangladesh is captive to what transpires in international markets and economies of leading countries. Against the background, Bangladesh cannot be immune from the global economic slowdown and is most likely to be adversely affected sooner or later.
Why this crisis?

To put it simply, it has been argued the whole meltdown of the financial system was “Made In America” for having relaxed rules of providing loans to jobless people with no income for buying houses, called “sub-prime housing loans” or now known as “toxic loans or assets” amounting to about $2.1 trillion dollars.
Banks and financial institutions that bought security-paper have lost money. In its latest calculations, the IMF reckons that worldwide losses on “toxic assets” originated in America will reach $1.4 trillion and so far $760 billion has been written down by banks and financial institutions.

Normally the banks and financial institutions lend and borrow money and the money market works well. During the crisis, money markets ceased to function as investors and banks who ordinarily arrange foreign exchange swaps among themselves for a set time period are nervous about the risk that their counter-party will go bust because of liability of “toxic assets” while the swap is being put into place and so have shied away from such deals.

Thus the global money market was closed and a severe credit-crunch was felt across the world. If it were allowed to continue further it would have led to depression.
How does it affect Bangladesh?

In the industrialized countries, it is reported that manufacturers are not making money, the retailer is not making money and the consumer is complaining because they are paying more. An unprecedented gloom in the confidence of consumers is being experienced in these countries. The global slowdown in the leading economies such as US, Europe, and Japan is likely to adversely affect principally, in three sectors, namely exports, aid-flow and foreign direct investment and remittance from workers.
About 75 % of the exports of garments and knitwear go to the US and Europe.

The exports of knitwear and ready made garments to the US and Europe are likely to fall because there will be no demand in those countries as people would keep money with themselves for meeting their basic needs during rainy days. Everyone will be tight with spending money for non-essentials.

Bangladesh needs foreign direct investment (FDI) up to 28% per cent of GDP (almost 415 billion) every year to reduce poverty in the country. Whatever FDI was coming to Bangladesh was encouraging but it is likely to slow down considerably.
Likewise the volume of foreign aid and loans to Bangladesh may also likely to be affected from the industrialized countries. It is noted that during the financial year, nearly 14% of its expenditure of the development budget of Bangladesh relies on foreign aid and loans.

It is reported that remittances during the last financial year stood to almost $7 billion dollars, 25% per cent were from the industrialized countries in the West and 75% per cent come from the Middle East. The Middle East has not been immune from the crisis and stocks fell over in the oil-rich countries, even in Dubai. Given the background, it is likely that remittances will be less because there will be jobs-cut in the countries of economic slowdown.

There is one flip side of the financial crisis in that price of oil has plummeted to a level, unimaginable this summer. At the time of writing it was less than $50 dollars, from the highest $147 dollars per barrel. That would enormously help Bangladesh which imports oil.

Bangladesh could feel impact of world financial crisis :

Visiting vice-president of World Bank for South Asia Isabel Guerrero Sunday said Bangladesh could feel an impact of the global economic recession and the country needs to prepare social safety net program to face the impact.

“So far Bangladesh has not felt the impact of the financial crisis…But it is possible in the future through Bangladesh’s manpower exports and remittances,” she told reporters here after meeting with Bangladesh’s Foreign Minister DipuMoni.

Isabel said Bangladesh has time to prepare social safety net program in a way that when the crisis comes the government is ready to help those people who are worst affected in the crisis.

Isabel who earlier met with Bangladesh’s Prime Minister Sheikh Hasina said World Bank has a program of 3.6 million U.S. dollars for three years for Bangladesh and that program will be available to help through the crisis if it comes.

The World Bank official who came here Saturday on a 3-day visit said it is important that the people get the benefit of the safety net programs. Besides, she said there could be many improvements in development programs so that the implementation is better.

About WB’s support for power generation, Isabel said “We get ready to support on the power sector,” as the power generation is said to be the number one priority of the government.

Suggested steps

Against the background, private sectors are likely to shed employees in the country and as a result, unemployment is likely to increase in the country. The government’s principal aim is to keep unemployment in check.
Many economists suggest that one of the ways to keep unemployment at bay is to spend money on infrastructure with the benefit of enhancing employment and ultimately increasing productivity. Second, purchasing power must be increased to vulnerable groups by directly giving money or food for works so that their basic needs are met.
Furthermore new business friendly policies may be adopted to attract foreign investment and a cut in interest rate by Bangladesh Bank is an option to be considered to boost investment by private sectors. Real estate developers and garment manufacturers may be given more incentives in cutting taxes and customs duties in importing raw materials so that engine of growth is maintained.

