Timeline-Global Credit Crunch
A year ago, few people had heard of the term credit crunch, but the phrase has now entered dictionaries. Defined as "a severe shortage of money or credit", the start of the phenomenon has been pinpointed as 9 August 2007 when bad news from French bank BNP Paribas triggered sharp rise in the cost of credit, and made the financial world realize how serious the situation was. The roots of the credit crunch, however, started earlier. 1.1 Sub-Prime Problems Between 2004 and 2006 US interest rates rose from 1% to 5.35%, triggering a slowdown in the US housing market. Homeowners, many of whom could only barely afford their mortgage payments when interest rates were low, began to default on their mortgages. Default rates on sub-prime loans - high risk loans to clients with poor or no credit histories - rose to record levels. The impact of these defaults were felt across the financial system as many of the mortgages had been bundled up and sold on to banks and investors. 1.2 A Quick Guide to the Origins of the Global Financial Crisis
Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give high-risk loans to people with poor credit histories. These and other loans, bonds or assets are bundled into portfolios - or Collateralized Debt Obligations (CDOs) and sold on to investors globally.
Falling house prices and rising interest rates lead to high numbers of people who cannot repay their mortgages. Investors suffer losses, making them reluctant to take on more CDOs. Credit markets freeze as banks are reluctant to lend to each other, not knowing how many bad loans could be on their rivals' books.
1.3 The Tattered State of Global Economy The impact of the sub-prime mortgage crisis is quickly shown to have implications beyond the United States. Losses are felt by investment banks as far afield as Australia. Firms cancel sales of bonds worth billions of dollars, citing market conditions.
But the short-term help does not solve the liquidity crisis - or availability of cash for banks - as banks remain cautious about lending to each other. A lack of credit - to banks, companies and individuals - brings with it the threat of recession, job losses, bankruptcies, repossessions and a rise in living costs.
2. Global Downturn: Interventions
This is one of the most tumultuous times on record in the global financial markets. 2.1 Trillion-Dollar Bail-Outs Huge amounts of money have been committed in financial support for banks.
2.2 Billion-Dollar Stimulus Packages Governments are spending billions of dollars to kick-start economic growth. Measures include tax cuts and building projects.
2.3 Victims The financial landscape has changed dramatically, with several giants of the business world disappearing.
2.4 The Way Out
These are troubled times and the mind cannot help but be troubled. Surveying the wreckage all around -from Wall Street, to Main Street, the real economy we live in -- it is disconcerting to see how quickly the contours of our world are changing. In Manhattan, the epicenter of the financial earthquake, the restaurants are emptier, the streets less busy, the shops empty. On a global scale, images of economic pain giving way to despair are troubling; this week alone, there are reports of riots in Bulgaria, student unrest in China, and violence in Iceland, as once peaceful citizenry gives in to despair. However, for those in positions of power, political or economic, entrusted with safeguarding millions of lives and livelihoods, surrendering to despair is not an option. There are policy tools available, which, if applied with care, can slow the rate of the recession, shorten its duration, and set the world back on a path to recovery. As the world sinks into a synchronized global recession, it is less important to ask how we got here and more important to figure out how to get out. In developed economies across the globe, where the crisis has already reached epic proportions, the needle has moved from the realm of academic debate about what to do and into concrete policy actions. From the US to Europe to China, politicians, central bankers and financiers are applying every macro-economic and legislative tool at their disposal to halt the downward spiral in their respective economies and chart a course to recovery. 2.4.1 To Intervene or Not "Government intervention usually makes a bad problem worse. The most efficient economy is one left to its own devices." -- Freidrich Hayek, Economist, Nobel Laureate "Economic theory has long explained why unfettered markets are not self-correcting, why regulation is needed, why there is an important role for government to play in the economy." -- Joseph Stiglitz, Economist, Nobel Laureate The debate has been raging among economists for much of this century: should governments intervene during times of economic crisis? With the world facing possibly the most severe economic slump in half a century, this question has taken on special poignancy. Not doing anything is an option. How can inaction in the face of an economic crisis be an option? In fact, over the last two decades, western leaders, including the last four US presidents, have been preaching, and in varying degrees practicing, a "hands-off" approach to the economy. This is not surprising. The philosophical underpinning of modern capitalism in the West is predicated on the belief that the private sector must be left to pursue its own profit goals, with little interference from the government.
De-emphasizing regulation and intervention, the proponents of the free market approach instead subscribe to a concept of economic Darwinism; only the fittest companies making rational economic choices should thrive, while those making bad choices must fail. A logical, although unintuitive conclusion of this theoretical construct is that recessions are inevitable, and even necessary. When demand rises, a virtuous expansionary cycle sets in; companies increase production, creating new jobs and improving wages, and in the process generating new demand. However, the expansionary forces tend to drive companies to excess -- creating too much capacity, taking on too much debt -- factors that eventually lead to business failures. As the failures pile up, companies shed capacity, cut employment and wages, and drive down demand -- the economy enters a recession. Therefore, recessions are inevitable and necessary; they purge the excesses that accumulate in an economy during the good times. A free market proponent will then argue against intervention to prevent a recession. Intervention may at times be necessary. Non-intervention may sound good in theory, but history reveals two practical limitations. First, non-intervention can magnify natural economic cycles -- unchecked by regulation, up cycles turn into "bubbles," or periods of excessive growth in demand and supply, followed by major downturns or "crashes." At times, these crashes are so steep that the economy cannot climb out unaided. In the words of famed economist John Maynard Keynes: "Free markets are not always self correcting." Second, the socio-political impact of up and down cycles is asymmetric; citizens enjoy long periods of prosperity, but have little endurance for long periods of economic hardship. Policy makers must weigh the broader social costs of a prolonged recession, and usually cannot justify inaction. The current downturn is not part of a typical expansion-contraction-expansion cycle; rather we are in the third phase of an expansion-meltdown-contraction economic cycle. Unaided, the contraction risks turning into a downward spiral that eventually may lead to a depression, the likes of which we have not witnessed in modern history. What can break the downward spiral? Intervention, massive in scale and synchronized across continents, may be the only choice. 2.5 How to Intervene
A PRIMER ON POLICY CHOICES
Once policy makers decide to intervene and fight a recession, the next question is how. There are three broad sets of intervention tools that can be used; interestingly governments across the globe are applying all three to combat the current crisis, and in massive doses. However, intervention can have unintended consequences, introducing harmful distortions in the economy. Therefore, the pros and cons must be carefully considered before application of any of the interventionist tools. As the French economist Fredric Bastiat warned: "Good economic policy must take into account both the effect that is visible and the effects that must be foreseen."
I. Intervention Tool Set #1- Fiscal Stimulus: There are two major sources of spending in an
economy -- the public sector (government) and the private sector (retail and business). Fiscal stimulus involves public sector spending above normal levels in order to stimulate the economy. There are typically two ways to provide fiscal stimulus:
a. Direct spending: The government can increase its budget above normal level and spend the excess
on projects -- roads and bridges, mass transit, education, energy supply -- with the goal of creating new jobs and improving the long-term competitiveness of the economy.
b. Tax cuts: The government can lower the tax rate, or provide special tax incentives, to individuals
and businesses. This action increases the amount of money available to the private sector to spend on the economy. However, tax cuts can be less effective than direct government spending to stimulate the economy; individuals and businesses can simply choose not to spend the tax breaks or not to take advantage of tax incentives.
Intervention Tool Set #1: Fiscal Stimulus
Beware of big economic distortions and deficits longer-term: Fiscal stimulus, while effective in shortterm, can be harmful longer-term. First, fiscal stimulus creates budget deficits (difference between what the government spends and what it earns), typically finances through borrowing. As the debt load becomes larger, the government has to impose higher and higher taxes to service the debt, eventually threatening the solvency and stability of the economy. Second, fiscal spending creates unintended distortions in the economy; government programs can end up directing capital to sectors that may not be the best use of resources. Classic examples are "bridges to nowhere," spending billions on infrastructure in a remote region that few will use. Third, government projects are usually difficult to dismantle. Over time, the bureaucracies created to run the programs and the communities that they benefit resist shutting down the program long after the need for the stimulus has ended.
I. Intervention Tool Set #2-Monetary Stimulus: Applied by central banks, monetary stimulus/easing
involve increasing the availability of money in the economy, typically through the banking system. The objective is to make it easier for retail and business customers to borrow from banks and spend it on the economy, thereby counteracting recessionary pressures. This can be achieved in one of several ways:
Intervention Tool Set #2: Monetary Stimulus
a. Interest rate cuts: By lowering the interest rates banks can charge on loans or offer for deposits, the
government makes it less attractive to save money and cheaper for companies and individuals to borrow.
b. Quantitative easing: The government can inject funds into the banking system by lending to banks
directly and/or by buying assets from banks (such as bonds). The goal is to "ease" pressure on bank assets, thereby allowing them to lend more to retail and business customers.
c. Reserve reductions: Monetary authorities require banks to hold a certain portion of their assets
with the central bank. By reducing this requirement, the central bank can free up banks' capital, which in turn is used by them to increase lending. Beware of monetary stimulus for too long: For the very reason that monetary easing is useful in a downturn, it can be harmful in an upturn. Easy money tends to create "credit bubbles" or excessive expansion fueled by excessive levels of borrowing. In fact, availability of easy money in developed economies during the last two decades is one of the root causes of the current financial crisis. And given that economic policy is not precise, governments tend to wait too long to turn-off the excess money flow, thereby creating bubbles in the long term.
