The Global Financial Crisis: Impact on Bangladesh

A.K.M. Atiqur Rahman Professor Department of Economics North South University

Overview
I. Introduction: Genesis and Spread of the Crisis. II. Global Recession and LDCs III. Impact on Bangladesh IV. Recession and Export from Bangladesh V. Exchange Rate Movement VI. Remittance VII. Import and Tax Revenue VIII. Overall Impact IX. Policy Implications

I. Introduction: Genesis and Spread of the Crisis.

Root: Mispricing in the Massive Credit Default Swap Market Sub prime Mortgage: Bank transferred credit risk to third party through the process of securitization ( MDS, CDO) Reckless growth of sub prime mortgage-lower yield in risky mortgage Arbitrage drove the yields on all bonds & loans down Expansion of consumer credit, housing price bubble

Intriduction continued
Unsustainability of Credit default swap and subprime mortgages exposed Housing bubble burst mortgage default foreclosures bank and insurance failure credit freeze Spillover of financial crisis to real economy through virulent credit crunch depressed aggregate demand Sub prime mortgage default led to spillover effects around the world (Europe and emerging economies) via an elaborate network of derivatives

Continued . Global consequence of the crisis includes: Sharp rise in Unemployment in the US, Job loss in few other countries Sharp fall in the stock market price around the globe, current stock prices are unable to explain the value of the companies Panic also spread around to reduce property prices in some other countries Extra caution in lending even with excess liquidity, depressed consumer demand

II. Global Recession and Low Income Countries Channels

- Although some countries with sufficient foreign equity capital experienced capital flight, spillover through financial market would be least for most of the low income countries - Spillover mostly through International Trade - Unfavorable effects on Official Development Assistance - Direct and Indirect impact on remittance

IMF and World Bank predicts sharp decline in growth of world trade and slowdown in growth of real GDP in developed and developing countries

Projected Slowdown in growth in Developing regions (Source: World Bank)

2007
East Asia and Pacific Europe and Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub Saharan Africa

2009 6.4 3.5 2.2 3.5 5.2 4.8

Change -4.1 -3.6 -3.5 -2.2 -3.2 -2.1

10.5 7.1 5.7 5.7 8.4 6.3

Impact on Bangladesh Economy

Financial market in Bangladesh is small and it is not integrated with the world market. Economy is integrated with the world mainly in terms of international trade. Trade orientation ratio of Bangladesh is about 45%. Most impact is through Trade channel Remittance from abroad is quite importance for external sector balance Floating Exchange Rate regime makes the country exposed to exchange rate risk with global shock

Recession and Bangladeshs Export

Almost 90% of our export is targeted to US, EU and other developed countries, depressed demand will have negative implication for prospect of our export growth. Although it is too early to draw any conclusion about the impact of recession on export, very recent export trend may show some early signals Aggregate Export figures show that Bangladesh maintained desired growth of export in the first six months of the Fiscal year 2008-09. July-September growth rate was above 19% over the same time of the last year. However, month to month comparison shows that global recession started to mark some impact on our export

Percentage Change in monthly export in 2008 from that of 2007

80

70

60 50

40

30

Ser i es 1

20

10 0 J ul y -10 A ugus t Sept ember Oc t ober Nov ember Dec ember

-20

Export continued

Apparent insensitiveness of overall export growth is due to success in garments and textile export in the early months of the current fiscal year. Export in the first six months goes even beyond the target for Woven Garments, Knit Garments, Home textile and Terry Towel Foot wear, tobacco product, agro-processed and few others also shown positive growth during this period On the other hand, frozen foods, raw jute, handicrafts, jute goods, ceramic products, cut flower, bicycle, vegetables etc showed negative growth. Price of Shrimp went down by about 30% Although other factors may also be responsible for decline in export, global recession put a negative mark on the export, particularly of relatively less-essential items. Protectionism in the DCs may result in further sluggish performance in export if the recession persist

Export of RMG
As three-fourth of our export earnings come from RMG, countries overall export performance is largely depend on it Global recession may generate two possible opposing force towards export of RMG (i) Decline in order due to recession, (ii) increase in order due to substitution of orders towards cheaper products and low cost source

Monthly Export of RMG, January 07-Dec 08

14 0 0

12 0 0

10 0 0

800

2007
600

2008

400

200

Monthly Export of Woven Garments, January 07-December 08

600

500

400

300

200

2007 2008

100

Monthly Export of Knit Garments, January 07-December 08

700

600

500

400

300 2007 200 2008

100

RMG Export cont .

