Financial Crisis
Milton
Introduction:
The world is currently gripped in a severe economic down turn. In fact, based on the economic outlook, many economists would venture to compare the current predicament with the Great Depression of the 1930s. Unemployment rate increases for the reason and the value of the goods & services produced in the country was cut in half, and stock market prices fell about 90 percent. Again the financial crisis that started in the US in March of this year has now turned into a full-fledged economic crisis that has pushed the European Union, Japan, Hong Kong and others into recession. No country was spared from the financial crisis because of globalization and inter-locking of financial interests. Why this crisis? To put it simply, it has been argued the whole meltdown of the financial system was "Made in America" for having relaxed rules of providing loans to jobless people. Banks and financial institutions that bought security-paper have lost money. Normally the banks and financial institutions lend and borrow money and the money market works well. During the crisis, money markets ceased to function. Thus the global money market was closed and a severe credit-crunch was felt across the world. The financial crisis that surfaced in the United States is now gradually spreading its tentacles all over the globe. For a while now, people have been weaving various speculations regarding the impact of financial crisis in Bangladesh. Governments of wealthiest countries came up with rescue packages to save their financial system. The financial crisis may be creating an impact in our export sectors, investment sectors, GDP of the country, local labor market and in import sector. The other areas of concern in the long run include foreign investment, foreign aid and the financial system. Let’s have a closer look at each of these. Literature Review: The world is undergoing an economic crisis. It started with the bankrupcy of the large companies of the USA,which is followed by the same fate of some of European companies. The US government tried to offset the effect by giving proposal of bailing out by 700b$. McCain dramatically stopped his election campaign and with Barak Obama attended the special conference of the leaders of the congress and the government. They all appeal in suppost of the bailout. World Bank Country Director Xian Zhu yesterday assured the government of its cooperation in facing the global economic downswing and protecting the poorest from its impacts. “We're ready to help Bangladesh tackle this crisis … we'll provide financial support, if needed,” the WB country director said when he met Planning Minister AK Khandker at his office. He thinks successful and quick implementation of ADP might help Bangladesh overcome the global financial crisis and it will create a positive impact on employment generation and alleviating poverty. Bangladesh mainly exports low-end garments; only 5 percent of the total manufacture belongs to the high-end. Professor MA Taslim, chief executive of Bangladesh Foreign Trade Institute said, “It's also an opportunity. Garment makers can take advantage of the decline in exports from other countries by increasing competitiveness,” citing the example of China, which raised exports after the 9/11 attacks on the US. Bangladesh has set an export target at $16.298 billion for fiscal 2008-09, with the readymade garment sector to earn the highest amount of foreign currency. Of $16.298 billion, $12.267 billion (75.27% approx. of total) is expected to come from two main sub-sectors of RMG: knitwear and woven. The central bank expects the inflow of remittances to touch an annual $10 billion over the next year. But economists fear the global financial crisis could cut down remittances, a key source of foreign exchange for Bangladesh. “The inflow of remittances would be affected if instability in financial markets persists for long," said Mustafa K. Mujeri, chief economist at the central bank The bulk of remittances in July-September came from Saudi Arabia, United Arab Emirates, the United States, the United Kingdom, Kuwait, Italy, Singapore and Malaysia the central bank said. The bulk of remittance inflows, which recorded a significant rise in the first quarter of the current fiscal year, mainly came from the Middle East, and less than a third came from the US, UK and Germany. According to the Finance Adviser Dr Mirza Azizul Islam, Middle East is unlikely to recruit new workers in the current situation of the world, but they're not terminating any workers either. “However, if a deep and protracted recession starts in the US and EU, the Middle Eastern economies are likely to be adversely affected,” said Zahid Hussain, a senior economist for the World Bank's Dhaka office. "If the Official Development Assistance (ODA) and bilateral fund flow slows down, pressures on government budget will be strong and may affect government's ongoing poverty alleviation, social safety net, health and education programs," Dr Salehuddin Ahmed, governor of Bangladesh Bank, told the meeting. Finance Adviser also said that the commitment from the multilateral development partners, mainly from ADB and the World