Report On Global Financial Crisis and its Impact on Bangladeshs Economy

Submitted to Mr. M. Nasiruddin Professor and Course Instructor (F-505) Department of Finance Faculty of Business Studies University of Dhaka

Submitted by Imroz Mahmud ID # 23050 Department of Finance Faculty of Business Studies University of Dhaka

Date of Submission: April 23, 2013

Letter of Transmittal
April 23, 2013 Mr. M. Nasiruddin Professor Department of Finance Faculty of Business Studies University of Dhaka

Subject: Prayer for acceptance of the Report on Global Financial Crisis and its Impact on BangladeshsEconomy.

Dear Sir, It is my great pleasure to submit my report on Global Financial Crisis and its Impact on Bangladeshs Economy. While preparing this report, I tried my level best to follow your directions. The entire report is based on personal observation, practical work, consulting from various articles and books. I have tried my best to provide what I have learned during the last two months. I shall be highly encouraged if you kindly receive this report. In case of any further query concerning this report, I would be very pleased to clarify that. Thank you for supervising me during this difficult transitional time of my career. Thanking you Sincerely yours, .. Imroz Mahmud ID # 23050 Department of Finance Faculty of Business Studies University of Dhaka

Acknowledgement
It is my great pleasure to prepare this report on Global Financial Crisis and its Impact on Bangladeshs Economy. I have found great help from many people during the preparation of it. At first, I would like to express my gratitude to the Almighty Allah for giving me strength to complete this report and then to my course instructor Mr. M. Nasiruddin, Professor, Department of Finance, University of Dhaka on this regard.

Executive Summary
The world economy experienced the worst global financial crisis in 2007.While major world economies have taken a massive hit resulting in negative growth rates in key countries or regions, including the US, EU and Japan, the contagion also spread to emerging developing countries like China, Brazil, India and South Africa, as well as to the countries of South East Asia and Latin America. The magnitude of impact seems to depend on the extent of integration with the rest of the world (or to use World Bank jargon, the extent of liberalization that has taken place). The impact on LDCs like Bangladesh has been muted in the first, and even the second round. However, there is growing evidence that third round impacts are making themselves felt, manifested in declining exports, declining migration of labor, growing number of sick industries, industrial unrest, and reduced growth. There are also fears that poverty and unemployment may be exacerbated and MDG targets could become jeopardized. Countries like Bangladesh are interested in understanding the socio-economic impact of the global financial and economic crisis as well as policy options to cope with emerging challenges. This study addresses itself to the task of assessing the unfolding impact of the GFC on Bangladesh. There is a consensus that the chief transmission mechanisms relevant for Bangladesh are quite limited, operating through the impact on exports, remittances and labor exports, and imports. These could also lead to second order effects operating through lowering of growth, balance of payment and budgetary effects, as well as micro effects on employment and poverty. Flows of FDI and ODI (including food aid) have dwindled as well, leaving LDCs like Bangladesh to deal with the crisis on their own. A saving grace has been

the lack of a liberalized capital account in Bangladesh, which prevented dramatic capital outflows, and has not contributed to increased vulnerability. The possibility of an adverse impact on agriculture has not been raised in the current debate. However, low world and Indian food prices arising from a volatile international market, has caused agricultural prices to be depressed, especially since Bangladesh imports significant quantities of agricultural produce, including cereals, from time to time. The current rice price situation suggests that the problem of farm incentives is a serious concern. The analysis of social impacts shows that the global economic crisis has adversely affected Bangladeshs progress toward achieving poverty reduction and social development goals including the MDGs. This highlights the need to re-launch more determined efforts in achieving the stipulated goals. Bangladesh thus faces difficult and complex challenges. Along with providing stimuli to growth, the government must also make efforts to strengthen safety nets and ensure that poverty reduction and key social development gains are not reversed.

Table of Contents
Serial # Chapter 1: Context 1.1 1.2 1.3 Objective of the Report Methodology of the Study Limitation of the Study 1 1 2 Particulars Page #

Chapter 2: Overview of Global Financial Crisis 2.1 2.2 2.3 2.4 Introduction Origin of the Crisis How the Crisis Did Spread Consequences for Developing Countries 3 3 7 9

Chapter 3: Global Financial Crisis and its Impact on Bangladesh Economy 3.1 3.2 3. 2.1 3. 2.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 Introduction Bangladesh: Export Performance Export Performance in 2008 11 13 15

RMG Sector

21

Stakeholder Perceptions Impact on Imports Impact on Remittance Global Financial Crisis Impact on Banking Global Financial Crisis impact on Capital Market Global Financial Crisis Impact on Unemployment Impact on Employment in Different Sectors Interest Rate

24 25 26 27 30 30 31 32

3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18

Exchange Rate Inflation Impact on DFI Impact on Agriculture Effect on GDP Growth Effect on Public Finance/Budget Impact on Foreign Aid Why Bangladesh remained Less Affected

33 35 36 36 37 38 39 40

Chapter 4: Findings & Recommendations 4.1 4.2 Key Findings of the Report Recommendations Conclusion Bibliography 43 43 45 46

Chapter 1: Context
1.1 OBJECTIVE OF THE REPORT
The overall objective of the study is to provide an exposure of real life situation to the students where they are expected to translate and adapt the knowledge gained from the MBA (Evening) courses into by the theoretical knowledge in practical field.
BROAD OBJECTIVE

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

SPECIFIC OBJECTTIVE

The prime objectives of the report are as follows: To identity the basic causes of Financial Crisis. To find out the effects of Financial Crisis. To identity the impact on export and import due to financial crisis. To identity the impact on economic indicators in Bangladesh. To analyze how does a global financial crisis spread all over the world.

1.2 METHODOLOGY OF THE STUDY

The report is prepared using qualitative research method. The data were relatively disorganized and collected based on our limited knowledge. The report has been prepared based on secondary data such as-the published reports, various articles, and related documents as well as down loaded data from website through internet. I have studied the sources of information, then all these reports and documents are also been analyzed and organized to make our report possible according to the topic of Global financial crisis and its impact on Bangladesh economy.

1.3 LIMITATIONS OF THE STUDY

This study is mainly depended on the secondary data. Limited primary data are also used. A time constraint was another limitation in comparison of the vastness of the topic. Much information was possible to gather but I cant gather with my limited knowledge .But I have tried my level best to make this report worthy.

Chapter 2: Overview of Global Financial Crisis(GFS)

2.1 INTRODUCTION
The United States economy is now experiencing a severe credit crunch (falling availability of credit), which is the most serious financial crisis since the Great Depression of the 1930s. The crisis that originated from plunging house prices and stock price declines in the US has already spread to Europe and Asia, and is expected to be global soon. Many economists, including IMF experts, believe that the US economy has entered a recession that might be longer than usual, throwing many countries into a deep slump. The IMF has already warned that world economic growth will slow substantially this year and be slower in the next year. The slowing down of economic growth in the US, Europe, Japan, and the relatively more advanced developing countries of Asia cannot but affect developing

countries elsewhere in terms of lower growth in their exports, and inflows of foreign direct investment, aid, and worker remittances. This paper addresses issues related to the crisis and seeks answers to the following questions: What the crisis is all about and what are its causes? What measures have been adopted to face the crisis, and to what effect? What are the lessons for financial institutions and governments? How does the crisis affect Bangladesh and what should be the policy response to avoid or minimize the impact of the crisis?

