The purpose of this assignment is to analysis Impact of Global Financial Crisis on the Economy of Bangladesh. A universal recession is a period of global economic slowdown. The International Monetary Account (IMF) takes many factors into consideration when defining a international recession, but it states that global economic growth of 3 percent or less is “equivalent to our global recession”. Understandably the Bangladesh government features formed a high-level complex committee and taskforce to be able to monitor and advise for the crisis and ministries and loan companies have taken several precautionary measures.
Introduction
A global recession is a period of global economic slowdown. The International Monetary Fund (IMF) takes many factors into account when defining a global recession, but it states that global economic growth of 3 percent or less is “equivalent to a global recession”.
Informally, a national recession is a period of declining productivity. In a 1974 New York Times article, Julius Shiskin suggested several rules of thumb to identify a recession, which included two successive quarterly declines in gross domestic product (GDP), a measure of the nation’s output. This two-quarter metric is now a commonly held definition of a recession. In the United States, the National Bureau of Economic Research (NBER) is regarded as the authority which identifies a recession and which takes into account several measures in addition to GDP growth before making an assessment. In many developed nations other than USA, the two-quarter rule is also used for identifying a recession.
Whereas a national recession is identified by two quarters of decline, defining a global recession is more difficult, because developing nations are expected to have a higher GDP growth than developed nations. According to IMF, the real GDP growth of the emerging and developing countries is on an uptrend and that of advanced economies is on a downtrend since late 1980s. The world growth is projected to slow from 5% in 2007 to 3.75% in 2008 and to just over 2% in 2009. Downward revisions in GDP growth vary across regions. Among the most affected are commodity exporters, and countries with sharp external financing and liquidity problems. Countries in East Asia (including China) have suffered smaller declines because their financial situations are more robust. They have benefited from falling commodity prices and they have initiated a shift toward macroeconomic policy easing.
The IMF estimates that global recessions seem to occur over a cycle lasting between 8 and 10 years. During what the IMF terms the past three global recessions of the last three decades, global per capita output growth was zero or negative.
Possibility of a global recession in 2009
According to the IMF’s World Economic Outlook, October 8, 2008, the world economy is “entering a major downturn” in the face of “the most dangerous shock” to rich-country financial markets since the 1930s. IMF expects global growth (measured using purchasing-power parity), to come down to 3% in 2009, on the verge of what it considers to be a global recession.
The World Bank said in December 2008 that the global economy will enter a recession for the first time since 1982. International trade will decline from 2007 levels. The bank said it expects global GDP growth to decline to 0.9% in 2009 from 2.5% in 2008. Any global growth rate under 2.0% is tantamount to a recession according to economist David H. Wang. Global trade is expected to decline 2.1% in 2009, the first decline since 1982, on reduced global demand and export credits.
Germany, Europe’s largest economy, contracted by 0.5 percent in the third quarter of 2008, putting it in recession for the first time in five years.
Japan’s GDP contracted at an annual rate of 0.4 percent from July to September 2008, marking the second consecutive quarter of negative growth. Japan’s previous recession was in 2001, after the dot-com bubble burst in the United States.
The Eurozone economy. made up of the 15 countries that use the euro contracted by 0.2% in the third quarter of 2008 following a 0.2% fall in GDP in the second quarter.
In USA, GDP dropped 0.5% drop in the third quarter of 2008. A number of economists surveyed by Wall Street Journal expect gross domestic product to decline at an annualized rate of 3% in this year’s fourth quarter and 1.5% in the following quarter.[
Despite the global economic forecast for 2009, the annual growth in greenhouse gas emissions of 3% is only likely to slow modestly. It may even rise over the long term because of the downturn’s impact on global climate talks and the funding of renewable energy projects.
Jan 2009: The IMF updated their forecast of global GDP growth in 2009 from over to 2% down to 0.5%.
World economic recession & Bangladesh
World economic recession is going on since 2007. The main reason of this recession is the crisis of mortgaged loan of USA which has started in housing sector where sub-prime were lending verily. The economists identified two prime reasons of this recession one is subprime lending & another is uncontrolled credit default. It’s also true that, this world recession increasing also for environmental disaster e.g. conflagration of Australia & draught in California. Many people lost their jobs & back to their country as the starting of this recession is in America. About 6 lakhs & 51 thousand people lost their job in February 2008 & in January this number was 6 lakhs 55 thousand. To face this problem many companies cut their workers. Almost 1 crore people of the world lost their job in 2008.