I. Intervention Tool Set #3-Structural Intervention: The most controversial of the intervention
tools, structural intervention involves the government directly intervening in one or more troubled sectors of the economy. There are several ways the government can do this, such as passing new regulations, creating new agencies or banks, injecting capital into the sector, and forcing mergers between healthy and unhealthy players to repair the sector.
Intervention Tool Set #3: Structural Intervention
Structural intervention is a slippery slope. While governments typically intervene in limited measures at first, attempting only the basic minimum and indirect involvement, practical experience demonstrates a snowballing effect. The initial structural intervention often evolves into a nationalization of the sector, whereby the government ends up as the majority owner of key players, reversing decades of privatization and all the efficiencies associated with it. 2.6 Government Actions to Fight the Financial Crisis Governments across the globe have been aggressively battling the current financial crisis -- using fiscal stimulus, monetary easing, as well as structural intervention. In the US, the epicenter of the financial crisis, the new Obama administration has recently passed the largest fiscal stimulus package in US history, with a price tag of $787 billion. The package contains both direct spending on infrastructure, healthcare, and other projects with universal benefits. These steps have been complemented by monetary easing, with unprecedented reduction in interest rates -- to almost zero. The government has also been aggressive with structural intervention, most visibly in the banking sector, which is in meltdown mode with 14 banks already failed. In 2008, the government engineered healthier banks to buy the weaker ones, and has set aside $700 billion under the Troubled Asset Relief Program (TARP) legislation. Importantly, there is now discussion in the US about setting up a "Big Bad Bank" (BBB) to buy up the hundreds of billions of dollars worth of toxic assets sitting on the balance sheets of banks, and quarantine these assets.
2.6.1 Intervention Matrix around the Globe In Table 2, we have highlighted some of the actions taken by the US and other developed and developing countries, including Japan, UK, France, Japan, China, and India. While there are variations in the approaches of individual countries, the measures have some unifying lessons that are important to consider as Bangladeshi policy makers look toward contingencies.
UK bank Northern Rock seeks an emergency loan to stay afloat, prompting a "run" on the bank, as worried customers withdraw £2bn. The bank is later nationalized. In the US, the near-collapse of Bear Stearns leads to a crisis of confidence in the financial sector and the end of investment-only banks.
Seeking a long-term solution, the US government agrees a $700bn bail-out that will buy up Wall Street's bad debts in return for stake in the banks. The US government plans to borrow the money from world financial markets and hopes it can sell the distressed assets back once the housing market has stabilized.
The UK government launches its own bail-out, making £400bn extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them. In return for its investment, the government expects to get a stake in the banks - although exactly how much is not quite clear yet.
Shares have risen and fallen with news of failures, takeovers and bail-outs. In part, this reflects investors' confidence in the banking system. While bank shares have been hammered because of bad debts, retailers have been hit as consumer confidence is shaken by falling house prices and job insecurity.
Be proactive, not reactive Remember the age-old adage "A stitch in time saves nine"? This is good advice at any time. But it is also difficult to implement since regulators typically cannot muster enough political support for intervention when things are "not bad enough." Yet, we have seen this again and again; the size of intervention needed becomes bigger the deeper the crisis. There are two reasons for this.
First, there is always a significant delay between the application of a stimulus and the time it impacts the real economy. Second, recessionary forces typically reinforce each other; falling demand during a recession drives companies to cut jobs and wages, which in turn shrinks demand further and deepens the recession. The bottom-line is that proactive intervention is far more effective than reactive action.
No halfway measures Consider the different US and German government approaches when domestic depositor confidence sank to unprecedented lows and the risk of "bank runs" became real. In the US, the government announced that it would increase bank deposit guarantees from $100,000 up to $250,000. But in Germany, the government announced a blanket guarantee covering deposits of all sizes.
The US government's "half measure" failed to shore up depositor confidence and led to failure of smaller regional banks and a major shift of assets to government treasuries and the largest three banks. Germany's "full measure," on the other hand, stemmed the flight of bank deposits very effectively. This is only one example, but there are others, of how full measures are far more effective in restoring confidence and achieving the desired results.
3. Projected Economic Growth
World economic growth is expected to slow sharply, with the UK among the hardest hit. Developing countries such as China and India should fare better.
3.1 Global Recession and Low Income Countries 3.1.1 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 2007 10.5 7.1 5.7 5.7 8.4 6.3 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
3.2 Projected Slowdown in growth in developing regions (Source: World Bank) Region East Asia and Pacific Europe and Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub Saharan Africa
Bangladesh reveals a slightly different scenario as no stimulus packages have been announced as yet. The country shines from basic garment exports and a steady remittance inflow, but falters on the other currency winners. Bangladesh achieved a real GDP growth rate of 6.2 percent in fiscal year 2008 despite uncertain and challenging circumstances created by natural disasters and other adverse domestic and external developments. With a resilient trend of the real economy, Bangladesh is likely to achieve a GDP growth rate of around 6.0 percent in fiscal year 2009, according to the central bank.
"The continuing slowdown of global growth, especially growth in advanced economies, may pose a big challenge, if it persists for long, through its impact on exports, workers' remittances, foreign aid and capital inflow channels," the central bank said in its latest quarterly report. Latest statistics indicate that global recession has cast shadows over the exports of several items such as shrimps, leather and leather goods, electronics, ceramic tableware, vegetables and other similar products. Bangladesh formed a task force towards the end of 2008 to deal with the impact of the financial crisis and global recession. But so far it has not announced any stimulus package or other measures as seen in other Asian countries. The country kept up export growth in ready-made garments as it ships out low-end products, which have relatively high demand on the international market. The Bangladesh taka has appreciated against many currencies such as the euro and Australian and Canadian dollars, making imports from those countries cheaper. Remittance receipts in the July-October period of 2008 were up 36.5 percent, compared to the same period a year ago. Most remittance to Bangladesh comes from the Middle East.
4. Management of the Crisis by Major Economies (widely known as G-20)
The newly constituted G-20 summit held on early April of 2009 got much attention both in developed and developing countries. For the first time, emerging economies like India, China, Brazil were given due importance in the summit.
4.1 G-20 at a Glance
G20 world leaders have revealed their communiqué to tackle the global economic crisis. They represent economies that make up 85 per cent of world output. UK Prime Minister Gordon Brown announced the $1.1 trillion deal as he closed the G20 summit which was held in London on 2nd and 3rd April. Here is a summary of the key points: 4.1.1 Financial Regulation • • • • • • • • • A new Financial Stability Board, with a strengthened mandate, will replace the Financial Stability Forum Financial regulation and oversight will be extended to all financial institutions, instruments and markets This includes bringing hedge funds within the global regulatory net for the first time Members are committed to implementing tough new rules on pay and bonuses at a global level International accounting standards will be set Credit rating agencies will be regulated in order to remove their conflicts of interest A common approach to cleaning up banks' toxic assets has been agreed There will be sanctions against tax havens that do not transfer information on request The Organization for Economic Co-operation and Development has published a list of countries assessed by the Global Forum against the international standard for exchange of tax information Resources available to the International Monetary Fund will be trebled to $750bn This includes a new overdraft facility, or special drawing rights allocation, of $250bn Additional resources of $6bn from agreed IMF gold sales will be made available for lending to the poorest countries The G20 also supports increased lending to the world's poorest countries of at least $100bn by the multilateral development banks There will be a commitment of $250bn of support for trade finance made over the next two years This will be made available through export credit and investment agencies, as well as through multilateral development banks
4.1.2 Tax Havens
4.1.3 IMF • • • •
4.1.4 Global Trade • •
National regulators will be asked to make use of available flexibility in capital requirements for trade finance
4.1.5 Protectionism • • • • The G20 has pledged to resist protectionism There will be a commitment to naming and shaming countries that breach free trade rules The G20 will notify the World Trade Organization (WTO) of any measures that constrain worldwide capital flows The G20 has called on the WTO to monitor and report publicly on these undertakings on a quarterly basis
4.1.6 Fiscal Stimulus
Although there is no new fiscal stimulus, Gordon Brown said G20 countries are already implementing "the biggest macroeconomic stimulus the world has ever seen" - an injection of $5tn by the end of next year.
