A

Report on
Impact of global financial crisis on the economy of Bangladesh.
Course title: Macroeconomics
Submitted to
Md. Shahadat Hussain
Lecturer,
Department of Finance and Banking
University of Barisal.

Submitted by
Md. Jubraz Mohiuddin
ID:16 FIN 065
2ndyear 2nd semester
Department of Finance and Banking
University of Barisal.
Date of submission :07/01/2018
ABSTRACT
The world economy experienced the worst global financial crisis in 2007.While major world
economies have taken a massive hit resulting in negative growth rates in key countries or regions,
including the US, EU and Japan, the contagion also spread to emerging developing countries like
China, Brazil, India and South Africa, as well as to the countries of South East Asia and Latin
America. The magnitude of impact seems to depend on the extent of integration with the rest of the
world (or to use World Bank jargon, the extent of liberalization that has taken place). The impact on
LDCs like Bangladesh has been muted in the first, and even the second round. However, there is
growing evidence that third round impacts are making themselves felt, manifested in declining
exports, declining migration of labour, growing number of sick industries, industrial unrest, and
reduced growth. There are also fears that poverty and unemployment may be exacerbated and MDG
targets could become jeopardized.
Countries like Bangladesh are interested in understanding the socio-economic impact of the global
financial and economic crisis as well as policy options to cope with emerging challenges. This study
addresses itself to the task of assessing the unfolding impact of the GFC on Bangladesh. There is a
consensus that the chief transmission mechanisms relevant for Bangladesh are quite limited,
operating through the impact on exports, remittances and labour exports, and imports. These could
also lead to second order effects operating through lowering of growth, balance of payment and
budgetary effects, as well as micro effects on employment and poverty. Flows of FDI and ODI
(including food aid) have dwindled as well, leaving LDCs like Bangladesh to deal with the crisis on
their own. A saving grace has been the lack of a liberalized capital account in Bangladesh, which
prevented dramatic capital outflows, and have not contributed to increased vulnerability.
The possibility of an adverse impact on agriculture has not been raised in the current debate.
However, low world and Indian food prices arising from a volatile international market, has caused
agricultural prices to be depressed, especially since Bangladesh imports significant quantities of
agricultural produce, including cereals, from time to time. The current rice price situation suggests
that the problem of farm incentives is a serious concern.

OBJECTIVE OF THE REPORT

The overall objective of the study is to provide an exposure of real life situation to the students where
they are expected to translate and adapt the knowledge gained from the BBA courses into by the
theoretical knowledge in practical field.

BROAD OBJECTIVE
To identify the impact of Global financial crisis in Bangladesh.

SPECIFIC OBJECTTIVE
The prime objectives of the report are as follows:
1. To identity the impact on export and import due to financial crisis.
2.To identity the impact on economic indicators in Bangladesh.
3.To analyze how can a global financial crisis spread all over the world.

METHODOLOGY OF THE STUDY:

The report is prepared using qualitative research method. The data were relatively disorganized and
collected based on my limited knowledge. The report has been prepared based on secondary data
such as-the published reports, various articles, and related documents as well as down loaded data
from website through internet. I have studied the sources of information, then all these reports and
documents are also been analyzed and organized to make my report possible according to the topic
of  Global financial crisis and its impact on Bangladesh economy.

Global financial crisis and its impact on Bangladesh economy:

IINTRODUCTION
Bangladesh is interlinked with global financial system. As such global financial crisis which was
originated from the year 2007 mainly in USA and spread in the latter part of the year 2008 among
developed nations and subsequently shifted to developing nations has impact on the domestic
economy of Bangladesh. The country is in a difficult situation as it faces imbalances, lack of
transparency in the financial markets and non-applicability of domestic safety net. The impacts of the
global financial crisis have been felt in the increasingly globally integrated economy of Bangladesh
in a very distinctive manner. In a number of ways, Bangladesh has been an outlier, with some lag to
the consequences. Indeed, crisis impacts were felt in a much more intense manner in the second half
of 2009, when many developed countries (Bangladesh’s major import sources and export
destinations) were beginning to recover. This lagged response makes the Bangladesh story somewhat
different from that of many other low-income countries (LICs).The crisis has left its fingerprints on
Bangladesh’s externally driven economy through the various transmission channels of exports,
imports, remittances and aid and foreign direct investment (FDI) flows, with consequent
repercussions for the labor market, domestic resource mobilization and gross domestic product
(GDP) growth and poverty. Nevertheless, the depth of the consequences has tended to vary during
different phases in the crisis.

