ICAP Conference 2009

63

Financial Meltdown - Crisis Of Governance?

Governance Crisis,
Global Financial Meltdown:
Ramifications in Bangladesh
 F I N A N C I A L M E L T D O W N
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Governance Crisis, Global Financial Meltdown:
Ramifications in Bangladesh
A. The Meltdown from the US Economy
Featured by lack of transparency, non-disclosure and
accountability, the financial management with special reference to
the derivative market was unregulated. The perception of more
profit only the core concept of capitalism through highly paid CEOs
phenomenally aggravated the financial market scenario. The CEOs
became adventurous to take off their units into success more by a
'greed culture' often irrational to the market needs & mechanism.
Deregulations meant greed to them all. They were rewarded with
enormous amount of incentive package & bonuses on their 'profit
successes mostly dwindling the banking sector into dire
consequences. The huge risks associated in these financial markets
resulted into unregulated credit derivative market. The credit
default swaps picked to US $ 42.6 trillion in June 2007 from US $
28.9 trillion in December 2006. Many other forms of derivatives
alike large scale speculative short selling aggravated the
prolonging vulnerable banking system. Alan Greenspan, the former
Chairman of US Federal Reserve Bank conceded in his testimony to
the US congress in relation to the havoc of disaster from
deregulation stating that 'he had too much belief in self correcting
power of free market and had failed to anticipate the self
destructive power of wanton lending. He acknowledged failure of
banks & financial Institutions in protecting the interest of
shareholders.
Recession in US economy is nothing strange. This however took a
severe turn since April 2007 when the sub prime crisis started to be
felt in the economy. Between 2004 and 2006, US rate of interest
went up from 1% to 5.35%. The reason for this rise was undertaking
higher risk at a higher interest leading to more revenues & hence
incentive to the CEOs and their teams for that matter. This was
innovated for borrowers with poor credit rating or collateral base.
The ratio of US public and private debt to GDP reached 358% in 3rd
quarter of 2008, the highest in US history. It was 300% in 1933
during the great depression. The private debt reached an all time
high at 294% of GDP in 2007, 105% above prior decade. A gigantic
debt and credit expansion, indeed! Over the past & decades, US
financial sector grew six times faster than the growth in nominal
GDP when the financial sector allegedly generated 40% of US
corporate profits. Household debt mainly on housing rose rapidly
from 6% in 1997 to 100% in 2007 of GDP.
This means in other words, the greed of a few, spelt disastrous
financial hazards for the rest. The crisis got aggravated as SMEs
could not avail bank finances. All these transformed the financial
- C R I S I S O F G O V E R N A N C E ?
Masih Malik Chowdhury, FCA
sector turmoil into turmoil of the economy. Even depression,
instead of recession remained a no wonder. These together
worsened the other EU, Japan, China and even Asian Economies.
The mortgage giants Fannie Mae and Freddie Mac were taken over
and huge cash was injected to save AIG. Alone in US over US $ 787
billion rescue plan came up despite which banks including Citigroup
did not show up signs of recovery.
Fallout from the housing collapse spread to other areas. Builders
cut spending on commercial construction projects 21.1 percent, the
most since the first quarter of 1975. Homebuilders slashed spending
at a 22.2 percent pace, the most since the start of 2008. A sharper
drop in U.S. exports also factored into the apparently weaker
performance in the fourth-quarter.
Many have termed that this is the start of another Great Depression.
Others have differed saying the situations at that time and that
persists now are dissimilar. However, some pertinent statistics
reveal more differences than similarities between the 1930s and
today:
?
The 1929 stock market crash caused the DJIA to plunge 40% in
two months compared to 22% over a year now.
?The unemployment rate jumped to 25% by 1933 compared to
6.1%today.It may slide more and then scenario would be
otherwise.
?The GDP shrank by 25% during the early 1930s; it is up over 3%
during the past year. Apprehensions prevail for its downslide
also.
?Consumer prices fell by about 30% from 1929 to 1933; and it is
falling now yet at a slower pace.
?Home prices plunged more than 30% during the Depression
versus about 16% today, which may in all likelihood come down
further.
?By 1934, some 40% of all mortgages were delinquent whereas
financiers are being bailed out being delinquent today.
?More than 9,000 banks failed in the 1930s compared with
much fewer numbers that have failed and would be failing in
coming years.
Looking back, almost everyone agrees that the great Depression
Governance Crisis, Global Financial Meltdown - Ramifications in Bangladesh
was not caused by the stock market collapse alone. It was mostly
caused by policy blunders. Instead of increasing the money supply
(and credit flow) - the Federal Reserve of that era reduced it by
nearly 33%.
So the mistakes of past will not be repeated now while the world
then and now is widely different. Now let us see was the US economy
in comfortable shape before the meltdown. This is a common
question. The answer is in negative as an empire built on debt is
considered as one on the sand. The US government now owes a
staggering US $ 13.7 trillion (US $ 10 trillion?). Moreover, the
American consumers owe another US $ 14 trillion. Therefore, this US
$ 28 trillion (US $ 24 trillions) does enable USA to be called as the
“Sick man of North America”.
The end of 15th century show dying Ottoman Empire used to be
termed as Sick man of Europe. Just in another following century
Bush administration transformed USA into debt ridden 'Sick man' of
North America' as these debts were not matched by productivity or
innovations. Instead, consumption prone economy got indebted in
a geometric progression. The consequence to these could be a new
