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Presentation on Global Financial Crisis by BIDS Presentation Transcript

  • 1. THE GLOBAL FINANCIAL CRISIS – LIKELY IMPACT ON BANGLADESH Study Conducted by BIDS-PRP Team: Ahmed, Mansur Mehedi, ATMS Zabid, I. Zohir, Salma C. Led by: Murshid, KAS. Paper presented to the BIDS-PRP seminar on 16 March, 2009 at BIDS Conference Hall, Agargoan, Dhaka-1207 1
  • 2. INTRODUCTION Figure : GDP Growth over preceding quarter, for the four quarters of 2008 of USA and EU European Commission forecast: GDP Growth 2 • Advanced economies like 1 USA, EU, Germany and UK are going to experience negative economic growth through out 0 2009; USA EU Germany UK -1 •The Economic Outlook sees US output gradually picking up from middle of next year as the -2 effects of the credit squeeze abate; and -3 •Weak household spending will limit recovery - US GDP is -4 projected to fall 1.6 percent in 2008Q1 2008Q2 2008Q3 2008Q4 2009, before rising 1.6 percent in 2010. Source: BEA and European commission, 2009. 2
  • 3. INTRODUCTION…. Figure : GDP Forecasts for USA and EU for 2009 Figure : Composite Leading Indicators for and 2010 Selected Countries OECD Area Euro Area Germany EU USA Germany UK United Kingdom United States 1.5 0 1 -0.5 0.5 0 -1 -0.5 -1.5 -1 -2 -1.5 2009Q 1 2009Q 2 2009Q 3 2009Q 4 2010Q 1 2010Q 2 2010Q 3 2010Q 4 -2.5 Jul-2008 Aug-2008 Sep-2008 Oct-2008 Nov-2008 Dec-08 urce: OECD, 2009 Source: EC, 2009 The vulnerability facing advanced economies is reflected in the OECD’s composite ading indicators which shows that downturn in the CLI has become flatter and has egun to turn upward between Oct-Dec 2008. GDP forecasts for EU even worse 3
  • 4. INTRODUCTION…. Table : IMF Projections about the Growth of Global Output Due to Recent Financial Crisis Projected Regions 2007 2008 2009 2010 World Output 5.2 3.5 0.5 3.0 Advanced Economies 2.7 1.0 -2.0 1.1 USA 2.0 1.1 -1.6 1.6 Euro area 2.6 1.0 -2.0 0.2 United Kingdom 3.0 0.7 -2.8 0.2 Developing Asia 10.6 7.8 5.5 6.9 China 13.0 9.0 6.7 8.0 India 9.3 7.3 5.1 6.5 Source: IMF, World Economic Outlook, January 2009. World growth is projected to slow from 5.2 percent in 2007 to 3.5 percent in 2008 to st over 0.5 percent in 2009 - recovery projected to begin later in 2009. Major emerging economies such as China, Brazil, Russia and India also affected. 4
  • 5. Linkages: Bangladesh and Global Economy Figure : Trend in Export-GDP ratio of Bangladesh ► Bangladesh’s export earnings Export-GDP Ratio 20.00 continuously rising since 1990s. 15.00 Export earnings are over 20 10.00 percent of our GDP. 5.00 ► The main driver exports is the 0.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 RMG sector which accounts almost four fifth of our total export Source: World Development Indicators, 2008. igure: Direction of Bangladesh’s Exports, 2007 earnings. Others Developing 19% ►The export sector is potentially Countries 12% vulnerable to the on-going financial crisis as it heavily depends on EU and US markets. Almost half of our EU USA 46% exports go to EU, while one quarter 23% goes to USA. Source: Direction of Trade, IMF, 2008. 5
  • 6. Forecasts Based on Export Demand Function: A SURE Approach ● To estimate the income elasticities for our exports to USA and EU, an attempt was made to estimate country specific and product specific export demand functions for Bangladesh. ● Literature: Weight of evidence - real income of the trading partners and relative prices are the determinants of export demand but magnitude of elasticity varies widely. ● This study estimates market specific disaggregated export demand behavior for Bangladesh’s exports using quarterly data and by applying seemingly unrelated regression (SUR) technique. ● Two major importing regions considered: USA, and Europe (EU-15). ● Demand theory identifies price as the main explanatory variable, and incomes, tastes and preferences, prices of related products (substitutes and complements) as demand shifters. Because of data limitations, a simplified model was estimated: Log X= α+βlogY+θlogE+u here X = Quantity of Export Demand, Y = Real GDP; E=Real Exchange Rate; and error term. 6