2.2 ORIGIN OF THE CRISIS

The crisis in the global financial markets that became manifest in August 2007 is the byproduct of developments since 2001 when the US economy was experiencing a severe recession. To prevent a further slowdown in the economy after the September 2001

terrorist attacks, the US Federal Reserve began cutting interest rates to encourage borrowing, which spurred both consumption and investment spending in the country. At one stage, the Federal funds rate came down to as low as 1 percent. Such a low rate of interest was never experienced in the country since the regime of President Nixon. At the same time, in some fast growing countries like China as also in the Middle East, savings increased considerably, resulting partly from high economic growth and partly from increased fuel prices. These savings were channeled mainly to the US, greatly increasing the liquidity of US banks. Abundant liquidity and low interest rates increased the tendency to spend by US consumers and investors. This tendency was very high in the housing sector. The US Administration also played a big part as it encouraged mortgage companies to expand financing of affordable housing. President Bushs speech to the Congress around that time about the virtues of home ownership created frenzy among Americans to buy houses, chiefly with borrowed funds. Long before they were formally taken over, the two mortgage giants, Fannie Mae and Freddie Mac, had an implicit government guarantee. Obtaining housing loans was also very easy. A 1995 US Act allowed very liberal terms for banks mortgage lending. The slack regulatory system encouraged aggressive lending by banks and financial institutions. They gave mortgage loans to home buyers without checking their solvency status. Loans were given to people with no income, no job, or no collateral except the house on which the mortgage was given. They loosened even the primary conditions of loan giving, allowing low interest rates and easier schedules of repayment in the initial years of the loan, which made mortgages inexpensive and encouraged people to borrow and buy houses. The demand for houses thus increased, and with that the price of houses also rose. Between 1997 and 2006, house prices in the United States rose by 124 percent. As house prices rose, many people started to buy additional houses as profitable investment. Buying additional houses also became easier because as the house prices rose, the home owner could get additional loans against the same house. As more and more loans were easily available from banks and financial institutions, new houses began to be built in response to increased demand, thereby creating a bubble in the housing market.

A significant financial innovation of the time was the creation by commercial banks of attractive financial derivatives against the mortgage loans, which are known as mortgagebased securities (MBS) or collateralized debt obligations (CDOs). Quite interestingly, the financial innovation did not occur in a vacuum but in response to incentives created by governments. Many of the new-fangled instruments became popular among banks because they got around financial regulations, such as rules on banks capital adequacy. Banks created off-balance-sheet vehicles because that allowed them to carry less capital. The market for credit-default swaps enabled them to convert risky assets, which would demand a lot of capital, into supposedly safe ones, which did not. These artificial paper securities were traded in the secondary market. Large investment banks were major investors in these securities. As home prices were increasing, these banks did never properly assess the risks associated with these securities. They were hoping that house prices would never fall. In the event of any loan default, they would simply take possession of the house (foreclosure) and recoup the loan by selling the house. Investments in housing increased so greatly that by 2006 the supply of houses far exceeded demand. As a result, house prices plunged. At the same time, as the economy was registering recovery, the key interest rate was also raised. From 1 percent in 2004, interest rates were raised to as high as 5.25 percent in 2006.When the adjustable interest rates on mortgage loans were reset higher in 2007; it was found that many home buyers did not have the capacity to repay the loans. Loan defaults increased greatly in number and volume, and the lending institutions suffered heavy losses as a result. Foreclosure activity increased dramatically. The situation so created became what is known as sub prime crisis or the crisis of the low-quality mortgage loans, which triggered the global financial crisis through 2007 and 2008. However, as house prices began falling around the end of 2006 and loan defaults increased, the value of CDO securities started falling fast. The bubble burst in August 2007. Assets of companies like Fannie Mae, Freddie Mac, J.P. Morgan, AIG etc. were badly depleted. Investment banks that were primary investors in these securities were the major losers. One after another, these banks began to be insolvent. Buyers of CDO securities were not confined in the US alone. Many European banks and investors also bought these securities and suffered huge losses from the market collapse.

Because of the plight of the financial institutions, their bankruptcies, and the recessionary trend in the economy, the general people rushed to withdraw their bank deposits and invest in gold, oil and other commodities, as well as in the nearly risk-free US government treasury bills. A severe liquidity crisis thus emerged. Investment banks that did not have access to primary deposits were affected the most by the credit crunch. Gradually, the crisis spread to mutual funds, hedge funds, and even to commercial banks. As soon as the poor state of the banks and financial institutions became evident, shareholders of these companies became scared and started selling their shares. The panic sales led to widespread falls in share prices. On 29 September 2008, the Dow Jones Industrial Average plummeted 778 points. Wall Street losses on that single day were over $1.2 trillion. The financial crisis has had serious adverse effects on the US economy. Plunging house prices reduced the value of home owners assets. They were forced to cut down their consumption spending, which in recent times was the driving force behind US economic growth. The decline in consumer demand led to lower production, cuts in employment, and created a slump in the US economy. The unemployment rate climbed to a 14-year high in October 2008, with 10.1 million people out of work.

The potentially crippling problem now is the short-term credit markets, where banks are hoarding whatever cash they have in an effort to get out of the crisis. Loans to businesses and even between banks have dried up. The decline in credit flows has affected every business that needs credit. The real sector has suffered the most from the credit crunch. The major concern in the US is now to prevent the migration of the crisis from the Wall Street to the Main Street (real sector) where the pain has begun to be felt. The government and the Fed are focusing on keeping money flowing in the credit system, and thereby limiting layoffs, shutdowns and bankruptcies.

2.3 HOW THE CRISIS DID SPREAD

The meltdown in the financial system can be attributed to the lax monetary policy in the United States. US regulators did not monitor the way the banks were providing loans during the housing-boom period. The US authorities relaxed rules of providing subprime housing loans (now known as toxic loans), that amounted to about $2.1 trillion. The complicated debt products built on these loans were sold to banks worldwide, and when borrowers failed to repay the loans, the banks or financial institutions could not recoup the loan money because the price of the property was too low or because there was no buyer. The credit losses on the mortgages that financed these houses and on the pyramids of the complex and artificial paper securities are still mounting. According to an IMF assessment, the worldwide losses on toxic assets originating in the US would reach $1.4 trillion, and so far $760 billion has been written off by them.

The culprit is thus the American model of deregulation of the financial sector, which was blind to, or even facilitated, the unbridled growth of greed and deception of executives of large financial institutions and Wall Street manipulators. Greed of the top management of financial institutions to pocket fat bonuses motivated them to lend recklessly to subprime (unsecured high-risk) borrowers, particularly in housing, without assessing the borrowers repayment capacity. The investment banks did not care to assess the risks involved in the newly-developed mortgage-backed securities and CDO derivatives. Nor was there any monitoring of activities of investment banks regarding their CDO transactions because, unlike commercial banks, the investment banks were not under the jurisdiction of US and European central banks. These banks concealed the risks of the artificial securities connected with the loans they made recklessly, and when the market failed, the risks rose to a point where banks became insolvent. It must, however, be conceded that the bankers error did not lie in violat ing the rules that govern global banking. The truth is that these rules themselves are flawed and promote what has been branded as Casino Capitalism. The rules are set by the Basle Committee of Bank Supervisors, representing only 11 OECD countries. The Basle Consensus disfavors government regulation of banks and advocates market price based self -regulation. The lesson derived from the present global financial crisis is that there should be structural changes in the global financial system, including strict public regulation, capital controls, and coordinated monetary policy among countries.

