A REPORT ON

Global financial crisis

and its impact on Bangladesh economy

Submitted to

Mrs. Nilufar Sultana

Lecturer of Finance,

Premier university, Chittagong

Submitted by:

Section A

Department of Finance& Banking

Serial No. Name ID no Program

01. MunMun Dev Nath 0816112271 BBA

02. Susmita Sen 0816112275 BBA

03. Sudeshna Das 0816112280 BBA

04. Farjana Karim 0816112289 BBA

05. Prasenjit Roy Chowdhury

0816112308 BBA

Submission date: 2012, july 5th

REPORT ON THE IMPACT OF RECENT GLOBALFINANCIAL CRISIS IN BANGLADESH

Premier University, Chittagong

Letter of transmittal

 A Report on global financial crisis and its impact on Bangladesh economy

June 24.06.12

Mrs. Nilufar Sultana

Department of Finance & Banking

Premier University

Subject: Submission of the Report.

Honorable Madam,

It is our great pleasure to submit the report titled `Report on “global financial crisis and its

impact on Bangladesh economy” to you. We have prepared this report, as a part of the course

International financial management. To make this report up to the standard we tried our

best to fulfill the requirements by implementing the knowledge we have gather from the

course. Thank you very much for providing us this type of opportunity and giving us the

necessary guidance and direction needed for preparing the report. We have tried our level

best to make this report holistic and informative enough. Besides this, there may be some

shortcomings. I would be grateful if you consider those from excusable point.

Sincerely yours

MunMun Dev Nath

Susmita Sen

Sudeshna Das

Farjana Karim

Prasenjit Roy Chowdhury

Batch16, 8th Semester Section #A

Department of Finance and Banking

Premier University

At first we want to express our great gratitude to our honorable Teacher to give us such a

good topic for making a assignment. She gave us her helpful hand to do this assignment.

Her class lecture & advice help us to prepare our assignment very much which was very

fruitful to us. So we are grateful to her.

.At the very beginning, a special note of acknowledgement is due to our course teacher,

Mrs Nilufar Sultana, for giving us the permission to prepare the report on this topic. She

was very generous and friendly toward us while conducting the course and was the person

who has guided us throughout preparing the report. Her teaching method was really

effective and interesting.

We would like to thank God for keeping everything on right track. Finally, we would like

to thank our parents and friends without whose support it was impossible for us to

complete the project.

We are-

Intake: 8th semester

Section: A

Program: BBA

Department of Finance and Banking

Premier University

OBJECTIVE OF THE REPORT:

ORIGIN OF THE REPORT

The topic has been chosen by our course teacher Mrs Nilufar Sultana Lecturer of

finance and banking, Premier University, Chittagong. According this report on “ The

Impact of Global Financial Crisis and its impact on Bangladesh Economy” has

been prepared under the proper guidance of the respectable supervisor.

OBJECTIVE OF THE REPORT

The overall objective of the study is to provide an exposure of real life situation to the

students where they are expected to translate and adapt the knowledge gained from the

BBA courses into by the theoretical knowledge in practical field.

BROAD OBJECTIVE

To identify the impact of Global recent financial crisis in Bangladesh.

SPECIFIC OBJECTTIVE

The prime objectives of the report are as follows:

1. To identity the basic causes of Financial Crisis.

2 . To find out the effects of Financial Crisis.

3. To identity the impact on export and import due to financial crisis.

4 . To identity the impact on economic indicators in Bangladesh.

5. To analyze how can a global financial crisis spread all over the world.

METHODOLOGY OF THE STUDY:

The report is prepared using qualitative research method. The data were relatively

disorganized and collected based on our limited knowledge.

The report has been prepared based on secondary data such as-the published reports,

various articles, and related documents as well as down loaded data from website

through internet. We have studied the sources of information, then all these

reports and documents are also been analyzed and organized to make our report

possible according to the topic of  Global financial crisis and its impact on Bangladesh

economy.

LIMITATIONS OF THE STUDY:

This study is mainly depended on the secondary data. Limited primary data are also used.

A time constraint was another limitation in comparison of the vastness of the topic. Much

information was possible to gather but we can’t gather with our limited knowledge .But

we have tried our level best to make this report possible.

Executive summary

The world economy experienced the worst global financial crisis in 2007.While major

world economies have taken a massive hit resulting in negative growth rates in key

countries or regions, including the US, EU and Japan, the contagion also spread to

emerging developing countries like China, Brazil, India and South Africa, as well as to

the countries of South East Asia and Latin America. The magnitude of impact seems to

depend on the extent of integration with the rest of the world (or to use World Bank

jargon, the extent of liberalization that has taken place). The impact on LDCs like

Bangladesh has been muted in the first, and even the second round. However, there is

growing evidence that third round impacts are making themselves felt, manifested in

declining exports, declining migration of labour, growing number of sick industries,

industrial unrest, and reduced growth. There are also fears that poverty and

unemployment may be exacerbated and MDG targets could become jeopardized.

Countries like Bangladesh are interested in understanding the socio-economic impact of

the global financial and economic crisis as well as policy options to cope with emerging

challenges. This study addresses itself to the task of assessing the unfolding impact of the

GFC on Bangladesh. There is a consensus that the chief transmission mechanisms

relevant for Bangladesh are quite limited, operating through the impact on exports,

remittances and labour exports, and imports. These could also lead to second order effects

operating through lowering of growth, balance of payment and budgetary effects, as well

as micro effects on employment and poverty. Flows of FDI and ODI (including food aid)

have dwindled as well, leaving LDCs like Bangladesh to deal with the crisis on their own.

A saving grace has been the lack of a liberalized capital account in Bangladesh, which

prevented dramatic capital outflows, and have not contributed to increased vulnerability.

The possibility of an adverse impact on agriculture has not been raised in the current

debate. However, low world and Indian food prices arising from a volatile international

market, has caused agricultural prices to be depressed, especially since Bangladesh

imports significant quantities of agricultural produce, including cereals, from time to time.

The current rice price situation suggests that the problem of farm incentives is a serious

concern.

Table of contents

Serial Number Topic1 Overview of the global financial crisis2 Origin of the crisis3 How the crisis did spread?4 Consequences of developing countries5 Impact on Bangladesh6 Impact on export & import7 Impact on foreign remittance8 Global financial crisis impact on banking9 Global financial crisis impact on capital market10 Global financial crisis impact on unemployment11 Impact on interest rate12 Impact on exchange rate13 Impact on inflation14 Impact on FDI15 impact on agriculture16 Impact on GDP growth171 Impact on public finance/budget18 Impact on foreign aid19 Why Bangladesh remained less affected20 Key findings of the report21 Recommendations22 Conclusions23 bibliography

Overview of Global financial crisis(GFS)

The United States economy is now experiencing a severe credit crunch (falling

availability of credit), which is the most serious financial crisis since the Great Depression

of the 1930s. The crisis that originated from plunging house prices and stock price

declines in the US has already spread to Europe and Asia, and is expected to be global

soon. Many economists, including IMF experts, believe that the US economy has entered

a recession that might be longer than usual, throwing many countries into a deep slump.

The IMF has already warned that world economic growth will slow substantially this year

and be slower in the next year. The slowing down of economic growth in the US, Europe,

Japan, and the relatively more advanced developing countries of Asia cannot but affect

developing countries elsewhere in terms of lower growth in their exports, and inflows of

foreign direct investment, aid, and worker remittances. This paper addresses issues related

to the crisis and seeks answers to the following questions:

What the crisis is all about and what are its causes?

What measures have been adopted to face the crisis, and to what effect?