  • 7. Forecasts Based on Export Demand Function: A SURE Approach ….. le : Regression Results: Income and Exchange rate Elasticities Regions Products Income Elasticity Exchange Rate Elasticity USA Knitwear 0.2903911* 1.85298** Income Elasticity: Woven 0.2855428* 0.8005111* Fish 0.0086 0.7962688 ► Income elasticities for all items for Jute 0.241779 0.2557664 USA and EU are low but significant. Leather 2.329824* 5.307921* Exception: leather products export to Products USA which shows high positive and Rawhide 0.6911198** 2.042887** significant elasticity (more volatile); and Total 0.3680913* 0.7344868* fish and jute exports to USA – which European Knitwear 0.3850197* 0.0074014* have insignificant elasticity. Union Woven 0.386823* 0.0001788* ► The low income elasticities imply Fish 0.2326834* 0.0021747 that there is a small, positive Jute 0.1866102* 0.0071777* association between the income or Leather 0.0041508* 0.0017311* GDP of the importing countries and Products export demand from Bangladesh. Rawhide 0.1995184* 0.0040831* Total 0.4474187* 0.0035401* 7
  • 8. Forecasts Based on Export Demand Function: A SURE Approach ….. Exchange Rate Elasticity: ►These were derived in terms of USD and Euro vs BDT implying that increase in exchange rate (more taka per $ or E) means depreciation of BDT. ► For most commodities, exchange rate elasticities were positive and significant – implying that exports were responsive to exchange rate changes. ► Especially stronger response indicated for leather goods, rawhide and knit to USA. 8
  • 9. Forecasts Based on Export Demand Function: A SURE Approach ….. Table: Impact on Exports: Forecast for 2009 and 2010 (Percentages) Forecast for USA Markets Quarters 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 Knitwear -0.06 -0.29 -0.23 -0.03 0.15 0.26 0.35 0.41 Woven wear -0.06 -0.29 -0.23 -0.03 0.14 0.26 0.34 0.40 Fish 0.00 -0.01 -0.01 0.00 0.00 0.01 0.01 0.01 Jute -0.05 -0.24 -0.19 -0.02 0.12 0.22 0.29 0.34 Leather Products -0.47 -2.33 -1.86 -0.23 1.16 2.10 2.80 3.26 Rawhides -0.14 -0.69 -0.55 -0.07 0.35 0.62 0.83 0.97 Total -0.07 -0.37 -0.29 -0.04 0.18 0.33 0.44 0.52 Forecast for EU Markets Knitwear -0.04 0.00 0.08 0.23 0.31 0.39 0.42 0.50 Woven wear -0.04 0.00 0.08 0.23 0.31 0.39 0.43 0.50 Fish -0.02 0.00 0.05 0.14 0.19 0.23 0.26 0.30 Jute -0.02 0.00 0.04 0.11 0.15 0.19 0.21 0.24 Leather Products 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 Rawhides -0.02 0.00 0.04 0.12 0.16 0.20 0.22 0.26 Total -0.04 0.00 0.09 0.27 0.36 0.45 0.49 0.58 Using EC GDP estimates: Qtr 2 and 3 are the worst periods for the US market with the leather sector especially hard-hit. In the EU market export growth is negative in qtr 1 of 2009 but improves slowly thereafter. 9
  • 10. Forecasts Based on Export Demand Function: A SURE Approach ….. Figure : Forecasts based on IMF Projections Export Forecast based on IMF Projections for 2009 USA EU -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 Knitwear Woven Fish Jute Leather Rawhides Total wear Products ♦ IMF estimates show negative performance for all categories, especially leather ♦ If IMF GDP forecasts are used, whole of 2009 will post negative export growth. 10