order economy away from or a modified neo-liberalism. In a year,
only US GDP was down by half and one out of 4 able Americans got
jobless. The two mortgage giants stated above held US $ 5 trillion
worth of mortgage, almost half of the total loan on mortgage. The
US blind eyes on the unbridled growth of greed and deception of the
CEO of large corporations and the wall street manipulation only in a
few years from Enron & WorldCom downfall, shows the worst (?) US
governance of the economy. The recent (March 2009) government
data reveals US economy contracted a stronger than expected
6.2% in fourth quarter highlighting the stunning meltdown. Mark
Zandi, the Chief Economist of Moody's Economy-com placed the
odds of 'a mild depression' at 25% up from 15% three months before.
The world largest economy was winding up a full year of recession.
For the full year 2008, the economy grew at a modest annualised
rate of 1.1%, the lowest since 2001, down from 2% in 2007.
Therefore, a sooner recovery would not be a rational or a logical
expectation. We can only hope for better years ahead.
Warren Buffet commented, “It's fallen off a cliff “Buffett said, “Not
only has the economy slowed down a lot, but people have really
changed their habits like I haven't seen”.
B. Meltdown from Crises of Governance?
Governance for the crises
The word governance derives from the Greek verb (Kubemao) which
means to steer and was used for the first time in a metaphorical
sense by Plato. It then passed on the Latin from which it has
transpired on to many languages.
Governance has since over the last decades been a vital subject of
concern and interests in both the worlds; capitalistic and beyond.
Indeed, billions of dollars have been drained out and are being
spent on researching about Governance more so for good
governance. Doubts however yet persist as to whether the
preachers of good governance have followed -charity begins at
home-philosophy for that matter. Whether global institution like
World Bank, EU, ADB, IMF and so on so forth or think tanks in and
around the world have all themselves at home practiced the
features of governance that they preach, are yet full of ambiguities.
Academics around the globe have found matters in it to talk and
research about it. The governance however can bring forth success
or failure in the state, corporate bodies, business entities and NGOs
by following the dictums of governance in respective local
perspectives. In all cases however, the governments concerned
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have the primary responsibility and credibility from governance.
Governance often is made a misnomer with Government. However
in terms of distinguishing the term governance from government
“governance” is termed as what a “government” does. It might be a
geo-political government (nation-state), a corporate government
(business entity), a socio-political government (tribe, family, etc.),
or any other kind of government. But governance is the kinetic
exercise of management power and policy, while government is the
instrument (usually, collective) that does it.
In general terms, governance occurs in three broad ways: (a)
through networks involving public-private partnerships (PPP) or
with the collaboration of community organizations;(b)through the
use of market mechanisms whereby market principles of
competition serve to allocate resources while operating under
government regulation ;(c)
Governance has by now, been viewed in different aspects. It relates
to decisions that define expectations, grant power, or verify
performance and consists either of a separate process or of a
specific part of management or leadership processes. In countries
all around, people set up a government to administer governance.
In the case of a business or of a non-profit organisation,
governance relates to consistent management, cohesive policies,
processes and decision-rights for a given area of responsibility.
Governance can be long & short terms for Global, Corporate, Entity
or Project perspective.
Good governance has to have some features, which are visible from
below:
As a process, governance may operate in an organization of any
size: from a single human being to all of humanity; and it may
function for any purpose, good or evil, for profit or not. Perhaps the
moral and natural purpose of governance consists of assuring, on
behalf of those governed. The ideal purpose, obviously that would
assure a perfect or near to perfect pattern of good with nothing bad
in it.
The traditions and institution are not similar everywhere, by which
authority in a country is exercised. Governance has been defined as
the rules of the political system to absolve conflicts between actors
and adopt decision. It has also been used to describe the “proper
functioning of institutions and their acceptance by the public”.
A new World Governance Index (WGI) has been developed and is
open for improvement through public participation. The following
domains, in the form of indicators and composite indexes, were
selected to achieve the development of the WGI: Peace and
Security, Rules of Law, Human Rights and Participation, Sustainable
 Governance Crisis, Global Financial Meltdown - Ramifications in Bangladesh
66
Development and Human Development. The ADB concept of
governance relies on four key elements or conditions that are
accountability, participation, predictability and transparency.
The recent recession, which probably did not or may not transpire
into depression that has been termed as global meltdown is the
byproduct from lack of governance. Globalisation and the inter
country dependence in the world has let one country to have the
smell of economic downfall in other. Equally, the economic up rise in
one would open similar prospect for the other. The financial crises
have been resulted for US economics downfall and static, more
properly as IMF predicted, negative economic movement. The CEO's
greed culture in USA that once, visibly opened an enormous era of
prospect emanating from the financial sector there, all beyond the
rules, norms & practices of governance have rendered the global
economies which are dependent on market forces interaction to a