The effect of this recession is coming in small companies. On 26 January 2009 heavy machinery company CATARPILLAR, Medicine Company FIZER, Telecom Company SPRINT NEXTOR CORPORATION & Infrastructure Company HOME DIPO took decision to cut their workers. Bankrupt companies are increasing in number in USA. The export market of China fallen on because of Banking crisis and many people are losing work. In Japan, Spain, England, Russia, Germany, Mexico, Latin America and also Caribbean’s countries contracted their job market. Bangladesh is not free from this recession. Its telling that 3 million people can loss their job of Bangladesh in this year, side by side poverty is increasing here. This recession affected on our export. According to export development bureau during last 7 months the exporting of raw jute decreased 15.20%, jute goods 19.80%, leather 31.80% & refrigerated foods 5%.
BGMEA said their export decreased in January by 4.98% in February by 17.58% as our cloth mostly goes in USA & Europe so it greatly affects our industry. This recession greatly affected our manpower export as well. In the meantime Malaysia, Kuwait, Dubai, & Saudi Arabia returned back our workers. Malaysia cancelled the visa of 55 thousand workers. All the countries who are importing our manpower are going to cut our workers.
Whenever this world recession affected in our manpower exporting it also affects our remittance. It is shown that the income from remittance decreased 250 crore in February than January 2009 from Middle East. This recession also greatly affected our industry where jute, sugar, spinning mills are about to die. Our textiles are also falling in danger. From the 80 mills of jute products 17 are fully stopped, 11 of these mills are working partially & other mills also are in the way to stop. Out of 25 lakhs workers, 1 lakhs labor has lost their job in spinning mills, 50 thousands labor are jobless. The unsold goods of spinning mills are tk 30 thousands crore. To protect this recession government, already took many steps. Our minister went to Malaysia to save visa of 55 thousands labor. Prime minister went to Saudi Arabia to solve the problem of Bangladeshi workers.
Finance minister A M A Muhit declared a stimulus package. This package is of 3424 crore tk where 13% is for export, 43% for agriculture, 18% for power, 11% for food & 15% for agriculture loan.
In this package there is no stimulus for RMG sector which is urgently needed. Though almost all economists welcomed this package but they said there is no definite guidance there. Its true that this package is not enough to check our problem but it is a stimulus package. It requires more steps. We think this package will be implemented perfectly & Bangladesh will be succeeded to free from this ongoing recession.
Impact of global recession on BD
Though Bangladesh is yet to face the impact of global economic recession directly, the country is likely to feel the brunt of the phenomenon by May-June in the form of fall in manpower export and inflow of remittances.
Zahid Hossain, World Bank senior economist in Dhaka expressed the view while talking to BSS today.
Optimistic in view of Bangladesh’s strong economic position and high reserves, the World Bank official said the country would be able to overcome the situation easily.
Recession is not the problem of Bangladesh alone, it has created a crisis all over the world, he observed.
To tackle the situation, Zahid Hossain said, employment opportunities would have to be created, if the overseas manpower market shrinks and the existing employees lose job abroad. Special credit programmes can be introduced for them, he suggested.
The World Bank economist said the government is active on the issue and has formed a committee in this regard.
Referring to Bangladesh Bank statistics, he said the country received eight million US dollars as remittance in January. The amount of remittance is likely to fall by May-June, he apprehended. He said the present reserves of 600 crore US dollars are comfortable.
Bangladesh Response to Global Financial Crisis
The world economy has changed spectacularly since September 2008. What began as a slump in the US housing sector is now a global crisis, spreading to both rich and poor economies. Many believe that this may go down in history as the worst crisis since the Great Depression of the 1930s wiping out almost 10 trillion US dollar worth of value from stock markets over the past months. The triggers of the present global financial crisis were in the US subprime mortgage market the crumple of which engulfed the global financial markets leading to a painful recession of the world economy.