  • 11. ACTUAL EXPORT PERFORMANCE Figure : Half Yearly Growth of Bangladesh’s Export Figure : Quarterly Exports of Bangladesh in (Year-over-Year) Million USD 25.39 24.93 Exports in Million USD 23.18 5000 25 4500 20 16.70 4000 3500 15 3000 9.22 2500 10 6.88 2000 1500 5 1000 0 500 Jan-June July-Dec Jan-June July-Dec Jan-June July-Dec 0 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2006 2007 2008 Source: IFS, 2008 and Bangladesh Bank Source: IFS, 2008 and Bangladesh Bank •Export performance positive but December performance has raised concerns. 11
  • 12. ACTUAL EXPORT PERFORMANCE……. Table : Quarterly Growth of Exports of Major Items to USA Growth of Exports (Jul-Dec 2008 on July-Dec2007) (Year-on-Year) ►Bangladesh is experiencing BD USA* China India Pakistan Philippines Sri Lanka Vietnam positive export growth while oven 12.49 -3.62 5.06 -8.88 4.08 -3.87 7.82 many other emerging Asian economies already affected, nit 25.88 -1.57 4.71 0.24 -0.89 -3.18 -25.23 0.57 e.g. India, Philippines and Sri Lanka. ish -16.46 3.48 19.42 -17.99 -6.51 -20.58 -41.30 7.44 ► Bangladesh share of US ome extile 16.93 -3.99 -2.46 2.92 -9.39 1.34 -21.42 -25.36 market increasing at the expense of other countries. eadgears -11.53 3.12 5.44 -23.22 44.28 8.46 -11.47 7.89 ► Bangladesh exports rose in utes -19.76 2.55 -2.95 3.24 7.95 -7.71 the face of declining imports of RMG products in USA – lastics 6.69 2.02 10.48 33.61 -13.26 -0.04 15.31 imports fell almost 9% while BD exports rose 18% (last otal 13.57 2.59 5.48 4.93 2.49 -12.21 -3.10 20.19 qtr 2008). Source: Calculated based on data accessed from USITC, 2009. 12
  • 13. ACTUAL EXPORT PERFORMANCE able : Growth of Exports to EU (July-Oct 2008 over July-Oct 2007) ►However, Bangladesh is Banglade facing problems in EU market sh China India Pakistan Sri Lanka Woven -2.04 6.46 4.56 1.88 3.92 (especially in shrimp, Knit 6.66 32.11 -4.48 -1.57 2.07 headgear, jute and rawhides). Fish -15.88 4.51 -11.96 0.93 ► Bangladesh experienced <4 Home Textile 4.28 1.50 -4.33 0.15 -14.23 % export growth in EU market Headgears -20.02 5.08 12.91 10.09 -0.16 while all other countries Plastics 33.13 7.45 -3.72 127.99 -2.69 (except Sri Lanka) have Jutes -13.30 2.64 -2.48 -4.87 experienced higher growth Rawhide -25.44 -26.96 -12.20 -23.94 -35.00 than Bangladesh. Leather Products 15.23 -1.12 11.32 14.57 Total 3.58 7.23 10.91 7.45 1.57 Source: Calculated based on data accessed from Euro stat, 2009 The above data and analysis show that still Bangladesh has been coping well h the on going global financial meltdown, though there is a clear indication t growth rate of exports from Bangladesh is going to face a slow down. 13
  • 14. RELATIVE SUCCESS OF BANGLADESH: CLOSER FOCUS ON RMG Trend in US Apparel Sales and Import 20 Retail sales World Bangladesh 15 10 5 0 Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter 17 27 37 47 18 28 38 48 -5 -10 • Retail clothing sales declined by 8.05 percent in the fourth quarter of 2008, and consequently US import of apparel declined by 2.94 percent. •But US import from Bangladesh increased by 18.5 percent during the fourth quarter of 2008. Main competitors of Bangladesh in US are Vietnam and Indonesia. 14
  • 15. RELATIVE SUCCESS OF BANGLADESH: CLOSER FOCUS ON RMG Figure: Product Diversification Product Div e rsification in RM G 100% Others 90% Share in RMG export 80% Sweater 70% T-Shirt 60% 50% Jackets 40% 30% Trousers 20% Shirts 10% 0% 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 (sept) ♦The share of knitwear increased; woven share fell. Bangladesh started as exporter of shirts, and has subsequently diversified to trousers, jackets, T-shirt and sweaters ♦ The share of shirts was 31.7 percent in 1995/96 but fell to 8.55 percent in 2007-08. On the other hand trouser share increased from 4.4 percent to 23.48 percent 15