IMPACT ON IMPORTS:
Bangladesh is dependent on POL imports from the world market and is also a significant importer of
food. The domestic economy was quite sensitive to movements in the world price of these key
commodities during GFC.The advent of the recession brought prices down drastically.Bangladesh
benefited greatly with domestic price pressures falling quickly, and the government making large
savings from reduced subsidies, especially on diesel. Bangladesh has also benefited from the terms
of trade effect as the import prices faced fell more sharply than export prices. Total merchandise
imports to Bangladesh during FY08 amounted to USD21.63 billion, registering a growth of 26.07
per cent compared to the corresponding period of FY07.

IMPACT ON REMTTANCES:
The global financial crisis could impact on Bangladesh’s earnings from remittance. Middle East
economies were unlikely to be affected by this, at least in the short term. As a consequence, out-
migration and remittances could follow historical trends in 2008-09.the slowdown degenerates into
recession; it had impact on both migration and remittance. Remittance inflows from Bangladeshi
migrants abroad have reached 10 percent of GDP, which was only 3 percent in 1995, putting
Bangladesh among the top ten remittance-receiving countries in the world. In 2008, nearly 6 million
workers were employed overseas. During FY2009, Bangladesh received US$ 9.7 billion as
remittances, which was 22.4 percent higher than the remittance inflow of FY2008. The growth rate,
however, shows considerable monthly variations. Out-migration in FY2009 was 30 percent lower
than that in FY2008 .

IMPACT ON CAPITAL MARKET:

Integration of Bangladesh’s capital market with the global capital market was rather weak -- foreign
investment accounts for only 2.48 per cent of total market capitalization. During July, 2008 to
January, 2009 a sluggish trend was observed in the capital market, which is partly related to global
economic slowdown . All the indices in the Dhaka Stock Exchange (DSE) experienced negative
growth. The country’s capital market does not at the moment have much reason to panic either.
Foreign portfolio investment in the country is quite small. Foreign investors’ share in the country’s
equity market is only 2.48 percent. Hence, withdrawal of funds by foreign investors would not have
any significant impact.

IMPACT ON EMPLOYMENT IN DIFFERENT SECTORS:

RMG: The demand for import of Bangladeshi apparels decelerated or in extreme case, entrepreneurs
searched for new ways for the reduction of cost of production. Further investigation required to
understand the extent of impact of the crisis on enterprises and on workers in this sector.
Frozen Food: Although export of frozen food, particularly shrimp, has declined during July-
December, 2008 period, there is no evidence that shrimp processing factories have closed down due
to the crisis. However, because of lack of availability of raw materials (57,000 m.ton of the total
required 0.3 million m.ton in FY2007-08) and infection in cultured shrimps (known as ‘microforon
(disease) only 77 mills are now operating out of the 140 mills, where about 77,000 workers are
working.
Leather and Footwear: Export of footwear has performed well during July-December, 2008 period;
however, export of processed and finished leather has sharply declined over time. There was no
report in the national dailies as regards laying off of workers in this industry. Further investigation is
needed in order to understand the extent of impact on workers working in this sector.
Ship Building: The shipbuilding sector was under pressure because of reduced orders and, in some
cases, deferment/cancellation of some previous orders.

IMPACT ON MIGRANT WORKERS:

Due to slowdown of the Singapore economy, especially in the shipping and construction sectors, 55
Bangladeshis employed by construction sub-contractor Tunnel & Shaft have returned home after
working there for seven months or less. The workers were recruited last year in anticipation of two
major projects estimated to be worth $20 million, which were expected to be launched later.Since
2006, UAE and Malaysia had been two key destinations for Bangladeshi workers followed by Saudi
Arabia. It is important to mention here that currently Saudi Arabia and Kuwait have stopped issuing
work permits to Bangladeshi workers, while these two destinations comprises of 39.7 per cent of
total migrant workers

INTEREST RATE:
The BB had directed the major commercial banks to reduce the interest rate spread and reduce their
lending rates. There has been an agreement recently to fix the highest lending rate at 14.0 percent.
Private commercial banks had felt that given the high cost of funds and high risks of lending in
Bangladesh, any further reduction in the lending rate is not feasible. Moreover, a lower lending rate
calls for a lower deposit rate which was discouraged savers to keep money in the bank and thus,
create liquidity crisis. This, in turn, will have an impact on the overall economy.