Bangladesh seems to be in unsheltered territory because such global economic crisis has never occurred before. It is qualitatively different from earlier economic break down in 1987 and in 1997 in South East Asia. Bangladesh’s economic security is likely to be threatened. No one can be sure what lies ahead for at least two years. It is commendable that the government has set up a task force with local think-tanks and private sectors as to how to address slowing economic growth in the country.
The volatile situation is both a challenge and an opportunity for Bangladesh to show innovation and creativity to come out from the likely adverse effects of global economic crisis.

Experts and economists called Saturday for formation of a high-powered taskforce to assess the possible impact of the global financial meltdown on Bangladesh and devise both short and medium-term policy measurers to protect the domestic economy.

Speaking at a dialogue, most of the discussants while seeing no major impact of the global crisis on Bangladesh gave their opinion in favor of setting up such a body as precautionary steps.

Largely participated by policy makers, economists, business leaders, representatives of foreign missions, politicians and members of the civil society, the dialogue on “The Global Financial Crisis and What it means for Bangladesh” was organised by the Centre for Policy Dialogue (CPD) at the city’s CIRDAP auditorium.

Bangladesh Bank Governor SalehuddinAhmed spoke on the occasion while Ambassador and Permanent Representative of Bangladesh to the WTO and UN Offices in Geneva Debapriya Bhattacharya presented the keynote paper on the dialogue with prominent economist RehmanSobhan in the chair.

“There is a need to set up a competent task force to assess the effects and impact and design an adjustment package with both short and medium term policy institutional measurers,” Debapriya said while presenting his keynote paper.

It is too early to conclusively assess the impact on Bangladesh as the global financial crisis continues to rage across the world, he said, adding, “We do not have the real time data to assess the situation.”

Also laying emphasis on the need for macro-economic policy adjustment, he said it can be done by reviewing the public expenditure portfolio to accelerate implementation of infrastructure projects and strengthening credit flow. He put a number of suggestions including taking the advantages of sobering trend in inflation, persuasion of expansionary monetary policy and lowering of interest rates in line with inflationary trend.

The economist-turned envoy also recommended an active management of exchange rate, strict monitoring on the activities of credit rating agencies, intensification of export market exploration in emerging economies and consolidation of the country’s labor markets.

Agreeing with Dr.Debapriya about setting up of a taskforce, the BB governor, however, called for united efforts from all the agencies concerned to help protect the country from current global financial crisis.

“Not only the central bank, all the agencies should come forward to help the country prevent the effects of global financial crisis,” the BB governor said.
He also said the central bank is closely monitoring the emerging situation and has already taken some measures in this connection.

“We are in favour of injecting money into the market, but at the same time it must be ensured that the money goes to small investors and agriculture sector instead of big borrowers,” Dr.Salehuddin said.

He said: “We must not allow any short-term portfolio investments.”
The BB chief also suggested that there was an urgent need to be careful about the activities of country’s securities market and insurance companies against the backdrop of the global financial turmoil.

Giving his opinion in favour of setting up of a taskforce and adoption of expansionary monetary policy, Former finance minister AbulMalAbdulMuhit, however, observed that the highest priority should be given to the country’s agriculture sector and rural development.

The president of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), FazlulHaq, said their exports are on a declining trend following the global financial crisis. Considering the situation, he urged the government should refrain from raising the prices of fuel oils and gas at this moment.

Also echoing the sentiment expressed by the BKMEA president, the former BFCCI president Mir Nasir Hossain observed that the authorities should not go for devaluation of the local currency right now.

BGMEA, BKMEA express frustration

Few trade bodies have expressed their frustration over the financial stimulus package the government announced yesterday to help face the recession challenges and demanded reconsideration of the incentives. “I can’t consider it a complete stimulus package… it only addressed the concerns of three sectors from the recession-hit ones,” FBCCI president AnnisulHuq told yesterday in an instant reaction.
He said the spinning sub-sector of the textile industry has been affected badly, but it has got no specific stimulus to face the situation.  The country’s apex trade body leader, also a leader of the RMG industry, said the apparel sector would be frustrated, although the sector has so far remained out of strong impact of the recession.