  • 16. RELATIVE SUCCESS OF BANGLADESH: CLOSER FOCUS ON RMG Cost Advantage: Bangladesh has a clear cost advantage compared to its competitors. US imports from Bangladesh increased by 18.5 percent. The market share of BD in US market has increased from 4.19 percent in 2007 to 4.81 percent in 2008. Table : Price per doz in selected Asian countries: first half 2008 Quota on World Bang China India Pakistan Vietnam China Categories 347 Cotton M/B Trousers Q 70.44 52.54 85.50 82.85 55.18 61.86 340 Woven Shirts, M/B Q 80.50 47.68 83.40 63.61 23.59 61.11 348 W/G Slacks Q 60.08 47.76 85.50 82.85 55.18 54.17 338 Knit Shirts, M/B Q 30.64 22.12 60.41 42.73 33.18 45.24 647 Trousers M/B Q 53.73 35.17 73.20 84.44 32.46 64.10 352 Cotton underwear Q 10.88 8.69 17.93 12.88 10.79 11.95 341 W/G woven blouse 62.15 38.82 61.56 63.61 23.59 42.73 339 W/G knit blouse Q 33.84 22.36 55.22 37.51 20.95 34.83 Source: emerging textiles. 16
  • 17. Can this growth be sustained in 2009? ►The safeguard on China was withdrawn from January 1, 2009 in the US market. This may lead to a further reduction in prices as competition from China will intensify. ► Bangladesh has benefited from safeguard on China: Out of the top ten products of Bangladesh exported to USA in 2007, seven products had a quota on China. ► The closest competitor is Pakistan in terms of prices, but Bangladesh enjoys greater economic and political stability compared to Pakistan. ► China and India are high-end producers of these products. As restrictions are withdrawn from China, will they move back into lower end products?? 17
  • 18. Challenges in EU Market ●The European Union (EU) became the largest single market for clothing imports in 2007 (35% in woven and 58% in Knit; US: 48% in woven and 17% Knit). ● The end of quotas on China from 1st January 2008 brought downward pressure on prices in the EU clothing market and required the suppliers to become more efficient. ● During the period July-Oct, 2008, knitwear imports from Bangladesh rose by 6.9 percent, while that of woven declined by 2.2 percent. ● The share of Bangladesh fell from 17 to 15 percent while of India declined from 10 to 8 percent during this period (for Knit). ● For woven imports, the share of China increased from 74 to 75 percent, but declined for Bangladesh from 7 to 6 percent. 18
  • 19. REVIEW/ASSESSMENT OF MAJOR DEVELOPMENTS FOR RMG Increasing market share in US but decline in EU Sourcing from China become expensive as Chinese currency appreciated and labour laws were being implemented more rigorously. Relatively, Textile is considered to be a low price item in China and hence could potentially shift to Bangladesh. Hong Kong based buyers consider Bangladesh to be a reliable and stable supplier as other competing countries like India, China, Pakistan and Turkey were facing problems. A small diversion from China has been a big gain for Bangladesh. Bangladesh benefited from the safeguard measure against China in both EU and US. This helped expand capacity base. Diversifying to new markets Suppliers in Bangladesh have been trying to enter the Japanese market with little success. About 80 percent of the clothing export to Japan is from China. The other major supplier is Vietnam. Japan is a high quality market. By the end of 2008, buyers were searching for sourcing from other low cost countries, including Bangladesh – this is an opportunity. 19
  • 20. REVIEW/ASSESSMENT OF MAJOR DEVELOPMENTS FOR RMG Diversification to higher-end products By the end of 2008, the buyers started to search for suppliers for outer wear - jackets, men’s suits, in a bid to relocate away from China. For sweater, polo shirt, trousers (especially denim) and home textile Bangladesh has strong potential. BD is better than India in T-shirt and polo shirts. Vietnam and Cambodia does not have backward linkages for knitwear. BD also has good quality yarn, which reduces the lead-time for export. This trend needs to be strengthened. Figure: Cost advantage persists L a b o u r c o s t in c o m p e t in g c o u n t r ie s C h i n a ( In l a n d ) 250 In d i a 232 200 In d o n e s i a 195 S ri L a n k a B ang= 100 V ie t n a m 173 P a k is t a n 168 150 C a m b o d ia 100 B a n g la d e s h B a n g l a d e sh = 2 2 c e n t s/ h o u r Source: Jassin O’Rourke, 2008 20