Bank's International Development Association (IDA), for this fiscal year have been better while they have increased their programs recently. The Bangladesh financial sector had little exposure to the sub prime mortgage securities and to the banks and financial institutions in US and Europe, and may emerge unscathed. "The liquidity position of the commercial banks in Bangladesh is good and no commercial banks have come to the central bank for massive liquidity support or they did not request for support for insolvency," Dr. Salehuddin Ahmed, Bangladesh Bank Governor had said in the international roundtable on "Impact of Financial Crisis in South Asia" at Washington. “As the crisis unfolds, it is becoming apparent that no country could remain immune. While some countries in South Asia had relatively less exposure to the crisis through adverse effects on capital flows, they remain vulnerable to global economic slowdown through export earnings, remittances, and external financing of infrastructure” said by Haruhiko Kuroda, President of Asian Development Bank. Bangladesh's economic security is likely to be threatened. No one can be sure what lies ahead for at least two years. It is commendable that the government has set up a task force with local think-tanks and private sectors as to how to address slowing economic growth in the country. The volatile situation is both a challenge and an opportunity for Bangladesh to show innovation and creativity to come out from the likely adverse effects of global economic crisis. Visiting vice-president of World Bank for South Asia Isabel Guerrero Sunday said Bangladesh could feel an impact of the global economic recession and the country needs to prepare social safety net program to face the impact. "So far Bangladesh has not felt the impact of the financial crisis. But it is possible in the future through Bangladesh's manpower exports and remittances," told Isabel after meeting with Dipu Moni.
Impact of Financial Crisis:
In different sectors many data has been found regarding the impact of financial crisis in Bangladesh. 1 Export Sector –
Bangladesh has some specific products that are exportable products. The products are – tea, woven garments, knitwear, frozen fish, leather, jute products, food products, agricultural products, handicrafts, bicycle, ceramics products, toiletries, potteries, home textiles. The global slowdown in the leading economies such as US, Europe, and Japan is likely to adversely affect principally, in three sectors, namely exports, aid-flow and foreign direct investment and remittance from workers. Bangladesh’s economy relies heavily on garment exports. About 75 % of the exports of garments and knitwear go to the US and Europe. The exports of knitwear and ready made garments to the US and Europe are likely to fall because there will be no demand in those countries as people would keep money with themselves for meeting their basic needs during rainy days. Everyone will be tight with spending money for non-essentials. During July-December FY09, several items such as woven garments, knitwear, terry towel, textile fabrics, tea, pharmaceuticals, and chemical fertilizer recorded growth over the last year's performance and achieved or exceeded their targets. The exports of footwear, home textile, petroleum bi-products, computer services, agricultural products such as tobacco and vegetables, and several manufacturing goods such as melamine tableware, and leather bags and purses recorded growth over the last year's performance but fell short of their export targets. On the other hand, exports of raw jute, handicrafts, jute goods, electronics, leather, frozen food, ceramic products, engineering products, and other primary commodities recorded decline over last year's performance (Figure 1.1.7). During the July-December FY09 period, exports of primary products declined by 5.1 percent (from USD 514.7 million to USD 488.2 million) while exports of manufactured products showed a growth of 21.5percent from USD 5,981.3 million to USD 7,266.5 million over the same period of FY08. The figure explain that there might be some problem in exports sector in FY09 for financial crisis. Remittance – Remittances from Bangladeshis are the country's second-biggest source of foreign income after ready-made garments, which earned nearly $11 billion in the 2007/08 fiscal year. In July-September, the first quarter of the 2008/09 financial year, remittances from more than 5 million Bangladeshis working abroad totaled $2.345 billion, almost 44 percent higher than the same period of 2007/08. Bangladesh received $802.58 million in remittances from expatriate workers in September, up 35.88 percent from a year earlier, despite a slowing global economy. The central bank expects the inflow of remittances to touch an annual $10 billion over the next year. But economists fear the global financial crisis could cut down remittances, a key source of foreign exchange for Bangladesh. An exact measure of the impact of financial crisis on remittances is not possible now, as it will depend on the economic condition in the destination countries in future. The inflow of workers’ remittances posted a healthy growth during