He said: “The government needs to be flexible in this regard and remain alert so it can come forward to rescue the sector from any worst situation as soon as possible.”
AnnisulHuq, however, appreciated the positive initiative of the government for giving some sort of economic direction before the next budget, which would have a good reflection on the internal economy.

He said there are some good policy indications in the announcement, but they are under consideration and some of them are budgetary measures. “Those are not policy decisions,” he said, adding that if implemented, the policies would yield some good results. BGMEA president AbdusSalamMurshedy termed the package “unwanted” as it did not take steps to save the apparel sector from the clutches of the ongoing economic meltdown.” We see the package hardly gave any importance to the RMG sector,” he told a hurriedly called press briefing at the BGMEA conference room, expressing his deep disappointment. Leaders of BGMEA demanded the government of providing additional Taka 10 as exchange rate per dollar up to 30 per cent of total RMG exports to help the industry tackle the shock of the global recession. They said Bangladesh’s competitors India, Pakistan, Vietnam and Cambodia have depreciated their currencies and China, India and Pakistan have announced economic packages in order to support their respective RMG sectors.

“The entrepreneurs of the industry are gradually loosing their competitiveness,” he said and demanded wavering 0.25 per cent source tax, exemption of all VAT, including utility bills, and fixing zero per cent duty on imports of capital machinery, spare parts and accessories for RMG industry. Like the agriculture sector, the government should also provide subsidy on diesel for running generators in the garments industries, he said.

He also demanded lowering the bank interest rate to single digit and also provide subsidy on bank interest rate and bringing down all bank charges at tolerable levels.
The BGMEA president urged the government to reconsider the stimulus package to accommodate allocations for them as a great danger is knocking at “our doors.”
BKMEA, the knit sub-sector of the apparel industry, also expressed their frustration over the stimulus package as they have been ignored.  Criticising the package, BKMEA president Fazlul Haque said that he does not find any justification for increasing the subsidy allocation for the agriculture as the sector is not affected by the recession.
“The package utterly neglected the export sector,” he told a press briefing at the BKMEA conference room.

Haque said Bangladesh Bank has decided to reduce the lending rate and waived the down payment for loan re-scheduling as they realised the impact of the recession. “I don’t understand why the government did not pay heed to the RMG sector.”
During the last three months, he said, export growth of the knit apparel sector was just five per cent as compared to its average growth of 20 per cent per year. “We’ve already lost US$ 450 million in the last three months.”
The BKMEA president brought allegation of injustice by the government and said: “We’ve a good opportunity to cash in on the aftermath of the recession, but this (government) stimulus package has strangulated that opportunity.”
He urged the government to make readjustment to the allocations of the stimulus package.

 Global financial crisis starts to bite Bangladeshi garment makers:-

The worst global financial crisis since the 1930s has started to bite Bangladesh’s key garment industry as buyers are cutting prices and delaying orders meant for spring and summer seasons, manufacturers said Monday.

Exporters said in the past week alone top buyers including Wall-mart, Tesco, Prominent and Mercury — who bought apparel worth one billion dollars last year have demanded up to two per cent rebates on their existing orders. Bangladesh, which last year became the world’s second largest apparel makers, prides itself of being the world’s cheapest clothing manufacturers.

But the dubious distinction was not enough to make the retailers happy, as the credit crunch in its main markets, the United States and the European Union, have suddenly changed all the equations. “Things are bad. Some of the buyers have made us give rebates on the existing orders,” said SalimRahman, managing director of KDS Garments, one of the largest apparel manufacturers of the country.

“Some of them even are making us to adjust rebates on future orders. They said they were hit hard by the global financial meltdown,” said Rahman, whose company exported apparel worth $150 million. The Bangladesh Knitwear Manufacturers Association (BKMEA) early this month reported a ten per cent drop in knitted items such as T-shirts and pullovers, but some manufacturers said things have worsened since then.

“The past week was like a massacre,” said Ziaul Islam Chowdhury, a director of Knit Asia, adding buyers are now renegotiating prices and delaying orders citing the ongoing financial turmoil.