The credit crisis has crossed the Atlantic to Britain and Europe. The migration of the crisis is the result of a huge increase in financial globalization in recent years basically since 1995. The rest of the worlds assets in the US have risen from around 10 percent in 1980 to over 50 percent now. In the same period, the US assets abroad as a percentage of non-US GDP have risen from 7 percent to 45 percent. The global financial system now is thus a lot more tightly linked, increasing the chances of contagion among big economies. In fact, many European banks and investment and pension funds bought many of the same toxic financial products that sank the US financial institution.

2.4 CONSEQUENCES FOR DEVELOPING COUNTRIES

The global meltdown and the unprecedented government interventions in US and Europe in bailing out banks could have some unwelcome consequences for the developing countries. Rescue packages in rich countries would lead to massive increases in their budget deficits and taxes. The US and UK budget deficit will likely double to 10 percent of their GDP. There is an apprehension that the growing budget deficits in rich countries will lead to a slowdown of official aid to poor countries. The 123 billion dollars pumped by the US Government to American life insurance giant AIG alone was 18 billion dollars more than the countrys total annual aid package for poor countries. The sum is also twice the amount needed to achieve the internationally agreed goal to reduce global poverty by 2015. As governments pour billions of dollars and Euros into their banks, it will be no surprise if their spending on aid for poor countries will fall drastically. It is also very likely that outward investment of rich countries will fall, too, and the curb on labor immigration will become stricter, affecting remittance flows to poor countries.
Is the Crisis more Serious than the Great Depression of the1930s?

GFC 2008

V S

Great Depression of the1930s

The gravity of the present financial crisis is acknowledged in all quarters, but rescue measures are underway in all major economies to combat the crisis. However, it will take time for the impact of these measures to be fully visible. In any case, another Great Depression like the one of the 1930s is unlikely. A comparison between the present crisis and what happened in the 1930s reveals the following: In the 1929 stock market crash, Dow Jones Industrial Average plunged 40% in just two months, compared to 22% over a year now. Unemployment rate in USA rose to 25% by 1933, as against only 6.1% today.

US GDP shrank by about a third during the early 1930s but it rose 3% in 2007. CPI fell by 30% between 1929 and1933, but it is rising now. House prices fell more than 30% during the Great Depression but only 16% today. By 1934, some 40% of all mortgages were delinquent as against only 4% today. More than 9000 banks failed in the 1930s, compared with fewer than 20 over the past couple of years. The Great Depression was not caused by the stock market crash alone but by monetary policy blunders. Instead of increasing the credit flow, the Federal Reserve in that era reduced it by nearly 33%. On the other hand, there are now automatic macroeconomic stabilizers like unemployment insurance, social security blanket, federal deposit insurance, and circuit breakers to keep stocks from falling too fast, which stand as safeguards. Moreover, there is strong and concerted cooperation among countries to tide over the crisis. A recession has perhaps set in, but policy makers worldwide are striving hard to make it less painful and short lived.

CHAPTER 3: GLOBAL FINANCIAL CRISIS ANDITSIMPACT ON BANGLADESH ECONOMY

3.1 INTRODUCTION
Bangladesh is interlinked with global financial system. As such global financial crisis which was originated from the year 2007 mainly in USA and spread in the latter part of the year 2008 among developed nations and subsequently shifted to developing nations has impact on the domestic economy of Bangladesh. The country is in a difficult situation as it faces imbalances, lack of transparency in the financial markets and non-applicability of domestic safety net. The impacts of the global financial crisis have been felt in the increasingly globally integrated economy of Bangladesh in a very distinctive manner. In a number of ways, Bangladesh has been an outlier, with some lag to the consequences. Indeed, crisis impacts were felt in a much more intense manner in the second half of 2009, when many developed countries (Bangladeshs major import sources and export destinations) were beginning to recover. This lagged response makes the Bangladesh story somewhat different from that of many other low-income countries (LICs). The crisis has left its fingerprints on Bangladeshs externally driven economy through the various transmission channels of exports, imports, remittances and aid and foreign direct investment (FDI) flows, with consequent repercussions for the labor market, domestic resource mobilization and gross domestic product (GDP) growth and poverty. Nevertheless, the depth of the consequences has tended to vary during different phases in the crisis. Two such phases can be discerned from an analysis of the impact of the ongoing crisis. In the first phase, ending with the first quarter of 2009, impacts through the various channels,

although present, were relatively subdued.3 Bangladesh was one of very few developing countries not to be affected to the extent expected. Although exports of primary products suffered early shocks through falling demand, at the aggregate level export performance continued with double-digit growth, driven by steady performance of apparels exports until the end of the first quarter of 2009. At the same time, despite cases of early retrenchment of workers abroad, remittance flows continued to be robust, thanks to the large stock of workers managing to stay overseas and continuing to send money home. However, a study on the impact of the crisis (Rahman et al., 2009a) cautioned that Bangladesh could face a lagged response, with further deepening of the crisis towards the second half of 2009. In fact, some indications of trouble began to be felt even in the second quarter of the year. This was reflected in the response of policymakers in terms of macroeconomic management, attempts at countercyclical measures and the stimulus packages put in place to address the emerging challenges. Thus, the main focus of this paper is to review the following issues: Impact of the global financial and economic crisis on the macro-economy, such as growth prospects, inflation, interest rate, level and composition of public expenditure, budget deficit, exports & imports, balance of payments, public debt, etc. Impact of GFC on different sectors of the economy like agriculture, manufacturing, construction, SME, trade etc. Micro level impact: on households, rural-urban poverty, inequality, gender issues Mitigation and policy: policies adopted, recommendations. The above analysis is likely to involve an examination of a number of indicators, e.g. Foreign capital flows/FDI and ODA flows Availability of credit Exports Global commodity price behavior GDP and investment Employment, unemployment, poverty

School dropout (especially of girls) Basic health care Widening fiscal deficit/ fiscal space Balance of payments Monetary stance Social safety nets It is widely recognized that in the case of Bangladesh, the direct transmission channels that are most relevant are exports, labor exports and remittances, and global commodity price changes and imports. The first task therefore is to assess what has been happening on these key fronts. However, it is useful to begin with a review of macro-economic performance in the backdrop of the GFC.

3.2 BANGLADESH: EXPORT PERFORMANCE

Bangladeshs export earnings have risen rapidly since the early 1990s. Exports have grown from around 7percent of GDP in 1991 to around 18 percent in 2006. The GDP growth rate has been consistently over 6percent over the last few years despite a number of weather related shocks emanating from cyclones and floods. There is considerable speculation about what impact the GFC will have on GDP growth with widely different figures emanating from different institutions. The World Bank suggests that growth could decline to 4.5 percent while most other observers consider a figure of 5.5 to 5.8 percent more realistic.

Two main sources of economic growth have been manufacturing and services, both crucially dependent on the RMG sector. Thus, any impact on the countrys export processing sector, and in particular on the large RMG sector, will adversely affect economic performance.

The main driver of our exports sector is the ready-made garments industry (RMG) which accounts for almost four fifth of our total export earnings. Almost two and half million people, ninety percent of them women, are employed in the RMG sector; while a large but undetermined number of people are involved in various ancillary and support services e.g.

banking, insurance, transport etc. to this sector. The workers are largely drawn from the poorer sections of society. Any adverse effects on the RMG sector will thus have farreaching implications for the entire economy and society.