Bangladesh, though not so much globalized financially, depends a lot on foreign trade. More significantly, its exports including readymade garments, shrimps, leather, etc are solely dependent on the western consumer demand. So falling employment and hence the income of the ordinary consumers in the USA and Europe is bound to have serious impact on our export potentials. This may start impacting after January once the buying spree during Christmas sales is over. Similarly, there can be negative impact on the export of Bangladeshi low-skilled manpower following ever declining oil price with potential depression in infrastructural development activities in the Middle-East. So the new government will have to face these economic crises head on. One positive thing is of-course falling price of oil and commodities in the international market. This will surely dampen inflationary pressures. Before we go any far let us understand the nature of the global financial crisis.
Subprime Crisis
Subprime lending is the practice of making loans against mortgaged property to borrowers who do not qualify for market interest rates owing to various risk factors, such as income level, size of down payment, credit history, employment status and so on. Banks transferred credit risks to the third party investors through a process called securitization- Mortgage Backed Securities (MDS), Collateralized Debt Obligations (CDO). Four primary categories of risks are involved in subprime lending- credit risk, asset price risk, liquidity risk and counterparty risk.
The value of US subprime mortgages was estimated at $ 1.3-2 trillion as of march 2007, while total mortgage market was estimated at $ 12 trillion. Between 1997 and 2006, American home prices increased by 124%. Thus second mortgage of properties increased and the added funds were used for consumer spending. As a result, household debt grew from $ 680 billion in 1974 to $14 trillion in 2008. However, records of nearly 4 million unsold existing homes were for sale which placed significant downward pressure on prices. As a result, more homeowners were at risk of default. Factors contributed to the global financial crisis include: poor judgment by borrowers and/or lenders, speculation and overbuilding during the boom period due to lower price and interest rates, risky mortgage products and high personal and corporate debt levels, weak financial regulation and lack of oversight of financial institutions, aggressive activities by the insurance companies and vague ratings of assets and securities, overexposure of banks to risky lending and easy credit money, greed of Wall Street financiaries, unsupervised cross border integration of financial markets, market fundamentalist philosophy and so on.
Governments across the world have taken multiple efforts to mitigate impact of financial crisis. The US, UK, Ireland and others have virtually ‘nationalized’ giant financial institutions including banks, insurance companies, and mortgage houses. In the US, Congress adopted a massive bailout plan with taxpayers’ money. It initially approved a law to buy $1.5 trillion worth of bad mortgages and other assets from the troubled banks, which would wipe debts from their books with the hope that they will be able to start lending more freely again. Overall, a $2.4 trillion dollar rescue package has been put into motion in the US, the EU and Asia. India cut its key interest rates (20 October) by one percentage points – from 9% to 8%. China also cut interest rates and announced a $586 billion stimulus package focusing mainly on infrastructure and social programs. This followed a similar $11 billion fiscal stimulus package announced by S. Korea a few days earlier. The International Monetary Fund (IMF) has urged the major central banks to provide direct support to the banking system, saying some $657 billion would be needed in the next few years. Several meetings have already taken place regarding the restructuring of the global financial system and more are scheduled in the near future.
Global consequences of the financial crisis include Sharp fall in exchange rates of most of the currencies against the US dollar, despite ongoing recession in the US territory, sharp decline in global stock markets, fall in property prices in many western countries, sharp rise in the unemployment in the US, over 65,400 jobs were cut as of September 2008. Currently, unemployment rate there estimated to be around 6.5%, fall in consumer confidence in developed economies and so on. Some projections made by IMF in its World Economic Outlook, October 2008 indicate that world economic growth will slow down to 3.9% in 2008 and 3.0% in 2009 from the relatively robust growth of 5.0% in 2007.
Impact of Meltdown on Developing Countries
Developing countries—at first sheltered from the worst elements of the turmoil—are now much more vulnerable, with dwindling capital flows, huge withdrawals of capital leading to losses in equity markets, and skyrocketing interest rates. It is no longer a question of ‘whether’ but ‘when’ and ‘how’ the ongoing financial crisis will affect developing and least developed countries. The effects will vary substantially across the globe depending on size and structure of the national economy, as well as level and nature of global integration. The full effects of financial crisis on developing countries have not yet been registered. Lack of real time data is a problem. The risks for low‐income countries vary, but all are potentially severe. Large external demand shocks will immediately have real economy impact as they can not be cushioned by internal demand. Unfavorable effects in Official Development Assistance (ODA) may accelerate economic slowdown in LDCs. World Bank projects the real GDP growth to slow down across all developing regions in 2009. GDP growth in developing countries—only recently expected to increase by 6.4% in 2009—is now likely to be only 4.5%, according to economists at the World Bank. Moreover, rich countries are now expected to contract by 0.1% next year. Thus LDCs are to be affected more, but given the trade relationship. Progress towards MDGs faced setbacks over the last 2 years due to soaring food and fuel prices. Now the challenge for many LDCs who rely on exports is how to cope with falling demand for these exports and prevent mass unemployment. But unfortunately, the challenge of high inflation has yet to fade away in some regions.