What are the lessons for financial institutions and governments?

How does the crisis affect Bangladesh and what should be the policy response to

avoid or minimize the impact of the crisis?

Origin of the Crisis

The crisis in the global financial markets that became manifest in August 2007 is the

byproduct of developments since 2001 when the US economy was experiencing a severe

recession. To prevent a further slowdown in the economy after the September 2001

terrorist attacks, the US Federal Reserve began cutting interest rates to encourage

borrowing, which spurred both consumption and investment spending in the country. At

one stage, the Federal funds rate came down to as low as 1 percent. Such a low rate of

interest was never experienced in the country since the regime of President Nixon.

At the same time, in some fast growing countries like China as also in the Middle East,

savings increased considerably, resulting partly from high economic growth and partly

from increased fuel prices. These savings were channeled mainly to the US, greatly

increasing the liquidity of US banks. Abundant liquidity and low interest rates increased

the tendency to spend by US consumers and investors. This tendency was very high in the

housing sector. The US Administration also played a big part as it encouraged mortgage

companies to expand financing of “affordable housing”. President Bush’s speech to the

Congress around that time about the virtues of home ownership created frenzy among

Americans to buy houses, chiefly with borrowed funds. Long before they were formally

taken over, the two mortgage giants, Fannie Mae and Freddie Mac, had an implicit

government guarantee. Obtaining housing loans was also very easy. A 1995 US Act

allowed very liberal terms for banks’ mortgage lending.

The slack regulatory system encouraged aggressive lending by banks and financial

institutions. They gave mortgage loans to home buyers without checking their solvency

status. Loans were given to people with no income, no job, or no collateral except the

house on which the mortgage was given. They loosened even the primary conditions of

loan giving, allowing low interest rates and easier schedules of repayment in the initial

years of the loan, which made mortgages inexpensive and encouraged people to borrow

and buy houses. The demand for houses thus increased, and with that the price of houses

also rose. Between 1997 and 2006, house prices in the United States rose by 124 percent.

As house prices rose, many people started to buy additional houses as profitable

investment. Buying additional houses also became easier because as the house prices rose,

the home owner could get additional loans against the same house. As more and more

loans were easily available from banks and financial institutions, new houses began to be

built in response to increased demand, thereby creating a bubble in the housing market.

A significant financial innovation of the time was the creation by commercial banks of

attractive financial derivatives against the mortgage loans, which are known as mortgage-

based securities (MBS) or collateralized debt obligations (CDOs). Quite interestingly, the

financial innovation did not occur in a vacuum but in response to incentives created by

governments. Many of the new-fangled instruments became popular among banks

because they got around financial regulations, such as rules on banks’ capital adequacy.

Banks created off-balance-sheet vehicles because that allowed them to carry less capital.

The market for credit-default swaps enabled them to convert risky assets, which would

demand a lot of capital, into supposedly safe ones, which did not. These artificial paper

securities were traded in the secondary market. Large investment banks were major

investors in these securities. As home prices were increasing, these banks did never

properly assess the risks associated with these securities. They were hoping that house

prices would never fall. In the event of any loan default, they would simply take

possession of the house (foreclosure) and recoup the loan by selling the house.

Investments in housing increased so greatly that by 2006 the supply of houses far

exceeded demand. As a result, house prices plunged. At the same time, as the economy

was registering recovery, the key interest rate was also raised. From 1 percent in 2004,

interest rates were raised to as high as 5.25 percent in 2006.When the adjustable interest

rates on mortgage loans were reset higher in 2007, it was found that many home buyers

did not have the capacity to repay the loans. Loan defaults increased greatly in number

and volume, and the lending institutions suffered heavy losses as a result. Foreclosure

activity increased dramatically. The situation so created became what is known as “sub

prime crisis” or the crisis of the low-quality mortgage loans, which triggered the global

financial crisis through 2007 and 2008.

However, as house prices began falling around the end of 2006 and loan defaults

increased, the value of CDO securities started falling fast. The bubble burst in August

2007. Assets of companies like Fannie Mae, Freddie Mac, J.P. Morgan, AIG etc were

badly depleted. Investment banks that were primary investors in these securities were the

major losers. One after another, these banks began to be insolvent. Buyers of CDO

securities were not confined in the US alone. Many European banks and investors also

bought these securities and suffered huge losses from the market collapse.

Because of the plight of the financial institutions, their bankruptcies, and the recessionary

trend in the economy, the general people rushed to withdraw their bank deposits and

invest in gold, oil and other commodities, as well as in the nearly risk-free US

government treasury bills. A severe liquidity crisis thus emerged. Investment banks that

did not have access to primary deposits were affected the most by the credit crunch.

Gradually, the crisis spread to mutual funds, hedge funds, and even to commercial banks.

As soon as the poor state of the banks and financial institutions became evident,

shareholders of these companies became scared and started selling their shares. The panic

sales led to widespread falls in share prices. On 29 September 2008, the Dow Jones

Industrial Average plummeted 778 points. Wall Street losses on that single day were over

$1.2 trillion.

The financial crisis has had serious adverse effects on the US economy. Plunging house

prices reduced the value of home owners’ assets. They were forced to cut down their

consumption spending, which in recent times was the driving force behind US economic

growth. The decline in consumer demand led to lower production, cuts in employment,

and created a slump in the US economy. The unemployment rate climbed to a 14-year

high in October 2008, with 10.1 million people out of work.

The potentially crippling problem now is the short-term credit markets, where banks are

hoarding whatever cash they have in an effort to get out of the crisis. Loans to businesses

and even between banks have dried up. The decline in credit flows has affected every

business that needs credit. The real sector has suffered the most from the credit crunch.

The major concern in the US is now to prevent the migration of the crisis from the Wall

Street to the Main Street (real sector) where the pain has begun to be felt. The government

and the Fed are focusing on keeping money flowing in the credit system, and thereby

limiting layoffs, shutdowns and bankruptcies.

How the Crisis Did Spread?

The meltdown in the financial system can be attributed to the lax monetary policy in the

United States. US regulators did not monitor the way the banks were providing loans

during the housing-boom period. The US authorities relaxed rules of providing “sub

prime housing loans” (now known as “toxic” loans), that amounted to about $2.1 trillion.

The complicated debt products built on these loans were sold to banks worldwide, and

when borrowers failed to repay the loans, the banks or financial institutions could not

recoup the loan money because the price of the property was too low or because there was

no buyer. The credit losses on the mortgages that financed these houses and on the

pyramids of the complex and artificial paper securities are still mounting. According to an

IMF assessment, the worldwide losses on “toxic assets” originating in the US would reach

$1.4 trillion, and so far $760 billion has been written off by them.

The culprit is thus the American model of deregulation of the financial sector, which was

blind to, or even facilitated, the unbridled growth of greed and deception of executives of

large financial institutions and Wall Street manipulators. Greed of the top management of

financial institutions to pocket fat bonuses motivated them to lend recklessly to sub prime

(unsecured high-risk) borrowers, particularly in housing, without assessing the borrowers’

repayment capacity. The investment banks did not care to assess the risks involved in the

newly-developed mortgage-backed securities and CDO derivatives. Nor was there any

monitoring of activities of investment banks regarding their CDO transactions because,

unlike commercial banks, the investment banks were not under the jurisdiction of US and

European central banks. These banks concealed the risks of the artificial securities

connected with the loans they made recklessly, and when the market failed, the risks rose

to a point where banks became insolvent.