sudden short term (?) economic squeezing syndrome. The stimulus
packages in almost all the economies & zones could have slowed
the pace of downfall but apparently demonstrated all the signals to
keep away from greed cultural. After the greed what next has been
answered by the economic process – that is uncertainties in free &
uninterrupted functions of market forces without state
interventions so to say, Governance. So it is the state which has to
govern the fate of market journey for economic ongoing &
development. It is thus failure of governance at USA, Europe & so is
Asia, which could not set norms or practices to be commonly
adhered by all specially private sector, around the world of
capitalism and beyond. Is not then Governance is the root cause for
the crises?
C. IMF and ILO on the Crisis
IMF has been suggesting various measures like stimulus package
etc. in the backdrop of the crisis often contradicting its own prior
prescription of free market operation. IMF published statements
saying world growth is projected to fall to .5% in 2009, the lowest
since World War II. While in November 2008, its forecast was 1.75%.
The 185 nations body IMF warned that the world economy is in deep
recession. It said about a highly uncertain out look and that the
timing and pace of the recovery depend critically on strong policy
action.
It warned that in the US, the epicenter of the financial crisis emerged
in August 2007 stemming
from a US sub-prime
mortgage crisis leading
into firestorm and
collapse of Wall Street
investment giants like
Lehman Brothers, will
endure 1.6% contraction in
2009 over the prior .9%
estimate. This estimate is
not unlikely to downslide
further.
Japan's economy would shrink by 2.6% in 2009 instead of .2%
previously foreseen. This being the world 2nd largest economy
after US would be mired in recession for a second consecutive year
in 2009, after shrinkage of .3% in 2008.
The 27-member Euro zone economy would be suffering a 2%
contraction in 2009 after growing 1% in 2008 as against a prior
estimate of .5% in 2009. IMF Managing Director Dominique Strauss
Kahn called for a European Central Bank to 'give more gases to the
zones' economy. It observed Germany, the EU biggest economy,
would contract by 2.5% from 1.3% expansion in 2008. Britain would
suffer most with GDP contracting 2.8% after .7% growth in 2008.
On the other hand, developing countries would expand by 3.3% in
2009 from 6.3% growth in 2008. Indian growth would slow down to
5.1% from 7.3%. China's pace of growth in 2009 would be 6.7% from
9% in 2008.It noted that downslide risks will continue to dominate.
In a separate report on global financial stability, IMF raised its
estimate of potential losses in US originated asset down to US $ 2.2
trillion from US $ 1.4 trillions.
ILO has feared a mere global economy growth by .5% while there
would be 50-million job cuts world wide, it continued. There has
been a big drop in funds flowing to developing countries. Net capital
flows to emerging markets are estimated to fall from US $ 929
billion in 2007 to $ 466 billion in 2008 and further to $165 billion
this year, according to the Institute of International Finance (IFI).
The flow of FDI worldwide fell by 21% to US $ 1.4 trillion last year,
according to UNCTAD data. The FDI flow to developing countries
still grew by 4 percent in 2008, but this was much slower than 21% in
2007. This deterioration would continue only to aggravate
struggling recipient economies.
These estimates of ILO and IMF are however likely to be worse as
estimated contractions are consistently being revised in the
backdrop of practical consideration. Moreover, the IMF MD said that
the cleaning up of balance sheets of banks in crisis are not being
done as rapid as needed. This needs to be geared up by more
powerful stimulus packages. A quicker cleaning up of balance
sheets are needed, he remarked.
D. The Davos Summit & Global Financial Meltdown
Since last 38 years, summit of world leaders are being held at the
Swiss Ski Resort to talk about the global economy. This year
compared to 27 of last year, 40 heads of state/ governments had
signed to attend the World Economic Forum meet. The two
predominant issues in this summit were how bad would this global
recession get? In addition, what will provide the growth needed to
end it?
Wide spread job losses and fears of social unrest and protectionism
reverberated around the world Economic Forum in Davos,
Switzerland. German Chancellor Angela Market proposed UN
Economy Council and condemned unfettered market saying-
freedom is a necessary precondition for market forces to operate.
Individual freedom needs to the limited if it takes freedom away
from others. UK PM Gordon Brown called for a global regulatory
system with toughened up IMF & WB. He stated you can not leave
everything to the market. Brazil voiced through its Foreign Minister
was- there is threat of instability and social unrest with all its dire
consequences. “Social unrest and protectionism are the two major
risks of the world economic crises,” said French Finance Minister
Christine Lagarde. The South Korean Trade Minister Kim Jong- Hoon
Governance Crisis, Global Financial Meltdown - Ramifications in Bangladesh
continued- “The more governments get involved in the market, the
more probable that protectionism measures will come about and
that is vicious circle”.
The IMF has recalculated the growth of global economy at less that
1% similar to what the WB did. This was done in the backdrop of
surprisingly low growth figure for China.
Prof Victor Halberstadt at Leiden University in the Netherlands and
a veteran of Davos event remarked, “Do we really understand too
little about the economy? I am afraid the answer may be 'yes' and
that is why policy makers are going to Davos”. He along with others
expressed the belief that this meeting could mark an opportunity to
seek a new economic order. “Everyone is at loss, this is the start of a
period of huge improvisation. There is no longer any best practice
around to refer to,” said Professor Halbertadt.
Goldman Sachs did not host many regular events as usual in the
global economic turmoil like the Davos Party. Yet however, over