5. Recession and Bangladesh’s Export
5.1 An Overview The ongoing global economic crisis is having a devastating impact on all export dependent economies, whether manufacturing or primary product exporting. The collapse in demand in major industrial countries in North America and the European Union has led to a sharp fall in export demand from the emerging and developing countries and a collapse in primary commodity and manufactured product prices. Even high performing countries like China and India have recorded sharp slowdowns or decline in export in recent months, following double-digit expansion over a prolonged period. Other high performing economies like those of Malaysia, Thailand, Philippines, and Indonesia are also suffering badly because of the ongoing crisis. Along with most exports, textile (including garment) exports from these countries are also declining sharply due to the economic meltdown in North America and Europe. In contrast, export of textile products from Bangladesh surprisingly remains quite buoyant. Knitwear and woven garments exports have increased by 41.8 percent and 36.2 percent, respectively, during JulyDecember 2008 over the corresponding period last year. Although the high growth rate is partly attributable to the low base of last year during this period, and with the growth rate likely to come down somewhat in the coming months, most garment and knitwear exporters are bullish about the near-term outlook and are talking about shortage of skilled manpower in the sector. Naturally, one would like to ask why Bangladesh experience is so different from others. The most common explanation is the "Wal-Mart effect" -- named after the world's largest retailer based in the United States, which caters mostly to ordinary Americans. The argument is based on the hypothesis that since Bangladesh primarily exports low-end textile products -- the kind of products marketed by Wal-Mart and whose sales have been least affected by the crisis -- and income declining in industrial countries, consumers would be buying more low-end Bangladeshi made textile products. Prof. Taslim, CEO of Bangladesh Foreign Trade Institute, questions this widely believed hypothesis and rightly points out that: "Our export sector is in deep trouble if it is spewing out mostly inferior goods since the demand for these products will certainly decline when income rises. We do not yet know of any product whose demand increases with both an increase and a decrease in income." I certainly agree with this view since the robust growth of textile exports in recent years (presumably normal times) could not be explained by the hypothesis that Bangladeshi products are inferior. Another argument put forward by the IMF resident representative in Bangladesh, Mr. Jonathan Dunn, during his presentation on the IMF's Asian Economic Outlook, also throws cold water on the Wal-Mart effect as the basis for explaining the growth in textile exports from Bangladesh. He points to the fact that most households in the US and Europe have closets full of clothes which may last several years even if they do not buy new clothes. There are many who will certainly testify in favor of Mr. Dunn's argument that households used to a certain quality/brands of clothes would not be shifting to inferior products in the short term, while their overflowing closets could easily meet their needs for several more years.
It is also not conceivable that Bangladeshi manufacturers and workers have suddenly become much more productive than those of China, India, and Indonesia, and will take market share away from these strong competitors. All these countries have larger and better market access, modern production facilities, and better infrastructure than Bangladesh. Why is the Bangladesh textiles sector doing so much better than most others in this difficult time, and will it come out of the global crisis on a positive note?
The answer to this puzzle appears to lie in the series of newspaper reports in recent months pointing to the opening of representative offices of major global corporations for buying textiles products directly from Bangladesh. Decisions regarding sourcing of supplies by major global multinational corporations (MNCs) are strategic in nature and based on medium- and long-term considerations. MNCs are aware of their excessive dependence on major emerging economies, and the cost pressures and exchange rate appreciations experienced by these economies in recent years. MNCs also recognize that, as the fastest growing economies like China and India are getting richer, they are becoming non-competitive in many low value-added products including textiles. Many MNCs have already concluded that they would need to find alternative or diversified sources for procuring their supplies. Although this strategic shift started several years back, the process is gaining momentum with cost pressures intensifying in China, India, and other emerging East Asian economies. The apparel sectors in Vietnam and Bangladesh gained remarkably in the post-MFA period, contrary to the doomsday scenarios painted by market analysts and economists at that time, due to this strategic shift by MNCs. The impact of this trend is markedly visible in the most recent data on export of textile products to the US market. (Fig- 1) The momentum is gaining strength. The shifts are based on the overall lower cost structure and its outlook, while taking into account the ability of the new sourcing countries to meet the quality and punctuality of deliveries. Bangladesh and Vietnam both meet these considerations and are the apparent beneficiaries of the shift in sourcing. The momentum is gaining strength as both Vietnam and Bangladesh have crossed a critical
mass in the area of textiles exports and have got the attention of all major MNCs engaged in textiles products. With unit labor cost at $0.25 per (Table 1), despite deficiencies in labor productivity, Bangladeshi manufacturers are likely to remain highly competitive for years to come. How far can the trade diversion toward Bangladesh carry us through? If we can fulfill buyers' expectations in terms of quality and punctuality, the sky is the limit. Although textiles account for 75 percent of Bangladesh exports, they account for less than 2 percent of the global market for textiles. At present, the global textiles market is about $600 billion a year, of which China accounts for 29 percent (Table 2). If Bangladesh can divert only 2 percentage points of global textile production out of China, we can more than double our exports to $25 billion per year. This shift alone may more than offset any temporary slowdown in demand arising from the global slowdown. How is the Bangladesh textiles sector going to perform during the current economic turmoil? Certainly, the effect of lower demand in industrial countries is affecting Bangladesh negatively. After all, Bangladesh textiles are normal products. However, because of the large shift in demand toward Bangladesh from other larger producers, textile exports from Bangladesh may still grow at a respectable pace throughout the crisis. It is more like a situation that we characterize in economic literature as "a positive substitution effect outweighing the negative income effect" emanating from the global downturn. Forward looking indicators for the overall activity level in the textiles sector in Bangladesh indeed point to a continued bullish trend. Letters of credit (LCs) settled for imported major textiles-related industrial inputs increased by high doubledigit rates during the July-December 2008 period over the corresponding period in the preceding year (Figure 2). The industrial inputs imported under these settled LCs will be used by the textile related firms in the coming months, and the LCs is generally backed by firm orders from foreign buyers. How will the Bangladesh textiles sector perform in the post-turmoil period as the industrial countries recover? Certainly, if we believe in the Wal-Mart effect, the Bangladesh textiles sector and the economy will be doomed in the post-recovery phase. If the hypothesis presented above holds, the pace of substitution toward Bangladesh will increase further, and we should expect a more robust performance of the textile sector in the coming years. With continued political stability and necessary infrastructure support (electricity, transport and port facilities), and if the current open trade regime for importation of textile inputs is maintained, the sector will be ready for a much faster export growth once the global economy moves to an expansionary phase. 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.
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 Developed Countries may result in further sluggish performance in export if the recession persists. 5.2 Export of RMG As three-fourth of our export earnings comes from RMG, countries overall export performance is largely depend on it. Global recession may generate two possible opposing forces 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. Situation at present: • • • •
RMG export is not showing any trend in the recent months as it did in the same months last year Knitwear export is more vulnerable 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
In a seminar on "Global Financial Crisis and Its Impact on Bangladesh" jointly organized by the World Bank and North South University, eminent economist Prof Wahiduddin Mahmud blasted the World Bank forecast that export growth might fall by 4.3 percentage points and remittance by 20 percentage points this fiscal year due to global economic meltdown. He said the World Bank made the report acknowledging the ongoing growth rate in GDP, export, remittance and import but these indicators are now stable and the current global financial crisis would not severely affect the economy and exports, especially the export of garment items. He told that Bangladesh produces garment products most efficiently in the world as labor cost is much lower and these mostly low-priced items have few substitutes. These factors indicate that the global recession would not affect the readymade garments (RMG) sector as severely as predicted by others. At the same time, our stock market does not have enormous foreign investment, so there would not be any direct effect of the global financial crisis on the local economy, he added. He, however, said that this is not the time to debate numbers and figures that the World Bank and International Monetary Fund estimate about declining GDP and export. The government should concentrate on increasing GDP and export instead. The professor told the seminar that even though the global financial crisis has no direct impact on Bangladesh, we should learn some important lessons from the failure of unregulated and ambiguous capitalist economy. He said the government should take lessons from current financial crisis and asked the government to strengthen the regulatory system and ensure transparency in every sector, including financial institutions, to increase the country's GDP and export. He hoped that after the parliamentary elections when a democratic government is formed, the growth rate in different sectors including export and GDP would be more stable. Senior economist of World Bank Dr Zahid Hossain in his keynote paper said the global financial crisis would slow the country's export growth, remittance and GDP. He described two possible scenarios for export, import and remittance. In the first scenario the export is projected at $16 billion with a 13.1 percent growth while in the worse-case scenario it is $15.7 billion with an 11.6 percent growth. In the last fiscal year, export was worth $14.1 billion with a 15.9 percent growth. This year's initial projection was $16.4 billion with a growth of 16.3 percent. He mentioned that the export growths of China, India and Pakistan have significantly declined in October due to the global financial crisis. He said even though the growth rates of GDP, export and remittances are now stable, changes can be seen in early 2009.He also said the remittance is likely to fall due to global economic recession as many developed nations would reduce employing migrant workers. 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.
5.3 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 raw-materials may decline in the domestic market.
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. 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.
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. 5.5 Foreign Aid • • No immediate impact on FA is expected 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. 5.6 Overall Impact on the Economy: Sum up • • •
Export growth may slow down if the recession persists and the protectionism in DCs grow Remittance growth may go 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.
5.7 Policy Recommendations for Bangladesh: A Contingency Plan
"Hope for the best, but prepare for the worst."
-- Old English proverb Far from the epicenter of the global financial crisis, Bangladesh nevertheless remains vulnerable to the aftershocks. Due to its relative insulation from global currency and equity capital flows, Bangladesh has so far suffered neither a banking sector collapse nor a stock market crash, unlike many developed and emerging economies. However, as the world slides into the worst global recession in fifty years, the probability of secondary shocks hitting the Bangladeshi economy, through slowdown in export demand and remittance, is increasing. It would be irresponsible, and foolhardy, to not prepare for an economic crisis with a contingency plan in place. Policy recommendations: Taking into consideration the repertoire of intervention tools being used by policy makers across the globe, their effectiveness and their applicability to Bangladesh, here are a set of policy recommendations:
Monetary authorities should shift to easy monetary bias, cutting interest rates Bangladesh has one of the highest interest rates in the globe, with risk-free government debt yielding above 12% and banks offering deposit rates of 14% or more. When compared to the key interest rates in the 2%-4% range in most developed economies today, the monetary policy in Bangladesh is very conservative. During expansionary times, such a "tight" monetary stance can be justified on the grounds of controlling inflation and preventing the economy from overheating.
