THE GLOBAL FINANCIAL CRISIS – LIKELY IMPACT ON BANGLADESH

THE GLOBAL FINANCIAL CRISIS – LIKELY IMPACT ON BANGLADESH

Study Conducted by BIDS-PRP Team:Ahmed, MansurMehedi, 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

INTRODUCTIONFigure : GDP Growth over preceding quarter, for the four quarters of 2008 of USA and EU

-4

-3

-2

-1

0

1

2

USA EU Germany UK

GDP Growth

2008Q1 2008Q2 2008Q3 2008Q4

Source: BEA and European commission, 2009.

European Commission forecast:

• Advanced economies like USA, EU, Germany and UK are going to experience negative economic growth through out 2009;

•The Economic Outlook sees US output gradually picking up from middle of next year as the effects of the credit squeeze abate; and

•Weak household spending will limit recovery - US GDP is projected to fall 1.6 percent in 2009, before rising 1.6 percent in 2010.

2

INTRODUCTION….Figure : Composite Leading Indicators for Selected Countries

-2.5

-2

-1.5

-1

-0.5

0

Jul-2008 Aug-2008 Sep-2008 Oct-2008 Nov-2008 Dec-08

OECD Area Euro Area Germany United Kingdom United States

ource: OECD, 2009

Figure : GDP Forecasts for USA and EU for 2009 and 2010

-1.5

-1

-0.5

0

0.5

1

1.5

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

EU USA Germany UK

Source: EC, 2009

•The vulnerability facing advanced economies is reflected in the OECD’s composite eading indicators which shows that downturn in the CLI has become flatter and has begun to turn upward between Oct-Dec 2008. GDP forecasts for EU even worse

3

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 ust 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

Linkages: Bangladesh and Global EconomyFigure : Trend in Export-GDP ratio of Bangladesh

Export-GDP Ratio

0.00

5.00

10.00

15.00

20.00

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: World Development Indicators, 2008.

EU46%

USA23%

Others19%

Developing Countries

12%

Figure: Direction of Bangladesh’s Exports, 2007

Source: Direction of Trade, IMF, 2008.

► Bangladesh’s export earnings continuously rising since 1990s. Export earnings are over 20 percent of our GDP.

► The main driver exports is the RMG sector which accounts almost four fifth of our total export earnings.

►The export sector is potentially vulnerable to the on-going financial crisis as it heavily depends on EU and US markets. Almost half of our exports go to EU, while one quarter goes to USA.

5

● 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+uwhere X = Quantity of Export Demand, Y = Real GDP; E=Real Exchange Rate; and = error term.

Forecasts Based on Export Demand Function: A SURE Approach

6

ble : Regression Results: Income and Exchange rate Elasticities

Regions Products Income Elasticity Exchange Rate Elasticity

USA Knitwear 0.2903911* 1.85298**

Woven 0.2855428* 0.8005111*

Fish 0.0086 0.7962688

Jute 0.241779 0.2557664

Leather Products

2.329824* 5.307921*

Rawhide 0.6911198** 2.042887**

Total 0.3680913* 0.7344868*

EuropeanUnion

Knitwear 0.3850197* 0.0074014*

Woven 0.386823* 0.0001788*

Fish 0.2326834* 0.0021747

Jute 0.1866102* 0.0071777*

Leather Products

0.0041508* 0.0017311*

Rawhide 0.1995184* 0.0040831*

Total 0.4474187* 0.0035401*

Income Elasticity:

► Income elasticities for all items for USA and EU are low but significant. Exception: leather products export to USA which shows high positive and significant elasticity (more volatile); and fish and jute exports to USA – which have insignificant elasticity.

► The low income elasticities imply that there is a small, positive association between the income or GDP of the importing countries and export demand from Bangladesh.

Forecasts Based on Export Demand Function: A SURE Approach …..

7

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

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

Forecasts Based on Export Demand Function: A SURE Approach …..

Figure : Forecasts based on IMF Projections

Export Forecast based on IMF Projections for 2009

-4-3.5

-3-2.5

-2-1.5

-1-0.5

0Knitwear Woven

wearFish Jute Leather

ProductsRawhides Total

USA EU

♦ 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

ACTUAL EXPORT PERFORMANCE

•Export performance positive but December performance has raised concerns.

