Global Financial Crisis: Impact on Bangladesh
Dr. Salehuddin Ahmed
Former Governor , Bangladesh Bank & Professor,
Business School, BRAC University, Dhaka.
1) Started in
-
2007
: Housing sector bubble
2008
: Sub-Prime crisis
Failure of banks and Financial Institutions
Liquidity and Insolvency Problems
2) Main Reasons
: Lax Regulation
: Low Lending Rates
Added to these two is “greed” of top management people of the financial institutions.
3) “Immediate and long term impact”
- Transmission through Financial, Real and Trade Sectors
- Global Growth Scenario (estimates by some international
organizations)
:
World
USA
Euro Zone
Emerging Nations
Bangladesh:
2009
0.5-1.0
-2.6
-3.2
1.5-2.5
2010
1.5-2.5
0.2
0.1
3.5-4.5
Growth in 2007-08
6.2%
Projected growth in 2008-09 5.9%
Projected growth in 2009-10 6%
4) Impact on Bangladesh
-
Financial Sector
Real Sector
Trade Sector
Capital Inflow/ Outflow
1
-
Likely impact on remittance, export etc.
5) BB Macro Situation
-
Forex Reserve 6.15 b$ (8/4.09)
Forex market stable
Remittance in 9 months (upto March’09) 7029.51 m$
Remittance on 2007-2008 (12 months) 7914.78 m$
Current A/C & BOP balance positive
Government Budget deficit within satisfactory limit
-
Increase export earning and remittance
Ensure liquidity & flow of credit in productive sectors
Real sector impact to be minimized
Inward looking development (SME, Agr, Thrust Sectors) &
Employment Generation
6) Objectives of BB
7) Measures taken by Bangladesh Government
8) Global Responses
-
Bailout packages
G-20 Meeting
US Federal Reserve Bank to inject US $ 1 Trillion (March 2009)
International Accounting Standard Board
Financial Stability Board
New roles of IMF/WB, Washington DC Annual Meetings, October
2009.
1. The Global and individual country responses to come out of the present global financial
crisis have yielded modest results. The forecast of growth and economic activities have
been adjusted downwards and these have implications on the performance of a
developing country like Bangladesh. The immediate impact of the global crisis has not
been felt in Bangladesh not only because Bangladesh economy is not highly integrated
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with the global economy but also for some early actions taken in the macroeconomic
management especially by the Bangladesh Bank from mid 2008.
2. It is therefore necessary that the macro situation of Bangladesh, key variables like
exports, imports, remittances, money supply, inflation, credit growth, and foreign
exchange are examined to see the impact on the macro economy and policy responses
to mitigate the impact. The first presentation of mine deals with that. The global crisis
has highlighted the transmission mechanism, particularly the role of banking system in
the process. Therefore, the second part of my presentation focuses on the “credit view”
of monetary transmission vis-à-vis the “meso” economy where bank credit has direct
impact on various types of economic activities affecting growth and employment at the
sub-aggregate level.
3. The first part deals with:
a. Economic and Financial Developments:
i. Real Sector
ii. Monetary Sector
iii. Fiscal Sector
iv. External Sector
v. Price Developments.
b. Transmission Channels of Global Crisis & Impacts:
i. Imports
ii. Exports
iii. Exchange Rate
iv. Remittances
v. Foreign Exchange Reserve
vi. Import Payments & Tax Revenue
vii. Foreign Aid & FDI
c. Performance of Bangladesh Economy with the fall out of Global Crisis.
d. Policy Responses:
i. Government’s Fiscals & Tax Incentives
ii. Livelihood Support
iii. Agricultural Development
iv. Exports and Remittances
e. Projection of some key macroeconomic variables ?
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i. In F y 10, export may rise by 5% to 6% compared to 11% in F y 09.
ii. Remittances may grow by 15% to 19% as against 22% in F y 09.
iii. Import may fall by 4% to 7.5% in Fy 10 against an increase of 4.2% in Fy
09.
iv. Inflation may rise to more than 7% in Fy 10 compared to 5.2% on
September 09.
f. Further Policy Implications.