July-December FY09. During the period, total remittances increased by 30.9 percent (from USD 3,440.3 million to USD 4,504.7 million) which is slightly lower than 32.4 percent growth achieved during the entire period of FY08. During the first six months, remittances from UAE grew by 50.7 percent (from USD 482.5 million to USD 727.0 million) along with notable increase in workers’ remittances from Saudi Arabia (41.9 percent), USA (34.7 percent), Qatar (26.1 percent), and Kuwait (21.1 percent). Remittances from UK, however, declined by 15.9 percent. The inflow of remittances from Saudi Arabia, the largest host country of Bangladeshi migrants, stood at USD 1,352.4 million in July-December FY09 from USD 953.1 million during the same period of FY08 (Figure 1.1.9). Investment Sector – Bangladesh is heavily dependent on foreign investment. Now that the western companies are in trouble, it would be difficult for them to consider investment in a relatively investment unfriendly Bangladesh. It is therefore likely that they are not making any new investments, rather likely to secure existing operations. Moreover, the US government, as part of its strategy to restore the economy, is likely to cut corporate taxes, particularly for those companies, which will create jobs. As such, the intending companies will lose incentive to invest abroad, especially at a moment when many countries of Asia and Latin America are competing for foreign direct investments; it will be difficult for Bangladesh to persuade capitals from the US at its toughest time since the Great Depression. The best bet for Bangladesh will be to seek investments from China, the Middle East and even Russia, which may be interested to review its relations with Bangladesh at the backdrop of new reality of warmer relations between the US and India and cooler relations between the US and Russian Republic over invasion of Georgia. But the major concern lies in the energy sector as Bangladesh do not have major investment from US and European countries in other infrastructure development except for the energy sector. If US and European companies fail to carry out exploration or slow down then it will be extremely difficult for Bangladesh to come out of serious energy crisis in the near future. So Bangladesh must try to interact more aggressively with regional energy giants Petronas, ONGC, GAIL, CNCC, CNPC, Pertamina to invest in Bangladesh energy sector. It can also engage more appropriately with Russia seeking its assistance in energy sector development. Foreign Aid – Finance and Planning Adviser thinks the country's economy, having no major stress at present, is unlikely to be affected largely due to the near recession in the United States and elsewhere. This is because our country mostly dependent on the multilateral donors, more than what we're dependent on the bilateral donors. Still Bangladesh Bank Governor Dr Salehuddin Ahmed has alerted development partners of possible adverse economic impact on Bangladesh, if there is foreign assistance slowdown due to the financial crisis. He rang the alarm bell at an international roundtable on "Impact of Financial Crisis in South Asia" on the sidelines of IMF-World Bank Annual Meetings in Washington. Finance Adviser also said that the commitment from the multilateral development partners, mainly from ADB and the World Bank's International Development Association (IDA), for this fiscal year have been better while they have increased their programs recently. Bilateral donors’ intentions are not known but it is expected that will at least maintain their present level of assistance. Aid disbursements during July-December, 2008 was lower at US$898.29 million, compared to US$903.24 million during July- December, 2007. Net receipts of foreign aid during July-December, 2008 stood also lower at US$579.64 million, against US$630.04 million during July-December, 2007. Below the figure it can easily find out the decreasing position of our foreign aid situation, in which we are mainly depended. Human Power – Manpower exports fell by 38 per cent in recent three months to March from a year earlier. Some 138,000 Bangladeshi workers found overseas jobs in January – March period of this year, down by 85465 from the year before, according to data released by Bangladesh Bureau of Manpower, Employment and Training. The figure for March was also depressing as the number of Bangladeshi migrant workers dropped by 25 per cent to 43946, down from 59183 a year earlier. Recently Malaysia government rejects 55,000 workers to migrate in their country for work. Again in March, 3,000 Bangladeshis returned from the Gulf tourism and business hub of Dubai, after losing jobs there. The new figure portend bad omen for future and highlight the vulnerability of Bangladesh to rely mainly on the Middle-eastern nations and Malaysia for workers’ employment, economists and migration experts says. Last year, the country drew in US$8.9 billion in remittances, boosted by record 8.75 million overseas jobs. Figure shows that how our exports of human power is gong down in last 3 years and the result of decreasing has large distance then the previous result. GDP – Global economic developments in 2008 