“We thought the crisis would not affect us because we offer cheapest rates to the buyers. But most manufacturers I talked to over the last few days narrated the same gloomy scenario,” he said.

He said a number of big orders for the spring and summer seasons have also been delayed as the retailers were not sure how the economic crisis would play out in the near future. Top buyers like H&M told the FE last week that they would increase sourcing from Bangladeshi manufacturers, despite a squeeze in retail sales in most of the rich countries. But this week buyers including the country chief of UK retail giant Tesco, however, would not comment on the issues of rebates and delayed orders.

“Most of the top buyers are assessing the situation. We are hearing a lot of noises of declining orders. Some are even trying to cut already offered prices,” said Nazrul Islam Swapan, managing director of Nassa Group. Swapan’s group is the country’s second largest apparel exporter, shipping garments worth $210 million last year. This year it wants to hit the $250 million mark. “I don’t know what the situation will look like in the next few months. If the gloom persists, there is no way we can cross our target,” Swapan said.

AnisurRahmanSinha, the owner of the country’s biggest garment manufacturing group, Opex, however, sees no reason to be panicked, saying cheap prices will help Bangladesh ride out the turmoil. “It’s true some of the top retailers are downsizing their inventories due to the crisis. But we don’t think we have much to worry about,” said Sinha, whose group exported over $250 million dollar in 2007.

“We have to be careful. If we can make shipment timely and keep the quality intact, I don’t think the global financial crisis will affect us,” he said. Bangladesh exported garments worth $10.7 billions last year — up more than 16 percent than last year — which accounted for 76 per cent of the country’s total shipments.

Manpower export may come down to less than half this year: BAIRA; Blame goes to global economic meltdown:-Dhaka, Feb 23, 2009 (Asia Pulse Data Source via COMTEX) –

Bangladesh Association of International Recruiting Agency (BAIRA) Monday apprehended that the global financial crisis may take its toll on the country’s manpower export bringing it down to less than a half to about four lakh this year if the crisis prolongs. Some 8, 75,055 workers were dispatched to different recipient countries last year fetching US $ 9.02 billion.

But due to fall in oil price and economic recession in the West, workers ? Recipient countries have either scrapped their development activities or trimmed their development projects,? BAIRA president GolamMostafa told a press conference at Dhaka Reporters Unity.

In addition to stoppage of issuing new visas, he said, a good number of expatriate workers might get back home from some countries. The BAIRA President said the remittance may not be seriously affected this year because the workers, if they lose their jobs, will return home with money. He thinks that remittance earning may be US $ one billion less than that of the previous year. Mostafa suggested that instead of getting scared, activities of Bangladesh missions in labor recipient countries need to be activated and convince the employers that the workers should not be sent back as they would face workers shortage as soon as the temporary phase of recession is over.

He said BAIRA members are in constant touch with employers so they do not send back the Bangladeshi workers who also need to keep patience and should not leave their respective workplaces. Mostafa said they are also trying to transfer the workers from one closing down project to another that needs workers. The BAIRA President appreciated the Foreign Minister’s meeting with Ambassadors of the Middle Eastern countries on February 15 and her request to recruit fresh workers from Bangladesh. He said such initiatives will bring positive results to manpower export. Mostafa also praised the Prime Minister for her government’s quick initiative to set up Expatriate Welfare Bank responding to a proposal of BAIRA. The BAIRA President announced gold medal, crest and TK 40,000 one each for electronic and print media every year. Besides, BAIRA will also reward two citizens every year for their scientific discoveries and welfare activities.

Bailout Package May Be Worth Tk 3000 Crore

Wednesday, 15 April 2009

The prime minister will roll out a ‘combined financial package’ for recession-hit sectors before she tours Saudi Arabia on Apr 22, the finance minister said Wednesday while the commerce minister hinted that the bailout package could be worth Tk 2500-3000 crore. Finance minister AMAMuhith, speaking to reporters almost at the same time, was tight-lipped about the figure when pressed.

Faruq Khan, the commerce minister, told reporters after a meeting with the Ireland’s integration minister that the finance minister will speak about the financial package for the export-focused sectors hit by the global financial downturn. “But the package is being considered in the region of Tk 2500-3000. On top of that, we are expecting assistance from the developed countries [for the export sectors] since the financial meltdown stemmed from them,”

Faruq said. Muhith said after a meeting with the representatives of the Association of Development Agencies Bangladesh (ADAB) at the Secretariat that new legislation would also be put in place to ensure the affected sectors get the financial support as fast as possible.