4. The second part, the review of ‘meso’ economy deals with:
a. Bank lending trend in Bangladesh: Bank advances in all 4 quarters in Fy 09 higher
than those of 2008. This is due rebound of some economic activities, rising
prices of oil and other commodities in the international market. However, trade
and miscellaneous purposes dominated than other sectors at the macro level.
Subsequent sluggish growth, total credit growth in July and August came down
sharply to 0.56% and 0.67% respectively over June 2008. There has been a
growing demand for consumer loan.
b. Gloomy picture of investment in recent months due to two factors:
i. Downward rigidity in lending rates.
ii. Lack of infrastructural support like gas and electricity.
c. For meso picture 18 bank branches of 9 banks were selected for data from
vulnerable and emerging geographical areas. The trend of credit from June 2008
to June 2009 at meso level gives a mixed picture. In December 2008, there was a
decline which picked up in March 2009, going down again in June 2009, when
there was a decrease by 5.5% over March 2009. The slow down at the meso level
is more than that at the macro level. At the meso level trade and miscellaneous
sectors received high advances because of private demand for quick yielding,
less risky ventures, compared to credit in industry, storage, transport and
communication. Moreover, the local economic activities at meso level was not
given due importance by the bank.
d. The private commercial banks (PCBs) have contributed more than the SCBs, BKB,
and RAKUB. In March 2009; SCBs, BKB/RAKUB and PCBs provided BDT 179 Crore,
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54 crore, and 3409 crore respectively. In June 2009 these banks provided 177
crore, 57 crore and 3205 crore respectively.
e. It is high time that banks take proactive steps to provide credit in the vulnerable
and emerging geographical areas of Bangladesh. The SCBs and specialized banks
should be more aggressive and dynamic to invigorate local economic activities to
create employment opportunities and improve livelihood of the poor and
disadvantaged people.
5. The global financial crisis shows that there is no substitute of prudent government
intervention and careful regulation even when market determined incentive structures
operate.
6. Some issues for further consideration:
a. How will the slowdown in global and regional growth impact Bangladesh
economy, financial system, markets, and institutions?
b. What is the risk that the Bangladesh Bank faces in addressing inflationary
pressure given the preference for growth over inflation?
c. What is the country’s current and historic experience in managing growth in
private sector credit and how effectively Bangladesh Bank’s monetary policy
stance can resolve the present excess liquidity in the banking sector?
d. How effectively Fiscal, Monetary, Export-Import and Industrial policies can work
in tandem in taking the country into higher growth path ensuring accelerated
poverty reduction ?
5
Chart I.1 Growth of Real GDP
Percent per annum
7
6
5
4
3
2
1
FY09*
FY08
FY07
FY06
FY05
FY04
FY03
FY02
0
Per capita GDP growth * = Provisional.
GDP growth
Chart I.2 Production of M ajor Crops
200
Lakh MT
150
100
50
Aus
Aman
Boro
Wheat
*
FY
09
FY
08
FY
07
FY
06
FY
05
FY
04
FY
03
FY
02
0
* Target
Chart - 2 Trends of M2 RM & Credit
3500
Taka in billion
3000
2500
2000
1500
1000
500
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
FY10
FY '06
FY '07
Reserve Money actual
Broad Money actual
Domestic Credit actual
Private sector credit actual
FY '08
Program
Program
Program
Program
FY '09
6
Chart 3.1 : Trend in Government Revenue and
Expenditure
6
Percent of GDP
5
4
3
2
1
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY05
FY06
FY07
Revenue
FY08
FY09
Expenditure
Chart 3.2: Financing of Budget Deficits
2
Percent of GDP
2
1
1
0
-1
-1
Q1 Q2Q3 Q4Q1 Q2Q3 Q4Q1 Q2Q3Q4 Q1Q2 Q3Q4 Q1Q2 Q3Q4 Q1
FY05
FY06
FY07