The export sector was potentially vulnerable to the financial crisis as it heavily depends on the EU and US markets which have been badly hit. Almost half of Bangladeshs exports go to the EU, while another quarter goes to the US. High export

concentration is a source of vulnerability for Bangladesh exports, especially in the context of the current recession.

There are at least two channels through which the crisis can hurt Bangladesh. Declining wealth and earnings in the USA and EU has reduced import demand and may reduce demand for Bangladeshi exports. Another impact could be through the banking system, reducing trade credit to buyers involved in imports from Bangladesh. This may in turn affect our exports.

3.2.1 EXPORT PERFORMANCE IN 2008

Bangladeshs export performance in 2008 was positive compared to the previous year. Its performance was also good if compared to other countries in the region. The countrys exports grew by 16.7 percent in 2008 compared to less than 7 percent in 2007 and around 23 percent in 2006.

However, a closer look at export trends suggests that by the end of the year, quarterly export growth was beginning to decline. This may be an early indication of the impact of the recession.

Bangladeshs positive export performance in the US market, for example, contrasts sharply with that of many other countries in the region (table 1.4). It will be seen that export

growth has become negative for India, Philippines and Sri Lanka although China and Vietnam have managed to post positive growth rates. Nevertheless, Bangladeshs performance would appear to be the best in this particular grouping.

Bangladesh registered a 12.5 percent export growth in woven products and 25.9 percent export growth in knit products to the US market at a time when US imports of these items actually shrank by 3.6 and 1.6 percent. Overall exports to the US grew by 13.6 percent in the face of a mere 2 percent growth in total US imports over the July-December, 2008 period. This basically indicates that Bangladesh has been increasing its market share in the US apparel market at the expense of competing countries, despite the recession (or perhaps because of it). Some Bangladeshi exports have been adversely affected in the US market, including frozen fish, headgear and jute products.

By the end of 2008 (4th quarter) we note that the quarterly growth of exports from China dropped to 0.06 percent; India posted negative growth; and US imports nose-dived to a negative 8.8 percent Against all this adversity, total Bangladesh exports climbed to 18.1 percent and Vietnam did slightly better, achieving a growth rate of 20 percent - further evidence of rising market share for Bangladesh.

However, Bangladesh has been facing problems in the EU market. Its exports to the EU grew by 3.6 percent in July-December 2008 while all other countries, with the exception of Sri Lanka, out-performed Bangladesh. In particular, Bangladesh has experienced problems in exports of shrimp, headgear, jute goods and rawhide registering a drop in exports of these products in the range of 16-25 percent. Most unusually, even woven exports registered a negative growth. China, on the other hand, experienced positive export growth for all the sectors except rawhides and leather products. The poor performance of Bangladesh in the EU market is largely attributable to the exchange rate situation that led to a sharp Depreciation of the Euro against the USD and BDT.

The main advantage of Bangladesh over its competitors is its price. Exporters from Bangladesh have been cutting back on prices further in trying to cope with the crisis. Indeed, unit prices, calculated by dividing value by quantity for the top ten RMG products exported by Bangladesh, reveal that except category numbers 340, 659 and 239, there is a downward price trend for all other categories. This has helped Bangladesh to remain competitive in the US market.

The following figure shows the quantity change of RMG exports for the top ten MFN categories to USA from Bangladesh, China and India. Out of the ten products, Bangladesh experienced negative export growth for three categories; while china and India experienced negative growth for two and seven categories respectively. China is experiencing positive growth in all categories in which Bangladesh is experiencing positive growth, except for category 239. Generally it is argued that Bangladesh is exporting low end products to the US markets. Because of income fall due to the financial crisis, it is expected that consumers are substituting their consumption of high-end products with these low end products the two following figure lends credibility to this view. While, Bangladesh and China are experiencing positive growth for these categories of products despite the recession, high-end products from China have actually been in decline. Thus, out of the top five Chinese RMG products exported (which are high-end), four items have been severely hit by falling demand. China has responded (somewhat surprisingly) by increasing exports of lower end products.

The following shows that China is facing a severe fall in export quantity of its major RMG export items to USA. This scenario has confirmed that consumers in USA are using low end RMG products from Bangladesh and China, instead of high-end RMG products.

In the EU, Bangladesh is experiencing negative export growth for rawhides, jute and frozen fish. For rawhide, China as well as India is also experiencing negative growth. Figure 1.15 rules out the possibility of substitution in the case of EU. Exchange rate has important implications for export performance as it directly influences the price competitiveness of exporting countries, although it must be noted that the exchange rate is not the sole determinant of a countrys export competitiveness. Figure 1.16 illustrates the appreciation

and depreciation of major foreign currencies against the dollar in 2008. Indian Rupee, Euro and pound have experienced sharp depreciation while Bangladeshi taka and Chinese Yuan have been stable. Sharp depreciation of Euro and Pound Sterling; and stability of the Bangladeshi taka eroded Bangladeshs competitiveness in Europe to an extent, reflected in the slowdown of Bangladesh exports to EU

However, depreciation of the Indian Rupee has improved the competitiveness of Bangladeshi RMG export to USA to some extent, as a significant portion of yarn that is used as input are being imported from India.

3.2.2 RMG SECTOR

Bangladesh has become integrated with the global economy through exports of RMG. The contribution of woven garments and knitwear were 38.3 and 37.4 percent respectively in 2006-07. The industry has grown exponentially in terms of capacity, exports and employment. At present Bangladesh exports account for about 2 percent of the $600 billion global textile and clothing market. Ready-made garments export rose to $10.7 billion in 2007-08. Over the years, Bangladesh diversified its exports both in woven and knitwear. The

share of knitwear increased, while that of woven fell. Within the RMG sector there has been diversification into different products: Bangladesh started as an exporter of shirts, and has subsequently diversified into trousers, jackets, T-shirt and sweaters. The share of shirts declined sharply, offset largely by rising contribution from trousers. The shift was made on the back of the emerging backward-linkage primary textile sector. Since 2006-07, jackets have emerged as a significant product and may start to replace trousers in the future. Within knitwear, both T-shirt and sweaters started to grow after 2005. Thus, the trend in the last few years is towards greater diversification and a distinct shift away from the lower end of the low end product range towards the upper end of the lower range - indicating Bangladeshs emerging confidence and competitiveness in the market.

Global recession may generate two possible opposing forces towards export of RMG: Decline in order due to recession. Many countries which import our RMG have begun to delay sending the orders due to recession. Prices for Bangladeshi garment products have fallen 20 to 25 percent in the global market and the situation is taking a "serious turn". Increase in order due to substitution of orders towards cheaper products and low cost source. The importers responded to the reduction in clothing sales with a search for low cost producers. As RMG is a buyers market, the buyers strategy was price reduction to boost sales volume. Due to this strategy, it may be noted that far from plunging, Bangladesh clothing exports was very strong in 2008. US retail clothing sales declined by 8.05 percent in the fourth quarter of 2008, and consequently US imports of apparel declined by 3 percent. But US imports from Bangladesh increased by 18.5 percent during the fourth quarter raising its market share from 4 to 5 percent in 2008. Over the years, Bangladesh diversified its exports both in woven and knitwear. The share of knitwear increased, while that of woven fell. Within the RMG sector there has been diversification into different products: Bangladesh started as an exporter of shirts, and has

subsequently diversified into trousers, jackets, T-shirt and sweaters. The share of shirts declined sharply, offset largely by rising contribution from trousers The whole situation of recession partly favors Bangladesh in a short run of our economy. But in a long run Bangladesh may suffer a lot because when other competitors will start producing RMG at low cost.

