How does the global financial crisis affect Bangladesh?
THERE is a saying that when America sneezes, the world gets flu. This is evident, as the American financial crisis has spread throughout the world. America can come out of this crisis, but countries with weaker economies will suffer heavily.
Bangladesh is affected by what transpires in international markets and economies of leading countries. Most of them are experiencing slowdown in growth. Bangladesh is most likely to be adversely affected sooner or later.
Stocks and shares dropped to the lowest level across the world on October 10. No country was spared from financial crisis because of globalisation and inter-locking of financial interests.
Some economists have compared October 10 to 9/11. Financially, 10/10 is a new 9/11 because the financial system and money markets will never be the same.
According to economists, 10/10 has dramatically changed global financial system forever. Governments have intervened with funds to avoid collapse of reputable banks. Some said that nationalisation of banks was unthinkable in the 21st century, but it has happened in a free market economic system.
Shashi Kapoor writes in the International Herald Tribune "Fidel Castro and Mahmoud Ahmadinejad should pronounce themselves vindicated by the crisis in global capitalism, since free market economy and capitalism have over the years been strongly identified with America."
The crisis is compounded by the fact that the Bush administration has been saddled with deficit budgets for several years. It is reported that current budget deficit of the US hit a record high to $ 455 billion. President Bush had inherited a surplus budget of $79 billion from the Clinton administration.
Furthermore, US regulators did not monitor the way the banks were providing loans during the housing-boom period. The regulatory bodies in the US ignored warning signs of a financial storm since August 2007, and believed that the free-market system would take care of it.
When the catastrophe went out of control, the US treasury secretary came up with the $700 billion rescue package. Some economists argue that it is too late, and is an inadequate or flawed response.
The rescue package met strong opposition in the Congress despite the request of the president to pass the law quickly. Republican lawmakers do not believe that the administration should use taxpayers' money to bailout the financial institutions.
After more than week, the bill was passed with many conditions. Some say that the US should now be called "Socialist Republic of America."
Britain's prime minister adopted measures to restore confidence in the banks and money market by buying shares in the banks and providing billions of dollars to the money markets, including guaranteeing all deposits in the banks, and inter-banking debt as well.
The US has reportedly entered a recession according to an official of the Federal Reserve Bank and leading European countries are on the brink of recession, although unprecedented financial stimulus packages by, Britain, France, Germany and Japan have avoided global financial meltdown.
Why meltdown?
It has been argued that the meltdown of the financial system was "Made In America," because it relaxed rules of providing loans to people with no income for buying houses, called "sub-prime housing loans" (now known as "toxic loans or assets"), amounting to about $2.1 trillion dollars.
The paper securities on property were packaged and sold to banks and financial institutions worldwide, and when borrowers failed to make payment for loan the banks and financial institutions could not recoup the loan-money because the price of property was too low or because there was no buyer.
The towns where these properties are, are called "ghost-towns" because the owners have left and banks cannot sell the property.
Banks and financial institutions that bought security-papers have lost money. The IMF reckons that, worldwide, losses on "toxic assets" originating in America will reach $1.4 trillion, and so far $760 billion has been written-off by them.
Normally, banks and financial institutions lend and borrow money, and the money market works well. During this crisis, money markets ceased to function as investors, and banks which ordinarily arrange foreign exchange swaps among themselves for a set time period are nervous about the risk that their counter-party will go bust because of liability of "toxic assets" while the swap is being put into place, and so have shied away from such deals.
Thus, the global money market was closed and a severe credit-crunch was felt across the world. If it were allowed to continue further it would have led to depression.
How does it affect Bangladesh?
In the industrialised countries, it is reported that manufacturers are not making money, the retailer is not making money and the consumer is complaining because they are paying more. An unprecedented plunge in the confidence of consumers is being experienced in these countries.
The global slowdown in the leading economies is likely to adversely affect exports, aid-flow, foreign direct investment and remittance from workers. About 75% of the exported garments and knitwear go to the US and Europe, but this is likely to fall because there will be no demand in those countries.
Bangladesh needs foreign direct investment (FDI) up to 28% of GDP every year to reduce poverty in the country, but it may slow down considerably. Likewise, aid from the G-7 countries will be less.
Remittances during the last financial year stood at almost $7 billion. 25% was from industrialised countries and 75% from the Middle East. The Middle East has not been immune from the crisis and stocks fell there too.
Furthermore, labour laws in some Middle East countries have changed to the detriment of foreign workers. It is likely that remittances will be less because there will be job cuts.
The good side of the financial crisis is that the price of oil has plummeted to a level unimaginable this summer. At the time of writing it was less than $75, from the highest $147 per barrel. This will help Bangladesh, which imports oil.
Suggested steps
Unemployment in the private sector is likely to increase, which the government must try to check.
Many economists say that one of the ways to keep unemployment at bay is to spend money on infrastructure, thus enhancing employment and ultimately increasing productivity. Purchasing power of vulnerable groups must be increased by directly giving money or food for work.
New business-friendly policies may be adopted to attract foreign investment. A cut in interest rates to boost investment in the private sector will be difficult because inflation hovers at around 10%.
Real estate developers and garment manufacturers may be given more incentives by cutting taxes and customs duties on raw materials so that rate of growth is maintained.
Bangladesh seems to be in unchartered territory because such global economic crisis has never occurred before. It is qualitatively different from earlier economic break- downs in South East Asia in 1987 and 1997.
Bangladesh's economic security is threatened. No one can be sure of what lies ahead for at least two years. Our think-tanks and private sector may advise the government on how to address slowing economic growth in the country.
The volatile situation is both a challenge and an opportunity for Bangladesh to show innovation and creativity to come out from the likely adverse effects of the global economic slowdown.
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