1400 CEO and Chairman of Companies made their presence. Klaus
Schwab who founded the World Economic Forum in 1971, the year
Bangladesh was struggling to liberate its homeland from the
occupation forces, has been running it since then as a nonprofit
organisation. There have been gathering during other economic
crises, in the 1980's and 1990's that seemed severe at that time but
none except the incumbent one was so global or open-ended. This
is absolutely a new Davos-remarked the founder of this summit. The
summit observed that many by banks are on government life
support and even state- controlled sovereign wealth funds are not
offering capital to Western Corporation.
A French Business School Professor of Economics & Political
Science Ethan Kapstein apprehended that this summit could be first
Davos where capitalism is widely viewed as a failure.
Richard Oliver son of late British actor Laurence Olivier, who throws
seminar from his own company commented- “The capitalist myth is
lovely and youthful. It kicked off the Industrial Revolution, but may
be we need a new one. Referring to Shakespeare tragedy Macbeth,
he said, “The tale shows a heroic soldier turned bad, led to self
delusion by his own ambition and greed like Lehman Brothers”.
The Summit leaders at Davos called for the conclusion of Doha
Round of global trade opening talks as part of the stimulus package
for the world economy. They warned that protectionist efforts,
which tend to rise at the economic crises events, could turn the
situation to worse. Eighteen countries including India resolved
against the trade barriers. The emerging BRIC (Brazil, Russia, and
India & Chine) economies articulated the worries of the developing
nations and marked their strong presence telling the American &
others in the west as to how their business models turned into
bubbles, which were to burst anyway. The voice of Indian commerce
& Industries Minister Kamal Nath echoed- “History is the witness
that whenever countries try to prop up protectionism, it intensifies
depression”.
Amidst persisting gloom due to the worst financial crises since the
great depression the summit took off with warnings against the
creeping protectionism and expectations that governments
bailouts alone will restore the worlds biggest economies to growth.
There remained a few retaining faith in capitalism, despite the
breadth & width of the current crises wherein its adverse effect on
the world are expected to continue through & even beyond 2010.
Although it is scheduled to hold the G-20 summit in April in London
to find a way out of the economic crisis, the Davos virtually ended
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without any solutions to Global Meltdown.
E. Asian Countries & the Financial Meltdown
Developing countries are facing a worsening of trade financing as
banks have tightened their supply of credit even for routine import
and export business. It was reported at a World Trade Organisation
meeting that there is a US$ 25 billion shortfall in trade financing
that now needs to be billed.
Japan parliament has passed a Yen 4.8 trillion (US $ 52.2 billion)
stimulus plan including a cash pay out of Yen 12,000 (US $ 133) per
taxpayers. Another package of US $ 109 billion (Yen 10 trillion) is
also in active consideration. Its economy minister stated about the
worst economic crises in the post war era. Its economy has
contracted for 3rd consecutive quarter possibly shrink by 12.7%.
Export plummeted a record 13.9% and GDP shrank .7%, first decline
in 9 years. IMF forecasts Japans economy will shrink 2.6% in 2009
which is over the 2% overall decline in advanced economies.
Japan PM said Thursday there was no bottom in sight for Asia's
biggest economy as a record slump in business investment raised
fears that its recession is the deepest since World War II. Japanese
companies slashed their investment in plants and equipment by
17.3 percent in the last quarter of 2008 from a year earlier, the
biggest fall since comparable records began in 2002, the finance
ministry said.
The contraction could be as large as 14.8 percent, which would be
the worst since World War II, surpassing a 13.1 percent decline in
early 1974 after the first oil shock, UBS economist Akira Maekawa
said. Prospects for Japan's export-driven economy turned gloomier
on Monday on news that worldwide demand for Japanese goods
dried up in January, sending the Tokyo stock market to a 26-year
low point. Japan currently deep in recession, has been hammered by
a global drop in demand for the cars, high-tech goods and
machinery for which it is famous, putting the economy on course for
its worst economic crisis since world War II.
The Chinese government has announced a Yuan 4 trillion (US $ 586
billion) fiscal stimulus package to spur domestic demand and
reserve the slowing economy until 2010. Additional provincial and
municipal governments have a Yuan 20 trillion ($ 2.93 trillion)
stimulus package. Its economy's growth dipped to 9 percent in third
2008 quarter from a persistent double digit in prior five years. The
export in January 2008 dropped shortly by 17.5%. Its year-to-year
GDP growth dipped to 9% in 2008 from 13% in 2007. Amidst closing
of factories in thousands, some 20 millions have lost jobs. Its
imports have declined by some 43%. February 2009 data showed a
27% fall in Chinese exports while a 24.1% decrease in imports
followed. Trade surplus has come down to US $ 4.84 billion from last
months US $ 39.10 billions.
South Korean government that aims at a 3% growth in 2009 has
allocated US $ 102 billion or 15% of GDP in liquidity injection for tax
cuts and stimulus package. Its US $ 970 billion economy grew 2.5%
in 2008 from a 5% growth in 2007. Its exports in January 2009
plunged by a record 32.8% from a year ago to US $ 21.7 billion
swinging the trade balance to a deficit of US $ 2.97 billion.
Taiwanese government has announced a NT 700 billion stimulus
package in 2 phases aimed at creating 150,000 jobs in 2009
confronting acute unemployment that climbed to all time high in
December 2008. Many think tanks foresee the growth in 2009 to be
close to zero.
Singapore's GDP growth is likely to be –5 to –2 percent in 2009
