World economic recession and Bangladesh World economic recession is going on from 2007.

It is the result of fall of world's financial and capital market. The main reason of this recession is the crisis of mortgaged loans in the USA. It started in the housing sector. The economists identified two prime reasons for this recession: one is subprime lending and the other is uncontrolled credit default. At the start, this recession hit America. Here job market was contracted most. About 600, 000 thousand and 51 thousand people lost their jobs in February 2008 and in January, this number was 6, 55, 000. To face this problem, many companies cut jobs. Almost 10 million people of the world lost their jobs in 2008. The effect of this recession is coming in for small companies, too. On 26 January 2009, heavy machinery company, Caterpillar, medicine company, Pfizer, telecom company Sprint Nextor Corporation and infrastructure company Home Dipo took decision to cut jobs. Many other companies also declared job cuts. The number of bankrupt companies is increasing in the USA. The export market of China has fallen because of banking crisis. So, many people are losing work in Japan, Spain, England, Russia, Germany, Mexico, Latin American and with in Caribbean countries. Bangladesh is not free from this recession. Three million people might lose their job in Bangladesh in this year, so here poverty is increasing. This recession affected our export. According to Export Promotion Bureau in seven months, the exporting of raw jute decreased by 15.20 per cent, jute goods by 19.80 per cent, leather goods by 31.80 per cent and frozen food by 5.0 per cent. The BGMEA said readymade garments (RMG) export decreased in January by 4.98 per cent and in February by 17.58 per cent as our cloth mostly goes to the USA and Europe. So it has greatly affected our industry. This recession greatly affected our manpower export, as well. In the meantime, many of our workers have come back from Malaysia, Kuwait, Dubai, and Saudi Arabia. Malaysia cancelled the visas of 55

thousand workers. All the countries that import our manpower are going to cut the jobs of our manpower at overseas. As the world recession affected our manpower export, it would impact our remittance earnings. The remittance income would decline particularly from the Middle East. The overall industrial sector of our economy is thus bearing the brunt of the global recession. Our jute, sugar and spinning industries are in a dire straits. Our textile is also in a severe trouble. Out of the 80 mills of jute products, 17 have fully stopped production Eleven of these mills are functioning partially, while other mills are also are on the verge of closure. Out of 25 million workers, one hundred thousand has lost their jobs. In the spinning mills, 50 thousand labourers are jobless. The unsold goods of spinning mills are worth Tk 30 billion. To protect our economy from recession, the government has already taken a number of steps. One of our ministers went to Malaysia to save the visas of 55 thousand labourers. The Prime Minister went to Saudi Arabia to solve the problem of Bangladeshi workers. Financial minister A M A Muhit declared a stimulus package. Of this package of Tk 34.24 billion, export sector will get 13 per cent, agriculture, 43 per cent, power, 18 per cent, food, 11 per cent and agriculture loan, 15 per cent. But in this package their is no stimulus for RMG sector. Though economists welcomed this package, they said there was no definite guidance. It is true that this package is not enough to solve our problems. It needs more steps. Mahfuzur Rahman Manik mahfuz_du@hotmail.com

World economic recession and its impact on Bangladeshs Economy: Seminar

World economic recession and its impact on Bangladeshs Economy titled seminar organized by Journalism and Media Department of Stamford University Bangladesh on 28th march, 2009 at Dhanmondi campus premises. Prof. Kazi Abdul Mannan, Chairman of Journalism Department presided over the seminar while Dr. Salah Uddin Ahmed, Governor of Bangladesh Bank was present as main speaker. Worlds on going recession is having an impact on our economy and the main reason is investment between our national banks with the international banks- said, Dr. Salah Uddin Ahmed. He also added that especially this will influence our exporting products though our GDP will be at near 6 percent. He specially pointed out that world recession will have impact on our Jute, Leather, Frozen Foods and Garments industrious. Then he suggested that we should not feared from the situation rather increase our investment in new sectors and raise new employment opportunities. For example we could have benefited more if we invested in agriculture sectors. He informed audience about the steps that have been taken Bangladesh Bank and Government jointly to face this recession. Governor added that meanwhile they are giving low interest to all small and medium entrepreneurs. Md. Zainul Abiden , Executive Vice President; Hellaluzzaman, Exam Controller; Dr. A. T. M. Johurul Haque, Chairman of Economic Department Head and Ex- UGC Chairman were also present at the seminar. Also Teachers, Students and Journalists of electronic & print media were present and through a students question answer session the seminar was end.

