Coping with the global crisis

The garment industry is still unaffected. Photo: Prito Reza/Drik News

THE impact of the still unfolding global crisis on the economy of Bangladesh and actions needed to counteract/minimise the potential adverse consequences have become subjects of intense discussions in various circles. Policy choices in this regard must be based on: (a) the identification of the channels of transmission of the crisis to our economy, (b) assessment of the intensity of negative impact, if any, and (c) evaluation of trade-offs among policy instruments.
A paper presented by the Centre for Policy Dialogue at a seminar on March 28 correctly indentifies four transmission channels: (i) exports, (ii) remittances, (iii) official development assistance, and (iv) foreign investment inflows -- both direct (FDI) and portfolio. The paper observes that movements in the latter two variables are unrelated to the current crisis. I agree fully with this observation.
Given a large pipeline of previously committed but undisbursed aid, a record level of new commitment of $1.34 billion by the World Bank (of this amount $ 958 million was approved by the Bank's board during the tenure of the caretaker government) and express declaration by the leaders of many developed countries that development assistance will not be reduced despite their own budgetary problems, ODA flow to Bangladesh is unlikely to shrink.
Investment inflows to any country are usually subject to considerable annual fluctuations, influenced by many factors. Moreover, a recession in source countries releases two opposing forces. On the one hand, lower sales and profits may deplete investible surplus. On the other hand, depressed domestic conditions encourage active search for profitable opportunities for investment abroad.
FDI inflow to Bangladesh in the first half of the current fiscal year was nearly 25 per cent higher than the average annual flows of the preceding three years. Portfolio flows constitute a very small proportion of market capitalization; movements in this variable do not, therefore, pose a threat to growth or capital market stability.
As regards exports and remittances, the situation so far is not greatly worrisome, though there are some budding concerns. Back in October 2008 when the first signs of recession in the real economy of developed countries were becoming visible, my response to a question asked in a seminar at the World Bank headquarters was that I did not foresee any serious adverse impact during FY08-09.
The logic was that as income fell, consumers would switch to lower end garments which constitute 75 percent of our exports. Nearly 70 per cent of our remittances came from the Middle-East countries awash with earlier petroleum bonanza. Any alarming fall in demand for labour and hence remittances was, therefore, also unlikely. Of course, if the recession became protracted and very deep, some unsavoury consequences could not be avoided. The logic has held up so far.
Total exports during Jul 2008-Jan 2009 recorded a healthy growth of 18.2 percent, backed by growth of 26.2 percent for knit garments and 20.6 percent for woven garments. Given either negative or much lower positive growth of most of our competitor countries, Bangladesh has actually increased its share in world export.
A small negative growth (1.2 percent in the last quarter of 2008) does not necessarily presage an emerging trend as the fall in October was followed by an increase in November. The fall in December was also followed by a pick-up in January 2009. Overall, therefore, our export sector is not yet in a state of distress and apparently far removed from disaster.
However, some of the sub-sectors may have been adversely hit. Based on Jul 2008-Oct 2008 or Oct 2008-Jan 2009 data, the sub-sectors that might have been adversely affected would include raw jute, jute goods, leather and leather goods, agricultural products, tea, and frozen foods.
Remittances have also followed a pattern similar to exports. There was a substantial fall in October 2008, but a fairly steep rise in November 2008. There was a minor decrease in December 2008, but again a steep increase in January 2009, recording the highest monthly flow during July 2008 to January 2009 period.
Overall, there was a 27.1 percent increase during July 2008 to February 2009. Here the concerns relate to decline in the number of new people migrating for work, low growth in issuance of new work permits and visible increase in the number of returnees.
In light of the above analysis, I will provide 12 suggestions that may be considered in designing future policies in the concluding part of this article in tomorrow's Daily Star. Some of these are directly related to redressing the potential adverse impact of global recession. Others are more relevant to medium-term considerations, but have assumed some degree of urgency in the present circumstances.

Mirza Azizul Islam, Ph.D. is former Adviser to the Caretaker Government, Ministries of Finance and Planning. Part II of this article will appear tomorrow.