Reason to worry, none to panic
THE world is in trouble, from Wall Street to Dalal Street, from Karachi, Tokyo and Singapore to Sao Paolo and Caracas. When the malaise is so widespread, it is unlikely that anyone will go unscathed, whether you are in Timbuktoo or in Dhaka.
I have never been to Timbuktoo, so let me address the question of what all this may mean for us here in Bangladesh. First of all, let us examine the two main positions that have surfaced so far:
The optimistic view
Bangladesh is a pretty much closed economy with rather limited exposure to the world financial markets. Portfolio capital (i.e. investments in our stock market) from abroad is tiny (under 5%) so that its potential flight would pose no danger. Nor has Bangladesh invested heavily in the U.S. bond/securities market (unlike China), eliminating another serious source of worry.
Capital flight could still occur if Bangladeshis thought it would be less risky to park their money elsewhere. Under the current circumstances, keeping your money parked in Bangladesh would appear to be the wiser decision.
There are a number of other factors that are in our favour: our balance of payments is in good shape, world commodity prices especially of fuel and food have come down substantially, our domestic food economy is stable and immediate prospects for the next harvest is looking good. All together a comforting situation to be in right now.
There is nothing wrong with the above analysis at all. The main weakness, however, relates to the depth and length of the crisis and what could be happening down the line, say in one or two years. This is where we may need to shed some of our optimism.
The pessimistic view
Fortunately, our economic structure is so simple that we don't have to look far to find probable areas of concern: the garments industry and remittance flows. My own view is that on both counts we are pretty safe. Our exports are low-end products (as opposed to luxuries) and, therefore, have a low "income elasticity" (demand will fall slowly in the face of income reduction).
This segment of the garments market would be one of the last to fall -- let us pray that the recession will have been reversed before that point is reached. Similarly, the Middle East has just reaped a huge bonanza due to the unprecedented oil price hike, some of which could now usefully be used to prop up their economies in the face of a full-blown recession. Thus, remittance flows are likely to keep coming.
Concerns have been aired about the flow of foreign aid. This is, of course, a real concern and the antidote to it would be more vigorous revenue generation. We must remember, of course, that real aid flows have been in decline now for years and our dependence has had to be scaled down although it still remains significant.
The most likely impact
The real concern in my mind is that we may not now be able to move out of the 6% growth rate range to the 8% growth rate zone for years to come. This will have a strong adverse impact on all our major goals, including the MDGs and eradication of extreme poverty.
The key to growth will be FDI flows, domestic credit expansion and investments -- these will be difficult to ensure in a climate of global uncertainty. At the same time, there will be intense lobbying to get concessions from the government by the usual culprits -- who would want to lose this God-sent opportunity to make a fast buck at the expense of the public exchequer?
I would hasten to add at this point that the request to keep energy tariffs on hold is completely justified until we have a clearer picture of how this crisis unfolds. The argument that we need help to compete with other countries (India, China, Vietnam) needs to be closely evaluated. After all, our competitors are even more adversely affected, or likely to be affected, than ourselves, suggesting that our relative position may even improve.
This is, however, something that needs close monitoring with intent to intervene positively if needed. We should certainly not allow our factories to close down because of the greed of the rich in the rich world.
What should we do?
We would be well-advised to look closely at the home ground: let's make sure that the boost to agriculture is not jeopardised, let us ensure that credit flows to agriculture, industry and SMEs are sustained, let us remain guarded in our response to lobbies, and above all let us keep our cool until the storm lifts.