It must, however, be conceded that the bankers’ error did not lie in violating the rules that

govern global banking. The truth is that these rules themselves are flawed and promote

what has been branded as “Casino Capitalism”. The rules are set by the Basle Committee

of Bank Supervisors, representing only 11 OECD countries. The “Basle Consensus”

disfavours government regulation of banks and advocates “market price-based self-

regulation”. The lesson derived from the present global financial crisis is that there should

be structural changes in the global financial system, including strict public regulation,

capital controls, and coordinated monetary policy among countries.

The credit crisis has crossed the Atlantic to Britain and Europe. The migration of the

crisis is the result of a huge increase in financial globalization in recent years – basically

since 1995. The rest of the world’s assets in the US have risen from around 10 percent in

1980 to over 50 percent now. In the same period, the US assets abroad as a percentage of

non-US GDP have risen from 7 percent to 45 percent. The global financial system now is

thus a lot more tightly linked, increasing the chances of contagion among big economies.

In fact, many European banks and investment and pension funds bought many of the

same “toxic” financial products that sank the US financial institution.

Consequences for Developing Countries

The global meltdown and the unprecedented government interventions in US and

Europe in bailing out banks could have some unwelcome consequences for the

developing countries. Rescue packages in rich countries would lead to massive

increases in their budget deficits and taxes. The US and UK budget deficit will

likely double to 10 percent of their GDP.

There is an apprehension that the growing budget deficits in rich countries will

lead to a slowdown of official aid to poor countries. The 123 billion dollars

pumped by the US Government to American life insurance giant AIG alone was

18 billion dollars more than the country’s total annual aid package for poor

countries. The sum is also twice the amount needed to achieve the internationally

agreed goal to reduce global poverty by 2015. As governments pour billions of

dollars and Euros into their banks, it will be no surprise if their spending on aid for

poor countries will fall drastically. It is also very likely that outward investment of

rich countries will fall, too, and the curb on labour immigration will become

stricter, affecting remittance flows to poor countries.

Is the Crisis more Serious than the Great Depression of the1930s?

The gravity of the present financial crisis is acknowledged in all quarters, but rescue

measures are underway in all major economies to combat the crisis. However, it will take

time for the impact of these measures to be fully visible. In any case, another Great

Depression like the one of the 1930s is unlikely. A comparison between the present crisis

and what happened in the 1930s reveals the following:

In the 1929 stock market crash, Dow Jones Industrial Average plunged 40% in

just two months, compared to 22% over a year now.

Unemployment rate in USA rose to 25% by 1933, as against only 6.1% today.

US GDP shrank by about a third during the early 1930s but it rose 3% in 2007.

CPI fell by 30% between 1929 and1933, but it is rising now.

House prices fell more than 30% during the Great Depression but only 16% today.

GFC 2008 Great Depression of the1930sVS

By 1934, some 40% of all mortgages were delinquent as against only 4% today.

More than 9000 banks failed in the 1930s, compared with fewer than 20 over the

past couple of years.

The Great Depression was not caused by the stock market crash alone but by monetary

policy blunders. Instead of increasing the credit flow, the Federal Reserve in that era

reduced it by nearly 33%. On the other hand, there are now automatic macroeconomic

stabilizers like unemployment insurance, social security blanket, federal deposit

insurance, and circuit breakers to keep stocks from falling too fast, which stand as

safeguards. Moreover, there is strong and concerted cooperation among countries to tide

over the crisis. A recession has perhaps set in, but policy makers worldwide are striving

hard to make it less painful and short lived.

Global financial crisis and its impact on bangladesh economy:

Bangladesh is interlinked with global financial system. As such global financial crisis

which was originated from the year 2007 mainly in USA and spread in the latter part of

the year 2008 among developed nations and subsequently shifted to developing nations

has impact on the domestic economy of Bangladesh. The country is in a difficult situation

as it faces imbalances, lack of transparency in the financial markets and non-applicability

of domestic safety net.

The impacts of the global financial crisis have been felt in the increasingly globally

integrated economy of Bangladesh in a very distinctive manner. In a number of ways,

Bangladesh has been an outlier, with some lag to the consequences. Indeed, crisis impacts

were felt in a much more intense manner in the second half of 2009, when many

developed countries (Bangladesh’s major import sources and export destinations) were

beginning to recover. This lagged response makes the Bangladesh story somewhat

different from that of many other low-income countries (LICs).

The crisis has left its fingerprints on Bangladesh’s externally driven economy through the

various transmission channels of exports, imports, remittances and aid and foreign direct

investment (FDI) flows, with consequent repercussions for the labor market, domestic

resource mobilization and gross domestic product (GDP) growth and poverty.

Introduction

Nevertheless, the depth of the consequences has tended to vary during different phases in

the crisis. Two such phases can be discerned from an analysis of the impact of the

ongoing crisis. In the first phase, ending with the first quarter of 2009, impacts through

the various channels, although present, were relatively subdued.3 Bangladesh was one of

very few developing countries not to be affected to the extent expected. Although exports

of primary products suffered early shocks through falling demand, at the aggregate level

export performance continued with double-digit growth, driven by steady performance of

apparels exports until the end of the first quarter of 2009. At the same time, despite cases

of early retrenchment of workers abroad, remittance flows continued to be robust, thanks

to the large stock of workers managing to stay overseas and continuing to send money

home.

However, a study on the impact of the crisis (Rahman et al., 2009a) cautioned that

Bangladesh could face a lagged response, with further deepening of the crisis towards the

second half of 2009. In fact, some indications of trouble began to be felt even in the

second quarter of the year. This was reflected in the response of policymakers in terms of

macroeconomic management, attempts at countercyclical measures and the stimulus

packages put in place to address the emerging challenges.

Thus, the main focus of this paper is to review the following issues:

(a) Impact of the global financial and economic crisis on the macro-economy, such as

growth prospects, inflation, interest rate, level and composition of public expenditure,

budget deficit, exports & imports, balance of payments, public debt, etc.

(b) Impact of GFC on different sectors of the economy like agriculture,

manufacturing, construction, SME, trade etc.

(c ) Micro level impact: on households, rural-urban poverty, inequality, gender issues

(d) Mitigation and policy: policies adopted, recommendations

The above analysis is likely to involve an examination of a number of indicators, e.g.

- Foreign capital flows/FDI and ODA flows

- Availability of credit

- Exports

- Global commodity price behaviour

- GDP and investment

- Employment, unemployment, poverty

- School drop out (especially of girls)

- Basic health care

- Widening fiscal deficit/ fiscal space

- Balance of payments

- Monetary stance

- Social safety nets

It is widely recognized that in the case of Bangladesh, the direct transmission channels

that are most relevant are exports, labour exports and remittances, and global commodity

price changes and imports. The first task therefore is to assess what has been happening

on these key fronts. However, it is useful to begin with a review of macro-economic

performance in the backdrop of the GFC.

Bangladesh: Export PerformanceBangladesh’s export earnings have risen rapidly since the early 1990s. Exports have

grown from around 7percent of GDP in 1991 to around 18 percent in 2006. The GDP

growth rate has been consistently over 6percent over the last few years despite a number

of weather related shocks emanating from cyclones and floods. There is considerable

speculation about what impact the GFC will have on GDP growth with widely different

figures emanating from different institutions. The World Bank suggests that growth could

decline to 4.5 percent while most other observers consider a figure of 5.5 to 5.8 percent

more realistic.

Two main sources of economic growth have been manufacturing and services, both

crucially dependent on the RMG sector. Thus, any impact on the country’s export

processing sector, and in particular on the large RMG sector, will adversely affect

economic performance.