“The special package is almost at the final stages. It will be announced before Sheikh Hasina’s Saudi tour,” he told reporters Asked what the package would be worth, the minister said, “That cannot be disclosed now.” A range of benefits will be included in the package for sectors being affected by the global recession, he said. The government was extending financial assistance to several export-oriented sectors including frozen food and textile. At present, the amount of outstanding money is more than Tk 1000 crore. However, the finance ministry waived Tk 243 crore in outstanding with the exporters several weeks ago.

The new law will make sure that the exporters receive the money as soon as possible or there remains no outstanding amount, the minister added. The poultry industry will be given special priority in 2009-10 fiscal year, he said to the reporters after a meeting with Bangladesh Poultry Industries Association. Faruq Khan told reporters at his ministry the Trading Corporation of Bangladesh will be made more active to rein in the price of essentials on the eve of Ramadan.

Asked about the sudden price hike of edible oil, he said, “I believe the businessmen would not do that. We will tell them to keep the price reasonable. If they don’t then government will take steps because we would not let people taken hostage by businessmen.”

About the BDR mutiny, the minister, who coordinates the investigation committees, said, “The investigation is going on very well. We want a thorough investigation. There is no point carrying out an investigation like the one of ‘Judge Mia’. Otherwise this type of incidents will increase.

“Questioned if it was possible to submit investigation report within the deadline, he said, “The matter is being looked after by the home ministry. Meanwhile a draft report has been made. New information will be added to this report.”

Businesses ask for Tk 6,000cr bailout

Monday, March 16th, 2009 The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) yesterday sought a Tk 6,000 crore rescue package to cope with the global financial meltdown.

“We proposed a Tk 6,000 crore bailout package to deal with the economic recession. We have also asked the government to take initiatives to help boost the country’s economy,” FBCCI President AnnisulHuq told reporters after a meeting with Prime Minister Sheikh Hasina at the Prime Minister’s Office (PMO).

The premier said the government would offer “special package” to save country’s business sectors from any possible negative impact of the current global economic recession, reported UNB.

The leaders of the country’s apex business body mentioned 17 points at the meeting and said the rescue fund could be raised by issuing bonds, if necessary. The delegation led by Annisul said they were facing difficulty in paying bank loan installments because of the financial meltdown that might cause further problems and lead to closure of sick industries. “If necessary, the prime minister should make overseas trips to protect the interests of expatriate Bangladeshi workers,” they said.

Their points include maintaining good relation with neighboring countries, announcing Sunday as weekly holiday, checking tender manipulation, making Better Business Forum and Regulatory Reforms Commission active and formation of a council for food security.

“We also proposed giving waiver for a year or two for the industries that fail to repay loans as a result of economic recession,” the FBCCI president said.” Already the ministries concerned have been directed to identify the problems that might be created following the world economic recession. After identifying the problems, government will chalk out plans and offer package programmer for the business sectors,” the PM said, adds UNB. Under the package programmers, the prime minister said, the business sectors will be given various facilities and incentives to keep the country’s economy vibrant increasing the flow of export and import. About the recent cancellation of Malaysian visas for Bangladeshi workers, she said the labor and foreign ministers would go to Kuala Lumpur to find out a solution to the problem. If necessary, Hasina said, she herself would go to Malaysia and other countries to resolve the issues.

Assuring all of taking every possible measure in this regard, she said the government, at the same time, is focusing on creating new labor markets in the foreign countries.

The PM also informed the business leaders about some of her government’s plans for the country’s development.

She said the government is planning to activate Bhola power plant and special economic zone in the country’s comparatively “poor and neglected” districts to expedite trade and business to create more employment opportunities. Hasina further informed that the government has a plan to set up hydropower plants in areas abound with rivers and haors. To popularize the solar energy system, taxes on the solar system equipment have already been withdrawn, she added.

The prime minister suggested the industrialists to set up small power stations at their own factories saying that it will help to reduce the scarcity of electricity in the industries and even in the adjacent localities. To increase navigability of the country’s waterways, rivers will be dredged gradually; she said adding that the government will dredge the Mongla port to fully reactivate it. She also asked the business leaders to invest in the proposed economic zones of the country.