Bank financing
Foreign Financing
FY08
FY09 FY10
Non-bank financing
Chart 4.1 Trends in Exports & Imports
7000
Million US Dollar
6000
5000
4000
3000
2000
1000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
FY06
FY07
Export
FY08
FY09
FY10
Import
7
Chart 4.2 Trends of Current Account and
Overall Balances
3.0
Percent of GDP
2.0
1.0
0.0
-1.0
-2.0
-3.0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09P
Current Account Balance
Overall Balance
Chart - 4.3 Import
6000
In million US$
5000
4000
3000
2000
1000
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
FY '06
FY '07
Consumer Goods
Indusrtial Raw Materials
Capital & Other Machinery
Total
FY '08
FY '09
FY10
Intermediate Goods
Petroleum & Petlm. Products
Others
74
8.0
71
7.0
69
6.0
66
5.0
64
4.0
61
3.0
59
2.0
56
June 05
Sep 05
Dec 05
Mar 06
June 06
Sep 06
Dec 06
Mar 07
June 07
Sep 07
Dec 07
Mar 08
June 08
Sep 08
Dec 08
Mar 09
June 09
Sep 09
9.0
Billion US Dollar
76
Exchange Rate
Chart 4.4 FOREX Reserve & Exchange Rate
10.0
Forex Reserve
Taka-Dollar Exchange rate
8
1500
140
1300
120
1100
100
900
80
700
60
500
40
300
20
100
US Dollar/Barrel
US Dollar/MT
Chart 5.2 Commodity Prices in the
International Market
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
FY06
FY07
FY08
FY09 FY10
Rice (US$/M.T)
Wheat(US$/M.T)
Soyabean oil (US$/M.T)
Petroleum(US$/Barrel)
Chart 5.1 12-Month CPI Inflation
14.0
12.0
8.0
6.0
4.0
2.0
Fo o d
Sep 09
Mar 09
June 09
Sep 08
Dec 08
Mar 08
June 08
Sep 07
Dec 07
Mar 07
June 07
Sep 06
General
Dec 06
Mar 06
June 06
Sep 05
Dec 05
June 05
Dec 04
0.0
Mar 05
Percent
10.0
No n-fo o d
9
1200
Chart 6 Trends in Market Capitalisation
and DSE Index
4000
1000
3000
Billion Taka
800
600
Index
2000
400
1000
200
0
Dec 04
Mar 05
June 05
Sep 05
Dec 05
Mar 06
June 06
Sep 06
Dec 06
Mar 07
June 07
Sep 07
Dec 07
Mar 08
June 08
Sep 08
Dec 08
Mar 09
June 09
Sep 09
0
Market Capitalisation
Index
Chart-7 Export Earnings
5000
In million US$
4000
3000
2000
1000
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
FY10
FY '06
FY '07
FY '08
FY '09
Woven Garments (Including Other Garments Products)
Other exports
Total Export Earnings
10
Chart 8 Exchange Rate Movements
100
90
80
70
60
Nominal ER
REER Index
Sep 09
June 09
Mar 09
Dec 08
Sep 08
June 08
Mar 08
Dec 07
Sep 07
Jun 07
Mar 07
Dec 06
Sep 06
Jun 06
50
NEER Index
REER Based ER
Chart 10
600
Chart - 9 Region-wise workers' remittances
300000
500
2400
250000
1800
200000
1500
150000
1200
900
100000
600
50000
300
No. of Persons
(In million US$)
2100
(In million US$)
2700
Trends of Foreign Aid & FDI
400
300
200
100
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
0
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
FY '06
FY '07
Gulf region
Asia Pacific region
Total
FY '08
FY '09 FY10
Euro region
USA
No.of persons left for abroad
FY '06
FY '07
Net foreign aid
FY '08
FY '09 FY10
Foreign Direct Investment
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The Global Financial Crisis: Daunting Tasks Ahead
.
The global financial and economic crisis started in 2007 as an aftermath of the housing sector
bubble coupled with aggressive lending practices in the US sub-prime mortgage market and lax
regulation of the financial sector. To start with, these developments affected the companies
holding mortgage-backed securities and credit derivatives. The early signs of the crisis were
evident in 2007; but the financial crisis developed into a full blown global recession in late 2008
battered by continuous deepening and widening of the crisis. The recession created shockwaves
though the global financial system and the global economy, and the advanced economies were
affected most. The governments in these countries are bracing their financial sector and the real
economy by stepping up various policy measures including injecting huge sums of money for
bailing out the ailing financial institutions and other industries. What is worst is that the
recession appears to hang on throughout 2014.