The main driver of our exports sector is the ready-made garments industry (RMG) which

accounts for almost four fifth of our total export earnings. Almost two and half million

people, ninety percent of them women, are employed in the RMG sector; while a large

but undetermined number of people are involved in various ancillary and support services

e.g. banking, insurance, transport etc. to this sector. The workers are largely drawn from

the poorer sections of society. Any adverse effects on the RMG sector will thus have far-

reaching implications for the entire economy and society.

.

The export sector was potentially vulnerable to the financial crisis as it heavily

depends on the EU and US markets which have been badly hit. Almost half of

Bangladesh’s exports go to the EU, while another quarter goes to the US. High

export concentration is a source of vulnerability for Bangladesh ‘exports,

especially in the context of the current recession.

There are at least two channels through which the crisis can hurt Bangladesh. Declining

wealth and earnings in the USA and EU has reduced import demand and may reduce

demand for Bangladeshi exports. Another impact could be through the banking system,

reducing trade credit to buyers involved in imports from Bangladesh. This may in turn

affect our exports.

Export Performance in 2008Bangladesh’s export performance in 2008 was positive compared to the previous year. Its

performance was also good if compared to other countries in the region. The country’s

exports grew by 16.7 percent in 2008 compared to less than 7 percent in 2007 and around

23 percent in 2006.

However, a closer look at export trends suggests that by the end of the year, quarterly

export growth was beginning to decline. This may be an early indication of the impact of

the recession.

Bangladesh’s positive export performance in the US market, for example, contrasts

sharply with that of many other countries in the region (table 1.4). It will be seen that

export growth has become negative for India, Philippines and Sri Lanka although China

and Vietnam have managed to post positive growth rates. Nevertheless, Bangladesh’s

performance would appear to be the best in this particular grouping.

Bangladesh registered a 12.5 percent export growth in woven products and 25.9 percent

export growth in knit products to the US market at a time when US imports of these items

actually shrank by 3.6 and 1.6 percent. Overall exports to the US grew by 13.6 percent in

the face of a mere 2 percent growth in total US imports over the July-December, 2008

period. This basically indicates that Bangladesh has been increasing its market share in

the US apparel market at the expense of competing countries, despite the recession (or

perhaps because of it). Some Bangladeshi exports have been adversely affected in the US

market, including frozen fish, headgear and jute products.

By the end of 2008 (4th quarter) we note that the quarterly growth of exports from China

dropped to 0.06 percent; India posted negative growth; and US imports nose-dived to a

negative 8.8 percent Against all this adversity, total Bangladesh exports climbed to 18.1

percent and Vietnam did slightly better, achieving a growth rate of 20 percent - further

evidence of rising market share for Bangladesh.

However, Bangladesh has been facing problems in the EU market. Its exports to the EU

grew by 3.6 percent in July-December 2008 while all other countries, with the exception

of Sri Lanka, out-performed Bangladesh. In particular, Bangladesh has experienced

problems in exports of shrimp, headgear, jute goods and rawhide registering a drop in

exports of these products in the range of 16-25 percent. Most unusually, even woven

exports registered a negative growth. China, on the other hand, experienced positive

export growth for all the sectors except rawhides and leather products. The poor

performance of Bangladesh in the EU market is largely attributable to the exchange rate

situation that led to a sharp Depreciation of the Euro against the USD and BDT.

The main advantage of Bangladesh over its competitors is its price. Exporters from

Bangladesh have been cutting back on prices further in trying to cope with the crisis.

Indeed, unit prices, calculated by dividing value by quantity for the top ten RMG products

exported by Bangladesh, reveal that except category numbers 340, 659 and 239, there is a

downward price trend for all other categories. This has helped Bangladesh to remain

competitive in the US market.

The following figure shows the quantity change of RMG exports for the top ten MFN

categories to USA from Bangladesh, China and India. Out of the ten products,

Bangladesh experienced negative export growth for three categories; while china and

India experienced negative growth for two and seven categories respectively. China is

experiencing positive growth in all categories in which Bangladesh is experiencing

positive growth, except for category 239. Generally it is argued that Bangladesh is

exporting low end products to the US markets. Because of income fall due to the financial

crisis, it is expected that consumers are substituting their consumption of high-end

products with these low end products –the two following figure lends credibility to this

view. While, Bangladesh and China are experiencing positive growth for these categories

of products despite the recession, high-end products from China have actually been in

decline. Thus, out of the top five Chinese RMG products exported (which are high-end),

four items have been severely hit by falling demand. China has responded (somewhat

surprisingly) by increasing exports of lower end products.

The following shows that China is facing a severe fall in export quantity of its major

RMG export items to USA. This scenario has confirmed that consumers in USA are using

low end RMG products from Bangladesh and China, instead of high-end RMG products.

In the EU, Bangladesh is experiencing negative export growth for rawhides, jute and

frozen fish. For rawhide, China as well as India is also experiencing negative growth.

Figure 1.15 rules out the possibility of substitution in the case of EU. Exchange rate has

important implications for export performance as it directly influences the price

competitiveness of exporting countries, although it must be noted that the exchange rate is

not the sole determinant of a country’s export competitiveness. Figure 1.16 illustrates the

appreciation and depreciation of major foreign currencies against the dollar in 2008.

Indian Rupee, Euro and pound have experienced sharp depreciation while Bangladeshi

taka and Chinese Yuan have been stable. Sharp depreciation of Euro and Pound Sterling;

and stability of the Bangladeshi taka eroded Bangladesh’s competitiveness in Europe to

an extent, reflected in the slowdown of Bangladesh exports to EU

However, depreciation of the Indian Rupee has improved the competitiveness of

Bangladeshi RMG export to USA to some extent, as a significant portion of yarn that is

used as input are being imported from India.

RMG sector:Bangladesh has become integrated with the global economy through exports of RMG.

The contribution of woven garments and knitwear were 38.3 and 37.4 percent

respectively in 2006-07. The industry has grown exponentially in terms of capacity,

exports and employment. At present Bangladesh exports account for about 2 percent of

the $600 billion global textile and clothing market. Ready-made garments export rose to

$10.7 billion in 2007-08. Over the years, Bangladesh diversified its exports both in woven

and knitwear. The share of knitwear increased, while that of woven fell. Within the RMG

sector there has been diversification into different products: Bangladesh started as an

exporter of shirts, and has subsequently diversified into trousers, jackets, T-shirt and

sweaters. The share of shirts declined sharply, offset largely by rising contribution from

trousers. The shift was made on the back of the emerging backward-linkage primary

textile sector. Since 2006-07, jackets have emerged as a significant product and may start

to replace trousers in the future. Within knitwear, both T-shirt and sweaters started to

grow after 2005. Thus, the trend in the last few years is towards greater diversification

and a distinct shift away from the lower end of the low end product range towards the

upper end of the lower range - indicating Bangladesh’s emerging confidence and

competitiveness in the market.

Global recession may generate two possible opposing forces towards export of RMG:

• Decline in order due to recession. Many countries which import our RMG have begun to

delay sending the orders due to recession. Prices for Bangladeshi garment products have

fallen 20 to 25 percent in the global market and the situation is taking a "serious turn".

• Increase in order due to substitution of orders towards cheaper products and low cost

source. The importers responded to the reduction in clothing sales with a search for low

cost producers.

As RMG is a buyers market, the buyers’ strategy was price reduction to boost sales

volume. Due to this strategy, it may be noted that far from plunging, Bangladesh clothing

exports was very strong in 2008. US retail clothing sales declined by 8.05 percent in the

fourth quarter of 2008, and consequently US imports of apparel declined by 3 percent.