Hasina said Bangladesh can capture huge market abroad for organic foods and vegetables. “Try to exploit the potentials.” She thanked the businessmen for reducing the price of edible oil and requested them, if possible, to reduce the prices of other daily essentials as well. The government attaches equal importance to both public and private sectors for overall development of the country, the PM said.

Hasina also thanked the business leaders for their role in holding the December 29 polls in free and fair manner and for standing beside the government to resolve the February 25-26 Pilkhana carnage in a peaceful manner. The FBCCI leaders highly praised the PM’s “wise and farsighted” steps to resolve the BDR carnage quickly and peacefully. The leaders observed that the prime minister’s February 26 speech to the nation had played an outstanding role to disarm the “killers” which saved lives of many army officers and their family members.

Hasina mourned the death of “well educated and talented” army officers and civilians in the BDR carnage. The prime minister categorically said she does not want to see any more conflicting situation, which is immensely harmful to the country’s image as well as trade and investment.

Recognizing the achievements of armed forces and police department’s in the UN peacekeeping missions, she said that if any more conflicting situation takes place in the country, the fame earned by the armed forces and police will be harmed. PM’s Secretary MollahWahiduzzaman, Press Secretary Abul Kalam Azad and Deputy Press Secretary Mahbubul Hoque Shakil were present at the meeting.

ADB cuts growth forecast for Bangladesh economy

March 10, 2009

The Asian Development Bank (ADB) has revised downward its growth forecast for Bangladesh economy, ranging between 5.5 per cent and 6.0 per cent, for the fiscal (FY) 2008-09 against the backdrop of the ongoing global financial crisis. ‘Before the onset of the global financial crisis, a 6.5 per cent growth target for FY2009 appeared attainable. With the financial crisis in the advanced economies unfolding and recession appearing to last longer than earlier anticipated, a growth rate in the range of 5.5 per cent to 6.0 per cent seems more likely in FY2009, the ADB said in its latest Bangladesh Quarterly Economic Update (BQEU).

The global financial crisis is yet to significantly affect Bangladesh, the December BQEU also said, adding that the pressure from the global slowdown is building up with signs of moderation in growth. Economic performance in the July-September of FY2009 had held up reasonably well with steady progress in domestic economic activity and satisfactory growth in exports and remittances, said the BQEU released Monday.

According to the Economic Update, growth in ready-made garment production, together with improved business confidence and recovery in housing and construction, stimulated the industrial activity. During the October-December period, export growth decelerated affecting the export-based industrial production, and growth in remittances also moderated, it revealed.

Highlighting the sector-wise performances, the ADB said Bangladesh’s agriculture sector is expected to attain the target growth rate of 4.0 per cent, up from the actual growth of 3.6 per cent in the FY2008.Production of rice and wheat for the FY2009 is targeted at 34.3 million tonnes33.3 million tones of rice and 1.0 million tones of wheat — 15.1 per cent rise from the actual production in FY2008, the BQEU said. Bumper harvests of Aman rice, maize, wheat and potato in FY2009 have already been reported, it said. A favorable outlook is maintained also for the upcoming Boro crops because of good weather conditions together with strong support from the government to ensure availability of key agricultural inputs, it added.

The prospects for output in various non-crop sub-sectors of agriculture also appear bright, it said, adding that the fishery sub-sector has performed well because of the growing domestic demand.

The country’s industrial growth is expected to be in the range of 6.6 per cent to 7.2 per cent this fiscal compared to 6.9 per cent in FY2008 with production for exports continuing the slowing trends that became evident in the October-December period of FY2009, the ADB said. It also said aided by the robust export growth of 42.4 per cent in the July-September of FY2009, the ready-made garment production, together with improvements in business confidence and recovery in housing and construction, stimulated the industrial activity.

However, exports declined by 1.4 per cent in October- December of FY2009 implying a slowdown in export-based industrial production, it said.

‘On the contrary, falling prices of construction materials and a rise in demand for real estate because of the growth in bank credit and higher remittances helped revive the construction sub-sector,’ the ADB said.

