Weathering the Storm
Mustafizur Rahman advises how the country can navigate the turbulant waters of 2009
Because of the ongoing global financial crisis, by all counts the year 2009 is going to be a bumpy ride for all countries -- high, middle and low income, large and small, North and South. The related discourse with regard to the crisis has now shifted from "Where did it all originate?" and "Who were the main culprits?" to "What are the possible consequences?" and "How the adverse impacts should be best addressed?"
A common refrain, oft-repeated and widely circulated, is that things will get worse before they start to get better. Experts tend to agree that the recession will continue and deepen in 2009, and possibly stabilise in early 2010, to be followed by recovery that will perhaps kick-start only towards the end of 2010. Across the globe, from the US to Germany, and from China and India to Singapore, countries are preparing to negotiate and navigate the turbulent waters in 2009.
To address the attendant challenges, developed and emerging economies have by now set in motion various initiatives in the form of bailout measures and stimulus packages. The objectives of such initiatives appear to be primarily five-fold: (a) to stimulate domestic demand, (b) to create new jobs, (c) to stabilise financial markets, (d) to support domestic industries and (e) to safeguard export interests.
In view of the above, it is only pertinent to ask how the recession and the consequent adverse effects, and also the wide-ranging response-measures taken by partner countries, are going to impact the overall macro-economic performance, price levels, domestic industries, exports of goods and services, and also the balance of payment position of low income economies such as Bangladesh.
As is the case, 2009 will cover the second half of Bangladesh's budget period for FY2008-09 and the first half of FY2009-10. How the current crisis will impact on the above-mentioned performance indicators, during the current fiscal year and over the next, and which policies Bangladesh should pursue in this regard, are important questions that merit serious and urgent consideration by the policymakers.
So Far So Good
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. Thankfully however, Bangladesh has so far been spared the worst consequences of the ongoing crisis.
When the early signals started to blip on the radar screen in 2008, the 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 and 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 neighbouring India's.
In hindsight, it also proved to be a blessing in disguise 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.
Munir Uz Zaman/AFP
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 increased 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.
A Wake Up Call
A close look at the various recent trends concerning some key macro-economic and sectoral indicators of Bangladesh economy transmits some cautionary notes.
Export growth over the first two quarters was a robust 19.3 percent. However, in the second quarter of FY08-09 (October-December), the growth had indeed been negative, at -1.4 percent. This is something unheard of in recent memory (export growth rate in the months of October to December 2008 were-7.4 percent, 13.5 percent, and -10.0 percent respectively when compared with corresponding months of FY07). This closely reflects the trend in export of apparels, the dominant item in the export basket, over the same period.
As evidence suggests, in recent months the import of apparels by the US (-9.9 percent growth in November 2008) and EU (-7.98 percent in October, 2008) has experienced a downward trend. True, export of apparels has posted positive rates of growth in spite of this deceleration in the two major markets: in the US (growth of 15.7 percent during July-November of FY08-09 compared to the same period of FY07-08) and in the EU (for July-October of FY08-09 growth of 10.3 percent over the corresponding period of the last fiscal year).
Nonetheless, sluggish demand seen in recent times in these two markets, accounting for about 90 percent of Bangladesh's apparels export (77.3 percent of total export), does not augur well for Bangladesh. Moreover, December retail performance in developed country markets, traditionally robust, has been rather discouraging in spite of multiple sales offers and heavy discounts by major retailers. Much will depend on how quickly the inventories lying with buying-houses and retailers are disposed off, and how the orders for the summer season pans out over the next couple of months.
The July-November export growth has been in the negative territory for several non-apparel items: growth of export of jute and jute goods was -6.8 percent and -12 .5 percent respectively; export of engineering products was -3.1 percent. What is also to be noted is the dismal record of leather exports (-17.9 percent).
Although the relatively low price elasticity of demand for the lower-end exportables from Bangladesh is still holding (the so-called Wal-Mart effect), once the recessionary trend deepens with the passage of time, the negative trends are likely to become stronger as income effect takes over.
The emerging shipbuilding industry, which received an export order of about $400 million in recent years, is also at present experiencing difficulty, not only in terms of receiving new orders consequent to slower growth of trade and significant fall in shipping traffic and freight incomes, but also because some of the orders placed earlier are now being cancelled.