Impact on South Asia
If we compare the economic integration of Bangladesh, India and Pakistan with the rest of the world, we will find that in 2006 trade as percentage of GDP is highest in India (48.78%) followed by Bangladesh (44.22%) and Pakistan (38.61%). Pakistan receives the highest FDI Inflow as percentage of GDP (3.37%) followed by India (1.19%) and Bangladesh (1.13). From the exchange rate side it as visible that Pakistan rupee has depreciated the most against the US dollar, followed by the Indian rupee while Bangladeshi Taka has remained relatively stable. The IMF data and projections indicate that all the three countries are expected to experience some slowdown in GDP growth rates from the previous years. Bangladesh government expects over 6% growth for Bangladesh in FY 2008-09. Indian PM forecast growth at 7.5% for India. Pakistan’s economy has grown by 7-8% over the past few years but most of this growth has taken place in sectors such as consumer financing. Real economy (agriculture, industry, mining, etc.) has not had much growth and impact on poverty reduction has been minimal at best.IMF projects high inflation of 23% and growth rate of only 3.5% for 2009. As previously mentioned, Pakistan rupee has depreciated significantly. This has adversely affected the country’s ability to repay foreign debts. As a result, the foreign exchange reserves of the country have fallen so low that they hardly cover 9 weeks of imports. To avoid default, Pakistan has sought help from the IMF. A US $7.6 billion has been approved and the country is expecting about $500 million loan from China. Pakistan will immediately access US $3.1 billion of the loan under a 23-month facility, with the rest phased in. The slowdown of economic growth in India has been less rapid than in other more export-dependent East Asian economies like Hong Kong, Singapore and Taiwan. GDP growth in the second quarter of the current fiscal year declined to about 8%, on the back of weakening investment. Indian PM forecasts GDP growth rate at 7.5% for current fiscal year. According to the Commerce Minister of India, the global meltdown in financial markets will impact demand in developed countries for Indian exports and the export target of $200 billion for the current financial year may be missed. Real estate and textile sectors are already facing a slump. Unrelated to the crisis, tourism and some related sectors may face short-term setbacks as a consequence of the tensions following the Mumbai terrorist attacks. Export growth in India slowed in the third quarter of FY08 from 33.7% year-on-year in July to 12.6% in September as demand from developed countries dropped dramatically. Trade and commercial services, manufacturing and agricultural sectors have all seen a slight decline in growth rates. Much of Indian industry is taking a more financially prudent stance, given the impact of the global financial meltdown. India is likely to miss the revenue and fiscal deficit targets in the current fiscal year as the government wants to spend extra money to boost the aggregate demand in the economy which has shown clear signs of slowdown. The government has foregone 31,000 crore rupee of revenue through reduction in taxes and duties, on account of fiscal measures to stimulate growth and fight inflation. Indian currency has come under pressure, prompting the Reserve Bank of India to intervene in support. As previously mentioned, interest rates were cut dramatically.