It also suggested that the prevailing shortages in power and gas supplies need to be urgently addressed to promote the industrial sector. The lack of gas supplies will also constrain power generation and new investment in manufacturing activities, it said, adding that the country’s export-based industry sector is likely to experience a slowdown in the coming months. According to the ADB, growth of the country’s services sector will slow to the range of 5.8 per cent to 6.2 per cent, down from 6.7 per cent in FY2008, due to lower activities in the export sector and declines in consumption spending induced by lower income and moderation in remittance growth.

Services, especially wholesale and retail trade and transport and telecommunications, performed well in July-September of FY2009. The satisfactory performance of agriculture and industry has contributed to healthy service sector growth, it said, mentioning that in October-December, escalation in demand for services during the parliamentary elections, contributed to boost retail trade in both rural and urban areas.

On the other hand, profit margins of private sector banks remain quite healthy, and are likely to have a positive impact on growth of financial services.

However, the global financial crisis will have an adverse impact on the services sector as well, because of effects on industry, particularly related to exports, and compression of domestic demand in general. In its Economic Update, the ADB projected the rate of inflation at about 7.0 per cent for the year as a whole, down from 9.9 per cent in FY2008.

Inflation moved steadily downward as the October-December of FY2009 unfolded, sliding from 10.2 per cent year-on-year in September to 6.0 per cent in December, it said. It also identified a rapid decline in international commodity prices and improved domestic food supplies as the main factors for pushing inflation lower. The decline in food inflation to 6.8 per cent in December from 12.1 per cent in September was steeper than that of nonfood inflation that came down to 4.8 per cent in December from 7.2 in September.

The cut in the locally-administered price of oil in October and December last, after a rise in July, also helped ease price pressures, the ADB said. The likely good domestic crop harvests, the effects of raising policy rates by the central bank for restraining credit in October-December of FY2009, and the January 2009 reduction in the domestic fuel prices will also ease inflation, it added. On the fiscal management, it said despite the recent rise in subsidy on fertiliser, the government’s budget deficit is expected to be around 4.7 per cent within the budgeted level of 4.9 per cent.

According to the ADB, the government revenues are showing signs of deceleration, with the revenue collections falling from 20.5 per cent during July-September of the FY2009 to 13.2 per cent during July-December period, over the corresponding periods of FY2008. The ADB cautioned that the slower private sector activity, as the impact of the global economic slowdown takes hold, could further affect revenue collection. Import-based revenues will be affected by the cuts in customs duties in the FY2009 budget and the erosion in import values resulting from the decline in international commodity prices, it added.

It also mentioned that a major challenge to the new government would be to raise the utilization rate of Annual Development Programmer (ADP). ‘Both quantity and quality of ADP need to be stepped up by addressing capacity constraints and better interagency and aid coordination, so that infrastructure provision can support increased private investment and help address the country’s development needs,’ it said.

About the monetary and financial sector, the multilateral donor agency said Bangladesh Bank maintained an accommodating monetary policy stance with little adjustment in policy rates to support high economic growth and to contain inflation within tolerable levels. Broad money growth reached 17.9 per cent year-on-year in December last, up from 14.7 per cent in December 2007, it said, adding that the private sector credit grew rapidly at 21.8 per cent year-on-year in December 2008 from 16.8 per cent in December 2007.

In mid-January last, Bangladesh Bank announced the Monetary Policy Statement (MPS) for the January-June period of FY2009 with a commitment to continue its support to maintain the flow of credit to raise production of goods and services, and provide refinance against lending in employment-intensive sectors such as agriculture and SMEs, it mentioned.

The ratio of gross non-performing loans (NPLs) to total loans of all banks declined to 12.3 per cent at the end of September last from 14 per cent at the end of September 2007. On the other hand, NPLs of the state-owned commercial banks (SCBs) rose from 26.9 per cent to 29.3 per cent during the period, it said. Weighted average lending rates continued to fall and stood at 12.4 per cent at the end of September 2008 while the interest rate spread declined from 6.2 per cent in September 2007 to 5.2 per cent in September 2008.

On the balance of payments, it said the preventing of a sharp decline in export earnings in the face of the cooling global demand in the coming months will be a major challenge for the government. During July-December of FY2009, imports rose by 23.2 per cent over the same period of FY2008 while the total remittance receipts during July-January of FY2009 rose by 29.4 per cent over the corresponding period of the preceding fiscal year.