However, currently inflation is not a big risk for the Bangladesh economy, the price of oil is down to $40 a barrel (a 70% decline from a year ago), global food prices have stabilized, and a high "normal" unemployment level is keeping wages under check. Moreover, the risk of the economy overheating is low -- with global demand for Bangladesh's primary exports declining and remittance likely to be under pressure, 2009 GDP growth rate will slow with a high probability. Thus, the current situation and an impending slowdown dictate the need for a monetary easing -- the policy makers should consider easing interest rates as a first measure.
Restrict credit flow toward short-term export capacity expansion, provide tax relief One of the structural risks that typically emerge during an economic recession is capacity expansion in sectors with weakening demand. Typically, this occurs because of the time lag between planning and implementation; businesses plan to expand capacity in response to strong demand, but by the time the capacity comes on line, the demand may have evaporated.
With export demand in certain sectors slowing, and weak demand likely to persist through 2009-2010, policy makers should discourage commercial banks from channeling credit toward short-intermediate capacity expansion projects in these sectors. However, these sectors are also major employers, and have been the source of high wages, lifting millions out of poverty. Restricting credit to prevent expansion should not be construed as discouraging the long-term growth of the sector. Moreover, the government should provide some short-term tax relief to the affected sectors so that they may continue to support jobs and wages in the face of declining demand.
Apply fiscal stimulus to sectors that improve long-term competitiveness of economy Recessions do not last forever, and businesses need to be prepared with adequate capacity when the upturn comes. For some sectors, like ship-building and power, capacity takes years to come online and, therefore, advanced planning and funding are required to ensure the long-term viability of these sectors. These are also the sectors that can improve the long-term competitiveness of the economy. This is where government's fiscal stimulus can play a role.
In this regard, the new government's focus on the power and energy sectors is on the right track. The high technology sector, an area where Bangladesh has immense potential due to its cadre of low cost educated labor, is another sector the policy makers can develop through fiscal stimulus. Moreover, in order to have the maximum impact on job creation and stimulate domestic consumption, policy makers should channel funds into the SMB (small medium business) sector.
Ease tax burden on productive sectors
Policy makers can use tax breaks to stimulate particular sectors of the economy without having to create/expand direct government involvement. Recently, the government instituted precisely this tool to aid the long-term growth and viability of the ship-building sector. Information technology (IT) and healthcare are two other sectors that could benefit from such tax holidays.
Nurture capital markets; create a stabilization fund Bangladesh's capital markets stand at a critical juncture. While it can play a critical role in aiding the economic development of the country by efficiently channeling capital to the most productive sectors, and away from the riskiest ones, the Bangladeshi stock market is still small relative to the size of the economy.
While the DSE remains somewhat insulated from the effects of the global contagion, it is not immune. In fact, the recent volatility is an indication that the market has entered a fragile phase and downside risks remain significant. However, given the out performance of the Bangladeshi stock market relative to its global counterparts, if the market comes out of the current downturn with only a correction, and not a crash, then the out performance will attract global capital into the DSE, setting a new growth phase for our capital markets. Thus, policy makers need to nurture the capital markets at this stage. However, this should be done more through encouraging institutional participation versus promoting retail speculation through increased margins. Some of the concrete steps the policy makers can implement; fast track current mutual fund applications in regulatory pipeline, mandate banks to sponsor institutional funds, fast track privatization of major government assets to promote the supply side of the equation. Finally -- and this may be most effective in the short run -- create a federal emergency market stabilization fund for a two-year period. The primary goal of such a fund would be to intervene and create a floor for the market in the event of a crash. In order to minimize distortions, the fund should only invest in the major index and should have two-year tenure. 5.8 Creating an Opportunity out of Crisis
"When written in Chinese, the word 'crisis' is composed of two characters. One represents danger and the other represents opportunity."
-- John F. Kennedy, 35th President of the US Bangladesh's economy and capital markets stand at a critical juncture. As Bangladesh builds on the success of its garments sector, it is fast becoming a magnate for global manufacturing -- from sectors like pharmaceuticals to ship-building, we are making incremental strides. Yet, our country is still a long way from joining the ranks of middle-income economies of the world as the overwhelming majority of the population still lives below the poverty line. And the global financial crisis will surely place a speed bump along the way. However, there is also an opportunity here; the global financial crisis is imposing a harsh Darwinian discipline on the global manufacturing industry. The higher cost, less efficient export industries in emerging markets like China and Vietnam are facing mass extinction, with market share shifting in our favor. Our crisis management policy must position Bangladesh to take full advantage of this opportunity. Parallel, but somewhat uncorrelated, is the development of our capital markets. Even though the Bangladeshi stock market has experienced significant growth in size and depth, it still remains small relative to the size of the overall economy. Thus, the silver lining to the impending economic crisis is not that we are immune from a slowdown in Bangladesh; rather it is that there is an opportunity for us to come out of the downturn stronger. However, steering the country through these difficult times will require thoughtful planning, proactive action, and vigilance on the part of policy makers.
5.9 Weathering the Storm
How the country can navigate the turbulent waters of 2009
Because of the ongoing global financial crisis, by all counts the year 2009 is going to be a bumpy ride for all countries -- high, middle and low income, large and small, North and South. The related discourse with regard to the crisis has now shifted from "Where did it all originate?" and "Who were the main culprits?" to "What are the possible consequences?" and "How the adverse impacts should be best addressed?" A common refrain, oft-repeated and widely circulated, is that things will get worse before they start to get better. Experts tend to agree that the recession will continue and deepen in 2009, and possibly stabilize in early 2010, to be followed by recovery that will perhaps kick-start only towards the end of 2010. Across the globe, from the US to Germany, and from China and India to Singapore, countries are preparing to negotiate and navigate the turbulent waters in 2009. To address the attendant challenges, developed and emerging economies have by now set in motion various initiatives in the form of bailout measures and stimulus packages. The objectives of such initiatives appear to be primarily five-fold: (a) to stimulate domestic demand, (b) to create new jobs, (c) to stabilize financial markets, (d) to support domestic industries and (e) to safeguard export interests. In view of the above, it is only pertinent to ask how the recession and the consequent adverse effects, and also the wide-ranging response-measures taken by partner countries, are going to impact the overall macroeconomic performance, price levels, domestic industries, exports of goods and services, and also the balance of payment position of low income economies such as Bangladesh. As is the case, 2009 will cover the second half of Bangladesh's budget period for FY2008-09 and the first half of FY2009-10. How the current crisis will impact on the above-mentioned performance indicators, during the current fiscal year and over the next, and which policies Bangladesh should pursue in this regard, are important questions that merit serious and urgent consideration by the policymakers. With a GDP of about $80 billion, Bangladesh's increasing integration with the global economy, through trade in goods and services (currently worth $47 billion, equivalent to about 60 percent of GDP in FY07-08), is a measure of the potential impact that the ongoing crisis could have on the economy. Thankfully however, Bangladesh has so far been spared the worst consequences of the ongoing crisis. When the early signals started to blip on the radar screen in 2008, the Bangladesh Bank took speedy and energetic steps to safeguard the country's reserves ($5.98 billion in October 2008), and also those of the commercial banks of the country (about $490 million kept at the time with overseas financial institutions). A large part of such reserves, kept with foreign central banks, in US treasury bills and also in the form of various bonds and certificates and deposits with foreign banks, were quickly brought back, and their safety ensured. Since foreign portfolio investment accounted for less than three percent of market capitalization in Bangladesh, her capital market did not witness the sort of volatility that was experienced by stock markets world over -- including neighboring India's. In hindsight, it also proved to be a blessing in disguise that the SEC and the Bangladesh Bank did not succumb to pressure by various quarters to allow trading in exotic but toxic derivatives in the country's share market. Exposure of local entrepreneurs and business to foreign financial market was also minimal. That Bangladesh did not go for capital market convertibility of her currency also proved to be a saving grace. During the first six months of FY08-09 (July-December 2008) exports from Bangladesh posted a growth of 19.4 percent over the corresponding period of FY07-08; remittance flow during the same period registered a growth of about 31 percent. The fall in the prices of food, fertilizer and fuel eased the burden of import payments, the growth of which is expected to decelerate further in the near future. This is likely to lead to some improvement in the balance of payments situation over the coming months. As is known, fuel prices have gone down quite significantly in the recent past (from $150/barrel at its peak in July-September 2008 to $42/barrel in January, 2009), as has also been the case with fertilizer (urea from $760/ton to $248/ton, TSP from $1,113/ton to $915/ton and DAP from $1,185/ton to $413/ton; only MOP increased from $560/ton to $772/ton). Thus, in spite of the significant increase in fertilizer and some increase in the diesel subsidy by the newly elected government, the pressure on budgetary expenditure is likely to be manageable (budget 2008-09 has an allocation of Tk 540 crore for diesel subsidy and Tk 3,738 crore earmarked for electricity and fertilizer subsidy). Some deceleration in inflation, particularly food inflation, is already visible. Macro-economic fundamentals remain within the comfort zone. Bangladesh Bank's projection about GDP growth for FY0809, with its low case of 6.3 percent and high case of 6.6 percent, appears to be realistic and attainable.