  • 21. Emerging Risks ►Financing: local bank issue of BB/LC based on mother LC – potential risk ► Decline in mother L/C - replaced by direct contracts, based on which local banks open BB/LC. This increases risk of default. ► LCs favour buyers: after goods shipped some buyers seek to change terms - agree to pay 30 percent and remainder to be paid only if goods are sold or goods returned! ► Request for Discount: Most European buyers demand 2 to 5 percent discount on prices. ► Request to delay shipment 21
  • 22. IMPACT ON REMITTANCES Current remittance earnings of Bangladesh are about $9 billion (compare RMG expor of around $11 billion) and (put it in perspective, equivalent to 9.5 % of GDP). Factors determining remittance are numerous (host and home country GDP, exchang rate, no. of migrants, earnings, length of stay, education of migrant, inflation rate and interest rate differentials, household incomes and employment) Table :Top remittance recipient developing countries (million US $) Fig. 10: Top ten remittance-recipient country year % change developing countries in 2007 & 2008 over 2007 35 40 2006 2007 2008e 35.62 35 30 India 25,426 27,000 30000 11.11 30 billion US $ 25 25 24.09 China 23,319 25,703 27000 5.05 % change 20 20 18.37 Mexico 25,052 25,037 23800 -4.94 15 14.79 15 11.11 10 Philippines 15,251 16,291 18700 14.79 8.45 5.47 5.05 4.80 5 10 Poland 8,496 10,496 11000 4.80 0 5 Nigeria 5,435 9,221 10000 8.45 -4.94 -5 - -10 Egypt 5,330 7,656 9500 24.09 ak h gl ia ia Ma a d n es om t o es p n an di an ta er ic Romania 6,718 8,533 9000 5.47 gy hi in In ex ad is ig ol C lip E N P hi R P an Bangladesh 5,428 6,562 8900 35.62 P B 2007 2008e % change over 2007 Pakistan 5,121 5,998 7100 18.37 Source: World Bank staff estimates based on the International Monetary Fund's Balance of Payments Statistics Yearbook 2008. 22
  • 23. IMPACT ON REMITTANCES From 2003 to 2008, world remittance flows have almost doubled ($206 to 375 billion) Developing countries – similar trend (from $143 b to 283 b) Estimated that 50% routed through informal channels (World Bank 2006) BD share of world remittance market: 2.4% (rising from 1.8% in 2006). USA, KSA and UK account for almost 60%. The largest recipients are India ($30 billion), followed by China ($27 billion). Remittance flows to developing countries increasing even in year 2008, when GDP rowth rates declining worldwide. Growth in BD in 2008 striking! M onthly inflow of re m ittance (m illion US $) 0 Remittance inflow from all % change (y- 0 countries o-y) 0 Country 2007 2008 0 0 U.S.A 1086.88 1582.49 45.60 0 U.K 889.74 823.42 -7.45 0 Kuwait 768 949.53 23.51 0 K.S.A 1788.28 2733.69 52.87 0 0 U.A.E 938.15 1379.54 47.04 0 Malaysia 29.71 165.03 455.47 Total 6568.03 9019.6 37.33 Year:2007 Year:2008 Year:2009 23
  • 24. Actual Remittance Inflows by Major Source Countries Remittance from U.S.A (2007 & 2008) Remittance earnings from UK 160 100 (2007 & 2008) 90 140 100 30 80 120 20 million US $ 70 17.54 Tk per US $ 15.55 80 illion U $ 11.24 10 100 8.83 % change 60 S 3.16 1.79 0 60 80 50 -2.73 -6.47 -10 40 60 40 -17.46 -18.59 -20 30 40 -30 M 20 20 -40 20 -42.00 -44.21 10 0 -50 0 0 ber ber ber November September December June January July arch ctober February ay April August June January July March October February May April August ovem ecem Septem M M O N D U.K-07 U.K-08 % change U.S.A-07 U.S.A-08 % change ●End of 2008 a suggestion of lower growth Remiitance earnings from Saudi Arabia(2007 & 2008) 300 100 % change over previous on monthly basis 90 87.03 250 80 illion U $ 72.24 70 200 S ● Highest increase from Malaysia and lowest 61.47 63.85 61.90 60 59.37 150 47.11 50 (negative growth) from UK ! 39.89 40 39.63 38.46 37.81 38.35 100 30 M 20 50 ● March-April peak more pronounced! 10 0 0 ber ber ber June January July arch ctober February ay April August ovem Septem ecem M M O N D Saudia Arabia-07 Saudia Arabia-08 % change Source: Bangladesh Bank 24