It is to be kept in mind that many of Bangladesh's developed country partners, who account for most of Bangladesh's exports of goods and a large part of export of services (remittance), are now officially in recession (if growth performance and projections with regard to the last two quarters, Q3 and Q4 of 2008, are considered): US (-0.5 percent; -3.8 percent); UK (-0.6 percent, -1.5 percent); Germany (-0.5 percent, -2.0 percent); France (-0.1 percent; - 1.1 percent).
The US economy, which accounts for 25.5 percent of Bangladesh's global export of goods and 17.4 percent of remittance, is projected to experience negative growth of -0.7 percent in 2009. The 42 year old Consumer Confidence Index is at its lowest reading. For the Euro-area countries the growth projection for 2009 is -0.5 percent. The Middle East is projected to have lower GDP growth of 5.3 percent in 2009, compared to 6.1 percent in 2008. As a consequence, demand for goods and services by these partner countries are likely to suffer in 2009.
It is also to be noted in this connection that world trade which registered a rise of 4 percent in real terms in 2008 is projected, according to World Bank estimates, to experience a negative growth of 2 percent in 2009, for the first time in recent history.
A significant feature of the export growth performance of Bangladesh is that this has been sustained mainly due to increase in volume (accounting for about 90 percent of the increase in export value) rather than price (by contrast, accounting for only about 10 percent of the increase in export value). Bangladeshi exporters have been able to sustain their market share by offering discounts, overcoming order deferment and cancellations, and taking significant cuts in profit margins.
Currency devaluation in competing countries such as India, Sri Lanka, Pakistan, to the extent of 10-40 percent over the recent years, has also undermined the competitive strength of Bangladeshi products, including apparels. The BDT has held steady over the past one year, depreciating only by 0.6 percent between January 2009 and January 2008 (indeed BDT has shown some signs of appreciation against the US dollar in the recent past, which induced the Bangladesh Bank to intervene in the forex market through purchase of dollars).
On the contrary, currencies of some of the other competing countries have depreciated significantly over the corresponding period: Indian rupee by 26.3 percent, Vietnamese dong by 9.2 percent, Pakistani rupee by 27.1 percent, Cambodian riel by 4.7 percent, Sri Lanka rupee by 5.6 percent, and British pound by 44.1 percent.
It is to be recalled here that the 7.5 percent cap on growth of Chinese export of apparels to the US market has been lifted as of January 1, 2009. The 34 quota categories on which export caps were imposed in January 2006 have 29 common categories as far as Bangladesh is concerned; these accounted for about 79 percent of Bangladesh's export of apparels to the US. China has also recently reversed a number of measures which were aimed at encouraging producers to move upmarket (e.g. tax on lower end products). Exports of low-end apparels from Bangladesh had earlier benefited from such policies.
Stimulus packages designed in support of producers and exporters in India and China will also have an impact on Bangladesh's competitiveness in the global market. Recently, India designed a plan to inject $4.5 billion into the financial system to help exporters, with the Reserve Bank of India adding another $1.3 billion through a refinance operation.
In November 2008, China announced a package of capital spending plus income and consumption support measures to the tune of $546 billion. Indeed, in a recent report, WTO DG Pascal Lamy warned that various stimulus measures "can easily be viewed as constituting some form of state aid or subsidy with negative spillover effects on other markets."
Bangladesh's backward linkage spinning sector, with an investment of about Tk 27,000 crore, has already made its case as regards the weakened competitive strength vis-à-vis imported Indian yarn in view of the new price dynamics. The price of 30-count yarn at present ranges between $2.25 and $2.30 in India compared to $2.80 and 2.90 a few months back; the price of the same count in Bangladesh ranges between $2.55 and $2.60 (generally, a 15-20 cent difference induces Bangladesh's spinners to source locally). The knitwear sector and spinning sub-sectors will likely suffer most because of the emergent situation. It is pertinent to recall here that the textile industry of Indonesia has already lost 150,000 jobs over the last one year (10 percent of employment in the sector) in the face of sluggish demand. The proposed new-EU GSP scheme, when implemented in 2010, will also confront the country's knitwear-apparels sector with new challenges, since its crucially important sweater and pullover sub-sector will be required to make use of local dyeing facilities if it is to continue enjoying preferential market access in the EU (local capacity currently can meet only about 50 percent of the requirement).