But US imports from Bangladesh increased by 18.5 percent during the fourth quarter

raising its market share from 4 to 5 percent in 2008.

Over the years, Bangladesh diversified its exports both in woven and knitwear. The share

of knitwear increased, while that of woven fell. Within the RMG sector there has been

diversification into different products: Bangladesh started as an exporter of shirts, and has

subsequently diversified into trousers, jackets, T-shirt and sweaters. The share of shirts

declined sharply, offset largely by rising contribution from trousers

The whole situation of recession partly favors Bangladesh in a short run of our economy.

But in along run Bangladesh may suffer a lot because when other competitors will start

producing RMG at low cost.

Stakeholder Perceptions

China: An important factor

Discussion with the key exporters and importers suggest that China has been an important

factor due to which the global financial crisis has been an opportunity for Bangladesh to

expand export to US and EU as well as diversify to new markets.

Sourcing from China has become expensive as the Chinese currency appreciated and

labour laws were being strictly implemented. Textile products are generally considered to

be low price and low valued item in China and a major shift could occur to Bangladesh in

the future. Hong Kong based buyers consider Bangladesh a more reliable, cheaper

supplier compared to many other countries. A small diversion from China can be a big

gain for Bangladesh. Indeed, the high growth of knitwear in 2008 has been due to

diversion from China.

Diversifying to new markets

RMG is a buyers market. Suppliers in Bangladesh have been trying to enter the high

quality Japanese market but have not been able to do so. This is because of the fact that

culturally, Japanese were more comfortable with China. About 80 percent of the clothing

export to Japan is from China. The other major supplier to Japan is Vietnam. By the end

of 2008, Japanese buyers were searching for sourcing from other low cost countries. A

major Japanese buyer, “Uniqlo” has already expressed an interest in procuring $600

million worth of apparels from Bangladesh, indicating that Bangladesh is well poised to

enter the Japanese market.

Request to delay shipment

Even after orders have been confirmed, buyers are requesting for delaying shipments.

Importers are shifting delivery by up to two months, causing warehousing problems,

problems with timely repayment to banks and eben payment of wages to workers. Even

reputed buyers like H&M had placed orders and confirmed and then asked to wait.

Industry insiders estimated that up to 3 percent of orders will be cancelled.

Impact on IMPORTS

Bangladesh’s imports as a share of GDP have been rising steadily over the past three

decades. A valuable portion GDP was spent on import payments in 2007-08. Around 76

percent of export earnings originate in the RMG sector, of which 54 percent goes into

imports of inputs needed for the RMG industry. Given the importance of imports for

Bangladesh’s economic growth and development, the implications for the balance of trade

and payments, it is important to assess the likely impact of the world recession on the

volume, structure and of imports, and the terms of trade. Import based revenues also

comprise of a significant part of the national budget and could be cause for concern.

The sharp fall in energy and food prices in the world market was benefited Bangladesh

immensely. The country is dependent on POL imports from the world market and is also a

significant importer of food. The domestic economy was quite sensitive to movements in

the world price of these key commodities during GFC.

Before the onset of the recession, Bangladesh was reeling under the price pressures in the

world market, leading to a high (double-digit) domestic inflation rate and fears of an

impending food crisis. The advent of the recession brought prices down drastically, and as

an importer, Bangladesh benefited greatly with domestic price pressures falling quickly,

and the government making large savings from reduced subsidies, especially on diesel.

Bangladesh has also benefited from the terms of trade effect as the import prices faced

fell more sharply than export prices.

Total merchandise imports to Bangladesh during FY08 amounted to USD21.63 billion,

registering a growth of 26.07 per cent compared to the corresponding period of FY07.

Imports to the EPZs also registered a positive growth of 13.11 per cent. Import share of

POL recorded the highest share, around 9.52 per cent of total import. The second highest

import share (in value terms) was of textile and articles thereof, accounting for about 8.75

per cent of total import. Imports of foodgrains posted a staggering growth of 142.64 per

cent (6.52 per cent of total import), with rice registering a phenomenal increase of 4.9

times and wheat 1.3 times.

Import growth was high to moderate for all major non-food items excluding capital

machineries, which posted negative growth rate of (-) 13.74 per cent. Import growth of

crude petroleum was high at 32.71 per cent, fuelled by the rise in global oil prices. By the

third week of May 2008, crude oil price/barrel has already hit USD132. But in more

recent times (22 October 2008), oil price has come down to USD70.60/barrel. Import of

POL also posted a huge growth of 20.43 per cent. The bill for this was to the tune of

USD2058.00 million. High import growth of intermediate inputs such as raw cotton

(41.10 per cent) would indicate further strengthening of backward linkage in textiles;

yarn (18.65 per cent) and iron, steel and other base metals (19.73 per cent), also posted

significant increase.

IMPACT ON REMTTANCES

The global financial crisis could impact on Bangladesh’s earnings from remittance.

Middle East economies were unlikely to be affected by this, at least in the short term. As

a consequence, out-migration and remittances could follow historical trends in 2008-

09.the slowdown degenerates into recession; it had impact on both migration and

remittance. Remittance inflows from Bangladeshi migrants abroad have reached 10

percent of GDP, which was only 3 percent in 1995, putting Bangladesh among the top

ten remittance-receiving countries in the world. In 2008, nearly 6 million workers were

employed overseas. During FY2009, Bangladesh received US$ 9.7 billion as remittances,

which was 22.4 percent higher than the remittance inflow of FY2008. The growth rate,

however, shows considerable monthly variations (Figure 4). Out-migration in FY2009

was 30 percent lower than that in FY2008 (Figure 5). Since no reliable data are available

on returnee migrants, the impact of global recession in terms of job loss of Bangladeshis

abroad cannot be assessed. There has, however, been some report (e.g. in newspapers) on

return of migrants due to job loss resulting from recession.

Global Financial crisis impact on Banking:

There are three causes of recent world financial crisis in banking sector-1. Relentless

lending of mortgage loans (even to people who would not be able to repay

their mortgages) i.e. subprime loans2. Mortgage backed securities3. Real estate market

crash the incidence of systemic banking crises has risen over the past twenty

years and the costs have been high. Although each country's experience has

country-specific factors, several common elements appear in most crisis countries :

( 1) Volatility in the macro economy (2) The inheritance of structural weaknesses in the

economy and financial system (3)

Hazardous banking practices(4) Hazardous incentive structures and moral hazard within

the financial system(5) Ineffective regulation(6) Weak monitoring and supervision by

official agencies(7) The absence of effective market discipline on banks(8 ) Structurally

unsound corporate governance mechanisms within banks and their borrowing customers.

Causes of such crises are complex and a myopic focus on single factors misses the

essential feature of interrelated and multidimensional causal factors. Although macro-

instability has been a common feature, and may often have been the proximate cause,

banking crises usually emerge because instability in the economy reveals existing

weaknesses within the banking system.

According to news report published in Business Times (25 Septmeber,2009) Bangladesh

Bank decided to follow accommodative monetary policy, aimed at boosting growth and

shielding the economy from the global crisis. The monetary policy stance between July

and December ,2009 is designed to support attainment of the highest sustainable output

growth without triggering escalation of inflation. Banking system of the country is not

free from the danger. Difference between the crisis of developed nations and Bangladesh

is that their crisis originated from the financial sector and worst impact felt in the real

sector. On the other hand in case of Bangladesh crisis has been originated in the real

sector due to the problem arise from financial sector. Due to financial crisis, not only

exporters will face the problem, but the banking sector will also face problem due to non-

recovery of advances against export financing. Moreover, liquidity surplus is prevailing in

the commercial banks. According to ADB report (2009) it is Bangladesh Taka 347.6

Billion on 30th June,2009. Foreign Exchange reserve at Bangladesh Bank is very high.