RMG export is not showing any trend in the recent months as it did in the same months last year Knitwear export face worse signal compared to woven garments Unit price of both Woven and Knit RMG declined in the post MFA period. Tendency of further decline in price in recent orders Many importers are now requesting for delayed shipment of order There may be payment delay as well At the same time there is also some evidence of diversion of order to Bangladesh from other countries like China or Pakistan where a number of factories are closed due to high cost

Exchange Rate
Since the crisis most of the major currencies in the world under floating regime depreciated against US dollar due to act of the financial market also due to expected decline of export to US. But Bangladeshi Taka remained fairly stable with US $. Consequently our currency appreciated with most of our major trading partners. Implications: our export is less competitive, import is cheaper Bad News: Export of some items may turn down its trend Good news: Price of essential commodities and rawmaterials may decline in the domestic market

Depreciation of Currencies of our trading partner from end July to end December
Australian Dollar British Pound Canadian Dollar South Korean Won Indian Rupee EURO Nepalese Rupee Singapore Dollar Thai Bath US Dollar -26.81 -26.3 -15.6 -14.3 -11.7 -9.1 -11.9 -4.3 -3.4 0.6

Remittance
Bangladesh experienced a massive growth of remittance in the recent years. Remittance stood at 8 billion US $ in the FY2007-08 About 80% of remittance comes from the middle east. Current petroleum price is much lower from the trend price even the trend line is drawn excluding recent boom in petroleum price Recent fall in petroleum price may severely affect remittance inflow to Bangladesh as the there will be a slum in construction work and also there may be a decline in wages Conjecture gets some support by the early signals

Remittance: Long Run Trend

12000 10000

P er s ons l ef t , hundr ed 8000 Remi t t anc e, mn$

6000

4000

2000

0 199394 199495 199596 199697 199798 199899 199900 200001 200102 200203 200304 200405 200506 200607 200708

Trend of person Left and Remittance since January 2007

1200 1000

800

600

400 P er sons l ef t , hundr ed 200 Remi t t ance, mn$

Remittance continued
World Bank Projection: -A 16.2 percent increase in remittance inflow in South Asia in 2008. -However Remittance is expected to decline by 0.1 per cent (base case) to 5.5 per cent (low case). Remittance in Bangladesh grew above 25% last year, but it lost any growth trend in recent months. Number of persons left for overseas employment declined considerably in recent months Hence if the low price of petroleum persists for a while, remittance growth may level of in line with World Bank Projection

Import and Tax Revenue

Reduction in commodity prices would imply a dampening effect on value of import which is good from Balance of payment consideration However, reduction in import value may result in sluggish performance of taxes on import As about 45% of tax revenue comes from taxes on import, sluggish performance of taxes on import will have negative implication for overall tax revenue of the government However decline on import bill on petroleum import and reduction of subsidy would reduce fiscal pressure

% Changes in Taxes on Import in July-December 08 from that of 07

July August September October November December July-December July-September October December 51.0 18.6 15.2 6.6 -0.4 -13.9 11.9 27.6 -2.5

Comparison of monthly import of July-Dec with that of Previous Year

Momthwise Import: July -December, 2007 & 2008
14000 12000

10000

8000 Vrore Taka

6000

Import,08 Import,07 Import with duty,08 Import with duty,07

4000

2000

0 July August September October November December

Taxes on Import
T ot a l T a x e s on I mpor t
2500 2000

15 0 0

2008 2007
10 0 0

500

0 Jul y August Sept ember Oct ober November December

Foreign Aid
No immediate impact on FA is expected is already there is commitment However in near future aid flow may decline as there is pressure on public money in the developed countries to finance the bailout programs In the recent past, the economy did quite well in some years even with a lower flow of aid. The government has to be ready to design its economic plain with a lower availability of Foreign Aid.

Overall Impact on the Economy: Sum up

Export growth may slow down if the recession persists and the protectionism ion DCs grow Remittance growth may melt down Balance of Payment may not be affected that much because of sluggish import growth Tax revenue growth may slow down Declining food prices in the global market and appreciation of Bangladeshi Taka may help the poor by reducing domestic food price that may have a positive impact on poverty. However, prolonged recession may also increase unemployment if export sector is hurt severely with negative impact on poverty.

Exact magnitude of change and the impact on the economy depends on how long the global recession sustains and the interplay of negative and positive factors emanated from the recent change in global economy Growth impact on GDP may be anywhere in between very insignificant as perceived by the Bangladesh Bank or a decline by 2% (from the national target of 6.5%) as projected by the World Bank.

Policy Measures
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

Measures continued

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 depends 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.

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