  • 25. What next? • Most of the oil exporting countries are taking expansionary monetary policy to encourage large investments and consumption expenditure based on bank credit – good for employment • Bulk of the share of earnings (above 60 percent) come from Middle East - it could be that remittance inflows from Middle East will offset the negative growth- expected to arise from U.S.A and U.K. Reasons for Cautious Optimism: • The rising share of skilled labor in total overseas employment of Bangladeshi workers in 2008 over 2007 • Stable exchange rate: better than volatility • Remittance flows do not seem to be influenced by GDP growth rate (host, World) • Accumulated stock of migrants large and rising. • The rising trend of remittance inflows in most developing countries including Bangladesh in the last year – and increasing share of BD. 25
  • 26. ur remittance earnings are Remittance out flows from t influenced by the World Saudi Arabia not influenced DP growth rate by oil prices Comparison of remittance growth with world Remittance outflows from Saudi Arabia not 80 real GDP growth inluenced by oil prices 80 20 60 70 rem ittance growth 40 60 15 B illio n U S $ 50 20 US $ 40 10 30 0 20 5 -20 10 0 0 -40 y 1976 y 1977 y 1978 y 1979 y 1980 y 1981 y 1982 y 1983 y 1984 y 1985 y 1986 y 1987 y 1988 y 1989 y 1990 y 1991 y 1992 y 1993 y 1994 y 1995 y 1996 y 1997 y 1998 y 1999 y 2000 y 2001 y 2002 y 2003 y 2004 y 2005 y 2006 y 2007 y1978 y1979 y1980 y1981 y1982 y1983 y1984 y1985 y1986 y1987 y1988 y1989 y1990 y1991 y1992 y1993 y1994 y1995 y1996 y1997 y1998 y1999 y2000 y2001 y2002 y2003 y2004 y2005 y2006 y2007 y2008 brent oil(US $/barrel) remittance outflows from Saudi Arabia World GDP growth remittance growth Source: Monthly oil Market Report, OPEC, february,2009 rce: World development indicator-2008 26
  • 27. The rising share of skilled The rising trend of total labor in total overseas no. of migrants employment Growth comparioson-Renittance earnings vs Distribution of overseas employment by different no. of overseas employment profession 100% 1 10 0.9 9 re m itta n ce e a rn in g s (b illio n U S 4 2 .9 7 4 4 .5 4 80% 0.8 8 no. of e m ploy m e nt 4 8 .8 8 5 1 .5 4 5 2 .4 4 5 8 .0 0 6 0 .5 9 0.7 7 M illio n s 0.6 6 60% 0.5 5 9.71 $) 20.18 7.35 15.19 0.4 4 15.18 40% 8.90 0.3 3 22.06 3 4 .7 6 4 4 .9 8 0.2 2 3 2 .1 2 3 2 .0 1 20% 3 2 .1 6 3 0 .2 7 0.1 1 1 9 .8 6 0 0 6.34 4.72 3.9 0.77 0.24 0.08 0.21 0% y 1995 y 1996 y 1997 y 1998 y 1999 y 2000 y 2001 y 2002 y 2003 y 2004 y 2005 y 2006 y 2007 y 2008 y1976- y1986- y1996- y2005 y2006 y2007 y2008 y1985 y1995 y2004 no. of overseas w orkers remittance Skilledyear Semi-skilled Professional Unskilled Source: World development indicator-2008 Source: BMET 27
  • 28. Impact of migrants on remittances – staggered effects of migration on remittances? Table: Regression Results Dependent variable: Log of Remittance inflows Explanatory variables Coefficient t-value Exchange rate 0.04* 6.38 Log of no. of overseas workers (t) 0.64* 2.65 Log of no. of overseas workers lagged by one year), t+1 0.43* 1.94 •indicates significance at the 5 % level Source: Authors Estimate We wanted to check if there was a staggered effect of migration on remittances. In fact, the staggered effect is quite pronounced although not as strong as the current year effects. In other words the current migrants have a significant impact on remittance flows in the current period, with remaining effect (also significant) staggered over time. 28