EXCHANGE RATE:
The exchange rate between Bangladesh Taka (BDT) and US Dollar (USD) was remained stable in
2007. This is because of the introduction of floating exchange rate in 2003 to contain fluctuations of
Taka against foreign currencies, particularly the US Dollar. During August, 2007 and August, 2008,
Taka appreciated slightly by 0.26 percent. At the end of August, 2008 Taka per USD decreased to
Tk.68.52 from Tk.68.70 at the end of August, 2007. Taka depreciated against Euro by 7.38 per cent
in August, 2008 compared to August, 2007. However, After August 2008 taka was appreciating
against the EURO owing to the global financial crisis. At the end of August, 2008 BDT per USD
declined to Tk.68.52 from Tk.68.70 at the end of August 2007.In Bangladesh, there was no
EURO/BDT market and EURO/BDT rate was calculated from the traded rates of USD/BDT. At the
end of august 2008 BDT appreciated against EURO as EURO had been depreciating against USD;
USD continued to remain stable against BDT.

INFLATION :
The commodity price boom of 2006-08 was due to strong growth in global demand. As opposed to
an unprecedented increase of commodity price during the FY08, the prices had taken a downward in
the face of global financial crisis. Except for soybean oil, prices of all other major commodities
including rice, wheat and crude oil suffered a falling price since September 2008. The benefits of
lower world prices have been reaped by Bangladesh, especially through lower inflation, including
lower food and energy prices. Another channel that can help lower the inflation rate of Bangladesh is
the declining trend of inflation in major trading partners. The headline inflation rate of Bangladesh
already started to decline from 10.82 percent in July’08 to 6.03 percent in December’08, currently
hovering at around 5 percent (in July 2009). The inflation rate of the major trading partners like
India, China, and Hong Kong has declined significantly in recent months as well (See CEIC database
& ADB website).

AGRICULTURE:
Low world prices combined with successive bumper harvests in 2008-09, especially of food grains,
has led to a price slump. While consumers have found respite from the sky rocketing inflation of
2008, farmers are in distress. The newly elected government has given very high priority to
agriculture, including scaling up of fertilizer and fuel subsidies. Out of a total The government also
announced ambitious plans to support farm prices through a procurement drive but met with little
success due to inadequate storage space in go downs and procurement efforts aimed at rice (from
millers) rather thandirectly in paddy from the farm gate. There are now concerns that these low
prices could operate as a disincentive for the next crop in the winter, at a time when price pressures
in the world market could once again exert themselves. In fact much of the stimulus package
announced by the government in April, 2009 is aimed at the agricultural sector. Out of an additional
allocation of BDT 34.2 billion almost BDT 30 billion is related to agriculture or food, and the
remaining for subsidies to exports.

EFFECT ON GDP GROWTH:

Bangladesh’s economy is not as “decoupled” from the rich world’s travails as is generally believed.
The reason is that Bangladesh’s exports depend almost totally on income growth in US and Europe.
A long and protracted recession in these countries may, therefore, lead to a drop in Bangladesh’s
exports and thereby a slowdown in overall economic growth. According to gght, the projected
growth rate should be easily achieved. However, a prolonged recession in the rich world may still
have a negative impact on domestic output growth. Considering the probable effects of the global
financial turmoil on exports and remittances, the IMF has recently said that Bangladesh’s GDP
growth may fall to 6.19 percent this year. The World Bank has warned of a much lower growth rate
– as low as 4.8 percent, as it fears that the growth of exports and remittances will decelerate
significantly.