3.3 STAKEHOLDER PERCEPTIONS

China: An important factor Discussion with the key exporters and importers suggest that China has been an important factor due to which the global financial crisis has been an opportunity for Bangladesh to expand export to US and EU as well as diversify to new markets. Sourcing from China has become expensive as the Chinese currency appreciated and labor laws were being strictly implemented. Textile products are generally considered to be low price and low valued item in China and a major shift could occur to Bangladesh in the future. Hong Kong based buyers consider Bangladesh a more reliable, cheaper supplier compared to many other countries. A small diversion from China can be a big gain for Bangladesh. Indeed, the high growth of knitwear in 2008 has been due to diversion from China. Diversifying to new markets RMG is a buyers market. Suppliers in Bangladesh have been trying to enter the high quality Japanese market but have not been able to do so. This is because of the fact that culturally, Japanese were more comfortable with China. About 80 percent of the clothing export to Japan is from China. The other major supplier to Japan is Vietnam. By the end of 2008, Japanese buyers were searching for sourcing from other low cost countries. A major Japanese buyer, Uniqlo has already expressed an interest in procuring $600 million worth of apparels from Bangladesh, indicating that Bangladesh is well poised to enter the Japanese market. Request to delay shipment Even after orders have been confirmed, buyers are requesting for delaying shipments. Importers are shifting delivery by up to two months, causing warehousing problems,

problems with timely repayment to banks and even payment of wages to workers. Even reputed buyers like H&M had placed orders and confirmed and then asked to wait. Industry insiders estimated that up to 3 percent of orders will be cancelled.

3.4 IMPACT ON IMPORTS

Bangladeshs imports as a share of GDP have been rising steadily over the past three decades. A valuable portion GDP was spent on import payments in 2007-08. Around 76 percent of export earnings originate in the RMG sector, of which 54 percent goes into imports of inputs needed for the RMG industry. Given the importance of imports for Bangladeshs economic growth and development, the implications for t he balance of trade and payments, it is important to assess the likely impact of the world recession on the volume, structure and of imports, and the terms of trade. Import based revenues also comprise of a significant part of the national budget and could be cause for concern. The sharp fall in energy and food prices in the world market was benefited Bangladesh immensely. The country is dependent on POL imports from the world market and is also a significant importer of food. The domestic economy was quite sensitive to movements in the world price of these key commodities during GFC. Before the onset of the recession, Bangladesh was reeling under the price pressures in the world market, leading to a high (double-digit) domestic inflation rate and fears of an impending food crisis. The advent of the recession brought prices down drastically, and as an importer, Bangladesh benefited greatly with domestic price pressures falling quickly, and the government making large savings from reduced subsidies, especially on diesel. Bangladesh has also benefited from the terms of trade effect as the import prices faced fell more sharply than export prices. Total merchandise imports to Bangladesh during FY08 amounted to USD21.63 billion,registering a growth of 26.07 per cent compared to the corresponding period of FY07. Imports to the EPZs also registered a positive growth of 13.11 per cent. Import share of

POL recorded the highest share, around 9.52 per cent of total import. The second highestimport share (in value terms) was of textile and articles thereof, accounting for about 8.75per cent of total import. Imports of food grains posted a staggering growth of 142.64 percent (6.52 per cent of total import), with rice registering a phenomenal increase of 4.9times and wheat 1.3 times. Import growth was high to moderate for all major non-food items excluding capitalmachineries, which posted negative growth rate of (-) 13.74 per cent. Import growth ofcrude petroleum was high at 32.71 per cent, fuelled by the rise in global oil prices. By thethird week of May 2008, crude oil price/barrel has already hit USD132. But in morerecent times (22 October 2008), oil price has come down to USD70.60/barrel. Import of POL also posted a huge growth of 20.43 per cent. The bill for this was to the tune ofUSD2058.00 million. High import growth of intermediate inputs such as raw cotton (41.10 per cent) would indicate further strengthening of backward linkage in textiles;yarn (18.65 per cent) and iron, steel and other base metals (19.73 per cent), also postedsignificant increase.

3.5 IMPACT ON REMTTANCES

The global financial crisis could impact on Bangladeshs earnings fromremittance. Middle East economies were unlikely to be affected by this, at least in the shortterm. As a

consequence, out-migration and remittances could follow historical trends in2008-09.the slowdown degenerates into recession; it had impact on both migration and remittance. Remittance inflows from Bangladeshi migrants abroad have reached 10 percent of GDP, which was only 3 percent in 1995, putting Bangladesh among the top ten remittancereceiving countries in the world. In 2008, nearly 6 million workers were employed overseas. During FY2009, Bangladesh received US$ 9.7 billion as remittances, which was 22.4 percent higher than the remittance inflow of FY2008. The growth rate, however, shows considerable monthly variations (Figure 4). Out-migration in FY2009 was 30 percent lower than that in FY2008 (Figure 5). Since no reliable data are available on returnee migrants, the impact of global recession in terms of job loss of Bangladeshis abroad cannot be assessed. There has, however, been some report (e.g. in newspapers) on return of migrants due to job loss resulting from recession.

3.6 GLOBAL FINANCIAL CRISIS IMPACT ON BANKING

There are three causes of recent world financial crisis in banking sector-1. Relentless lending of mortgage loans (even to people who would not be able to repay their mortgages) i.e. subprime loans2. Mortgage backed securities3. Real estate market crash the incidence of systemic banking crises has risen over the past twenty years and the costs have been high. Although each country's experience has country -

specific factors, several common elements appear in most crisis countries :( 1) Volatility in the macro economy (2) The inheritance of structural weaknesses in the economy and financial system (3)Hazardous banking practices(4) Hazardous incentive structures and moral hazard within the financial system(5) Ineffective regulation(6) Weak monitoring and supervision by official agencies(7) The absence of effective market discipline on banks( 8 ) Structurally unsound corporate governance mechanisms within banks and their borrowing customers. Causes of such crises are complex and a myopic focus on single factors misses the essential feature of interrelated and multidimensional causal factors. Although macroinstability has been a common feature, and may often have been the proximate cause, banking crises usually emerge because instability in the economy reveals existing weaknesses within the banking system. According to news report published in Business Times (25 September, 2009) Bangladesh Bank decided to follow accommodative monetary policy, aimed at boosting growth and shielding the economy from the global crisis. The monetary policy stance between July and December, 2009 is designed to support attainment of the highest sustainable output growth without triggering escalation of inflation. Banking system of the country is not free from the danger. Difference between the crisis of developed nations and Bangladesh is that their crisis originated from the financial sector and worst impact felt in the real sector. On the other hand in case of Bangladesh crisis has been originated in the real sector due to the problem arise from financial sector. Due to financial crisis, not only exporters will face the problem, but the banking sector will also face problem due to non-recovery of advances against export financing. Moreover, liquidity surplus is prevailing in the commercial banks. According to ADB report (2009) it is Bangladesh Taka 347.6 Billion on 30th June, 2009. Foreign Exchange reserve at Bangladesh Bank is very high. Irony is that at this stage they are taking loan from the International Monetary fund. For last three years investment has declined substantially and borrowing from the banking sector by the investors has reduced substantially. Rather default culture is crippling the economy. Recently the Central Bank Governors and Heads of Supervision decided to strengthen the banking rules and regulations under the guidance of the Bank for international settlements: Raise the quality, consistency and transparency of the Tier 1 capital base; Introduce a leverage ratio as a supplementary measure to the Basel II risk based framework ; Introduce a minimum global