 Governance Crisis, Global Financial Meltdown - Ramifications in Bangladesh
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down from –2 to –1 percent range. The job losses soared to 16,000
in 2008, a 5 years high. The government is planning to inject US $ 5.1
billion to help companies to avert layoffs along with a corporate tax
cut of 17%.
Indonesia has set aside a US $ 6.31 billion stimulus package to boost
its economy amidst the crises. The December 2008 exports
plunged 20% from the year before as overseas demand for its
products shrank. This meant an obvious impact on the economy
from the global economic meltdown. The exports earning in
December 2008 was US $ 8.7 billion down from November US $ 9.6
billion.
The Philippines set a 3.7% to 4.7% economic growth target while IMF
apprehended downslide of the growth to 2.25% in 2009. Exports
plunged 40.4%, shipment of electronics dropped 47.6%, job losses
are taking place at large all meaning the economy in recession.
Vietnam as recipient of FDI has retained the fall along with a
declining inflow a remittances and outflow of exports. Growth slid
down to 4% from the projected 6.5%. Compared to usual monthly
average of exports for US $ 6.5 billion the December 2008 figure
was US $ 4.9 billion only. Along side tax-exemption, a stimulus
package of US $ 6 billion is in the offing.
Laos originally projected 8% growth, has now been vying for a 6%
growth. Its economy grew by 7.9% in 2007-2008 fiscal.
Srilanka announced a US $ 141 million (Rupee 16 billion) stimulus
package that include reducing fuel prices to shield the economy
from the global slowdown.
India has lowered its economic growth target for the current fiscal
to March 2009 to 6.8% from last 7.7%. Export fell first in October
during 7 years, industrial production fell .4% & rupee fell perilously
to IR 50 for a dollar in November 2008. India has unveiled US$ 6
billion bailout package.
Thailand export fell 15.7% in December from a year before after
17.7% drop in November 2008. Bank of Thailand believes the
Kingdom would experience a quarterly contraction but not
recession. The stimulus package of US$ 3.36 billion has been set
alongside other specific measures.
Malaysia has set its earlier target of a 3.5% growth this year but it is
likely to be revised downwards amidst persistent uncertainty. In the
last 3 months of 2008, 1.5 millions turned jobless consequent upon
the squeezed economic output by 6% during last quarter of 2008
compared to that of 2007. The stimulus package including tax cuts
would be between US $ 6.7 to US$ 9.4 billions.
Gulf growth has been forecasts at 3.5% decline in OPEC member
revenues for price & production fall will cause governments a loss of
US $ 300 billion in 2009 compared to 2008. The most publicised fall
is in the oil price, which dropped from its peak of $ 140 a barrel to
around $ 40 at present. This is a blow to oil, producing countries.
Bangladesh has not been touched here in order to avert
overlapping as it has been analysed at length elsewhere being the
today's subject matter.
F. Recession in Europe
The countries who first become victim to the recession in Europe are
the Nordic three- Denmark, Finland and Sweden. These
traditionally robust and export driven economies could not be away
from the financial meltdown amidst primary belief to escape the
worst effects of recession. The first to join the recession from
Europe is Denmark when its GDP contracted 2% in the 4th quarter of
2008 but it shrank by 8% in 3rd quarter. Chief analyst of Nordea
Bank reported Denmark is perhaps experiencing its worst crisis
since World War II. Finland's GDP shrank 1.3% in last quarter, 3%
down from the prior quarter. Sweden's import fell by 5.4%, exports
down by 7.2% and industrial production shrank by 6.1% in the last
quarter. Norway by exception, being worlds leading oil & gas
exporter, grew 1.3 percent. The Nordic region will persistently see
recession during 2009, forecasts reveal.
In Britain also BoE slashed the British borrowing cost by a further
half percent to .5%. This rate is the 315 years lowest interest level for
BoE history. Since October 2008, the 5% rate was down due to the 18
years recession and falling inflation. Yet BoE announced a
foreseeable shrinkage of about 6% before returning to growth in
2010. BoE has created a US $106 billion fund (£ 84b) via extra
ordinary measures to boost lending after the lending rate dipped to
.5%.
To save the automobile industries France has taken stimulus plans.
Czech PM has resented as EU President saying, “The attempts to use
the financial crises to introduce some form of protectionism may
slow down and threaten the EU economic revival. Meantime,
unemployment rockets in Spain, Italy and Greece have already
resulted into riots. The EU golden rules are in a test due to the crisis.
G. Bangladesh, Impact of the Meltdown
Bangladesh has not yet liberalised the capital account. Our banking
system is awaiting integration with international banking
procedures, which is a blessing for our economy right now.
Resultantly, the effects on global financial meltdown is minimal, if
any. The recessionary effects for the faster economies which are
globally interrelated and integrated would definitely befall upon
Bangladesh. If the recession worsens which is likely to prolong to
2010, the impact on Bangladesh is to be absorbed for which policy
decisions are to be taken immediately. Procrastinations may take us
to a far adverse consequence than we can ever anticipate. However,
should the recession prolong further taking few years, Bangladesh
cannot stay apart. Rather impacts are going to be severe. The
economies affected now are all in economic relationship with
Bangladesh. So, all severe matters affecting those economies will
have ramification in Bangladesh.
We need to ponder about which areas are going to concern
Bangladesh and have implication on our economic health?
Economists, policy planners and entrepreneurs have come up with
views & opinions both verbally and in seminar papers. The recent
unfolding changes in the global financial scenario would broadly be
Governance Crisis, Global Financial Meltdown - Ramifications in Bangladesh
69