Professor Syed M Ahsan Tuesday, 04.14.2009, 02:25pm (GMT) The various outlooks released thus far by multilateral agencies, think-tanks and experts have been wide off the mark in predicting the evolvement of the crisis; hence, rather than looking at forecasts, one may profitably look at observed patterns. Although GDP is a poor indicator due to lag/revisions, fourth quarter 2008 results showed that in the United States and Japan, GDP losses were of 6.2 per cent and 12.1 per cent respectively and Thai GDP fell by 4.3 per cent (all annualised rates). Both China and India appear to be growing at about 300-400 basis points below rates posted 12 months earlier. A better indicator of the output decline to evolve in the coming quarters is the unemployment rate. Since January 2008, the US unemployment rate has risen from 4.9 per cent to 8.1 per cent in February 2009, i.e. by 3.2 percentage points (or, by 5.1 million), of which the most severe decline occurred since November 2008. Worse news comes with trade, where advanced country import growth has turned negative in 2009. Major export losses are being recorded all across Asia.

While global FDI flows have slowed down markedly, unlike many developing countries, Bangladesh is well-shielded due to its relative insignificance. Advanced country credit markets (especially in the US) continue to remain substantially clogged and the interest rate spread remains near the peak in many countries (particularly the US). Even though the US federal funds rate has been lowered to near zero, the prime rate is 3.25 per cent, and the 30-year fixed mortgage rate about 5.25 per cent with the fund approval criteria and processes becoming tighter. Most other advanced countries also have not passed along the full extent of the official overnight rate cuts to consumers in the form of prime or mortgage lending rates, signalling a continued tight credit situation. Further, since January 2008, advanced country stock indices have lost about 50 per cent of their value, which jeopardises the recovery prospects in the market for household durables and other large expenditure items. The Federal Reserves monetary policy intervention via the target overnight rate has been largely futile. Cash injections have resulted in improving capital shortfall, but major weaknesses remain in that the global credit market is still largely non-operational (especially in the US). To shore up confidence, Joe Stiglitz is in favour of interim government ownership of troubled banks, where assets can be re-evaluated, the balance sheets cleansed, banks closed down as needed, and lending resumed. The Economist has also signed on to this idea (March 6, 2009). Affected bond and share holders will lose out in the process, but taxpayers will not suffer any more than they already have. Those doubting the size of the government expenditure multiplier (e.g. Robert Barro) prefer a reduction in the marginal tax rate. However, the low confidence in the financial system and the spectre of prolonged recession may not induce consumers to quickly spend the tax savings. Returning to expenditure programme, the safe alternative would be the public adoption of priority capital expenditures chosen strictly for its economic merit (i.e. ranked in terms of net benefits over costs). The risk, however, is that in times of crisis, prudent decisions may not come easily. The financial system in Bangladesh and many least development countries has been free of the direct contagion of toxic assets plaguing the advanced economies. Even then, active monitoring of the capital structure of the banking system would be important to retain public confidence. Worries are that the fundamental mismatch on the asset-liability term structure, brought on by the overwhelming share of bank credit as the source of finance (@ 90 per cent of total), has put enormous stress on the banking system. The same dependence increases the systemic risk faced by the banking system due to the potential default by both importers (unable to sell what they bring) and exporters (declining demand abroad) brought on by this crisis. That being said, there is a need to aggressively expand equity finance (currently 10 per cent), a need to revisit and possibly deepen the deposit insurance facility and a resolute stand in support of bank/non-banking financial institution mergers. Two major challenges facing the financial system in Bangladesh have been the high cost of funds, and the high spread between the borrowing and lending rates offered by the banks (DMBs) and non-banking financial institutions (NBFIs), where the two issues are not necessarily related. How to bring down the cost of funds? Portfolio theory teaches us that a risk-free instrument (i.e. sovereign bonds such as the National Savings Directorate certificates) serves as the base rate upon which all other financial returns are determined in view of premium due to risk and liquidity concerns. Hence, it is immaterial that total