standard for funding ; Introduce a framework for countercyclical capital buffers above the minimum requirement; Issue recommendations to reduce the systemic risk associated with the resolution of cross border banks(Source:http://www.abbl.lu/articles/comprehensiveresponse-global banking-crisis). The global financial crisis is not likely to have any adverse effect on Bangladesh B anks foreign exchange reserves, because the Taka is not freely convertible for capital account transactions. Moreover, Bangladesh Bank has taken several initiatives to avoid any impact of the global financial turmoil on the financial sector. The currency composition of its foreign exchange reserves has been altered significantly to protect the real value of the reserves. At present only 50 percent of the Bangladesh Banks reserves are held in US Dollar, and the rest in other currencies. Furthermore, to avoid risks of any possible losses, both Bangladesh Bank and commercial banks holding reserves abroad have withdrawn funds from problem banks that were merged or taken over or are likely to be merged or taken over soon and placed them in central banks of respective countries. The countrys banking system has no toxic derivative involvements. It is, therefore, highly unlikely that external shocks will increase the risk of asset quality problems or precipitate a credit crunch in Bangladesh. However, to forestall the occurrence of any financial crisis, the financial sector should be properly regulated. Banks and financial institutions will need to take necessary caution while extending credit, by ensuring the quality of assets to avoid any financial risk. They should invest mainly in the productive sectors instead of lending to non-productive sectors, in particular consumer financing, which increased by over 100% in the past one year. Bangladesh may also consider guaranteeing bank deposits as a defensive measure. All major countries in America, Europe and Asia have in recent days moved to guarantee all their bank deposits to shore up investor confidence. Such guarantees may induce a shift of deposits from Bangladeshs banking system to countries elsewhere. There is, therefore, a need for defensive action. In a time where there is a lot of uncertainty, investor risk aversion is very high, and there is a lot of nervousness, there are possibilities to have contagion to banking systems anywhere. Banks and financial institutions in Bangladesh will need to strictly comply with the existing regulations. They need to be extra-cautious in running their business, taking lessons from the collapse globally. They should also take appropriate measures to overcome the various

ailments of the banking sector such as capital inadequacy, provision shortfall, declining trend in loan recovery, and the increase in bad loans.

3.7 GLOBAL FINANCIAL CRISIS IMPACT ON CAPITAL MARKET

Integration of Bangladeshs capital market with the global capital market was rather weak -- foreign investment accounts for only 2.48 per cent of total market capitalization. During July, 2008 to January, 2009 a sluggish trend was observed in the capital market, which is partly related to global economic slowdown (i.e. liquidation of portfolio investment). All the indices in the Dhaka Stock Exchange (DSE) experienced negative growth. The countrys capital market does not at the moment have much reason to panic either. Foreign portfolio investment in the country is qu ite small. Foreign investors share in the countrys equity market is only 2.48 percent. Hence, withdrawal of funds by foreign investors would not have any significant impact. On the contrary, as stock market sources indicate, foreign portfolio investors are now showing interest to invest in the countrys secondary markets because they find Bangladesh an attractive destination of investment as it has remained unaffected by the present global financial crisis.

3.8 GLOBAL FINANCIAL CRISIS IMPACT ON UNEMPLOYMENT

Global recession may affect Bangladeshs productive sectors, in particular

manufacturing. Private sector employers may be forced to cut jobs. Worker remittances may also be affected by the crisis. Nearly a third of inward remittances currently come from US and Europe, while about 60 percent comes from the Middle East, and the rest comes from countries in East and Southeast Asia. A deep and prolonged recession in the West may hurt the Middle-Eastern and other countries as well where migrant workers may lose jobs and therefore remittances from these countries may decline. Government will therefore need to keep a constant vigil on manpower exports and remittance earnings, facilitate emigration of workers, and, through official contact, ensure continuity of jobs of migrant workers abroad.

3.9 IMPACT ON EMPLOYMENT IN DIFFERENT SECTORS

RMG

The demand for import of Bangladeshi apparels decelerated or in extreme case, entrepreneurs searched for new ways for the reduction of cost of production. Further investigation required to understand the extent of impact of the crisis on enterprises and on workers in this sector.
Frozen Food

Although export of frozen food, particularly shrimp, has declined duringJuly-December, 2008 period, there is no evidence that shrimp processing factories have closed down due to the crisis. However, because of lack of availability of raw materials (57,000 m.ton of the total required 0.3 million m.ton in FY2007-08) and infection in cultured shrimps (known as microforon disease) only 77 mills are now operating out of the 140 mills, where about 77,000 workers are working.
Leather and Footwear

Export of footwear has performed well during July-December,2008 period; however, export of processed and finished leather has sharply declined over time. There was no report in the national dailies as regards laying off of workers in this industry. Further investigation is needed in order to understand the extent of impact on workers working in this sector.
Ship Building

The shipbuilding sector was under pressure because of reduced orders and,in some cases, deferment/cancellation of some previous orders.
Impact on Migrant Workers

Due to slowdown of the Singapore economy, especially in the shipping and construction sectors, 55 Bangladeshis employed by construction sub-contractor Tunnel & Shaft have returned home after working there for seven months or less. The workers were recruited last year in anticipation of two major projects estimated to be worth $20 million, which were expected to be launched later. Since 2006, UAE and Malaysia had been two key destinations for Bangladeshi workers followed by Saudi Arabia. It is important to mention here that currently Saudi Arabia and

Kuwait have stopped issuing work permits to Bangladeshi workers, while these two destinations comprises of 39.7 per cent of total migrant workers.

3.10 INTEREST RATE

The BB had directed the major commercial banks to reduce the interest rate spread and reduce their lending rates. There has been an agreement recently to fix the highest lending rate at 14.0 percent. Private commercial banks had felt that given the high cost of funds and high risks of lending in Bangladesh, any further reduction in the lending rate is not feasible. Moreover, a lower lending rate calls for a lower deposit rate which was discouraged savers to keep money in the bank and thus, create liquidity crisis. This, in turn, will have an impact on the overall economy.

However, the business community was pursuing for a higher cut in the lending rate. This demand was being voiced afresh by the business community in view of the global meltdown of financial markets. Ensuring better returns on deposits would be one way to improve the liquidity situation. The lending rate (calculated on a quarterly basis) of scheduled banks was 12.29 per centin June, 2008 as compared to 12.75 per cent in December, 2007. Their deposit rate (alsocalculated on a quarterly basis) stood higher at 6.95 per cent in June, 2008 as compared to 6.77 per cent in December 2007.

3.11 EXCHANGE RATE

The exchange rate between Bangladesh Taka (BDT) and US Dollar (USD) was remainedstable in 2007. This is because of the introduction of floating exchange rate in 2003 to contain fluctuations of Taka against foreign currencies, particularly the US Dollar. During August, 2007 and August, 2008, Taka appreciated slightly by 0.26 percent. At the end of August, 2008 Taka per USD decreased to Tk.68.52 from Tk.68.70 at the end of August, 2007. Taka depreciated against Euro by 7.38 per cent in August, 2008 compared to August, 2007. However, After August 2008 taka was appreciating against the EURO owing to the global financial crisis. At the end of August, 2008 BDT per USD declined to Tk.68.52 from Tk.68.70 at the end of August 2007.In Bangladesh, there was no EURO/BDT market and EURO/BDT rate was calculated from the traded rates of USD/BDT. At the end of august 2008 BDT appreciated against EURO as EURO had been depreciating against USD; USD continued to remain stable against BDT. Some exporters had demanded that BDT should be depreciated to cover the probableloss of export income as a result of global recession. The importers opposed the idea assome of them had suffered significant loss due to fall of commodity price. In thiscontext, the BB had to devise a balanced policy to take care of the interests of bothexporters and importers. The BB had to carefully examine the request of the exportersto devise special packages for making up for the likely losses of export income at thisjuncture of global economic crisis.