Indeed, Bangladesh's terms of trade (ToT) has been on the decline over the last several years (if FY 2000 is taken to be the base year, 100, then the ToT had declined to 88 by FY08). The falling commodity prices in the global market could improve the situation. However, in spite of the positive spin-off effects, resource mobilisation, particularly from the perspective of revenue generation from duties on imports, will be negatively affected. Data show that in October of FY08-09, growth of import duties was lower (-1.7 percent) compared to the corresponding month of FY07-08 (growth of total import related duties was +6.6 percent), whilst the November figure indicates a further dip (-10 percent and -0.5 percent respectively). The December figures are rather alarming, with the two corresponding figures being -12.2 percent and -13.9 percent (in the backdrop of falling VAT duties of -19.7 percent). As a result, revenue mobilisation targets are likely to be missed in FY2008-09.
In 2007 and 2008, a record number of Bangladeshi workers (1.7 million) left the country in search of jobs abroad (total number of migrant workers is estimated to be about 6.1 million, who are expected to remit about $10 billion in FY08-09). In 2009, in all likelihood, the number of workers going abroad will be significantly lower, because some of the new destinations, including UAE, Malaysia, and Singapore, have indicated caution in the face of sluggish economic growth and lower demand for construction and other services. Saudi Arabia and Kuwait have already instructed their embassies in Dhaka not to issue worker visas.
UK, a major source of remittance (11.3 percent of total) and an important export destination (18.8 percent of total EU export) is already in recession. Estimates indicate that earnings of restaurateurs, a major source of remittance sent by Bangladeshis living in UK, have come down by about 15 percent; the weakened British pound has not helped our exports to and remittance from UK. Although no reliable estimates are available with regard to returning migrant workers, anecdotal evidence suggests the need for attention to this issue as well.
Some of Bangladesh's commercial banks, specially those with exposure to trading, particularly import and export business, are being compelled to go for deferment of L/C payments in the face of falling commodity prices, and with their clients having to deal with high inventories in view of earlier imports at higher prices.
As is known, stock market behaviour is critically dependent on investor confidence. Vigilance is important, particularly because the banking sector is a major player in the market. It is important that banks enjoy confidence of depositors, borrowers and shareholders. It is to be noted in this context that the all share index of DSE (DSI) was about 10 percent lower at the end of January 2009 compared to a year back, indicating continuing bearish trends in the share markets of the country. Strengthening of oversight functions by the SEC should receive highest priority, particularly in view of past experience.
With the Doha talks stalling, and in view of the recession, countries are increasingly likely to resort to various implicit and explicit protectionist initiatives and take recourse to various trade remedy measures. Bangladesh will need to keep a sharp eye on related developments.
Market access initiatives, both at multilateral level (e.g. the duty-free, quota-free market access in the WTO) and bilateral level (e.g. market access under the New Partnership for Development Act of US), are likely to see limited progress in view of the ongoing recession, with consequent frustrating implications for preferential market access for Bangladeshi goods.
Crisis as an Opportunity
Every crisis creates opportunities for those few who are willing and prepared to look for and realise the potential benefits. In spite of the adverse impacts and potential dangers, there are some encouraging signs which Bangladesh should seize on and try to make work to her advantage.
Bangladesh is only one of very few developing countries that are expecting to attain a six percent plus GDP growth rate in the current fiscal year. Notwithstanding the measures taken by China to stimulate her export sector, leading buyers are exploring the possibility of shifting orders to Bangladesh because of the relatively low prices that Bangladeshi exporters are able to offer.
As evidence suggests, Bangladesh has emerged as the foremost exporter of cotton trousers in the US market, with a market share of about 14 per-cent for this category; on the other hand, Bangladesh's export of cotton shirts to US has been on the decline for some time now. Strong backward linkage in denim in case of the former, and dependence on imported fabrics in case of the latter, are possible reasons for such diverse growth performance, once again reinforcing arguments favouring strategic support for Bangladesh's backward linkage textile sector.
Major buyers from Japan, a market worth about $22.6 billion of imported apparels (Bangladesh accounts for only about $29.6 million out of this, about 0.13 percent), have started to show renewed interest to source from Bangladesh by diverting imports from other countries (mainly China). The interest recently shown by a major Japanese buyer, Uniqlo (with imports worth $2 billion globally), to procure $600 million worth of apparels from Bangladesh is to be noted in this context.
The adverse affects of recession, pressure to appreciate the yuan (appreciation of 5.2 percent over the last one year), wage rates that are about 2-3 times higher than in Bangladesh (though productivity is higher in China), make Bangladesh an attractive destination for major buyers of apparels in spite of China's dominant presence in the market.
Only Vietnam's performance (16.9 percent growth during July-November 2008) is comparable to Bangladesh's record (15.7 percent) in the US market. All major competitors have either seen negative growth (Cambodia: -2.9 percent, India: -6.1 percent, Sri Lanka: -1.1 percent) or low growth (China: 3.6 percent).