stock of outstanding NSD deposits, though exceeding the magnitude of all industrial term loan of banks and non-banking financial institutions combined, amount to roughly 25 per cent of all time deposits held by the banking system (as of end December 2008). The NSD rate serves as the floor for the entire structure of deposit rates, and hence determining the cost of funds. Further note that econometric analysis carried out at the Bangladesh Banks policy analysis unit suggests that 3-5 year NSD rates directly influence the DMB term deposit market even for as short a term as 6 to 12-months. The term rates at DMBs in turn determine the rates offered by NBFIs since these are the only source of their funds. Put differently, the policy rates, such as repo and reverse repo and the 28-day T-bill, do not have much of an impact on the broader market for supply and demand of loans primarily due to the lack of secondary trade in these instruments (especially 28-day and 90-day Tbills) thereby preventing the monetary policy signals to be smoothly transmitted to the broader market. These are highly illiquid even for primary dealers. The NSD rates (both 3 and 5-yr) have remained pegged between 11.5 and 12.0 per cent since October 2005. In contrast, the 10-year rate in India has been below 8 per cent since about then (currently 7.65 per cent). Given the current benign inflationary environment, the goal of permanently lowering the entire structure of interest rates would appear most opportune. A significant drop (say 250 basis points over a 24-month period) in NSD rates is expected to lower production cost in both manufacturing and in services in one fell swoop. Consumers, especially mortgage/auto debtors would gain, while net savers would temporarily lose, but gain over time via lower prices. Transitional measures may, however, be designed for the not-so-rich pensioners (say with less than Tk 1 million in deposits), who do not diversify their savings. The above scheme, though lowering the structure of rates (both lending and borrowing) may not accomplish much in lowering the spread, which is the cost of intermediation. The former nationalised banks being saddled with massive non-performing (primarily SOE) loans have failed to provide any competition to the banking system and, as a consequence, allowed the leading private banks to behave as a cartel. Thus, unless genuine competition can be unleashed, a very different outcome would be hard to bring about (see PN_0701 and PP_0804, PAU, BB). Being stable vis--vis the US dollar, the Bangladesh currency (the mighty taka) has gained significantly in nominal terms against the currencies of our principal export destinations (e.g. most advanced countries plus India). The 12-month nominal gains have been as follows: UK and Korea (31.8 per cent), Canada (23.3 per cent), India (22.4 per cent), EU (16.4 per cent), and essentially flat against US, Japanese and Chinese currencies. There is a need to monitor the pattern continuously. Consequently, the historic real exchange rate undervaluation has also somewhat weakened. To bring this realignment to our advantage, we must explore (a) how to direct our raw material and intermediate imports away from the US/Japan/China and toward Korea, UK and India so as to lower production costs, and, (b) how we can gain export market share in the US, Japan and EU. It is heartening to observe that this is roughly what seems to be happening on the ground. Both knitwear and woven products have gained market share in the US (at the expense of China/India); between July 2008 and January 2009, total growth has been 26.2 and 20.6 per cent, respectively. Industry sources reveal weakening demand in the

coming months, but overall the RMG market appears to be weathering the crisis as well as one would hope. Conversely, there is a definite moderating trend in the growth of the export of non-RMG items. Nevertheless there seems to be no cause for panic here. A policy response would be to find temporary incentives for those affected (vis--vis cost of finance, rescheduling of loans and loan classification) and long term measures would be to unleash competition in shipping, insurance and services at the port in order to gain on cost competitiveness. With the dramatic collapse of oil prices, and the widening impact of the global recession, growth of remittance flows (in part due to currency re-alignment, e.g. against UK) is expected to fall significantly in FY09: 3rd and 4th quarters. In January- February 2009, manpower export was down by about 40 per cent, tens of thousands have already returned from the Gulf, and the year-on-year growth of 13.8 per cent in February was the slowest in the fiscal year 2009. Since returning migrants send/bring all they have, the remittance flow may even rise over the next 2-3 months even though employment may be falling. The prospect of a marked slowdown in the last two quarters of 2009 would appear credible. The response should include domestic fiscal stimulus in generating domestic demand (e.g. public sector salary increase) and selective transfers to the needy. With thousands of unemployed (and indebted) migrants returning home, the poverty outlook is bound to worsen in a policy vacuum. The design of a safety net (cash transfers, access to discount food via the rationing system) for laid-off workers, especially of the export sectors is needed. New infrastructure projects, selected using credible cost-benefit criteria, would create immediate temporary, and via the multiplier process, permanent jobs. Large microfinance institutions may also reach out to the returning migrants, facilitating credit and assistance in the setting up of micro enterprises. An industry that covers 15 million households can easily embrace a few hundred thousand returnees. Donor fund (e.g. seed money for emerging MFIs) shortage may not be a problem in the SR, as well as the domestic budget deficit need not be a concern as initial conditions are favourable. Once the dust settles, and if global growth take-off is less than spectacular, the accumulated debt and the high level of deficit would require painful recourse (higher and new taxes, fewer public goods and govt. consumption expenditure). Hence, tinkering with the tax structure (except for targeted temporary relief) would be imprudent. The action ought to be on the public capital expenditure side. Long-term steps would include making the monetary transmission process functional and to invigorate corporate bond and equity markets in order to ease the systemic stress/vulnerability in the banking industry. Professor Syed M Ahsan teaches at Concordia University in Montreal and is a former adviser, Bangladesh Bank