Figure : Half Yearly Growth of Bangladesh’s Export (Year-over-Year)

25.39 23.18

9.226.88

24.93

16.70

0

5

10

15

20

25

Jan-June July-Dec Jan-June July-Dec Jan-June July-Dec

2006 2007 2008

Source: IFS, 2008 and Bangladesh Bank

Figure : Quarterly Exports of Bangladesh in Million USD

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

20

05Q

1

20

05Q

2

20

05Q

3

20

05Q

4

20

06Q

1

20

06Q

2

20

06Q

3

20

06Q

4

20

07Q

1

20

07Q

2

20

07Q

3

20

07Q

4

20

08Q

1

20

08Q

2

20

08Q

3

20

08Q

4

Exports in Million USD

Source: IFS, 2008 and Bangladesh Bank

11

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)

BD USA* China India Pakistan Philippines Sri Lanka Vietnam

Woven 12.49 -3.62 5.06 -8.88 4.08 -3.87 7.82

Knit 25.88 -1.57 4.71 0.24 -0.89 -3.18 -25.23 0.57

Fish -16.46 3.48 19.42 -17.99 -6.51 -20.58 -41.30 7.44

Home Textile 16.93 -3.99 -2.46 2.92 -9.39 1.34 -21.42 -25.36

Headgears -11.53 3.12 5.44 -23.22 44.28 8.46 -11.47 7.89

Jutes -19.76 2.55 -2.95 3.24 7.95 -7.71

Plastics 6.69 2.02 10.48 33.61 -13.26 -0.04 15.31

Total 13.57 2.59 5.48 4.93 2.49 -12.21 -3.10 20.19

Source: Calculated based on data accessed from USITC, 2009.

►Bangladesh is experiencing positive export growth while many other emerging Asian economies already affected, e.g. India, Philippines and Sri Lanka.

► Bangladesh share of US market increasing at the expense of other countries.

► Bangladesh exports rose in the face of declining imports of RMG products in USA –imports fell almost 9% whileBD exports rose 18% (last qtr 2008).

12

ACTUAL EXPORT PERFORMANCETable : Growth of Exports to EU (July-Oct 2008 over July-Oct 2007)

Bangladesh China India Pakistan Sri Lanka

Woven -2.04 6.46 4.56 1.88 3.92

Knit 6.66 32.11 -4.48 -1.57 2.07

Fish -15.88 4.51 -11.96 0.93

Home Textile 4.28 1.50 -4.33 0.15 -14.23

Headgears -20.02 5.08 12.91 10.09 -0.16

Plastics 33.13 7.45 -3.72 127.99 -2.69

Jutes -13.30 2.64 -2.48 -4.87

Rawhide -25.44 -26.96 -12.20 -23.94 -35.00

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

►However, Bangladesh is facing problems in EU market (especially in shrimp, headgear, jute and rawhides).

► Bangladesh experienced <4 % export growth in EU market while all other countries (except Sri Lanka) have experienced higher growth than Bangladesh.

The above data and analysis show that still Bangladesh has been coping well th the on going global financial meltdown, though there is a clear indication at growth rate of exports from Bangladesh is going to face a slow down.

13

RELATIVE SUCCESS OF BANGLADESH: CLOSER FOCUS ON RMG

Trend in US Apparel Sales and Import

-10

-5

0

5

10

15

20

Quarter17

Quarter27

Quarter37

Quarter47

Quarter18

Quarter28

Quarter38

Quarter48

Retail sales World Bangladesh

• 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 areVietnam and Indonesia.

14

RELATIVE SUCCESS OF BANGLADESH: CLOSER FOCUS ON RMGFigure: Product Diversification

Product Diversification in RMG

0%10%20%30%40%50%60%70%80%90%

100%

95-9

6

96-9

7

97-9

8

98-9

9

99-0

0

00-0

1

01-0

2

02-0

3

03-0

4

04-0

5

05-0

6

06-0

7

07-0

8

08-0

9 (s

ept)

Shar

e in

RM

G e

xpor

t OthersSweaterT-ShirtJacketsTrousersShirts

♦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

RELATIVE SUCCESS OF BANGLADESH: CLOSER FOCUS ON RMG

Table : Price per doz in selected Asian countries: first half 2008

CategoriesQuota on China

World Bang China India Pakistan Vietnam

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.

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.

16

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

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

REVIEW/ASSESSMENT OF MAJOR DEVELOPMENTS FOR RMGIncreasing 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 marketsSuppliers 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

REVIEW/ASSESSMENT OF MAJOR DEVELOPMENTS FOR RMGDiversification to higher-end productsBy 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, poloshirt, 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 tin g c o u n tr ie s

1 0 0

1 5 0

1 6 8

1 7 3

1 9 5

2 0 0

2 3 2

2 5 0

B a n g la d e s h

C a m b o d ia

P a k is t a n

V ie t n a m

S ri L a n k a

In d o n e s ia

In d ia

C h in a ( In la n d )

B a n g l a d e sh = 2 2 c e n ts/ h o u r

B a n g = 1 0 0

Source: Jassin O’Rourke, 2008

20

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

IMPACT ON REMITTANCESCurrent remittance earnings of Bangladesh are about $9 billion (compare RMG exporof around $11 billion) and (put it in perspective, equivalent to 9.5 % of GDP).