  • 29. Exchange rate effect: Significant but small? Exchange rate effect on remittance Taka per currency asssuming January'07 900 70.5 as hundred 120 70 800 115 69.5 700 110 69 105 tk per currency 600 68.5 Tk per $ 100 500 68 95 400 90 67.5 300 85 67 80 200 66.5 75 100 66 70 0 65.5 Jan,07 Feb,07 ar,07 ay,07 Jun,07 July,07 Oct,07 Nov,07 Dec,07 Jan,08 Feb,08 ar,08 ay,08 Jun,08 July,08 Oct,08 Nov,08 Dec'08 Jan'09 ept,07 ept,08 pr,07 ug,07 pr,08 ug,08 Nov,06 Nov,07 Nov,08 July,06 Jan,07 Jun,07 July,07 Jan,08 Jun,08 July,08 Aug,06 Sept,06 Oct,06 Dec,06 Feb,07 Mar,07 Apr,07 May,07 Aug,07 Sept,07 Oct,07 Dec,07 Feb,08 Mar,08 Apr,08 May,08 Aug,08 Sept,08 Oct,08 M M M M A A A A S S EURO Indian Rupee Japanese Yen US Do llar remittance(million $) exchangerate(tk per us $) U.K.P o und Sterling chinese Yuan Source: Economic trend Of Bangladesh Bank, January,2009 ►The graph shows that even in the face of a stable exchange rate since September 2007, remittances continued to rise rapidly. 29
  • 30. Reasons for concern ● New visas not being issued by Saudi Arabia (but not related to GFC) ● Kuwaiti visas not issued for last 3 years (but not related to GFC) ● U.A.E, Qatar, Malaysia Singapore, Bahrain remain risky destinations – visas could be stopped at any time. ● U.A.E has stopped or suspended many construction projects worth of $582 billion – definitely related to GFC. According to BMET each day about 6000 clearances were given in early 2007 – dropped to 3000 in 2008. In December 2007, 77977 clearances issued whereas in 2008 it fell to 44378. Can we attribute this to GFC? Perhaps only partly – but nevertheless worrying. ►In a nutshell, Growth rate in remittances likely to slow down a little in 2009-10; UK situation is poor; USA – no sign of downturn yet; Middle East – how worried should we be? 30
  • 31. IMPLICATIONS FOR IMPORTS ●Bangladesh imports as a share of GDP has been rising over the past three decades. In 2007-08, 27% of Bangladesh’s GDP was spent on imports ● 76% of export earnings are due to RMG and 54% of this is used to import RMG inputs. % change of total import by month 50 45 40 35 % change 30 25 20 15 10 5 0 September November June January July March October February May April August % change over 2007 % change over 2006 Source: Bangladesh bank 31
  • 32. IMPLICATIONS FOR IMPORTS ■Overall import so far has increased by 31 percent in 2008 over 2007 ■ Total merchandise imports showed a robust 35 percent growth during July-October 2008 despite a sharp decline in imports of food grains over the corresponding period of the previous fiscal year ■ Non-food imports, especially fertilizer, crude and raw materials expanded ■ Intermediate and capital goods imports expanded significantly Much of the imports seem to have gone to productive, capacity enhancing sectors. This will put us in a better position to address any adverse effects of the GFC. 32
  • 33. Percentage Change in Import LCs Composition of Import (million US $) Opened & Setteled 2007 2008 July-Dec. 2007- July-Dec. 2008- Items July-Nov July-Oct July-Nov % change 08 09 (4 over 2) Opening Settlemen Openin Settleme A. Food Grains 492.2 239.7 367.2 -25.4 Commodity t g nt Rice 252.3 158.5 187.5 -25.68 Wheat 239.9 81.2 179.7 -25.09 Food grains( rice 256.47 164.48 -55.99 -35.83 Edible oil 411.1 311.6 368.9 -10.27 & wheat) Sugar 130 156.4 182.9 40.69 Capital -3.4 -7.74 -20.68 13.9 C. Consumer & 3465 4365.4 5162.9 49 machinery Intermediate Goods Clinker 137.3 97.4 119.8 -12.75 Machinery for 15.56 19.76 Crude petroleum misc. industry 219.7 403.1 403.1 83.48 Fertilizer 196.9 597.5 694.1 252.51 Petroleum -23.99 6.17 16.25 16.87 Dyeing and tanning 84.2 112 129 53.21 materials Industrial raw 28.13 15.33 12.27 33.77 Raw cotton 425.3 460.1 563.7 32.54 materials Yarn 260.6 305.5 366.4 40.6 Others 18.69 17.32 13.73 24.9 Textile and articles thereof 785.1 747.5 905.7 15.36 D. Capital Goods & Others 2740.6 2762.9 3439.7 25.51 Total 21.37 17.25 4.24 22.44 Capital machinery 752.2 541.5 661.9 -12 Grand Total (A+B+C+D) 7999.4 8417.9 10231.1 27.9 Source: Bangladesh Bank 33