The annual growth in the number of workers leaving Bangladesh for overseas jobs slowed in 2008 compared with a growth of 118.2 per cent in 2007. The trade deficit edged up to $2.9 billion in the first half of FY2009, up from the $2.2 billion deficit in the corresponding period of the previous fiscal year. Higher deficits in trade and service payments reduced the current account surplus to $232 million from $298 million of the same period the year before.

Because of the higher surplus in the financial and capital accounts, the overall balance showed a higher surplus of $489 million in July-December 2008 against a surplus of $44 million in July-December 2007. Gross foreign exchange reserves of Bangladesh Bank were lower at $5.8 billion (equivalent to about 3.3 months of imports) at the end of December 2008, down from $6.2 billion at the end of June 2008

Opinion about crisis on Bangladesh:

Visiting Assistant Secretary General AjayChhibber of the United Nations on Tuesday said Bangladesh will be less affected by the global economic downturn than other nations in the South Asian region as the country is not much integrated with world financial system.  After a meeting with Bangladesh’s Finance Minister AMA Muhith here on Tuesday, Chhibber told reporters that the impact of global recession on Bangladesh’s exports and remittance have so far been less but can deepen in future. “We hope the impact of recession will be much less for Bangladesh,” said Chhibber, who arrived in Dhaka on Saturday for a five-day visit.

He said the Bangladeshi government is aware of the possible impacts of global economic downturn which already hit economies of many countries throughout the Asia-Pacific region. “We’ll have to intensely monitor the world economic situation. Impact on our export earning and remittance are still less but we must remain high on alert,” said Bangladesh’s Finance Minister Muhith at the same occasion,

The World Bank earlier said Bangladesh’s exports and remittance will be affected due to global economic downturn which will bring down the country’s GDP growth from 6.5 percent to 5.4 percent in current 2008-09 fiscal (July 2008-June 2009).

Economist’s report on Bangladesh economy not based on fact: BB

Sheikh Shahariar Zaman

High officials of the central bank have contradicted a report published in The Economist’s latest issue titled ‘A battered economy takes another hit’ and said the report is not based on fact. The report said that the global meltdown would severely hit the country, and remittance and export earnings would fall sharply in the coming months. “Remittance increased by 30 per cent in July-January period, export and import increased by about 20 per cent in the first six months of the current fiscal,” said a high official of the central bank.

The meltdown started in September last and the developed world has already felt the bite of the crisis but Bangladesh has shown its resilience and the economy is expected to grow at a rate of over 6.0 per cent, he said. “The Economist’s report said the banking system in Bangladesh is among the weakest in Asia. If that is the case, what they will say about the banking system of the US and the UK, where the financial institutions are virtually bankrupt and begging mercy of the governments for bailout package,” said another official of Bangladesh Bank (BB). Bangladesh exports readymade garments for low-end markets and the demand for them does not vary with respect to price and income, he explained.

The country has huge orders up to May and the export earnings from the sector is not likely to face dramatic decline, he said. About the import payment, he said petroleum and commodity prices are declining fast in the international market and it would help the country maintain a positive balance of payment, he added. In February, an IMF team visited the country and said Bangladesh was largely protected from the first round of global crisis as its capital account dependence was limited.

AnoopSingh, director of the Asia and Pacific Department of the IMF, said many countries in Asia suffered export loss in December by as high as 40 per cent and in this context Bangladesh performed relatively well. “The developed countries are facing the biggest financial problems in the post-War period and Bangladesh is facing the impact in a limited scale,” he said. The country has some advantage like cheap labor and RMG exporters have orders up to April. There would not be any sudden impact on the economy due to lower demand in the industrialized countries, he added. The domestic economy has retained momentum from a favorable agriculture performance and RMG order is holding up and remittance flow is also increasing, Anoop said.

Conclusion

            The whole world is going through global financial crisis specially the develop countries such as USA, EU Japan, Australia affected by financial crisis. This crisis was started from USA, USA is the most affected country overall the world. There are lot of financial organization was collapsed such as Lemon brothers city bank etc. To overcome this situation US govt. & EU authority has been taken some good steps. Such as bailout problem financial assistance . Bangladesh also affected from this situation. So the govt. of Bangladesh should be awarded about this. By taking effective steps by the govt. it be probable to minimize the risk of affected.