Factors determining remittance are numerous (host and home country GDP, exchangrate, no. of migrants, earnings, length of stay, education of migrant, inflation rate and interest rate differentials, household incomes and employment)

Fig. 10: Top ten remittance-recipient developing countries in 2007 & 2008

11.11

5.05

-4.94

14.79

4.808.45

24.09

5.47

35.62

18.37

-

5

10

15

20

25

30

35

India

China

Mexico

Philipi

nes

Poland

Nigeria

Egypt

Roman

iaBan

glade

shPak

istan

billi

on U

S $

-10-50510152025303540

% c

hang

e

2007 2008e % change over 2007

year % change over 2007

country

2006 2007 2008e

India 25,426 27,000 30000 11.11

China 23,319 25,703 27000 5.05

Mexico 25,052 25,037 23800 -4.94

Philippines 15,251 16,291 18700 14.79

Poland 8,496 10,496 11000 4.80

Nigeria 5,435 9,221 10000 8.45

Egypt 5,330 7,656 9500 24.09

Romania 6,718 8,533 9000 5.47

Bangladesh 5,428 6,562 8900 35.62

Pakistan 5,121 5,998 7100 18.37

Table :Top remittance recipient developing countries (million US $)

Source: World Bank staff estimates based on the International Monetary Fund's Balance of Payments Statistics Yearbook 2008.

22

IMPACT ON REMITTANCES

Monthly inflow of remittance (million US $)

00

50

00

50

00

50

00

50

00

50

00

Year:2007 Year:2008 Year:2009

Remittance inflow from all countries

% change (y-o-y)

Country 2007 2008

U.S.A 1086.88 1582.49 45.60

U.K 889.74 823.42 -7.45

Kuwait 768 949.53 23.51

K.S.A 1788.28 2733.69 52.87

U.A.E 938.15 1379.54 47.04

Malaysia 29.71 165.03 455.47

Total 6568.03 9019.6 37.33

►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 growth rates declining worldwide. Growth in BD in 2008 striking!

23

Actual Remittance Inflows by Major Source CountriesRemittance from U.S.A (2007 & 2008)

020406080

100120140160

Jan

uary

Feb

ruar

y

Mar

ch

Apr

il

May

Jun

e

Jul

y

Aug

ust

Sep

tem

ber

Oct

ober

Nov

embe

r

Dec

embe

r

mill

ion

US $

0102030405060708090100

Tk p

er U

S $

U.S.A-07 U.S.A-08 % change

Remittance earnings from UK (2007 & 2008)

3.16

17.548.83

-17.46-18.59

-2.73

11.2415.55

-6.47

-42.00

1.79

-44.210

20

40

60

80

100

Jan

uary

Feb

ruar

y

Mar

ch

Apr

il

May

Jun

e

Jul

y

Aug

ust

Sep

tem

ber

Oct

ober

Nov

embe

r

Dec

embe

r

Mill

ion

US

$

-50-40-30-20-100102030

% c

hang

e

U.K-07 U.K-08 % change

Remiitance earnings from Saudi Arabia(2007 & 2008)

72.24

39.89

87.03

61.4759.3763.85

39.63

61.90

38.4647.11

37.8138.35

0

50

100

150

200

250

300

Jan

uary

Feb

ruar

y

Mar

ch

Apr

il

May

Jun

e

Jul

y

Aug

ust

Sep

tem

ber

Oct

ober

Nov

embe

r

Dec

embe

r

Mill

ion

US $

0102030405060708090100

% c

hang

e ov

er p

revi

ous

Saudia Arabia-07 Saudia Arabia-08% change

Source: Bangladesh Bank

●End of 2008 a suggestion of lower growth on monthly basis● Highest increase from Malaysia and lowest (negative growth) from UK !● March-April peak more pronounced!