Alongside China (accounting for 33.1 percent of market share, by far the highest), Bangladesh (in fifth position with current share of 4.6 percent compared to Vietnam occupying second position with a share of 7.1 percent) should strive to secure the second position in terms of market share in US. Indeed, Bangladesh's strategy in these times of recession and falling global apparels demand should be to go for a higher share in a shrinking pie by making best use of the emerging opportunities.
In this context, mention may also be made here about the interest of Germany's Multiline Limited with potential investment in the textile sector to the tune of $200 million and Taiwan's Pao Chen which has shown interest in building the world's largest footwear factory in Bangladesh.
Two committees were constituted by the caretaker government because of the crisis, with the Bangladesh Bank deputy governor and the finance secretary as chairs. The finance minister recently mentioned that a multi-stakeholder committee would be constituted to provide recommendations in view of the emerging crisis. This committee will be asked to review the developments and give suggestions. It will need to consult with the private sector and exporters to review the situation on a continuing basis, and provide appropriate policy inputs to the government for speedy decision making.
It is good to see that the monetary policy recently announced by the Bangladesh Bank evinces sensitivity in view of possible adverse impact on our economy. To take advantage of the emerging opportunities, Bangladesh will need to devise appropriate policies to create adequate incentives to encourage domestic entrepreneurs and attract foreign investors.
Policymakers could consider the idea of creating an export-stimulus fund to support entrepreneurs and export business. Such funds could be used to provide credit at lower rates, encourage acquisition and adoption of new technologies, and promote R&D and process and product diversification at enterprise level. Such a fund could also be used to support entrepreneurs who are interested in setting up common services such as affluent treatment plants, skill up-gradation, and dyeing facilities in the industrial clusters that are growing up around Dhaka city and also in the proposed special economic zones.
This fund could also be used in support of initiatives for workers (e.g. government could take an initiative to build dormitories for workers in such clusters). In case of any adverse outcome originating from a crisis, workers become one of the earliest victims. The government's employment guarantee scheme and "one person from one family scheme" may need to be made to work in support of the workers, if there is such a need.
To stimulate productivity, a technology up-gradation fund could also be set up (such a fund, in support of jute and textile sectors, has been in place in India for several years). It is of interest to note in this context that the US stimulus package to jumpstart the economy, which includes a Trade Adjustment Assistance (TAA) program, stipulates initiatives to open up new markets for US exporters and also requires the use of US-made materials in all public works financed by the stimulus package.
As mentioned above, stimulus packages of competing countries, that include both fiscal and monetary measures as well as currency depreciation, have enhanced their relative competitive strength vis-à-vis Bangladesh, both in domestic and foreign markets. Given the emerging situation, and in view of the interest of potential investors to invest in Bangladesh, all efforts need to be geared towards creating a conducive business and investment environment in the country.
Availability of the required power supply will be of crucial importance in stimulating investment, particularly in view of the recent trend of negative growth of import of capital machineries (-13.9 percent during July-September 2008 according to actual imports and -20.7 percent during July-December 2008 as per L/C opening figures, compared to the matched period of the preceding fiscal year).
Required investments will also need to be made to enhance the capacity and facilities provided by EPZs and specialised investment zones. The proposed export-support fund could be used for this purpose. At times like this, when investors tend to be cautious, they also are on the lookout for new and safe investment opportunities. Recent history bears ample evidence to the so-called herd mentality of investors.
Countries such as India and Vietnam, which had FDI of less than $1 billion only a few years back, were able to attract a significantly higher amount of FDI in recent years, once the critical mass was in place: to recall, the FDI flow to these two countries was $15 billion and $20 billion in 2007.
It is a recognised fact that FDI is also more likely to follow only if and when domestic investors feel confident enough to come forward, take risk and invest. Along with exports, sources of growth in our own backyard should receive equal attention, particularly in view of the large domestic demand and the uncertainties with respect to global demand.
Thus far, Bangladesh's relative insulation from global capital market and heavy dependence on lower-end exports of goods and services have provided some cushion to the economy. But there is no room for complacency. As the above discussion would suggest, Bangladesh will need to be on the alert. We must closely examine the recent trends, identify the disquieting developments, and undertake appropriate initiatives and measures to address the attendant challenges originating from the ongoing crisis and try to take advantage of the emerging opportunities.
Professor Mustafizur Rahman is Executive Director, Centre for Policy Dialogue (CPD).