3.12 INFLATION
The commodity price boom of 2006-08 was due to strong growth in global demand.As opposed to an unprecedented increase of commodity price during the FY08, the prices had taken a downward in the face of global financial crisis. Except for soybean oil, prices of all other major commodities including rice, wheat and crude oil suffered a falling price since September 2008. The benefits of lower world prices have been reaped by Bangladesh, especially through lower inflation, including lower food and energy prices. Another channel that can help lower the inflation rate of Bangladesh is the declining trend of inflation in major trading partners. The headline inflation rate of Bangladesh already started to decline from 10.82 percent in July08 to 6.03 percent in December08, currently hovering at around 5 percent (in July 2009). The inflation rate of the major trading partners like India, China, and Hong Kong has declined significantly in recent months as well (See CEIC database & ADB website).

3.13 IMPACT ON DFI

The global financial crisis hit FDI inflows from US and Europe. Already, the FDI inflows to the country have started declining. The country should therefore rely more on domestic investment as a catalyst for growth. FDI should be treated only as a supplement to the countrys resources for development, not the backbone of the economy. Over -reliance on FDI must be done away with, and domestic investment should be encouraged just as much, may be more.

3.14 IMPACT ON AGRICULTURE

Low world prices combined with successive bumper harvests in 2008-09, especially of food grains, has led to a price slump. While consumers have found respite from the sky rocketing inflation of 2008, farmers are in distress. The newly elected government has given very high priority to agriculture, including scaling up of fertilizer and fuel subsidies. Out of a total The government also announced ambitious plans to support farm prices through a procurement drive but met with little success due to inadequate storage space in go downs and procurement efforts aimed at rice (from millers) rather than directly in paddy from the farm gate. There are now concerns that these low prices could operate as a disincentive for the next crop in the winter, at a time when price pressures in the world market could once again exert themselves. In fact much of the stimulus package announced by the government in April, 2009 is aimed at the agricultural sector. Out of an additional allocation of BDT 34.2 billion almost BDT 30 billion is related to agriculture or food, and the remaining for subsidies to exports.

3.15 EFFECT ON GDP GROWTH

Bangladeshs economy is not as decoupled from the rich worlds travails as is generally believed. The reason is that Bangladeshs exports depend almost totally on income growth in US and Europe. A long and protracted recession in these countries may, therefore, lead to

a drop in Bangladeshs exports and thereby a slowdown in overall economic growth. According to gght, the projected growth rate should be easily achieved. However, a prolonged recession in the rich world may still have a negative impact on domestic output growth. Considering the probable effects of the global financial turmoil on exports and remittances, the IMF has recently said that Bangladeshs GDP growth may fall to 6.19 percent this year. The World Bank has warned of a much lower growth rate as low as 4.8 percent, as it fears that the growth of exports and remittances will decelerate significantly.

3.16 EFFECT ON PUBLIC FINANCE/BUDGET

Total revenue collection in 2008-09 is estimated to fall short of target by around 2 percent (CPD-IRBD), mainly due to the shortfall experienced in tax revenue collection by the National Board of Revenue (NBR). In fact, non-NBR tax revenue is estimated to have exceeded the target set very comfortably, although non-tax revenues also dipped into the red. The revenue collection effort of the NBR has certainly been constrained by

international forces, first stemming from the sharp rise in food and fuel prices (causing Bangladesh to reduce duties on many food items), and secondly, in the wake of the GFC, which led to a collapse in world commodity markets and reduction in import-based duties and taxes (which account for more than 40 percent of tax collection). Collection of import duty is estimated at 2.3 percent in 2008-09 against a target of 13.1 percent. Similarly, achievement by way of supplementary duties was very poor. However, these losses were compensated to an extent by growth in income tax collection (over 20 percent compared to a target of only 11 percent). On the basis of projected revenue earnings and expenditures for 2008-09 and 2009-10, the size of the budget deficit is estimated to be 3.19 percent of GDP in 2008-09 (down significantly from 4.18 percent in the preceding year) rising to 4.5 percent in 2009-10. This suggests that the government would need to be ready to deal with a significantly larger deficit in 2009-10, because of a large budget designed to meet the challenges of the global economic crisis. It would be important to carefully balance financing the budget from bank and non-bank sources and through foreign financing. While the government has generally opted to go for more non-banks financing, its ability to use foreign financing has tended to be poor.

Budget expenditures for 2008-09 have also been well below target. The major expenditure accounts are interest (19.8%), education (17.7%), public services ((14.6%), agriculture (11.5%), defense (8.8%) and public order and safety (8.6%). In the light of the

GFC it will be important to scale up expenditures and improve utilization of the ADP during the next fiscal. A concerted effort is urgently needed to improve utilization rates.

3.17 IMPACT ON FOREIGN AID

Foreign aid flows to Bangladesh in 2008-09 appear to have remained roughly at the 2007-08 level. However, food aid has declined dramatically. Thus over the period July-April (2008-09), food aid fell to $37.6 million compared to $83.3 million during the same period in the preceding year. The total amount has declined from historical levels of around a million tons to around 80,000 tons this year. Food security has been given the highest priority by the current government but given the large volatility often experienced in domestic food production, there is always a threat of crop losses and high domestic price levels. Given the recent volatility seen in world food markets, the government remains worried about food security, and would have welcomed an assurance of some food aid of at least 200,000 tons. There is a fear that low farm gate prices this summer, following on good harvests and low world market prices, will impact negatively on the next winter harvest, and could destabilize the crucial rice market. Cuts in aid would mount a pressure on Bangladesh governments budget, affecting the ongoing poverty alleviation efforts, and social safety net, health and education sector programs. Mobilization of more domestic resources through enhancing collection of tax and non-tax revenues will be needed to meet any shortfall in aid receipts. Bangladesh may also negotiate government to government loans with developing countries that enjoy large current account surpluses and have accumulated huge foreign exchange reserves (e.g., China $1.8 trillion, Abu Dhabi $ 900 billion). These countries can direct part of their surpluses to stimulate economic growth of capital-starved countries like Bangladesh, which offer far more compelling growth prospects than the US or European economies.