Irony is that at this stage they are taking loan from the International Monetary fund. For

last three years investment has declined substantially and borrowing from the banking

sector by the investors has reduced substantially. Rather default culture is crippling the

economy. Recently the Central Bank Governors and Heads of Supervision decided to

strengthen the banking rules and regulations under the guidance of the Bank for

international settlements: Raise the quality, consistency and transparency of the Tier 1

capital base; Introduce a leverage ratio as a supplementary measure to the Basel II risk

based framework ; Introduce a minimum global standard for funding ; Introduce a

framework for countercyclical capital buffers above the minimum requirement; Issue

recommendations to reduce the systemic risk associated with the resolution of cross

border banks(Source:http://www.abbl.lu/articles/comprehensive-response-global banking-

crisis).

The global financial crisis is not likely to have any adverse effect on Bangladesh Bank’s

foreign exchange reserves, because the Taka is not freely convertible for capital account

transactions. Moreover, Bangladesh Bank has taken several initiatives to avoid any

impact of the global financial turmoil on the financial sector. The currency composition of

its foreign exchange reserves has been altered significantly to protect the real value of the

reserves. At present only 50 percent of the Bangladesh Banks’ reserves are held in US

Dollar, and the rest in other currencies. Furthermore, to avoid risks of any possible losses,

both Bangladesh Bank and commercial banks holding reserves abroad have withdrawn

funds from problem banks that were merged or taken over or are likely to be merged or

taken over soon and placed them in central banks of respective countries.

The country’s banking system has no “toxic” derivative involvements. It is, therefore,

highly unlikely that external shocks will increase the risk of asset quality problems or

precipitate a credit crunch in Bangladesh. However, to forestall the occurrence of any

financial crisis, the financial sector should be properly regulated. Banks and financial

institutions will need to take necessary caution while extending credit, by ensuring the

quality of assets to avoid any financial risk. They should invest mainly in the productive

sectors instead of lending to non-productive sectors, in particular consumer financing,

which increased by over 100% in the past one year. Bangladesh may also consider

guaranteeing bank deposits as a defensive measure. All major countries in America,

Europe and Asia have in recent days moved to guarantee all their bank deposits to shore

up investor confidence. Such guarantees may induce a shift of deposits from

Bangladesh’s banking system to countries elsewhere. There is, therefore, a need for

defensive action. In a time where there is a lot of uncertainty, investor risk aversion is

very high, and there is a lot of nervousness, there are possibilities to have contagion to

banking systems anywhere. Banks and financial institutions in Bangladesh will need to

strictly comply with the existing regulations. They need to be extra-cautious in running

their business, taking lessons from the collapse globally. They should also take

appropriate measures to overcome the various ailments of the banking sector such as

capital inadequacy, provision shortfall, declining trend in loan recovery, and the increase

in bad loans.

Global Financial crisis impact on Capital Market:

Integration of Bangladesh’s capital market with the global capital market was rather weak

-- foreign investment accounts for only 2.48 per cent of total market capitalization.

During July, 2008 to January, 2009 a sluggish trend was observed in the capital market,

which is partly related to global economic slowdown (i.e. liquidation of portfolio

investment). All the indices in the Dhaka Stock Exchange (DSE) experienced negative

growth. The country’s capital market does not at the moment have much reason to panic

either. Foreign portfolio investment in the country is quite small. Foreign investors’ share

in the country’s equity market is only 2.48 percent. Hence, withdrawal of funds by

foreign investors would not have any significant impact. On the contrary, as stock market

sources indicate, foreign portfolio investors are now showing interest to invest in the

country’s secondary markets because they find Bangladesh an attractive destination of

investment as it has remained unaffected by the present global financial crisis.

Global Financial crisis impact on Unemployment:

Global recession may affect Bangladesh’s productive sectors, in particular manufacturing.

Private sector employers may be forced to cut jobs. Worker remittances may also be

affected by the crisis. Nearly a third of inward remittances currently come from US and

Europe, while about 60 percent comes from the Middle East, and the rest comes from

countries in East and Southeast Asia. A deep and prolonged recession in the West may

hurt the Middle-Eastern and other countries as well where migrant workers may lose jobs

and therefore remittances from these countries may decline. Government will therefore

need to keep a constant vigil on manpower exports and remittance earnings, facilitate

emigration of workers, and, through official contact, ensure continuity of jobs of migrant

workers abroad.

Impact on Employment in Different Sectors

RMG:

The demand for import of Bangladeshi apparels decelerated or in extreme case,

entrepreneurs searched for new ways for the reduction of cost of production. Further

investigation required to understand the extent of impact of the crisis on enterprises and

on workers in this sector.

Frozen Food: Although export of frozen food, particularly shrimp, has declined during

July-December, 2008 period, there is no evidence that shrimp processing factories have

closed down due to the crisis. However, because of lack of availability of raw materials

(57,000 m.ton of the total required 0.3 million m.ton in FY2007-08) and infection in

cultured shrimps (known as ‘microforon disease’) only 77 mills are now operating out of

the 140 mills, where about 77,000 workers are working.

Leather and Footwear: Export of footwear has performed well during July-December,

2008 period; however, export of processed and finished leather has sharply declined over

time. There was no report in the national dailies as regards laying off of workers in this

industry. Further investigation is needed in order to understand the extent of impact on

workers working in this sector.

Ship Building: The shipbuilding sector was under pressure because of reduced orders and,

in some cases, deferment/cancellation of some previous orders.

Impact on Migrant Workers:

Due to slowdown of the Singapore economy, especially in the shipping and construction

sectors, 55 Bangladeshis employed by construction sub-contractor Tunnel & Shaft have

returned home after working there for seven months or less. The workers were recruited

last year in anticipation of two major projects estimated to be worth $20 million, which

were expected to be launched later.

Since 2006, UAE and Malaysia had been two key destinations for Bangladeshi workers

followed by Saudi Arabia. It is important to mention here that currently Saudi Arabia and

Kuwait have stopped issuing work permits to Bangladeshi workers, while these two

destinations comprises of 39.7 per cent of total migrant workers

Interest Rate

The BB had directed the major commercial banks to reduce the interest rate spread and

reduce their lending rates. There has been an agreement recently to fix the highest lending

rate at 14.0 percent. Private commercial banks had felt that given the high cost of funds and

high risks of lending in Bangladesh, any further reduction in the lending rate is not feasible.

Moreover, a lower lending rate calls for a lower deposit rate which was discouraged savers to

keep money in the bank and thus, create liquidity crisis. This, in turn, will have an impact

on the overall economy.

However, the business community was pursuing for a higher cut in the lending rate. This

demand was being voiced afresh by the business community in view of the global meltdown

of financial markets. Ensuring better returns on deposits would be one way to improve the

liquidity situation.

The lending rate (calculated on a quarterly basis) of scheduled banks was 12.29 per cent

in June, 2008 as compared to 12.75 per cent in December, 2007. Their deposit rate (also

calculated on a quarterly basis) stood higher at 6.95 per cent in June, 2008 as compared to

6.77 per cent in December 2007.

Exchange Rate

The exchange rate between Bangladesh Taka (BDT) and US Dollar (USD) was remained

stable in 2007. This is because of the introduction of floating exchange rate in 2003 to

contain fluctuations of Taka against foreign currencies, particularly the US Dollar. During

August, 2007 and August, 2008, Taka appreciated slightly by 0.26 percent. At the end of

August, 2008 Taka per USD decreased to Tk.68.52 from Tk.68.70 at the end of August,

2007. Taka depreciated against Euro by 7.38 per cent in August, 2008 compared to August,

2007. However, After August 2008 taka was appreciating against the EURO owing to the

global financial crisis.