had important implications for macroeconomic performance of Bangladesh in FY2008. The increasingly globally integrated economy of Bangladesh suffered the consequences of some of the negative trends experienced by the global economy in 2008. As is known, about 56 per cent of Bangladesh economy is at present connected with the global economy through export and import of goods and services, and aid and investment. Slower growth projections for major export destinations of Bangladesh, particularly the stagflation in the US (following the sub-prime mortgage market crisis) and also the Euro zone countries, and the high global inflationary trends, have had an adverse impact on the performance of Bangladesh economy in FY2008. As is evidenced by information in Table 1, growth projections for the US economy for 2008 was a low 0.5 per cent (down from 2.2 per cent in 2007); for the EU the corresponding figure was 1.8 per cent (3.1 per cent in 2007) and for Japan this was 1.4 per cent (2.1 per cent in 2007). Growth rates were also revised downward for China and India, two major import sources of Bangladesh. Indeed IMF has reduced its 2008 global growth projections from 4.1 per cent to 3.7 per cent; world trade growth is expected to come down to 4.5 per cent in 2008. High commodity prices, particularly of critically important import items of Bangladesh including food, fuel and fertilizer, raised the import burden significantly. Prices of these increased in the range of 100-200 per cent in the span of one year between April 2007 and April 2008. Sluggish growth in developed countries is also likely to have dampening effect on FDI and portfolio investment flow to Bangladesh and adverse implications for flow of foreign aid. Sluggish US growth, and consequently lower consumer demand, led to a deceleration in demand for Bangladeshi exports – in the first nine months of FY2008 export to US had come down by 10 per cent; however, export to EU registered quite robust growth. One effect of the sluggish global demand had been increasing price squeeze in the international market for Bangladesh’s major exports, including apparels. Higher commodity prices in global market, and declining export prices of Bangladeshi commodities has led to deteriorating terms of trade and higher trade deficit in the first three quarters of FY2008. A weakened dollar also had negative impact for Bangladesh’s force reserves (denominated, to a significant extent, in dollar terms), and for import from Euro zone and other countries. Slower growth of major economies could also dampen initiatives such as aid for trade, and also undermine the prospects of LDC-friendly initiatives in the WTO in the form of DF-QF market access, and the NPDA2007 initiative in US (providing zero-tariff access to LDC products). On the other hand, rising fuel prices have significantly enhanced export earnings of oil-exporting economies which are attracting increasing number of migrant workers, leading to higher remittance flow to countries such as Bangladesh. The experience of FY2008 indicates the need for a close monitoring of the developments in the global economy and the necessity of pursuing appropriate strategies in view of both the emerging challenges and the attendant opportunities for Bangladesh. Import Sector – The country’s overall import fell drastically by over 21 percent in February over that of the previous month of this calendar year because of a falling trend in prices of commodities in the global market. Import LCs worth US$ 1.405 billion and $1583 billion were opened in December last and January respectively. But import LCs worth $1.698 billion were executed in February last. The Bangladesh Bank official also said the settlement of LCs against import may increase this month following a rise in opening of LCs in February, 2009. Imports of essentials including rice, wheat, sugar, edible oil and onion fell in terms of both quantity and value in February over that of the previous month of this year. During the period under review, the import of rice declined by 8,000 tons to 72,000 tons. Bankers said the import of essentials may improve this month due to increase in demand for the items in the local market. But they have urged the authorities concerned to ascertain both stock and demand for essentials immediately to avoid shortfall of the items. Financial System – The Bangladesh financial sector had little exposure to the sub prime mortgage securities and to the banks and financial institutions in US and Europe, and may emerge unscathed. Governor Dr. Salehuddin Ahmed said that the commercial banks in Bangladesh are not very much exposed to the banks and investment firms in the USA and Europe. Therefore, the ripples of financial shock into the financial systems would be less likely in the short run. Besides, he said, the commercial banks in Bangladesh were taking appropriate measures so that their funds kept in the banks abroad are not adversely affected. As for the Bangladesh Bank itself, its Deputy Governor Ziaul Hassan Siddiqui informed that the central bank's investment from the reserve was invested in the central banks of other countries or in the government bonds of other countries who