Impact on Bangladesh Economy
This crisis has several downside risks for the Bangladesh economy. However, the impact on the Bangladesh economy will depend on the nature, scope, severity, and duration of the crisis. Although the economy of Bangladesh has become increasingly integrated with the global economy in recent years, the country’s financial sector is not as globally integrated as India’s. Private foreign players are important players in the banking sector; however, foreign portfolio holdings in the equity market are relatively small at only 2.6%. Also, currency transfers abroad are restricted, so no question of large-scale capital flight. Therefore, the country’s financial markets have yet to feel any direct impact. The risks like mainly in the areas export earnings, remittances and foreign aid. Financial sector is in relatively good health, underpinned by prudent regulation and sound management due to past reforms. It is highly insulated from foreign markets and lacks sophisticated financial derivatives linked to Western capital markets. Non-performing loans are decreasing and the capital base is relatively comfortable. Foreign exchange reserves remain well managed and kept mostly in cash, US Treasury securities, accounts with central banks, and in sovereign bonds with no holding of any corporate bonds. At present they are equal to about $5.3 billion. The banking system is mostly separated from international financial markets, and does not have sophisticated financial products. These factors also apply to the financial sectors in Sri Lanka and Nepal. The capital account remains nonconvertible with few private transactions permitted such as foreign direct investment and portfolio investment. There is a positive current account balance that reduces the risks emanating from short run fluctuations in the exchange rate and foreign reserve situation. Net inflow of FDI has remained relatively stable in recent times whereas private debt transactions are limited and strictly monitored by the central bank. One potential threat for the banking sector is the likely incidence of payment default by foreign buyers against export orders, especially of RMGs, in the event of their going bankrupt.
Nearly 87 percent of Bangladesh’s exports are destined to markets in developed countries. Readymade garments (RMG) make up over 75% of all exports, mostly to US and EU markets. The impact on RMG exports will therefore determine the impact on the country’s overall exports. With the ongoing recession in the US and EU, it is likely that exports will be hurt. There are some moderating factors that should be considered. Since the country’s RMG exports mainly cater to the low price segment of the apparel market, the current slowdown may create less impact on the country’s RMG exports. With incomes falling, even some diversion of demand from the high-end garment segment to low-end may take place. But people may also compensate by not diverting to low-end and just buying far less high-end clothing. Major purchasers of RMG products may move to take advantage of the market situation by negotiating less favorable order contracts for suppliers from LDCs. Bangladesh is the cheapest producer of RMG in the world at present. In fact, a local company has received a $10 million order that was diverted from China. There are also negotiations for orders that are being diverted from India, Turkey, Indonesia, and Cambodia. Latest data from government indicates exports during Jul-Sep 2008 up about 42% from the same period of the previous year. But a more important question would be if this trend can be sustained if recession prolongs. Bangladesh is a net importer of essential food commodities and fuel. In recent months prices of commodities such as rice, wheat, edible oil, fuels, fertilizer, etc. have dropped significantly in the global market which favors Bangladesh. The settlement of L/Cs for consumer goods during Jul-Oct 2008 declined by 19% (Source: Bangladesh Bank). On the other hand, settlement of L/Cs for capital machinery has increased by about 8.5% which is a positive sign for future industrial growth and productivity. Taka has appreciated against many currencies such as the Euro, Aus $, Canadian $, etc. so this makes imports from those countries cheaper. Official general inflation figures are: 7.26% in October down from 10.19% in September. Food inflation is 8.08%, down from 12.09% (these are point-to-point calculations). Remittance receipts during July-October 2008 up by around 36.5% compared to the same period of the previous year. Most remittance to Bangladesh is from the Middle Eastern Gulf states whose financial health has not yet been severely affected by the crisis. However, the price of oil has fallen very sharply, from $147 a barrel in July to under $50 at present. If this continues, the demand for labor from Bangladesh is bound to fall as new construction projects are halted. Bangladesh has little FDI and most of these are longer term in nature. Tighter global credit markets have raised the cost of capital in the international market and are likely to reduce FDI in developing countries. Increasing FDI to Bangladesh depends more on domestic factors such as improvements in infrastructure, power supply, and governance and business practices. Most of Bangladesh’s aid sources (nearly 80 percent of the total) come from multilateral sources. Aid inflows are likely to remain unaffected in the short run although the promises of significant aid increases may not materialize. Aid during FY 2009-10 is not likely to increase as developed countries mobilize resources to tackle their domestic economic problems.
Bangladesh Bank projects growth of around 6.2% for the current fiscal year. However, World Bank projects it will be in the range of 4.8-5.4%. Official govt. forecast is based on the fact that Bangladesh has not had any major natural disasters this year which set back agricultural output. Over half of all economic activity in the country occurs in the informal sector. Accurate data regarding this sector is hard to come by. The informal sector employs a large section of the population (particularly lower income groups) and the global financial crisis is unlikely to affect it. It is therefore difficult to paint an accurate picture of the impact of the crisis on the economy of Bangladesh and lower income groups in particular. Newly elected govt. should actively focus on these issues.