At the end of August, 2008 BDT per USD declined to Tk.68.52 from Tk.68.70 at the end of

August 2007.In Bangladesh, there was no EURO/BDT market and EURO/BDT rate was

calculated from the traded rates of USD/BDT. At the end of august 2008 BDT appreciated

against EURO as EURO had been depreciating against USD; USD continued to remain stable

against BDT.

Some exporters had demanded that BDT should be depreciated to cover the probable

loss of export income as a result of global recession. The importers opposed the idea as

some of them had suffered significant loss due to fall of commodity price. In this

context, the BB had to devise a balanced policy to take care of the interests of both

exporters and importers. The BB had to carefully examine the request of the exporters

to devise special packages for making up for the likely losses of export income at this

juncture of global economic crisis.

Inflation

The commodity price boom of 2006-08 was due to strong growth in global demand.

As opposed to an unprecedented increase of commodity price during the FY08, the prices had

taken a downward in the face of global financial crisis. Except for soybean oil, prices of all

other major commodities including rice, wheat and crude oil suffered a falling price since

September 2008.

The benefits of lower world prices have been reaped by Bangladesh, especially through lower

inflation, including lower food and energy prices. Another channel that can help lower the

inflation rate of Bangladesh is the declining trend of inflation in major trading partners. The

headline inflation rate of Bangladesh already started to decline from 10.82 percent in July’08

to 6.03 percent in December’08, currently hovering at around 5 percent (in July 2009). The

inflation rate of the major trading partners like India, China, and Hong Kong has declined

significantly in recent months as well (See CEIC database & ADB website).

Impact on DFI

The global financial crisis hit FDI inflows from US and Europe. Already, the FDI inflows to

the country have started declining. The country should therefore rely more on domestic

investment as a catalyst for growth. FDI should be treated only as a supplement to the

country’s resources for development, not the backbone of the economy. Over-reliance on FDI

must be done away with, and domestic investment should be encouraged just as much, may

be more.

AGRICULTURE

Low world prices combined with successive bumper harvests in 2008-09, especially of food

grains, has led to a price slump. While consumers have found respite from the sky rocketing

inflation of 2008, farmers are in distress. The newly elected government has given very high

priority to agriculture, including scaling up of fertilizer and fuel subsidies. Out of a total The

government also announced ambitious plans to support farm prices through a procurement

drive but met with little success due to inadequate storage space in go downs and

procurement efforts aimed at rice (from millers) rather than directly in paddy from the farm

gate. There are now concerns that these low prices could operate as a disincentive for the next

crop in the winter, at a time when price pressures in the world market could once again exert

themselves.

In fact much of the stimulus package announced by the government in April, 2009 is aimed at

the agricultural sector. Out of an additional allocation of BDT 34.2 billion almost BDT 30

billion is related to agriculture or food, and the remaining for subsidies to exports.

Effect on GDP Growth:

Bangladesh’s economy is not as “decoupled” from the rich world’s travails as is generally

believed. The reason is that Bangladesh’s exports depend almost totally on income growth in

US and Europe. A long and protracted recession in these countries may, therefore, lead to a

drop in Bangladesh’s exports and thereby a slowdown in overall economic growth.

According to gght, the projected growth rate should be easily achieved. However, a

prolonged recession in the rich world may still have a negative impact on domestic output

growth. Considering the probable effects of the global financial turmoil on exports and

remittances, the IMF has recently said that Bangladesh’s GDP growth may fall to 6.19

percent this year. The World Bank has warned of a much lower growth rate – as low as 4.8

percent, as it fears that the growth of exports and remittances will decelerate significantly.

Public Finance/Budget

Total revenue collection in 2008-09 is estimated to fall short of target by around 2 percent

(CPD-IRBD), mainly due to the shortfall experienced in tax revenue collection by the

National Board of Revenue (NBR). In fact, non-NBR tax revenue is estimated to have

exceeded the target set very comfortably, although non-tax revenues also dipped into the red.

The revenue collection effort of the NBR has certainly been constrained by international

forces, first stemming from the sharp rise in food and fuel prices (causing Bangladesh to

reduce duties on many food items), and secondly, in the wake of the GFC, which led to a

collapse in world commodity markets and reduction in import-based duties and taxes (which

account for more than 40 percent of tax collection). Collection of import duty is estimated at

2.3 percent in 2008-09 against a target of 13.1 percent. Similarly, achievement by way of

supplementary duties was very poor. However, these losses were compensated to an extent

by growth in income tax collection (over 20 percent compared to a target of only 11 percent).

On the basis of projected revenue earnings and expenditures for 2008-09 and 2009-10, the

size of the budget deficit is estimated to be 3.19 percent of GDP in 2008-09 (down

significantly from 4.18 percent in the preceding year) rising to 4.5 percent in 2009-10. This

suggests that the government would need to be ready to deal with a significantly larger deficit

in 2009-10, because of a large budget designed to meet the challenges of the global economic

crisis. It would be important to carefully balance financing the budget from bank and non-

bank sources and through foreign financing. While the government has generally opted to go

for more non-banks financing, its ability to use foreign financing has tended to be poor.

Budget expenditures for 2008-09 have also been well below target. The major expenditure

accounts are interest (19.8%), education (17.7%), public services ((14.6%), agriculture

(11.5%), defense (8.8%) and public order and safety (8.6%). In the light of the GFC it will be

important to scale up expenditures and improve utilization of the ADP during the next fiscal.

A concerted effort is urgently needed to improve utilization rates.

Foreign Aid

Foreign aid flows to Bangladesh in 2008-09 appear to have remained roughly at the 2007-08

level. However, food aid has declined dramatically. Thus over the period July-April (2008-

09), food aid fell to $37.6 million compared to $83.3 million during the same period in the

preceding year. The total amount has declined from historical levels of around a million tons

to around 80,000 tons this year. Food security has been given the highest priority by the

current government but given the large volatility often experienced in domestic food

production, there is always a threat of crop losses and high domestic price levels. Given the

recent volatility seen in world food markets, the government remains worried about food

security, and would have welcomed an assurance of some food aid of at least 200,000 tons.

There is a fear that low farm gate prices this summer, following on good harvests and low

world market prices, will impact negatively on the next winter harvest, and could destabilize

the crucial rice market.

Cuts in aid would mount a pressure on Bangladesh government’s budget, affecting the

ongoing poverty alleviation efforts, and social safety net, health and education sector

programmes. Mobilization of more domestic resources through enhancing collection of tax

and non-tax revenues will be needed to meet any shortfall in aid receipts.

Bangladesh may also negotiate government to government loans with developing countries

that enjoy large current account surpluses and have accumulated huge foreign exchange

reserves (e.g., China $1.8 trillion, Abu Dhabi $ 900 billion). These countries can direct part

of their surpluses to stimulate economic growth of capital-starved countries like Bangladesh,

which offer far more compelling growth prospects than the US or European economies.

Why Bangladesh remained Less Affected

The review in the previous section reveals that Bangladesh has so far remained

somewhat less affected by the global economic slowdown. Although economic growth has

slowed down, and exports and remittance inflows, two of Bangladesh’s critical parameters of

macroeconomic strength, have grown at slower rates relative to pre-crisis projections, the

quantitative nature of these impacts in Bangladesh are much less compared with impacts

experienced by comparable countries especially in the Asia-Pacific region.5 Moreover,

Bangladesh’s growth prospects remain relatively less affected. Inflation has eased with

falling global commodity prices and good domestic production especially in agriculture.