However, Bangladesh's macro-economic performance indicators conceal some disquieting features and undercurrents, and some of the emerging trends of recent times ought to be seen as cause for concern. These recent developments merit a closer examination and should serve as a wake-up call for the policymakers. 5.10 A Wake up Call A close look at the various recent trends concerning some key macro-economic and sectoral indicators of Bangladesh economy transmits some cautionary notes. Export growth over the first two quarters was a robust 19.3 percent. However, in the second quarter of FY08-09 (October-December), the growth had indeed been negative, at -1.4 percent. This is something unheard of in recent memory (export growth rate in the months of October to December 2008 were-7.4 percent, 13.5 percent, and -10.0 percent respectively when compared with corresponding months of FY07). This closely reflects the trend in export of apparels, the dominant item in the export basket, over the same period. As evidence suggests, in recent months the import of apparels by the US (-9.9 percent growth in November 2008) and EU (-7.98 percent in October, 2008) has experienced a downward trend. True, export of apparels has posted positive rates of growth in spite of this deceleration in the two major markets: in the US (growth of 15.7 percent during July-November of FY08-09 compared to the same period of FY07-08) and in the EU (for July-October of FY08-09 growth of 10.3 percent over the corresponding period of the last fiscal year). Nonetheless, sluggish demand seen in recent times in these two markets, accounting for about 90 percent of Bangladesh's apparels export (77.3 percent of total export), does not augur well for Bangladesh. Moreover, December retail performance in developed country markets, traditionally robust, has been rather discouraging in spite of multiple sales offers and heavy discounts by major retailers. Much will depend on how quickly the inventories lying with buying-houses and retailers are disposed off, and how the orders for the summer season pans out over the next couple of months. The July-November export growth has been in the negative territory for several non-apparel items: growth of export of jute and jute goods was -6.8 percent and -12 .5 percent respectively; export of engineering products was -3.1 percent. What is also to be noted is the dismal record of leather exports (-17.9 percent). Although the relatively low price elasticity of demand for the lower-end exportable from Bangladesh is still holding (the so-called Wal-Mart effect), once the recessionary trend deepens with the passage of time, the negative trends are likely to become stronger as income effect takes over. The emerging shipbuilding industry, which received an export order of about $400 million in recent years, is also at present experiencing difficulty, not only in terms of receiving new orders consequent to slower growth of trade and significant fall in shipping traffic and freight incomes, but also because some of the orders placed earlier are now being cancelled. It is to be kept in mind that many of Bangladesh's developed country partners, who account for most of Bangladesh's exports of goods and a large part of export of services (remittance), are now officially in recession (if growth performance and projections with regard to the last two quarters, Q3 and Q4 of 2008, are considered): US (-0.5 percent; -3.8 percent); UK (-0.6 percent, -1.5 percent); Germany (-0.5 percent, -2.0 percent); France (-0.1 percent; - 1.1 percent). The US economy, which accounts for 25.5 percent of Bangladesh's global export of goods and 17.4 percent of remittance, is projected to experience negative growth of -0.7 percent in 2009. The 42 year old Consumer Confidence Index is at its lowest reading. For the Euro-area countries the growth projection for 2009 is -0.5 percent. The Middle East is projected to have lower GDP growth of 5.3 percent in 2009, compared to 6.1 percent in 2008. As a consequence, demand for goods and services by these partner countries are likely to suffer in 2009. It is also to be noted in this connection that world trade which registered a rise of 4 percent in real terms in 2008 is projected, according to World Bank estimates, to experience a negative growth of 2 percent in 2009, for the first time in recent history. A significant feature of the export growth performance of Bangladesh is that this has been sustained mainly due to increase in volume (accounting for about 90 percent of the increase in export value) rather than price (by contrast, accounting for only about 10 percent of the increase in export value). Bangladeshi exporters
have been able to sustain their market share by offering discounts, overcoming order deferment and cancellations, and taking significant cuts in profit margins. Currency devaluation in competing countries such as India, Sri Lanka, Pakistan, to the extent of 10-40 percent over the recent years, has also undermined the competitive strength of Bangladeshi products, including apparels. The BDT has held steady over the past one year, depreciating only by 0.6 percent between January 2009 and January 2008 (indeed BDT has shown some signs of appreciation against the US dollar in the recent past, which induced the Bangladesh Bank to intervene in the Foreign Exchange market through purchase of dollars). On the contrary, currencies of some of the other competing countries have depreciated significantly over the corresponding period: Indian rupee by 26.3 percent, Vietnamese dong by 9.2 percent, Pakistani rupee by 27.1 percent, Cambodian riel by 4.7 percent, and Sri Lanka rupee by 5.6 percent and British pound by 44.1 percent. It is to be recalled here that the 7.5 percent cap on growth of Chinese export of apparels to the US market has been lifted as of January 1, 2009. The 34 quota categories on which export caps were imposed in January 2006 have 29 common categories as far as Bangladesh is concerned; these accounted for about 79 percent of Bangladesh's export of apparels to the US. China has also recently reversed a number of measures which were aimed at encouraging producers to move up market (e.g. tax on lower end products). Exports of low-end apparels from Bangladesh had earlier benefited from such policies. Stimulus packages designed in support of producers and exporters in India and China will also have an impact on Bangladesh's competitiveness in the global market. Recently, India designed a plan to inject $4.5 billion into the financial system to help exporters, with the Reserve Bank of India adding another $1.3 billion through a refinance operation. In November 2008, China announced a package of capital spending plus income and consumption support measures to the tune of $546 billion. Indeed, in a recent report, WTO DG Pascal Lamy warned that various stimulus measures "can easily be viewed as constituting some form of state aid or subsidy with negative spillover effects on other markets." Bangladesh's backward linkage spinning sector, with an investment of about Tk 27,000 crore, has already made its case as regards the weakened competitive strength vis-à-vis imported Indian yarn in view of the new price dynamics. The price of 30-count yarn at present ranges between $2.25 and $2.30 in India compared to $2.80 and 2.90 a few months back; the price of the same count in Bangladesh ranges between $2.55 and $2.60 (generally, a 15-20 cent difference induces Bangladesh's spinners to source locally). The knitwear sector and spinning sub-sectors will likely suffer most because of the emergent situation. It is pertinent to recall here that the textile industry of Indonesia has already lost 150,000 jobs over the last one year (10 percent of employment in the sector) in the face of sluggish demand. The proposed new-EU GSP scheme, when implemented in 2010, will also confront the country's knitwear-apparels sector with new challenges, since its crucially important sweater and pullover sub-sector will be required to make use of local dyeing facilities if it is to continue enjoying preferential market access in the EU (local capacity currently can meet only about 50 percent of the requirement). Indeed, Bangladesh's terms of trade (ToT) has been on the decline over the last several years (if FY 2000 is taken to be the base year, 100, then the ToT had declined to 88 by FY08). The falling commodity prices in the global market could improve the situation. However, in spite of the positive spin-off effects, resource mobilization, particularly from the perspective of revenue generation from duties on imports, will be negatively affected. Data show that in October of FY08-09, growth of import duties was lower (-1.7 percent) compared to the corresponding month of FY07-08 (growth of total import related duties was +6.6 percent), whilst the November figure indicates a further dip (-10 percent and -0.5 percent respectively). The December figures are rather alarming, with the two corresponding figures being -12.2 percent and -13.9 percent (in the backdrop of falling VAT duties of -19.7 percent). As a result, revenue mobilization targets are likely to be missed in FY2008-09. In 2007 and 2008, a record number of Bangladeshi workers (1.7 million) left the country in search of jobs abroad (total number of migrant workers is estimated to be about 6.1 million, who are expected to remit about $10 billion in FY08-09). In 2009, in all likelihood, the number of workers going abroad will be significantly lower, because some of the new destinations, including UAE, Malaysia, and Singapore, have indicated caution in the face of sluggish economic growth and lower demand for construction and other
services. Saudi Arabia and Kuwait have already instructed their embassies in Dhaka not to issue worker visas. UK, a major source of remittance (11.3 percent of total) and an important export destination (18.8 percent of total EU export) is already in recession. Estimates indicate that earnings of restaurateurs, a major source of remittance sent by Bangladeshis living in UK, have come down by about 15 percent; the weakened British pound has not helped our exports to and remittance from UK. Although no reliable estimates are available with regard to returning migrant workers, anecdotal evidence suggests the need for attention to this issue as well. Some of Bangladesh's commercial banks, especially those with exposure to trading, particularly import and export business, are being compelled to go for deferment of L/C payments in the face of falling commodity prices, and with their clients having to deal with high inventories in view of earlier imports at higher prices. As is known, stock market behavior is critically dependent on investor confidence. Vigilance is important, particularly because the banking sector is a major player in the market. It is important that banks enjoy confidence of depositors, borrowers and shareholders. It is to be noted in this context that the all share index of DSE (DSI) was about 10 percent lower at the end of January 2009 compared to a year back, indicating continuing bearish trends in the share markets of the country. Strengthening of oversight functions by the SEC should receive highest priority, particularly in view of past experience. With the Doha talks stalling, and in view of the recession, countries are increasingly likely to resort to various implicit and explicit protectionist initiatives and take recourse to various trade remedy measures. Bangladesh will need to keep a sharp eye on related developments. Market access initiatives, both at multilateral level (e.g. the duty-free, quota-free market access in the WTO) and bilateral level (e.g. market access under the New Partnership for Development Act of US), are likely to see limited progress in view of the ongoing recession. Thus preferential market access for Bangladeshi goods might have frustrating implications.