In conclusion, South Asia as a whole is clearly feeling the effects of the current global financial crisis to varying degrees. Pakistan is the worst affected in the subcontinent. Foreign reserves have been exhausted, the country is now dependant on emergency loans, and growth forecasts are sharply lower while inflation forecasts are terribly high. It is this high inflation that will hurt Pakistan’s development and poverty reduction prospects the most. India has felt the adverse effects and is actively tackling the slowdown with several stimulus measures. The extent to which the crisis will hurt the economy of Bangladesh is still unclear. At present, some indicators such as exports and remittance are actually encouraging. However, that does not mean that the government can be complacent. A prolonged global recession now seems likely and therefore negative impacts may be inevitable. So Bangladesh must be prepared to face this crisis both at the macro and micro levels. Policy adjustments may have to be made at any time as demanded by the depth of the crisis. Appropriate policy taskforce, in addition to the routine monitoring by technical groups will have to be functioning continuously to provide necessary guidelines to the implementers so that there is no scope of complacency and hence inaction in any quarter.
Addressing Fallout of Global Recession in Bangladesh
THE impact of the global economic meltdown is visible in most of the countries of the world. Though the crisis originated in developed countries, it has started to bite the economies of even many low-income countries. Bangladesh is no exception. A lot of debate is now going on among businessmen and economists about the impact of the meltdown on Bangladesh. The government is also taking up the issue seriously.
Finance Minister AMA Muhith is upbeat about the issue. He hinted that the proposed high-powered political committee, that awaits cabinet approval, would be in place anytime soon to face the possible impacts of the global economic meltdown on Bangladesh’s economy. The government would announce the committee within 15 days. The proposed committee, headed by the finance minister, will be represented by political leaders, trade body leaders and stakeholders of trade, industry, business and the economy to keep close watch on the affects of the financial crisis and take remedial measures.
However, the taskforce comprising of officials formed earlier in this regard would work side by side while the Bangladesh Better Business Forum (BBBF) would continue to function. As per expert opinions so far, the issues of concern that deserve close attention by the proposed committee would include the impact mainly on the country’s exports and remittance inflow.
Meantime, Bangladesh Bank Quarterly Report released recently recommended a close watch on the impact of global recession on the country’s exports and wage earners’ remittance while it stressed the need for looking further at the exchange rate situation of Bangladesh taking into consideration the adjustment of currencies in the neighboring and competitor countries. Experts and trade bodies suggested reduction of lending rates to a tolerable level particularly for the export-oriented and manufacturing sectors, and keeping exchange rate stable and competitive.
At a recent meeting, noted economist Prof Rehman Sobhan called for formation of a “special parliamentary committee” to update lawmakers on the global financial crisis and its probable impact on Bangladesh. The committee will act as a link between lawmakers and the proposed taskforce to monitor the probable impact of the crisis. The taskforce should be assigned to brief the government on the movement of economies, national and international, he said.
Prof Sobhan criticized the past governments in Bangladesh for their negligence in implementing recommendations by different taskforce committees. He said the new government must involve professionals and experts in the new committee. There are competent professionals in the country. As they want to work, the government should make best use of their talents. Taskforce members need to know the global economic trend and when and how it could affect Bangladesh. Besides formation of a taskforce, the government should review export, import, fiscal, farm and food policies to make a proper strategic plan.
The technical committee of the coordination council on monetary and exchange rate policy recently recommended forming a high-power executive committee to deal with the global economic recession. It also forecast that the economy would remain stable until March as inward remittance and export data showed an increasing trend. The collection of custom duties had declined and as a result the total revenue earning by the National Board of Revenue was also on the wane.
However, there is nothing to worry about the economy until March as the growth of both inward remittance and export is showing an increasing trend. The committee will also place recommendations to the coordination council to minimize the possible adverse effects of the global financial crisis on the country’s economy and its financial sector. The country’s current account for the first three months of the current fiscal year was positive, however, the import payments and short-term expenditures of the country pulled down the current account balance to the negative zone in October. If the current account remains in the negative zone for a long time there will certainly be a negative effect of it on the country’s balance of payment (BoP) as well as the overall economy.