transmitted to Bangladesh through a) Exports & Imports b) consumption while credit crunch will also adversely affect their
Remittances c) External Assistance & FDI d) Policy changes in buying spree. Along side the exports, import cost for Bangladesh is
developing partner countries etc. Some information about likely to be lower as well. The thrust sector RMG & Textile
Bangladesh economy may be relevant here: contributes over 60% to our exports earnings with 25% local value
additions. Thus, the balance 75% is spent because of import costs
for back-to-back L/C wherein the cost will be competitive and
GDP (2007-2008) – Tk. 541,919 Crores (US $ 80 billion)
downslide in favour of Bangladesh balance of trade. There is likely
to be a balanced fall in export price alongside a downslide in import
Contributions From Employment (%)
costs.
Agriculture & Fisheries contributions 20.87% 48.10
Industries 17.77% 11.18 The exports & imports from and into Bangladesh are vulnerable to
Power, Gas & Water Resources 1.56% .21
Construction 9.14% 3.16 US $ in Billion
Whole Sales & Retailing Marketing 14.39% 16.45 Item Target Actual Remarks
Transport, Conservation & Communication + 12.34% 8.44 Woven Garments 2.738 2.805 Advanced
Hotel Restaurant Knitwear 3.172 3.240 Advanced
Financial Institution Services 1.80% 1.48 Terry Towels .0598 .0664 Advanced
Real Estate, Rentals & Other Business 7.46% 5.49 Textile Fabrics .0385 .0416 Advanced
Public Administration & Defence 2.77% 5.49
Education 2.58% the respective country's perspective in the backdrop of the
Health & Social Services 2.32% meltdown. The rise or fall in prices needs to be taken in both exports
Community, Social & Private Services 7.00% 7.00
and imports. However, the RMG & Textile sectors have been
(Economics Analysis-2008) 100
=====
requesting the government for stimulus packages. Stimulus
Packages have been given by countries with severely affected
financial sector. Countries like Japan (133 US $) and Malaysia have
Exports and Imports
given some relief to tax payers in the name of subsidies & tax
Exports & Imports are the most important medium through which
benefits. Although BGMEA is proactive for the Stimulus Package for
the economy would be affected. Infact, however exports may fall in
Tk. 60 billion in the form alike 10% cash incentives or a tax relief. The
value due to price falls in countries concerned for the meltdown
newspaper, the Daily Star (8th March 2009) reported- Bangladesh
effect. The fall in employment & wages in those countries would
has turned into a lucrative destination for the buyers for its cheaper
lead these people to be thrifty. They are likely to shift to low priced
clothes. Quoting exporters it reported that exports of RMG would