Although Bangladesh suffered significant loss of income in the external sector since 2003

from severe terms of trade shock mainly originating from higher food and petroleum prices,

this large loss of income was largely met by compensating growth in remittances and thus

Bangladesh enjoyed a surplus in its current account balance.6 In addition, despite large scale

challenges, Bangladesh has maintained relatively sound macroeconomic fundamentals, stable

external balances, and good foreign exchange reserves.7 In short, one can identify several

reasons behind the relatively low level of impact of global economic recession on the

Bangladesh economy:

Bangladesh's financial system has reasonable resilience with capacity to

safeguard the stability of banking and financial systems. The financial

institutions were not exposed to complex financial derivatives and synthetic

securitization instruments. As such, contagion effects of the global financial

markets were non-existent. There has been no sign of any crisis of confidence or

liquidity problem. Prudential regulations and strong monitoring by Bangladesh

Bank has ensured a relatively good health of the banking sector including

lending-deposit ratio within acceptable limits. Bangladesh’s positive current

account balance has also reduced the risks emanating from short run

fluctuations in the exchange rate and foreign reserve situation.

The robust growth of agriculture, led by crop (mainly rice) production having a

growth of more than 5 percent in FY2009 compared with 2.7 percent in the

previous year, supported the growth of income as well as employment (more

than half of the labor force are engaged in agriculture) especially in the rural

areas. The government’s policy of providing subsidy to fertilizer and diesel for

irrigation enhanced profitability and helped the farmers to go for higher

production. The informal sector, being the largest source of employment and

income for the majority of households, also flourished with support of high

agricultural growth.

Given the overwhelming dominance of RMGs in the export basket, the impact

on RMGs has determined the impact on Bangladesh's exports. Since

Bangladesh's RMG exports mainly cater to the low-price segment of the apparel

market where income elasticity is lower than that in the high-price segment, the

country's RMG exports remained less affected. With incomes falling, even some

diversion of demand from high-end garment segment to low-end segment

probably took place in the developed country markets counterbalancing the

otherwise negative impact. Also recession driven fall in prices of imported

industrial raw materials helped domestic RMG industries to maintain low

production cost. Moreover, in view of the country specific nature of changes

resulting from the crisis, RMG importers in advanced economies (especially in

the US and EU) introduced adjustments in sources of procuring apparel

products (e.g. diversion of orders from countries like China to Bangladesh)

which compensated, at least partly, Bangladesh's loss in RMG exports and

enabled it to capture greater market shares in these countries.

In case of imports, the changes favored Bangladesh through lowering the

growth of the import bill. In the international market, prices of commodities for

which Bangladesh is a net importer (especially food, oil, fertilizer, and other

essential products) experienced significant decline since the global recession. In

particular, sharp fall in prices of oil, fertilizer, imported raw materials, and

machinery/equipment helped in reducing production costs and improving

competitiveness.

The remittance inflow was not much affected since bulk (around 64 percent) of

the inflows originates in the Gulf region where recession has been less severe

and growth prospects marginally declined. Remittances from advanced

economies (especially from USA, UK, and Germany which together account for

nearly 30 percent of the total) were also not affected to a significant extent. The

net impact so far has been steady growth in remittance inflows especially since

the low-skilled jobs in which Bangladeshi migrant labor is mostly concentrated

are unlikely to be much affected due to growth slowdown. In addition, the

resilience remittance inflows to past changes in economic growth in major

remittance sending countries and the compulsion of remitters to send money to

meet family obligations helped in maintaining growth of remittance inflows.

The measures to reduce the cost of remittance and bring more efficiency in

remittance related operations also encouraged more migrant workers to send

money through official channels.

KEY FINDINGS OF THE REPORT:

During the time of preparing this report we find that the negative impacts o f   global financial crisis are beginning to show on the increasingly globalizing economy of Bangladesh:

Bangladesh’s export growth rate experienced has turned negative.

Export of non-apparels items has seen a significant deceleration.

Depreciation of currencies by competing countries ranging from 6-30 per cent over the last one year and their stimulus packages that provide wide ranging incentives to export-oriented sectors, have led to erosion of Bangladesh’s competitive strength in the global market

Remittance earnings could be adversely affected in near future as number of job-seekers going abroad halved as some countries have either revoked earlier job- contracts or have stopped issuing new visas.

The adverse affects are likely to have negative implications for GDP growth, labor market and consequently attainment of poverty alleviation targets and MDGs by Bangladesh.

There are clear indicators of weakening macroeconomic performance

Recommendation

While Global recession did not hurt much our economy so far except some early mark, some measures should be taken to protect the economy from the global shock as the recession may sustain a while. This includes:

• Financial support to RMG and other export sector in the event of any liquidity crisis due to delayed payment or lower price

• Temporary enhancement of cash incentive to the promising export sectors which are currently facing hard times

• Reducing price of diesel further to reduce transport cost and cost of operating diesel based generators in the event of inadequate supply of electricity and gas.

• Targeted subsidy on food items to bring food price down and also to help export oriented industries from the pressure of wage hike.

• Central Bank should go with a moderate monetary policy so as to maintain a respectable growth of local demand and stimulate local investment.

NBR should continue its effort to strengthen the tax administration further so as to maintain revenue growth even with sluggish import performance. Government may think of increasing import taxes on import of selected luxury items that will help retaining foreign exchange without negative impact on tax revenue.

In the event that recession brings severe impact on our export with implication of job cut, the government should come with adequate safety net programs

How aggressive would be the policy measures depend on the extent of impact of the recession. Hence the high profile taskforce constituted by should strongly monitor the events and come up with timely implementation of required policy measures.

Conclusions Although the impact has not been as severe as in many other developing

countries, Bangladesh has been experiencing the adverse impact of the global economic

crisis where the most obvious areas are exports, remittances, and economic growth affecting

social equity and poverty. Much of the sensitivity resulted from the export-led development

strategy that the country follows creating a situation of slackened export-related production

and investment as well as softened domestic demand. So far Bangladesh has successfully

coped with the crisis through appropriate adjustments in monetary policy supported by an

expansionary fiscal policy stance focusing on boosting domestic demand and promoting more

competitive markets. The strategic thrust of the government’s policy is on spending more on

education, health care, social protection and social safety nets that would not only help boost

domestic demand but also support broader social objectives like inclusive growth and

poverty reduction.

The analysis of social impacts shows that the global economic crisis has adversely

affected Bangladesh’s progress toward achieving poverty reduction and social

development goals including the MDGs. This highlights the need to re-launch more

determined efforts in achieving the stipulated goals. Bangladesh thus faces difficult and

complex challenges. Along with providing stimuli to growth, the government must also make

efforts to strengthen safety nets and ensure that poverty reduction and key social development

gains are not reversed. While the government is the key actor, a shared paradigm is necessary

in which global and regional partnership could foster technology diffusion and capacity

building for inclusive and sustainable growth. Also this is the time for the developed

countries to keep their commitment to share required resources for achieving the MDGs from

which the developed countries have as much to gain as the developing countries like

Bangladesh.

Bibliography

We collect data form many sources. We use-

Internet

www.google.com

www.wisebread.com

www.wekipedia.com

www.bangladeshjournal.com

Newspaper (the financial express, the daily star)

http://www.thefinancialexpress-bd.com/more.php?news_id=98170&date=2011-12-21 

Magazines