3.18 WHY BANGLADESH REMAINED LESS AFFECTED

The review in the previous section reveals that Bangladesh has so far remained somewhat less affected by the global economic slowdown. Although economic growth has slowed down, and exports and remittance inflows, two of Bangladeshs critical parameters of macroeconomic strength, have grown at slower rates relative to pre-crisis projections, the quantitative nature of these impacts in Bangladesh are much less compared with impacts experienced by comparable countries especially in the Asia-Pacific region.5 Moreover, Bangladeshs growth prospects remain relatively less affected. Inflation has eased with falling global commodity prices and good domestic production especially in agriculture. Although Bangladesh suffered significant loss of income in the external sector since 2003 from severe terms of trade shock mainly originating from higher food and petroleum prices, this large loss of income was largely met by compensating growth in remittances and thus Bangladesh enjoyed a surplus in its current account balance.6 In addition, despite large scale challenges, Bangladesh has maintained relatively sound macroeconomic fundamentals, stable external balances, and good foreign exchange reserves.7 In short, one can identify several reasons behind the relatively low level of impact of global economic recession on the Bangladesh economy: Bangladesh's financial system has reasonable resilience with capacity to safeguard the stability of banking and financial systems. The financial institutions were not exposed to complex financial derivatives and synthetic securitization instruments. As such, contagion effects of the global financial markets were non-existent. There has been no sign of any crisis of confidence or liquidity problem. Prudential regulations and strong monitoring by Bangladesh Bank has ensured a relatively good health of the banking sector including lending-deposit ratio within acceptable limits. Bangladeshs positive current account balance has also reduced the risks emanating from short run fluctuations in the exchange rate and foreign reserve situation. The robust growth of agriculture, led by crop (mainly rice) production having a growth of more than 5 percent in FY2009 compared with 2.7 percent in the previous year, supported the growth of income as well as employment (more than half of the labor force are engaged in agriculture) especially in the rural

areas. The governments policy of providing subsidy to fertilizer and diesel for irrigation enhanced profitability and helped the farmers to go for higher production. The informal sector, being the largest source of employment and income for the majority of households, also flourished with support of high agricultural growth. Given the overwhelming dominance of RMGs in the export basket, the impact on RMGs has determined the impact on Bangladesh's exports. Since Bangladesh's RMG exports mainly cater to the low-price segment of the apparel market where income elasticity is lower than that in the high-price segment, the country's RMG exports remained less affected. With incomes falling, even some diversion of demand from high-end garment segment to low-end segment probably took place in the developed country markets counterbalancing the otherwise negative impact. Also recession driven fall in prices of imported industrial raw materials helped domestic RMG industries to maintain low production cost. Moreover, in view of the country specific nature of changes resulting from the crisis, RMG importers in advanced economies (especially in the US and EU) introduced adjustments in sources of procuring apparel products (e.g. diversion of orders from countries like China to Bangladesh) which compensated, at least partly, Bangladesh's loss in RMG exports and enabled it to capture greater market shares in these countries. In case of imports, the changes favored Bangladesh through lowering the growth of the import bill. In the international market, prices of commodities for which Bangladesh is a net importer (especially food, oil, fertilizer, and other essential products) experienced significant decline since the global recession. In particular, sharp fall in prices of oil, fertilizer, imported raw materials, and machinery/equipment helped in reducing production costs and improving competitiveness. The remittance inflow was not much affected since bulk (around 64 percent) of the inflows originates in the Gulf region where recession has been less severe and growth prospects marginally declined. Remittances from advanced economies (especially from USA, UK, and Germany which together account for

nearly 30 percent of the total) were also not affected to a significant extent. The net impact so far has been steady growth in remittance inflows especially since the low-skilled jobs in which Bangladeshi migrant labor is mostly concentrated are unlikely to be much affected due to growth slowdown. In addition, the resilience remittance inflows to past changes in economic growth in major remittance sending countries and the compulsion of remitters to send money to meet family obligations helped in maintaining growth of remittance inflows. The measures to reduce the cost of remittance and bring more efficiency in remittance related operations also encouraged more migrant workers to send money through official channels.

Chapter 4: Findings & Recommendations

4.1 KEY FINDINGS OF THE REPORT

During the time of preparing this report we find that the negative impacts o f global financial crisis are beginning to show on the increasingly globalizing economy of Bangladesh: a. Bangladeshs export growth rate experienced has turned negative. b. Export of non-apparels items has seen a significant deceleration.

c. Depreciation of currencies by competing countries ranging from 6-30 per cent over the last one year and their stimulus packages that provide wide ranging incentives to export-oriented sectors, have led to erosion of Bangladeshs competitive strength in the global market d. Remittance earnings could be adversely affected in near future as number of jobseekers going abroad halved as some countries have either revoked earlier job-contracts or have stopped issuing new visas. e. The adverse effects are likely to have negative implications for GDP growth, labor market and consequently attainment of poverty alleviation targets and MDGs by Bangladesh. f. There are clear indicators of weakening macroeconomic performance

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

a. Financial support to RMG and other export sector in the event of any liquidity crisis due to delayed payment or lower price b. Temporary enhancement of cash incentive to the promising export sectors which are currently facing hard times c. Reducing price of diesel further to reduce transport cost and cost of operating diesel based generators in the event of inadequate supply of electricity and gas. d. Targeted subsidy on food items to bring food price down and also to help export oriented industries from the pressure of wage hike. e. Central Bank should go with a moderate monetary policy so as to maintain a respectable growth of local demand and stimulate local investment.

f. NBR should continue its effort to strengthen the tax administration further so as to maintain revenue growth even with sluggish import performance. Government may think of increasing import taxes on import of selected luxury items that will help retaining foreign exchange without negative impact on tax revenue. g. In the event that recession brings severe impact on our export with implication of job cut, the government should come with adequate safety net programs h. How aggressive would be the policy measures depend on the extent of impact of the recession. Hence the high profile taskforce constituted by should strongly monitor the events and come up with timely implementation of required policy measures.

CONCLUSION
Although the impact has not been as severe as in many other developing countries, Bangladesh has been experiencing the adverse impact of the global economic crisiswhere the most obvious areas are exports, remittances, and economic growth affecting social equity and poverty. Much of the sensitivity resulted from the export-led development strategy that the country follows creating a situation of slackened export-related production and investment as well as softened domestic demand. So far Bangladesh has successfully coped with the crisis through appropriate adjustments in monetary policy supported by an expansionary fiscal policy stance focusing on boosting domestic demand and promoting more competitive markets. The strategic thrust of the governments policy is on spending more on education, health care, social protection and social safety nets that would not only help boost domestic demand but also support broader social objectives like inclusive growth and poverty reduction. The analysis of social impacts shows that the global economic crisis has adversely affected Bangladeshs progress toward achieving poverty reduction and social development goals including the MDGs. This highlights the need to re-launch more determined efforts in achieving the stipulated goals. Bangladesh thus faces difficult and complex challenges. Along with providing stimuli to growth, the government must also make efforts to strengthen safety nets and ensure that poverty reduction and key social development gains are not reversed. While the government is the key actor, a shared paradigm is necessary in which global and regional partnership could foster technology diffusion and capacity building for inclusive and sustainable growth. Also this is the time for the developed countries to keep their commitment to share required resources for achieving the MDGs from which the developed countries have as much to gain as the developing countries like Bangladesh.

Bibliography
Book
Beyond the Crash: Overcoming the First Crisis of Globalization, 1st Free Press hbk, New York - By Gordon Brown

Website
http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008 http://www.bdresearch.org/home/index.php?option=com_content&view=article&id =54:impact-of-global-financial-crisis-on-the-economy-ofbangladesh&catid=46:protifolon&Itemid=97 http://www.slideshare.net/masumbillah/protifolon-issue-1-impact-of-globalfinancial-crisis-on-the-economy-of-bangladesh http://www.discoverybangladesh.com/meetbangladesh/economy.html http://www.nfpcsp.org/agridrupal/content/global-financial-crisis-and-bangladesheconomy http://www.worldbank.org/financialcrisis/ http://www.economist.com/node/15810590