6. Crisis as an Opportunity
Every crisis creates opportunities for those few who are willing and prepared to look for and realize the potential benefits. In spite of the adverse impacts and potential dangers, there are some encouraging signs which Bangladesh should seize on and try to make work to her advantage. Bangladesh is only one of very few developing countries that are expecting to attain a six percent plus GDP growth rate in the current fiscal year. Notwithstanding the measures taken by China to stimulate her export sector, leading buyers are exploring the possibility of shifting orders to Bangladesh because of the relatively low prices that Bangladeshi exporters are able to offer. As evidence suggests, Bangladesh has emerged as the foremost exporter of cotton trousers in the US market, with a market share of about 14 per-cents for this category; on the other hand, Bangladesh's export of cotton shirts to US has been on the decline for some time now. Strong backward linkage in denim in case of the former, and dependence on imported fabrics in case of the latter, is possible reasons for such diverse growth performance, once again reinforcing arguments favoring strategic support for Bangladesh's backward linkage textile sector. Major buyers from Japan, a market worth about $22.6 billion of imported apparels (Bangladesh accounts for only about $29.6 million out of this, about 0.13 percent), have started to show renewed interest to source from Bangladesh by diverting imports from other countries (mainly China). The interest recently shown by a major Japanese buyer, Uniqlo (with imports worth $2 billion globally), to procure $600 million worth of apparels from Bangladesh is to be noted in this context. The adverse affects of recession, pressure to appreciate the Yuan (appreciation of 5.2 percent over the last one year), wage rates that are about 2-3 times higher than in Bangladesh (though productivity is higher in China), make Bangladesh an attractive destination for major buyers of apparels in spite of China's dominant presence in the market. Only Vietnam's performance (16.9 percent growth during July-November 2008) is comparable to Bangladesh's record (15.7 percent) in the US market. All major competitors have either seen negative growth (Cambodia: -2.9 percent, India: -6.1 percent, Sri Lanka: -1.1 percent) or low growth (China: 3.6 percent). Alongside China (accounting for 33.1 percent of market share, by far the highest), Bangladesh (in fifth position with current share of 4.6 percent compared to Vietnam occupying second position with a share of 7.1 percent) should strive to secure the second position in terms of market share in US. Indeed, Bangladesh's strategy in these times of recession and falling global apparels demand should be to go for a higher share in a shrinking pie by making best use of the emerging opportunities. In this context, mention may also be made here about the interest of Germany's Multiline Limited with potential investment in the textile sector to the tune of $200 million and Taiwan's Pao Chen which has shown interest in building the world's largest footwear factory in Bangladesh. Two committees were constituted by the caretaker government because of the crisis, with the Bangladesh Bank deputy governor and the finance secretary as chairs. The finance minister recently mentioned that a multi-stakeholder committee would be constituted to provide recommendations in view of the emerging crisis. This committee will be asked to review the developments and give suggestions. It will need to consult with the private sector and exporters to review the situation on a continuing basis, and provide appropriate policy inputs to the government for speedy decision making. It is good to see that the monetary policy recently announced by the Bangladesh Bank evinces sensitivity in view of possible adverse impact on our economy. To take advantage of the emerging opportunities, Bangladesh will need to devise appropriate policies to create adequate incentives to encourage domestic entrepreneurs and attract foreign investors. Policymakers could consider the idea of creating an export-stimulus fund to support entrepreneurs and export business. Such funds could be used to provide credit at lower rates, encourage acquisition and adoption of new technologies, and promote R&D and process and product diversification at enterprise level. Such a fund could also be used to support entrepreneurs who are interested in setting up common services
such as affluent treatment plants, skill up-gradation, and dyeing facilities in the industrial clusters that are growing up around Dhaka city and also in the proposed special economic zones. This fund could also be used in support of initiatives for workers (e.g. government could take an initiative to build dormitories for workers in such clusters). In case of any adverse outcome originating from a crisis, workers become one of the earliest victims. The government's employment guarantee scheme and "one person from one family scheme" may need to be made to work in support of the workers, if there is such a need. To stimulate productivity, a technology up-gradation fund could also be set up (such a fund, in support of jute and textile sectors, has been in place in India for several years). It is of interest to note in this context that the US stimulus package to jumpstart the economy, which includes a Trade Adjustment Assistance (TAA) program, stipulates initiatives to open up new markets for US exporters and also requires the use of US-made materials in all public works financed by the stimulus package. As mentioned above, stimulus packages of competing countries, that include both fiscal and monetary measures as well as currency depreciation, have enhanced their relative competitive strength vis-à-vis Bangladesh, both in domestic and foreign markets. Given the emerging situation, and in view of the interest of potential investors to invest in Bangladesh, all efforts need to be geared towards creating a conducive environment for business and investment in the country. Availability of the required power supply will be of crucial importance in stimulating investment, particularly in view of the recent trend of negative growth of import of capital machineries (-13.9 percent during July-September 2008 according to actual imports and -20.7 percent during July-December 2008 as per L/C opening figures, compared to the matched period of the preceding fiscal year). Required investments will also need to be made to enhance the capacity and facilities provided by EPZs and specialized investment zones. The proposed export-support fund could be used for this purpose. At times like this, when investors tend to be cautious, they also are on the lookout for new and safe investment opportunities. Recent history bears ample evidence to the so-called herd mentality of investors. Countries such as India and Vietnam, which had FDI of less than $1 billion only a few years back, were able to attract a significantly higher amount of FDI in recent years, once the critical mass was in place: to recall, the FDI flow to these two countries was $15 billion and $20 billion in 2007. It is a recognized fact that FDI is also more likely to follow only if and when domestic investors feel confident enough to come forward, take risk and invest. Along with exports, sources of growth in our own backyard should receive equal attention, particularly in view of the large domestic demand and the uncertainties with respect to global demand.
6.1 Concluding Remarks
Thus far, Bangladesh's relative insulation from global capital market and heavy dependence on lower-end exports of goods and services has provided some cushion to the economy. But there is no room for complacency. As the above discussion would suggest, Bangladesh will need to be on the alert. We must closely examine the recent trends, identify the disquieting developments, and undertake appropriate initiatives and measures to address the attendant challenges originating from the ongoing crisis and try to take advantage of the emerging opportunities.
7. Intervention by Bangladesh Bank
7.1 Bangladesh Bank Fixes Lending Rate Limit at 13 Percent Bangladesh Bank is going to cap lending rate of all types of loans except credit card and consumer loans at 13 percent to offset the fallout of global meltdown. Against the backdrop of the stretching global financial crisis, the Bangladesh Bank decided to cut the lending rate of all types of loans except credit card and consumer loans, and give loan-rescheduling facility without down payment to six sectors -- garment, frozen food, leather, jute, textile and tea. A policy in this regard will be formulated shortly. After about 18 years, the central bank is imposing a ceiling on lending rate. It has not imposed any such ceiling since liberalizing the interest policy in 1990. The central bank has instructed scheduled banks to reset the prime lending rates at a maximum of 13 percent. Earlier, the Bangladesh Bank had tried to pursue banks to cut rates. Bangladesh Bank wants the spread between the lending and deposit rates to fall within 5 percent. The interest rate spread is the gap between the interest rate a bank pays on deposits and the higher rate it charges for loans. Presently, lending rate in productive sector is 14.75 percent, and in case of other loans it is as high as 18 per cent. Bangladesh Bank Governor Dr Salehuddin Ahmed informed the decision to all commercial banks at a meeting chaired by him on 07-04-2009, and the central bank would issue a circular to this effect very shortly. Various directives for providing assistance to export sectors, expatriates affected by the global meltdown and for increasing overall investment were given at the meeting attended by chief executives of all commercial banks and held at the central bank. High officials of the Bangladesh Bank mentioned that it is empowered to impose lending rate ceiling as per Article 29 (2) of the Bank Company Act. Dr Salehuddin Ahmed also opined that the lending rate cut is for an interim period to boost local economy and stave off the fallout of global recession and it would be reviewed later. Meeting sources said the central bank informed the meeting that cash reserve requirement (CRR) would be lowered by 1 per cent from present 5 per cent so that cost of fund of the banks comes down. The banks were directed to decrease fees for remittance, and to prepare a separate package for the expatriates so that they are encouraged to increase remittance. Dr. Salehuddin Ahmed also told that the central bank has postponed for six months the provision for taking a minimum of 10 percent down payment. The Central Bank will also formulate a policy soon identifying some specific sectors for this opportunity. The bankers will provide the rescheduling opportunity on a case-to-case basis depending on the bankercustomer relations. Those who are or will be affected by the global recession will be eligible for the opportunity, not those who were defaulters from earlier. Presently 10 to 50 percent down payment of the total loan is required for various types of loan rescheduling.
Bangladesh Bank decided to cut the lending rate to help investment and employment increase amid financial meltdown. The lending rate cut is for an interim period and later it may be reviewed.