  • 34. Inflation Impact: World prices % Change in commodity price index Jan/Dec Jan 09/Jan ‘08 Dec/Nov Dec 08/Dec 07 4.1 -37 Commodity -14.1 -36.4 4.2 -25.5 Non-Energy -6.8 18.4 4 -43 Energy -18.5 -42.7 5.7 -51.6 Crude -23.2 -53.6 7.7 na Agriculture* -4.0 na 6.4 -16.8 Food -2.7 -18.4 9.5 -16.1 Corn -3.0 -40.3 8.7 -35.2 Wheat -3.6 -23.2 10.8 -34 Soybean Oil -6.5 -33.7 7.1 na Sugar -4.0 -1.7 1 -41.4 Industrial Metals -10.9 -36.4 5.2 na Gold* 7.3 na -3 na Fertilizers* -10.9 na Sources: IMF; Estimations based on data provided by the IMF. * World Bank Index 34
  • 35. Production/Productivity Impact Growth of manufacture & import of capital Growth of manufacturing/Industrial production machinery 14 12 & import of capital & indutrial raw materials 20 2000 taka in crore(000) 12 10 th(%) 10 8 goods(million US 15 imported raw & 8 1500 6 Growth(%) grow 6 10 capital 4 4 1000 $) 2 2 5 0 0 500 0 p) 20 00 20 01 20 02 20 03 20 04 20 05 20 06 07 07 Nov,07 Jan,07 Jun,07 July,07 Jan,08 Jun,08 July,08 Feb,07 Mar,07 Apr,07 May,07 Aug,07 Sept,07 Oct,07 Dec,07 Feb,08 Mar,08 Apr,08 May,08 8( - - - - - - - 20 6- 99 00 01 02 03 04 05 -5 0 -0 0 19 indutrial/m anufacturing growth Capital Machinery grow th of manuf acture total raw & capital m achinery Im port of RMG raw m aterials by m onth (2007 & 2008) Im port of te xtile by m onth(2007 & 2008) 500 200 450 190 Million US $ 180 400 illion US $ 170 350 160 M 150 300 140 250 130 Jan Feb Jun Oct May July Nov Mar Sept Aug Apr Jan Feb Jun ay July Nov Oct ar ept ug pr M M A A S RMG raw material-07 RMG raw material-08 textile-07 textile-08 Sources: Bangladesh Bank & ADB website 35
  • 36. Policy Implications ►We have gained in important ways at the expense of competitors; our reputation as a reliable, quality supplier of RMG established ► Foothold in new destinations – work in progress ► Problems remain in EU markets – withdrawal of restriction on China, exchange rate problem ► Vertical integration: China and India are becoming expensive. The buyers are seeking to expand sourcing from experienced countries that can produce quality products at lower prices. Firms producing directly for retailers at a big advantage. Such direct links need to be forged – but difficult for smaller operators. ■ Diversify products needs to be taken much further ■ Diversify markets – some initial gains made.. ■ Lower import prices helped stabilize prices and affords an opportunity to invest in capacity, technology and inventories 36
  • 37. Policy Implications ●Some specific sectors hard hit – leather, shrimp, jute: special measures? □ Incentive package? No bailout but we must seize the opportunity now created. □ Competitor countries have adopted special packages – these should be monitored and reviewed. □ Backward-linkage industries (PTI) add strength and competitiveness to RMG sector; acts as a check on Indian tex prices. An expansionary monetary/credit stance needed. Now is the best time to invest in inventories, equipment and raw materials; upgrade technology and expand productive base; short-term measures for PTI? ● Remittances: continue to attract through formal channels ● Focus more on skilled manpower exports ● Need to change image of BD labor in some countries Final word: Adopt a moderately expansionary monetary and credit stance; reduce cost of retailing credit as we need to focus on investment and capacity expansion to capture emerging opportunities 37
  • 38. THANK YOU 38