At present, over 50 per cent equivalent of Bangladesh’s gross domestic product (GDP) is connected with the global economy through exports and import of goods and services. About 85 per cent of Bangladesh’s exports are destined to developed economies; about 60 per cent of imports are from those countries. If India, China and other emerging economies are also taken into consideration, the extent of exposure of Bangladesh economy with crisis-driven developed and developing economies will be quite significant. All of Bangladesh’s partner countries have seen their growth projections revised downward several times in recent months, to various degrees.
Bangladesh has also benefited from fall in global commodity prices such as food, fuel and fertilizer which has somewhat eased the import burden. However, if recession deepens further, some slowdown in export growth should not be excluded. Besides, the commodity prices are likely to bounce back once the global economy starts to experience an upturn. Accordingly, Bangladesh’s fiscal, monetary and macroeconomic management policies should be pursued with due caution in anticipation of possible adverse implications as well as changes in market environment.
The export sector is potentially the most vulnerable in Bangladesh since it depends heavily on US and EU economies. The readymade garment (RMG) industry accounts for over three quarters of export earnings and depends almost entirely on US and EU markets. There is growing concern that a deep and prolonged recession in the US and EU may reduce consumer spending significantly across the board, thus undermining the demand for Bangladeshi exports.
Although demand for Bangladesh’s exports is not too sensitive to income, export prices may decline and this could have significant effects on the country’s export earnings even if export volumes remain largely unaffected. There is unlikely to be any direct immediate impact on remittances. Remittances in Bangladesh proved to be resilient during previous financial crises in the world. The bulk of Bangladesh’s remittances come from the Middle East, and less than one-third come from the US, UK and Germany. Strong remittance growth (44 per cent) has continued in the first quarter of FY09.
However, if a deep and protracted recession ensues in the US and EU, then the Middle-Eastern economies are likely to be adversely affected. Stock markets in important Middle-Eastern economies have already started to crash. Even if the current nearly $8.0 billion level of remittances is sustained, it would be challenging to maintain its growth momentum since 2001 if the world economy remains depressed for an extended period.
Official aid flows may take a bite. Governments in rich donor countries are doling out massive amounts to rescue their domestic financial institutions. They may look for savings from other sources to finance these bailouts. Foreign aid budget is relatively easy to cut since the foreign aid recipients do not count as their voters.
Bangladesh’s remarkable resilience so far to this ongoing global financial crisis and slowing growth in high-income countries is in large part because of the country’s relative insulation from international capital markets and the negligible role played by foreign portfolio investors in the country. This resilience also derives from sound policy framework and macroeconomic fundamentals.
Inflation has recently been the biggest macro policy challenge in Bangladesh. With the aggravation of the financial turmoil we have seen a sharp decline in global commodity prices. This makes the inflation battle a little easier for Bangladeshi policymakers. But new policy dilemmas are likely to emerge if export earnings begin to slow down and currencies of Bangladesh’s competitor countries depreciate. This will put exchange rate policy under pressure to maintain export competitiveness.
If manufacturing sector is hit badly by recession in western economies, there will be fresh demand for further expansion of safety nets and increase in direct and indirect subsidies to exports. This will call for some more tough choices, accommodate these demands through increased domestic borrowing and/or restrain other spending if additional concessional financing cannot be mobilized from external sources.
The demand for the country’s low-end products is likely to sustain in the face of falling purchasing power in the partner countries. Hence, this also gives Bangladesh an opportunity for increasing its market share in major trade partner countries. The country’s policies will need to be geared to such market openings, and the exporters of goods and services will need the support of policymakers to realize the potential benefits.
Impact on migration and remittance
Bangladesh is the fifth highest remittance-earning country in the world and is the second largest sector in the country which is integrated with the world economy. About 1.7 million workers left Bangladesh in search of jobs during 2007 and 2008 and about five million Bangladeshis are currently working abroad, mainly in Saudi Arabia, Kuwait and Malaysia.
In 2009, it is predicted that the number of workers going abroad will be significantly lower with UAE, Saudi Arabia, Malaysia and Singapore already struggling with slow economic growth and declining demand for construction and other services [CPD and ILO, 2009]. Overall remittances during 2008 were 37.3% higher than the previous year but since August 2008 they showed a decreasing trend as did the number of workers travelling overseas [Bangladesh Bank, 2009].
