Weathering the storm

Azizur Rahim Peu/ Driknews

WITH a GDP of about $80 billion, Bangladesh's increasing integration with the global economy through trade in goods and services (currently worth $47 billion, equivalent to about 60 percent of GDP in FY07-08), is a measure of the potential impact that the ongoing crisis could have on the economy. However, thankfully, till now Bangladesh has been spared the worst consequences of the ongoing crisis.
When the early signals started to blip on the radar screen in 2008, Bangladesh Bank took speedy and energetic steps to safeguard the country's reserves ($5.98 billion in October 2008), and also those of the commercial banks of the country (about $490 million kept at the time with overseas financial institutions). A large part of such reserves, kept with foreign central banks, in US treasury bills as also in the form of various bonds and certificates and deposits with foreign banks, were quickly brought back, and their safety ensured.
Since foreign portfolio investment accounted for less than three percent of market capitalisation in Bangladesh, her capital market did not witness the sort of volatility that was experienced by stock markets world over -- including those of the neighbouring India.
With hindsight, it also proved to be a blessing in guise that the SEC and the Bangladesh Bank did not succumb to pressure by various quarters to allow trading in exotic but toxic derivatives in the country's share market. Exposure of local entrepreneurs and business to foreign financial market was also minimal. That Bangladesh did not go for capital market convertibility of her currency also proved to be a saving grace.
During the first six months of FY08-09 (July-December 2008) exports from Bangladesh posted a growth of 19.4 percent over the corresponding period of FY07-08; remittance flow during the same period registered a growth of about 31 percent. The fall in the prices of food, fertiliser and fuel eased the burden of import payments, the growth of which is expected to decelerate further in the near future. This is likely to lead to some improvement in the balance of payments situation over the coming months.
As is known, fuel prices have gone down quite significantly in the recent past (from $150/barrel at its peak in July-September, 2008 to $42/barrel in January, 2009), as has also been the case with fertiliser (urea from $760/ton to $248/ton, TSP from $1,113/ton to $915/ton and DAP from $1,185/ton to $413/ton; only MOP posted some increase, from $560/ton to $772/ton).
Thus, in spite of the significant increase in fertiliser and some increase in the diesel subsidy by the newly elected government, the pressure on budgetary expenditure is likely to be manageable (budget 2008-09 has an allocation of Tk 540 crore for diesel subsidy and Tk 3,738 crore earmarked for electricity and fertiliser subsidy). Some deceleration in inflation, particularly food inflation, is already visible. Macro-economic fundamentals remain within the comfort zone. Bangladesh Bank's projection about GDP growth for FY08-09, with its low case of 6.3 percent and high case of 6.6 percent, appears to be realistic and attainable.
However, Bangladesh's macro-economic performance indicators conceal some disquieting features and undercurrents, and some of the emerging trends of recent times ought to be seen as cause for concern. These recent developments merit a closer examination and should serve as a wake-up call for the policymakers.
For the full version of this article please read this month's Forum, available free with The Daily Star on Monday, March 2.

Professor Mustafizur Rahman is Executive Director, Centre for Policy Dialogue (CPD).