The makings of the crisis were essentially in the US imbalances exported to the rest of the world,
over the last couple of decades or so, in the form of persistent current account deficits. The
position of US dollar as the dominant global reserve currency enable US to pursue lax
macroeconomic policies indefinitely, with its deficits financed externally by economies running
surpluses. Not since the beating down of US inflation in the nineteen eighties by US Fed under
Paul Volcker at substantial pain of a domestic recession has the US opted again for domestic
adjustments to correct imbalances; nor unlike the EU, has the US
committed itself
unequivocally to pursuing balanced policies (fiscal accounts were in balance in the Clinton era
but private sector deficit unrestrained, and in the subsequent Bush era deficits of both public and
private sectors ran amok).
In the lax US monetary and fiscal policy regime the surfeit of cheap liquidity surged in several
aberrant directions chasing higher returns; into speculation creating commodity and asset price
bubbles (the incipient US house price bubble at the turn of the century actually eased the pains
from the dot com bubble burst), into equity buybacks with reckless leveraging (improving return
on equity but worsening the fragility of corporate finance), into loans to borrowers of dubious
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credit and securities backed thereby, into derivatives of inscrutable complexity concealing the
riskiness of the underlying assets. Close global integration transmitted these trends of the US
financial markets and institutions quickly to the other open economies, including those pursuing
balanced policies. Also, the laxities of US monetary policies immediately and automatically
surfaced in the economies with currencies pegged to US dollar, including the Middle Eastern oil
exporters. The surging wealth from price bubbles in commodities and assets flowed not into
combating global poverty, environmental degradation or climate change; but largely into
hedonism of private jets, yachts, mansions and other indulgences including such whimsical,
fanciful pursuits as competition in mega scale fairytale-like construction projects, artificial islets
curved in the Gulf with coastlines alien to known laws of hydrodynamics, mega dollar artworks
like golden lamb and Kate Moss gold statue. Now the whole fantasy structure faces collapse as
popping price bubbles triggered chains of debt default, paralyzing markets with freeze up of
fresh lending to refinance maturing debts.
Small economies like Bangladesh are however by no means invulnerable to fallouts from
prolonged global downturns or to negative spillovers of policies of large economies, and
therefore have strong stake in global stability. In forums like G-20 they need to argue forcefully
for the same high priority to stability as to recovery; and also for stability action agenda going
beyond addressing symptoms (lapses in risk managements, inadequacies of regulation and
supervision) to addressing the underlying cause (lax policies allowing unbridled liquidity
expansion, incubating bubbles).
A safe path of global balance and stability will be a lot easier if global liquidity growth is tied to
the growth of real global output in some mechanism that injects and withdraws liquidity countercyclically as global real output growth slackens or paces up. The IMF (reformed with
appropriately rebalanced voting rights and quotas for member economies) can be mandated to
craft and administer the tying mechanism, in a new role somewhat as the apex global monetary
agency.
Consensus building for such a new mechanism (in broad likeness of gold standard, with real
global output substituting for gold) may be arduous, all the more reason for kicking off the
consultation processes at the soonest possible.
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Significant gain in global financial stability can be expected also from reforms limiting excessive
leverage in corporate finance. In the current crisis the high fragility brought about by reckless
substitution of equity with debt precipitated extended chains of debt defaults, paralyzing
financial markets across major economies. A corporate generally favors debt over equity because
debt servicing costs are tax deductible while income on equity is subject to taxation. However, in
downturns, debt burden deepens a firm’s financial distress, even inviting demise, as made amply
evident by the current global financial crisis.
The Bank for International Settlement (BIS) in Basel, Switzerland for some years is engaged in
developing global norms of capital adequacy for banks and financial institutions. BIS can also be
mandated to develop global norms of debt equity balance and sound practices in corporate
financing, limiting tendencies of excessive leveraging. To this end, some extent of tax break on
income from equity, narrowing the gap in relative attractiveness of debt and equity as financing
option, may also be well worth considering.
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