promised to protect the deposits. "So you can say there is no risk," he said. Meanwhile, Bangladesh Bank recently pulled its foreign currency investment out of different risky ventures in the face of a financial crisis in the US and elsewhere. Actions: Before the beginning of the financial turmoil, inflation control has been the greatest challenge for Bangladesh. That battle has now become a bit easier as the global commodity prices sharply declined due to the financial crisis. But a new challenge now looms in front of us. We have enough cushions to insulate us from Global financial crunch, but we must use them with care. Other renowned economists’ advice, the Bangladeshi government has already formed a high-powered advisory committee to tackle the impact of the world economic crisis. The committee would watch the global economic trends and make recommendations to the government for implementation. The 27-member high-powered body of taskforce also called for focusing on some specific areas including early disbursement of official incentive, exemption of existing license fee on captive generators and up gradation of certification quality of Bangladesh Standards and Testing Institution (BSTI). Other areas are: giving special attention to the country's frozen-food export sector, relaxation of the existing CIB (Credit Information Bureau) rules and regulations and withdrawal of value added tax (VAT) from exports. "We have agreed on the need for taking quick steps to help cope with the ongoing global financial recession…And to do so, we have also given importance to some of the issues," the Taskforce head and Finance Minister AMA Muhith told the post-meeting press briefing at the secretariat. He also laid emphasis on creating more job opportunities and boosting investment to help keep the country's economy active against the backdrop of the global meltdown, which could, according to him, take a serious turn next year. There is a need to tackle the crisis both locally and internationally, the economist observed. It is important to consider as to how the meltdown-hit countries could help Bangladesh face the situation. Responding to a question, the Finance Minister said most of the country's export sectors including readymade garment (RMG), jute, ceramic, leather, frozen foods are more or less affected by the global meltdown. When his attention was drawn to the demand of a Tk 60-billion bailout package by the country's businesses, Mr Muhith said that it would not be possible for the government to dole out such large sum. "But, possibly we will enhance the amount of official incentive for the exporters, which now amounts to around Tk 10.50 billion," he said. He also mentioned that since the government's resources are limited, the exporters would also have to shoulder some of their financial loss. Besides, necessary measures have been taken to give a further boost to the remittance growth, he added. The government formed the taskforce to devise necessary measures for the government to face the possible adversity of the global meltdown. The International Monetary Fund launched a line of credit without conditions in a major overhaul of lending practices to tackle the worst global economic crisis in 60 years. One week before a Group of 20 crisis summit in London, the IMF hiked the amount of money it would lend to its 185 member countries, streamlined procedures and took steps to encourage borrowing. After analysis all the information collect from different sources these are the some of our opinion that can use to change our economic condition during the financial crisis. Grant a cash support for the export sector, especially for the RMG and knitwear. Announced an export subsidy for three sectors, namely, jute, leather and frozen food. Make a good conference with other foreign country, those imported our man power and ensure job security. Make invest sector more profitable and attractive. Take some effective steps to increase GDP or hold the position. References: · “Annual-Report-2007-Vol01”, Asian Development Bank, Published 2008. · “Financial Sector Review”, Volume IV, Number 1, Bangladesh Bank, Published January 2009. · “Annual Export Report”, 2007-2008, Department of Statistics, Bangladesh Bank, Published 2009. · “Major Economic Indicators: Monthly Update”, March 2009, Monetary Policy Department, Bangladesh Bank, Published March,2009. · Rahman, Dr. Rushidan Islam, “Performance of the Economy”, Bangladesh Institute of Development Studies, Published July 2001. · Murshid, Dr. K.A.S., “Remittance Inflow and Use”, Bangladesh Institute of Development Studies, Published 2001. · “Bangladesh Economy in FY2007-08”, Central for Policy Dialogue, Published June 2008. · “The Global Financial Crisis and What it Means for Bangladesh”, Central for Policy Dialogue, Published October, 2008. · “IMPACT OF TRADE LIBERALISATION ON EMPLOYMENT IN BANGLADESH”, articles, Central for Policy Dialogue, Published 2009. · “IMF Staff Country Report no.98/130”, International Monetary Fund, Published in web net – “www.imf.org” · “Economic Review of Bangladesh”, Ministry of Finance, Published 2009. · “Impact of Global Financial Crisis on South Asia”, World bank, Published 2008.