Country wise Import US $ in Million

Financial China India Singapore Japan Hong Taiwan South USA ( Other )
Year Kong Korea Malaysia Total
2000-01 709 1184 824 846 478 412 411 248 148 4075 9335
2001-02 878 1019 871 655 441 312 346 261 145 3612 8540
2002-03 938 1358 1000 605 433 328 333 223 169 4271 9658
2003-04 1198 1602 911 552 433 377 420 226 255 4929 10903
2004-05 1642 2030 888 559 565 439 426 329 276 5993 13147
2005-06 2079 1868 849 651 626 473 489 345 302 7034 14746
2006-07 2571 2268 1035 690 747 473 553 380 334 8106 17157
2007-08 2043 2108 882 435 540 326 360 346 225 6123 13388
Economic Review-2008
Country wise Export US $ in Million
Financial USA German UK France Belgium Italy Netherlands Canada ( Others )
Year Japan Total
2000-01 2500.42 789.88 594.18 365.99 253.91 295.73 327.96 125.66 107.58 1105.99 6467.30
2001-02 2218.79 681.44 647.96 413.69 211.39 262.31 283.36 109.85 96.13 1061.17 5986.09
2002-03 2155.45 820.72 778.25 418.51 289.48 258.99 277.95 170.26 108.03 1270.80 6548.44
2003-04 1971.59 1298.57 898.65 553.50 326.71 316.28 290.47 284.69 118.33 1544.20 7602.99
2004-05 2418.67 944.18 1351.06 625.51 327.80 369.78 290.92 335.25 122.53 1868.82 8654.52
2005-06 3039.77 1763.38 1053.74 678.94 359.33 427.89 327.20 406.97 138.45 2330.49 10526.16
2006-07 3441.02 1955.38 1173.95 731.76 435.82 515.66 459.01 457.21 147.47 2860.58 12177.86
2007-08 2611.38 1643.10 1006.29 659.59 348.71 414.01 409.75 372.30 126.74 2567.91 10159.78
(July-
March)
Economic Review-2008
 Governance Crisis, Global Financial Meltdown - Ramifications in Bangladesh
70

pickup from the next few months at lower prices than before. Indian US$ In Million
exporters slashed 11-12% on prices despite which their exports of Month FY : 2006 -2007 FY 2007 -2008 FY 2008 -2009
RMG dropped. Major buyers are shifting from India to neighbouring January - 710.74 859.00
February 500.32 689.26 -
countries for RMG at a 12-15% off take cuts on prices. Indian exports
March 537.29 808.72 -
this fiscal will be US $ 9 billion, down for the target of US $ 12 billion. April 543.74 781.71 -
During July-December 2008, Bangladesh exported as follows: May 557.02 730.26 -
June 516.38 753.58 -
Over the last 5 years, the RMG exports fetched US$ 11 billion in FY July - 567.11 820.71
2007/08. The same period the inflow of remittance reached a August - 470.95 721.92
record all time high of US$ 7.9 billion from 5.5 million expatriate September - 590.67 794.18
wage earners. This is 10% of our GDP of approximately US$ 80 October - 559.05 648.51
November - 617.39 761.38
billion in last fiscal. The volume of RMG is yet on rise as per latest
December - 635.34 758.03
figures but the work force recruitment have come down. Moreover,
the return of some in thousands for ME & Malaysia recently gives the Source : Bangladesh Bank Website
nation a gloomy picture. Last fiscal .875 million-wage earners went employment contracts have been either cancelled or deferred
out and the country was quite on the right track despite limitation. which came with great negative projection in newspapers. A recent
As far as absorbing the challenges of global crisis are concerned, event is some 55,000 workers were in the verge of being withdrawn
concerted efforts are in the offing. The government is likely to take a by Malaysia. Alongside these, new recruitment possibilities may
stimulus package of Tk. 6,000 crores or Tk. 60 billion. The mode or turn gloomy, as meltdown has heavily affected SE and ME
modus operandi is however not yet unveiled. We hope for standing economies. Those economies derive a huge quantum of their GDP
back against the crisis that Bangladesh is confronting ahead. The from financial sector, which along with low oil prices would only give
fall in oil prices from US $ 150 to US $ 40 will also offset the deficit on – bleak prospect for their development. It is worthwhile to note that
balance of trade as Bangladesh Petroleum Corporation has this more than 2/3 rd of the remittance inflows are sourced from ME
year hopes for profit after long 9 years. Additionally government countries keeping aside the volatility of oil prices. Bangladesh can
will definitely take adequate fiscal measures to cater to the instantly feel safe but without assurance of any safety tenure.
protection needs of the economy from the implications of
meltdown. Foreign Assistance
In the donor countries, the meltdown does have heavy adverse
Remittances impact. However, the dependence of Bangladesh on figure wise
The next most vital sector to affect the economy would be a drop in basis is very insignificant but the donors are powerful in our policy
the Bangladesh work force exports. In the FY 2008 remittance, matters as there have been comments & counter comments from
inflow was close of US $ 8 billion. That year alone 8,75,000 persons the previous Government and WB & ADB on growth prospects of
were sent abroad for employment overseas. The table below shows Bangladesh in the backdrop of global meltdown. The growth
the population on overseas employment. forecast of Bangladesh by ADB, WB and Bangladesh Bank varied
within 5.8% to 6.7% on the debate.
The effect on remittance will in all likelihood be an issue of grave
concern for Bangladesh. Indeed, the slow down of Middle East (ME) Not all anti people policies have been turned down by the
development pace in the backdrop of fallen price & lower demand governments under various circumstances mainly for donors'
for oil will adversely affect the overseas employment and dictum and our policy makers' silence. The annual amount of
remittance inflow into Bangladesh. Needless to say, that many assistance is US $ 1.5 billion, which is not a significant amount of our