Bangladesh Bank suggests that because the oil rich countries of the Middle East have accumulated large reserves of oil, migrant workers will still be in demand, but a World Bank report suggests Bangladesh needs to create an additional one million jobs for the people likely to lose jobs at home and abroad (Asian Tribune, 2009). Any downward trend is likely to create issues for the receiving families.
A 2005 International Organization for Migration (IOM) report examines the utilisation of remittance in Bangladesh and, drawing on varied research, shows the impact that remittance can have in reducing vulnerability, providing financial safety nets and improving areas such as access to education and household debt.
The IOM report suggests that the dependency on this income can create serious issues when the political or economic circumstances in the destination countries change and that “the importance of remittances for the receiving family cannot be underestimated.”
For the migrants working abroad as well, economic crises can exacerbate already difficult conditions as their host countries become more constrained. Concerns include inadequate access to decent living and working conditions, cuts in social service provision, fear of xenophobic attacks and restricted access to worker rights (IOM, 2009). Whilst evidence for this in relation to Bangladeshi workers is difficult to find, it is important in the growing turmoil to safeguard against human right violations.
So what measures can be introduced to protect migrant workers and their families? Whilst Bangladesh Bank have sought to improve the efficiency of transferring remittance, the Bangladesh Government has devised a seven point strategy which includes extending existing manpower markets and exploring new host countries in Europe. However in April’s emergency stimulus package remittances were absent (New Age, 2009). To protect migrants abroad and to try and retain remittance levels the Government need to prioritise this issue.
Recommendations include:
- Agree steps with Saudi Arabia and Kuwait to protect Bangladeshi’s working there
- Ensure good relations are maintained with existing migrant destinations such as UAE, Malaysia, Oman, and Qatar through diplomatic intervention
- Examine further alternative migrant destinations including Iraq, Bahrain, Mauritius, Sudan, Libya, and South Africa
- Seek technical and financial support from the ILO and initiate memorandums of understanding (MOUs) between Bangladesh and the destination countries of the migrants. These MOUs could contain basic rights such as full wages every month and safe working conditions
for returning migrants provisions should be put in place to assist in their repatriation, reception and reintegration and Official Development Assistance (ODA) could be increased to create employment opportunities.
Impact of global financial crisis on the economy of Bangladesh
Since the collapse of the United States subprime mortgage market and the subsequent international global crisis, many developed and developing countries have been plunged into deep recession. Bangladesh though has found itself in a slightly different position. Its economy is not so dependent on international capital and foreign investment, which has helped to lower the immediate impact of the crisis.
Despite this the Bangladesh government has formed a high-level technical committee and taskforce to monitor and advise on the crisis, and ministries and financial institutions have taken several precautionary measures. Importantly in October 2008 Bangladesh Bank withdrew 90 % of its total investment from foreign banks which has helped to further shield the economy, so that it is only now that the affects of the crisis are being felt.
Additionally the Bank has taken measures to stabilize the exchange rate, provide extra liquidity to the financial sector and raised the limit on private foreign borrowing. It has also relaxed the conditions for opening fresh letters of credit (L/Cs).
In February 2009, the Finance Minister AMA Muhith admitted that the global financial crisis was having an impact on trade in Bangladesh. In April the Government announced their stimulus package with 65 million dollars directed to assist exports. This though falls short of the 877 million dollars needed according to industry experts (Yahoo news, 2009).
During 2008, 57% of Bangladesh’s economy was involved in the global economy and this is increasing. This indicates that the country might be progressively more affected should the crisis continue for an extended period. Trade, migration and remittance are the most likely sectors to be impacted as 43.3% of Bangladesh’s openness is related to trade and 10 % to remittance. Overseas Development Assistance (ODA) and Foreign Direct Investment (FDI) may also be vulnerable in the longer term but to a lesser extent due to only 3.2% integration with the global economy (CPD and ILO, 2009).
Whilst the longer term nature of FDI commitments has kept the net inflow of investment relatively stable, the sluggish growth of rich countries may eventually slow it down. Aid receipts (excluding dollars) are providing less in local currency due to unfavorable exchange rates and future aid commitments from donors may be in jeopardy if the downturn continues.