7.2 Reaction: Banks Rush Into Deposit Rate Cuts
About 20 banks moved to cut the interest rates offered on fixed deposits by as much as 1.5 percentage points, a day after the central bank reset the lending rate at a maximum of 13 percent. • • Prime Bank has reduced the interest rate on its fixed deposits from 13 percent to 12 percent. Only last month, the bank cut this rate by 50 basis points to arrive at 13 percent. Sonali Bank, United Commercial Bank, Premier Bank, Jamuna Bank, Exim Bank, Mercantile Bank, Standard Bank, National Bank, Dhaka Bank, One Bank, Southeast Bank, NCC, Dutch Bangla Bank, Mutual Trust Bank, Trust Bank, AB Bank, Eastern Bank and BRAC Bank are among the banks that slashed the interest rate on fixed deposits. • • • • • • BRAC Bank has reset the rate for its two-years and above but less than three years and three years and above fixed deposit products at 11 percent, down from 13.50 percent. Dhaka Bank set it at 11.50 percent and 11 percent respectively. Eastern Bank cut the interest rate on fixed deposits to 11.75-12 percent from 13 percent. United Commercial Bank reduced it to 11.50 percent from 13 percent. State-owned Sonali Bank fixed its highest rate on fixed deposits at 9.25 percent from the previous 10 percent. Other banks have fixed the rate between 12 percent and 12.50 percent from the previous 13.50 percent, according to senior officials of those banks. Other banks prefer to wait for the central bank circular on the lending rate to decide on any deposit rate cut. The Association of Bankers Bangladesh President and Managing Director The City Bank Limited, Mr.K.Mahmud Sattar said many banks would not be able to implement their new rates soon because, according to central bank regulations, a bank can change the rate only once a month.
7.3 Dilemma for Private Banks
The deposit rate is entirely linked with the lending rate. Private commercial banks have been offering at least 13 percent for fixed deposits to attract money from the market.
• • •
In May last year, a bank had offered 14 percent for the fixed deposit, the highest ever in the country, and created uneven competition among the banks. Some banks have recently reduced the deposit rates because of the global financial crisis and its impact on domestic demand. The government and the central bank have long been pursuing the private banks to reduce the spread by cutting the lending rate. The central bank on 19-04-09 forced these banks to slash the rate. Presently, the lending rate in the productive sector is 14.75 percent and in case of other loans it is as high as 18 percent.
The existing lower rates (7-11 percent) for agricultural and export loans will remain unchanged, a Bangladesh Bank meeting with commercial banks was told.
8. Interpretation of Data and Strategic Measures for Janata Bank Limited
8.1 Interpretation of Data This is one of the most tumultuous times on record in the global financial markets. Evidence so far suggests that Bangladesh has held up remarkably well, partly due to deft economic management that helped absorb the pressure of the global food and oil price crisis in January 2007-May 2008 without jeopardizing macroeconomic stability. A close look at the various recent trends concerning some key macro-economic and sectoral indicators of Bangladesh economy transmits some cautionary notes. 8.1.A National Export Trend Total national export growth over the first three quarters (Jan-September, 08) was a robust 19.3 percent See Fig-A. When compared with corresponding months of 2007.However total export followed a sharper decline path from August, 08 than that of August, 07. The trend rebound in October’ 08 and export got a strong foothold and continue to rise up-to January 2009. Export dropped by US $100 million in April’09 compared to March’09.
Sector Wise “April Export” of 2007, 2008 & 2009
April 2007 Actual % of Total Export 100.00 % April 2008 Actual % of Total Export 100% US $ million April 2009 Actual % of Total Export 100%
All Products RMG Sector
Foot wear Leather Frozen Food Petroleum by Products Chemical Products Agri. Products Ceramic Products Computer Services Handicrafts Other Mfd. Goods
Other Primary Commodity
876.34 661.52 12.47 23.42 35.85 2.5 9.4 5.88 2.31 1.27 0.44 51.78 5.5 25.41 12.19 24.8 0.92 0.31
75.49% 1.42% 2.67% 4.09% 0.29% 1.07% 0.67% 0.26% 0.14% 0.05% 5.91% 0.63% 2.90% 1.39% 2.83% 0.10% 0.04%
1205.9 5 940.72 11.23 24 40.53 19.99 23.33 6.69 2.99 4.34 0.36 62.61 10.14 17.64 15.42 27.19 0.44 0.17
78.01% 0.93% 1.99% 3.36% 1.66% 1.93% 0.55% 0.25% 0.36% 0.03% 5.19% 0.84% 1.46% 1.28% 2.25% 0.04% 0.01%
1181.7 5 959.1 10.35 12.01 29.64 10.14 22.91 7.46 2.46 4.21 0.34 48.2 14.56 21.88 15.21 22.84 0.37 0.07
Engineering Products Raw Jute Jute Goods Tea Electronics
81.16 % 0.88% 0.88% 1.02% 2.51% 0.86% 0.63% 0.21% 0.36% 0.03% 4.08% 1.23% 1.85% 1.29% 1.93% 0.03% 0.01%
The data presented here is a comparative statement for the month of April only. It does not reflect overall yearly performance. January- April Export of 2007, 2008 & 2009 stand as US $ 3692.18, 4869.81 and 5063.51 million respectively.
• • •
If we look into the April Export of 2007, 2008 & 2009, we find that total export of April 2008 was the highest among three. The RMG Sector export of April 2009 was also the highest and the contribution of this sector to national export also grew; i.e. 75.49% in 2007 to 78.01% in 2008 and to 81.16% in 2009. Export of Footwear decreased by 0.88 mn from April 2008 to April 2009. Export of leather saw a sharp decline during the period.
8.1.1 RMG Sector When we look into the figures of RMG export of Bangladesh, it has been observed that the export trend in 2008 was at much higher comparing to that of year 2007(growth of 15.7 percent during July-December’08compared to the same period of 2007). Table-1 Yearly Trend in RMG Export Components In US $ mn 2007 2008 % Change 4608.47 5654.12 22.69% 4741.51 6222.95 31.24% 53.67 125.6 134.02% 30 91.12 203.73% 263.33 316.61 20.23% 9696.98 12410.4 27.98% 12453.17 15369.58 23.42% 76.59% 81.31% 3.70%
Woven Garments Knitwear Terry Towel Textile Fabrics Home Textile RMG Sector Total Export RMG Sector as % of Total Export
Note: We considered Woven Garments, Knitwear, Terry Towel, Textile Fabrics and Home Textile as components of RMG Sector. However in many studies only Woven Garments and Knitwear are treated as RMG Sector components.
i. Woven Garments Export growth rate was higher up to September’08 compares to the same period of 2007. Export dropped both in October’08 and October’07. However it rises after October of 07 and 08.This trend seems to be seasonal variation as demand for this product increases in holiday season in western countries.
ii. Knitwear Export of Knit Garments follow the similar trend; sharp decline from September’08 to October’08 and an increasing trend up to December in 2007. However export dropped slightly in December 2008.But January’ 09 export was US $ 88 million higher than that of January’08. February’09 export was about US $11million higher than that of February’08. April’09 and April’08 figures are almost equal.
iii. Terry Towel Contribution of Terry Towel is not as significant compare to woven & Knitwear.The general trend is that it reaches its peak in September and the up and downword trend continues.Export in January’09 and February’09 were higher than that of January’08 and February’08.From February’09 a slight growth trend can be seen.
iv. Textile Fabrics The overall export was much higher in 2008 than in 2007. December 2008 and January 2009 figures are more or lees same. Export in first four months of 2009 are much higher than 2007,but lower than that of 2008.
v. Home Textile Overall export in 2008 was higher compared to 2007.The January, February and March 2009 figures are slightly higher than that of 2008 figures. But the trend is downwards.
8.1.2 Footwear & Leather Goods & Leather
Leather export showed a dismal performance in 2008. The national export declined at 17.9% when compared with 2007.But export of footwear showed an upward trend in 2008. i. Footwear Footwear export seems to keep its foothold remarkably well compared to other products in this sector. There was sharp increase in June & August of 2008.Though the export thereafter took a slight downward path, the pattern was consistent with previous years. It maintained a steady state from October 2008 to February 2009.However from March’09 onwards the trend is downwards.
ii. Leather Bags & Purses The figure shows a consistent growth from August 2008 to November 2008.However, there was a significant drop in export in December 2008.But the January 2009 figure was much higher when compared to the figure of January 2008.There is a sharp decline in April’09.
The most affected industry in Bangladesh by the global downturn is leather. If we look into the following graph the dismal scenario of the leather export becomes obvious. There was a drastic fall in leather export from September 2008 to October of the same year. It briefly rose in November 2008 and continuously declined since then. It reached its lowest level in January 2009.Therefore investment in this sector should be watched very carefully.
8.1.3 Frozen Food (mainly shrimp) The export showed an erratic trend in 2008 mainly due to enforcement of new EU regulations. Though the export suffers a serious setback in December 2008, the January 2009 figure was 40% higher than the corresponding month of 2008.It took a nose dive in February’09 but steadily rising since.
8.1.4 Raw Jute & Jute Product Overall performance of this sector is very poor. i. Raw Jute The export is in downhill trend from November 2008 to January 2009.However it gained some foothold since.
ii. Jute Product This sector also suffers heavily in 2008 and continues to do so in 2009.
8.1.5 Tea Export of tea from Bangladesh had a dismal performance in 2007 due to low price and lack of marketing. However, the export seems to gain some foothold in 2008. The trend is erratic up to October 2008. It is now in steadily declining state.
8.1.6 Petroleum by Products The export suffers heavily after July 2008 and continues to do so.
8.1.7 Chemical Products The overall performance was upbeat upto September 2008.Since then it declined sharply and showed upward trend from February’09. Pharmaceuticals & Chemical Fertilizer constitute this sector. It is now in steadily increasing state.