US $ In Million
Particulars 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07R 2007-08P
1 2 3 4 5 6 7 8 9
1.Foreign Aid
A. Commitment 2,053 879 1693 1923 1581 1787 1436 2730
B. Disbursement 1,369 1442 1585 1033 1488 1568 1166 2039
C. Total Commitment since
45,672 46951 48644 50567 52148 53935 55371 58101
1972
D. Total Disbursement since
37,706 39156 40741 41774 43262 44830 45996 48035
1972
570 570 608 562 656 666 704 767
Long-term)*
3.Outstanding External Debt
14,677 15885 16953 17953 18416 18603 19355 20110
as on June,30
4.Outstanding Debt as
31.24 33.7 32.7 32.6 30.5 30.0 28.2 25.5
percentage of GDP
5.Medium and Long Term
Debt Services as percentage 8.88 9.6 9.4 7.5 7.7 6.4 5.8 5.4
of Export Earnings
Source: (i) Economic Relations Division, Ministry of Finance. * =Excludes repayment in respect of loans from the IMF. Provisional. Revised.
P R

(ii) Statistics Department, Bangladesh Bank.

 Governance Crisis, Global Financial Meltdown - Ramifications in Bangladesh
71

US $ In Million
Particulars 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07R 2007-08P
1 2 3 4 5 6 7 8 9
1.Foreign Aid
A. Commitment 2,053 879 1693 1923 1581 1787 1436 2730
B. Disbursement 1,369 1442 1585 1033 1488 1568 1166 2039
C. Total Commitment since
45,672 46951 48644 50567 52148 53935 55371 58101
1972
D. Total Disbursement since
37,706 39156 40741 41774 43262 44830 45996 48035
1972
570 570 608 562 656 666 704 767
Long-term)*
3.Outstanding External Debt
14,677 15885 16953 17953 18416 18603 19355 20110
as on June,30
4.Outstanding Debt as
31.24 33.7 32.7 32.6 30.5 30.0 28.2 25.5
percentage of GDP
5.Medium and Long Term
Debt Services as percentage 8.88 9.6 9.4 7.5 7.7 6.4 5.8 5.4
of Export Earnings
Source: (i) Economic Relations Division, Ministry of Finance. * =Excludes repayment in respect of loans from the IMF. P Provisional. Revised.
R

(ii) Statistics Department, Bangladesh Bank.

GDP of US $ 80 billion. Yet however, the table below readily refers to private sector.
our receipt of Foreign Aid/ Assistance during recent years. - Establish transparency, accountability & responsibility.

The net foreign aid (net off DSL), in FY 2007-2008 was US $ 1 .376
billion only. This amount for the FY 2008-2009's first 6 months was
US $ .579 billion against previous FY same period's US $ .630 billion.
This means the inflow of foreign aid is black.
H. Recommendation
The persisting apprehension that in some or other means recession
or the turmoil would proliferate in Bangladesh is no more
preposterous. What have been said so far about situations around
the globe but not the actions to be undertaken? In the meanwhile,
Taskforce has been formed with experts and representatives from
all political forums in the JS. The honourable Finance Minister will be
at its helm. In that backdrop some recommendations echoed by
business associations, trade bodies, exporters, development
thinkers, economists ,the author and bankers to be considered may
include but not limited to the followings:
- FDI and Foreign Assistance will dry up and should be replaced
by indigenous resource mobilisation.
- Risk management of bank & financial institution is improvised
in the light of BASEL-II.
- Off stream economy should be encouraged to be unveiled
with some reasonable penalties over the rates of taxpayers in
mainstream economy.
- Skill development of workforce for ME market to fetch higher
remittance from smaller head counts.
- Participatory democracy at all levels.
- Power, Ports, Energy & Infrastructure development may be
encouraged though IPO & off stream economy and to attract
FDI.
- Cost of finance or lending rate must be reduced substantially
to encounter the apprehended downfall in the economy by
more investment.

- Agriculture contributes over 48% & employs 50% workforce. - Duty & fiscal structures should be rearranged for homegrown
Reform in Agriculture should be initiated. development .

- Reclaim economic – policymaking sovereignty. - Task force or its working group to regularly monitor the
recurring service & suggest steps to be taken immediately.
-Land Reform measures are undertaken.

- For a better financial management lending, enquiry & The Author is the a fellow member of the Institute of Chartered
contract procedures need to be transparent. Accountants of Bangladesh

- Put a balanced and faster role of public and the private sector.

- Control mechanism should be stronger & transparent.

- Balanced management & control of the economy.

- Better national investment climate & expanded productive