FOREIGN AID:
Foreign aid flows to Bangladesh in 2008-09 appear to have remained roughly at the 2007-08 level.
However, food aid has declined dramatically. Thus over the period July-April (2008-09), food aid
fell to $37.6 million compared to $83.3 million during the same period in the preceding year. The
total amount has declined from historical levels of around a million tons to around 80,000 tons this
year. Food security has been given the highest priority by the current government but given the large
volatility often experienced in domestic food production, there is always a threat of crop losses and
high domestic price levels. Given the recent volatility seen in world food markets, the government
remains worried about food security, and would have welcomed an assurance of some food aid of at
least 200,000 tons. There is a fear that low farm gate prices this summer, following on good harvests
and low world market prices, will impact negatively on the next winter harvest, and could destabilize
the crucial rice market.

WHY BANGLADESH REMAINED LESS AFFECTED :

The review in the previous section reveals that Bangladesh has so far remained somewhat less
affected by the global economic slowdown. For the following reasons our country remained less
affected:
@ Bangladesh's financial system has reasonable resilience capacity to safeguard the stability of
banking and financial systems.
@ The robust growth of agriculture
@ overwhelming dominance of RMGs in the export
@ In case of imports
@ Remittance inflow

KEY FINDINGS OF THE REPORT:

During the time of preparing this report we find that the negative impacts of global financial crisis
are beginning to show on the increasingly globalizing economy of Bangladesh:
Bangladesh’s export growth rate experienced has turned negative.
Export of non-apparels items has seen a significant deceleration.
Depreciation of currencies by competing countries ranging from 6-30 per cent over the last one
year and their stimulus packages that provide wide ranging incentives to export-oriented sectors,
have led to erosion of Bangladesh’s competitive strength in the global market
Remittance earnings could be adversely affected in near future as number of job-seekers going
abroad halved as some countries have either revoked earlier job-contracts or have stopped issuing
new visas.
The adverse affects are likely to have negative implications for GDP growth, labor market and
consequently attainment of poverty alleviation targets and MDGs by Bangladesh.
There are clear indicators of weakening macroeconomic performance

RECOMMENDATIONS:
While Global recession did not hurt much our economy so far except some early mark, some
measures should be taken to protect the economy from the global shock as the recession may sustain
a while. This includes:
• Financial support to RMG and other export sector in the event of any liquidity crisis due to delayed
payment or lower price
• Temporary enhancement of cash incentive to the promising export sectors which are currently
facing hard times
• Reducing price of diesel further to reduce transport cost and cost of operating diesel based
generators in the event of inadequate supply of electricity and gas.
• Targeted subsidy on food items to bring food price down and also to help export oriented industries
from the pressure of wage hike.
• Central Bank should go with a moderate monetary policy so as to maintain a respectable growth of
local demand and stimulate local investment.

CONCLUSION
Although the impact has not been as severe as in many other developing countries, Bangladesh has
been experiencing the adverse impact of the global economic crisis where the most obvious areas are
exports, remittances, and economic growth affecting social equity and poverty. Much of the
sensitivity resulted from the export-led development strategy that the country follows creating a
situation of slackened export-related production and investment as well as softened domestic
demand. So far Bangladesh has successfully coped with the crisis through appropriate adjustments in
monetary policy supported by an expansionary fiscal policy stance focusing on boosting domestic
demand and promoting more competitive markets. The strategic thrust of the government’s policy is
on spending more on education, health care, social protection and social safety nets that would not
only help boost domestic demand but also support broader social objectives like inclusive growth
and poverty reduction.
 References

Financial crisis of 2007-2008-Wikipedia.(n.d.). Retrieved from

https://en.m.wikipedia.org/wiki/Financial_crisis_of_2007–2008

Sadiq Ahmed.(2009,January 15).Bangladesh and global financial crisis. The Daily Star.

Muhammad Mahboob Ali, Anisul M. Islam, Victoria J. Luise (2011, February 17).The great recession of

2008:Impact on the Bangladeshi economy and international business implications.Retrived from

https://onlinelibrary.wiley.com/doi/10.1002/tie.20405/full

Harun Ur Rashid.(2008). How does the global financial crisis affect Bangladesh?. The Daily Star.Retrived

October 22,2008 from

http://www.thedailystar.net/news-detail-59689