The performance of the last quarter of 2008 was much lower than that of 2007. As it is an essential product, the global downturn should not affect it much.Lack of penetration in new market seems to be the cause of the downfall.The April 2009 figure is much comforting.
ii. Chemical Fertilizer The performance of 2008 was much more erratic than that of 2007. It dropped heavily in December 2008 & gain slightly in January 2009.But February’09 export is much lower than that of February’08. It is now in steadily increasing state.
8.1.8 Agricultural Products There is a sharp downward trend from October 2008 to December 2008.A slight growth in first four months of 2009.This sector consist of Vegetables & Tobacco.
8.1.9 Ceramic Product It suffers heavily from September 2008 to January 2009.Since then it recovered slightly.
8.1.10 Handicrafts Export was much lower in 2008 than of 2007. The trend is downwards with an abrupt peak in March’09.
8.1.11 Other Manufactured Goods Overall performance is slightly lower in 2008 comparing with 2007. A slight increase in January & February 2009 figures.Since then no significant change has happened. Melamine Tableware, Camera Parts constitute this sector.
Melamine Tableware The export was at its peak in September 2008.It took a deep in October 2008.Regain slightly after that and again took a nose dive in March’09.
8.1.12 Other Primary Commodity It suffers heavily in the last quarter of 2008.The downward trend is still continuing. Cut Flower/Foliage & Agro. Process Food constitutes this sector. It gained slightly in March’09.
i. Cut Flower/Foliage From April’08 export of this product is in downhill territory.
ii. Agro. Processed Food The trend was much higher in 2008 compared to 2007.However; export suffers slightly in February’09 onwards.
8.1.13 Engineering Products Sharp decline from September 2008.Reached its lowest level in December 2008. Following months of 2009 & 2008 are more or less same.
i. Bi-Cycle It reached its peak in June 2008 but Sharp decline then on up to January this year. February’09 and March’09 export was much better.
8.1.14 Electronics The sector got a huge boost in December 2007.But from November 2008 it declined sharply since then.
8.1.B Wage Earners Remittance Inflows
The nation recorded its highest ever remittance inflow in 2008. January 2009 figure rose at US $ 859 mn which is also highest on monthly basis. But this figure also reveals the contraction in labor markets in Malaysia and in Middle-East. As massive number of labors was laid-off, they returned home with all of their savings. The redundancy package given to some also contributed to this figure.
Total Wage Earners Remittance for the year of 2007 and 2008 was US $ 6557.81 and 8979.07 respectively. May 2009 figure is the highest for any individual month. January –May figure for the year of 2007, 2008 and 2009 was US $ 2600.92, 3720.76 and 4260.18 million respectively.
8.2 Export performance of Janata Bank Limited
8.2.A Total Export If we consider the export performance of Janata Bank Limited, we find that export in 2008 was higher than in 2007 in every month except May. The monthly pattern remains same. First four months export of 2009 figure is much higher than that of 2008 & 2007.
Sector Wise “May Export” of 2007, 2008 & 2009
Table 1 In US $ mn
Items Readymade Garments Footwear, Leather Goods & Leather Jute Product Frozen Food Agricultural Product Raw Jute Tea Others Total i.
May-07 Actual % of total Export 43.55 11.2 0 5.29 10.4 3 1.65 0.88
0.00 42.60% 10.96% 5.17% 10.20% 1.61% 0.86% 0.00% 28.59% 100.00%
May -08 Actual % of total Export 41.88 10.19 7.15 6.60 1.94 0.54 0.04 29.54
97.87 42.79% 10.41% 7.31% 6.74% 1.98% 0.55% 0.04% 30.18% 100.00 %
May -09 Actual % of total Export 46.5 40.91% 3 14.7 13.00% 9 12.7 11.18% 2 11.5 10.15% 4 1.78% 2.02 0.55% 0.62
25.5 2 113. 74
0.00% 22.44% 100.00 %
RMG Sector There was steady and gentle decline from June to October of 2008.But from then on till December 2008 the growth was steep. Though it dropped in January 2009 the figure is consistent with other January figures. Usually 1st quarter export is lower. However, it declined significantly from March’09 onwards.
ii. Footwear, Leather Goods & Leather
There was steep decline in this sector in last quarter of 2008.It bounced back heavily in May’09.
iii. Frozen Food It showed somewhat erratic behavior consistent with the National Export. January 2009 figure is in the same level with that of January figures of 2008 & 2007.But February’09 export took a nose dive as shown in the chart. It is steadily rising since.
iv. Jute Product Export declined steadily from November 2008 till January 2009 and remains in the same level up-to February’09.A sudden peak can be observed in May’09.
v. Raw Jute The export of Raw Jute showed a complete reverse trend in 2008 while compared with that of National Figure. But 2009 starts with dismal performance and the trend is still continuing.
vi. Agricultural Product There was sharp decline from September 2008 to October 2008.From then on the decline rate was mild. April and May figures of 2009 and 2008 are almost same.
vii. Tea The export in 2007 and in 2008 was very insignificant except for December 2008.However in absolute figure the export is only US $ 0.28 mn. In January 2009 and March 2009 we exported only US $ 0.06 and 0.15 million respectively. In February, April and May export was nil.
8.3 Contribution of Janata Bank Limited in National Export
US $ mn
Year National Janata Bank Limited JBL's Contribution to National Export as %
2007 12457.17 1072.47 8.61%
2008 15369.58 1256.14 8.17%
April 2009 1181.75 101.66 8.60%
As seen in National Export, RMG Sector continues to dominate the total export of Janata Bank Limited as shown in following table:
US $ mn
RMG Sector Total Export % of RMG in Total Export
2007 2008 May 2009 533.02 619.79 46.53 1072.47 1256.14 113.74 49.70 49.34 40.91%
8.4 Some contrast with National Export • • •
In Raw Jute Sector, while the national export declined sharply in the last quarter of 2008, export of Janata Bank maintained its modest positive trend. In Jute Product Sector not sharp decrease as seen in national figure. In fact a sudden peak can be observed in May’09. In Footwear Sector though the national export show remarkable resistant to downturn, export from Janata Bank declined sharply except an abrupt increase in May’09.
8.5 Strategic Measures for Janata Bank Limited
1. RMG Sector Though the export showed an upward trend up to December 2008, export in two major markets US and EU declined significantly. This shortage was offset by new markets; UAE, Eastern Europe and some Central Asian Countries. The expertise built over the years will help Bangladesh to dominate in the market. The few high end items will see negative growth which constitutes almost negligible contribution to total RMG export. In fact export of RMG might grow further due to increase in demand of low end items which comprises more than 90% of total RMG export. 2. Footwear Support to the existing customer should continue. 3. Leather & Leather Goods Sector No new investment should be made in leather industry. 4. Frozen Food The existing support should continue. 5. Jute & Jute Goods Sector These sectors performance is not encouraging. Janata Bank Limited may provide fund in existing projects where the product’s buyer reputation is excellent. No new project should be financed in this sector up to June’09. 6. Tea Sector Janata Bank Limited may continue its support to its existing customer only. 7. Agricultural Product Investment should be made until July of this year with caution. 8. Shipbuilding Sector In Ship-building, capacity takes years to come online and, therefore, advanced planning and funding is required to ensure the long-term viability of these sectors. This is also a sector that can improve the long-term competitiveness of the economy. This is where our investment can play a vital role. 9. Power Plant Investment should be encouraged in this sector. Plants comprising brand new Euro or North American machinery should be given preference. 10. Investment Diversification Janata Bank may extend its support to import substitute and complimentary sectors like accessories of RMG & Textile Industry, Packing Material Industry (including paper glue etc), Wood Extraction and Furniture Sector, Rubber Industry, Power Generation, Small Generator production, Low Lift Pump Production, Tractor Manufacturing, Agro-Machineries etc. Emphasis should be given on emerging technologies to expedite the process of expanding the IT network to all corners of Bangladesh.
8.6 Concluding Remarks In recent months the import of apparels by the US (-9.9 percent growth in November 2008) and EU (7.98 percent in October, 2008) has experienced a downward trend. True, export of apparels has posted positive rates of growth in spite of this deceleration in the two major markets: in the US and in the EU (for July-October’08 growth of 10.3 percent over the corresponding period of the last fiscal year). Nonetheless, sluggish demand seen in recent times in these two markets, accounting for about 90 percent of Bangladesh's apparels export (about 82 percent of total export), does not augur well for Bangladesh. Moreover, December retail performance in developed country markets, traditionally robust, has been rather discouraging in spite of multiple sales offers and heavy discounts by major retailers. Much will depend on how quickly the inventories lying with buying-houses and retailers are disposed off, and how the orders for the summer season pans out over the next couple of months.
• • • • • •
Ahsan H. Mansur, Executive Director, Policy Research Institute. -Can Bangladesh Textile Exports Survive?-Published in The Daily Star
Professor Rahman Mustafizur, Executive Director, Centre for Policy Dialogue (CPD). -The Global Financial Crisis: Impact on Bangladesh-Published in The Daily Star A.K.M. Atiqur Rahman, Professor, Department of Economics, North South University. -The Global Economic Crisis-Presented in Bangladesh Institute of Strategic Studies(BIIS) Mahmud. Wahiduddin, Professor & eminent economist.-Interview published in The Daily Star
Export Promotion Bureau, Bangladesh.-National Export Data Export Data of Janata Bank Limited.-Foreign Trade Department, Janata Bank Limited
www.worldbank.org www.imf.org www.Bangladesh Bankcworld.com www.bangladesh-bank.org