24

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

Our remittance earnings are ot influenced by the World

GDP growth rateComparison of remittance growth with world

real GDP growth

y197

8y1

979

y198

0y1

981

y198

2y1

983

y198

4y1

985

y198

6y1

987

y198

8y1

989

y199

0y1

991

y199

2y1

993

y199

4y1

995

y199

6y1

997

y199

8y1

999

y200

0y2

001

y200

2y2

003

y200

4y2

005

y200

6y2

007

y200

8-40

-20

0

20

40

60

80

rem

ittan

ce g

row

th

World GDP growth remittance growth

urce: World development indicator-2008

Remittance out flows from Saudi Arabia not influenced by oil prices

Remittance outflows from Saudi Arabia not inluenced by oil prices

01020304050607080

y197

6y1

977

y197

8y1

979

y198

0y1

981

y198

2y1

983

y198

4y1

985

y198

6y1

987

y198

8y1

989

y199

0y1

991

y199

2y1

993

y199

4y1

995

y199

6y1

997

y199

8y1

999

y200

0y2

001

y200

2y2

003

y200

4y2

005

y200

6y2

007

US $

0

5

10

15

20

Billi

on U

S $

brent oil(US $/barrel)remittance outflows from Saudi Arabia

Source: Monthly oil Market Report, OPEC, february,2009

26

The rising share of skilled labor in total overseas

employmentDistribution of overseas employment by different

profession

6.34 4.72 3.9 0.77 0.24 0.08 0.21

34.7

6

32.1

2

32.0

1

44.9

8

30.2

7

19.8

6

32.1

6

7.35 20.1815.19

9.71

8.9022.06

15.18

51.5

4

42.9

7

48.8

8

44.5

4

60.5

9

58.0

0

52.4

4

0%

20%

40%

60%

80%

100%

y1976-y1985

y1986-y1995

y1996-y2004

y2005 y2006 y2007 y2008

year Professional Skilled Semi-skilled Unskilled

Source: BMET

The rising trend of total no. of migrants

Source: World development indicator-2008

Growth comparioson-Renittance earnings vs no. of overseas employment

00.10.20.30.40.50.60.70.80.9

1

y199

5y1

996

y199

7y1

998

y199

9y2

000

y200

1y2

002

y200

3y2

004

y200

5y2

006

y200

7y2

008

Mill

ions

no. o

f em

ploy

men

t 012345678910

rem

ittan

ce e

arni

ngs

(bill

ion

US

$)

no. of overseas w orkers remittance

27

Impact of migrants on remittances – staggered effects of migration on remittances?

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 % levelSource: Authors Estimate

Table: Regression Results

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

Exchange rate effect: Significant but small?Exchange rate effect on remittance

0100200300400500600700800900

July

,06

Aug

,06

Sep

t,06

Oct

,06

Nov

,06

Dec

,06

Jan,

07Fe

b,07

Mar

,07

Apr

,07

May

,07

Jun,

07Ju

ly,0

7A

ug,0

7S

ept,0

7O

ct,0

7N

ov,0

7D

ec,0

7Ja

n,08

Feb,

08M

ar,0

8A

pr,0

8M

ay,0

8Ju

n,08

July

,08

Aug

,08

Sep

t,08

Oct

,08

Nov

,08

65.56666.56767.56868.56969.57070.5

Tk p

er $

remittance(million $) exchangerate(tk per us $)

Taka per currency asssuming January'07 as hundred

707580859095

100105110115120

Jan,

07Fe

b,07

Mar

,07

Apr,0

7M

ay,0

7Ju

n,07

July

,07

Aug,

07Se

pt,0

7O

ct,0

7N

ov,0

7D

ec,0

7Ja

n,08

Feb,

08M

ar,0

8Ap

r,08

May

,08

Jun,

08Ju

ly,0

8Au

g,08

Sept

,08

Oct

,08

Nov

,08

Dec

'08

Jan'

09

tk p

er c

urre

ncy

EURO Indian Rupee Japanese Yen US Dollar U.K.Pound 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

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

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

05

101520253035404550

Jan

uary

Feb

ruar

y

Mar

ch

Apr

il

May

Jun

e

Jul

y

Aug

ust

Sep

tem

ber

Oct

ober

Nov

embe

r

% c

hang

e

% change over 2007 % change over 2006

Source: Bangladesh bank

31

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 significantlyMuch 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

Composition of Import (million US $)2007 2008

Items July-Nov July-Oct July-Nov % change (4 over 2)

A. Food Grains 492.2 239.7 367.2 -25.4Rice 252.3 158.5 187.5 -25.68Wheat 239.9 81.2 179.7 -25.09Edible oil 411.1 311.6 368.9 -10.27Sugar 130 156.4 182.9 40.69C. Consumer &

Intermediate Goods3465 4365.4 5162.9 49

Clinker 137.3 97.4 119.8 -12.75Crude petroleum 219.7 403.1 403.1 83.48Fertilizer 196.9 597.5 694.1 252.51Dyeing and tanning

materials84.2 112 129 53.21

Raw cotton 425.3 460.1 563.7 32.54Yarn 260.6 305.5 366.4 40.6Textile and articles thereof 785.1 747.5 905.7 15.36D. Capital Goods & Others 2740.6 2762.9 3439.7 25.51Capital machinery 752.2 541.5 661.9 -12Grand Total (A+B+C+D) 7999.4 8417.9 10231.1 27.9

Percentage Change in Import LCsOpened & Setteled

July-Dec. 2007-08

July-Dec. 2008-09

Commodity Opening Settlement

Opening

Settlement

Food grains( rice & wheat)

256.47 164.48 -55.99 -35.83

Capital machinery

-3.4 -7.74 -20.68 13.9

Machinery for misc. industry

15.56 19.76

Petroleum -23.99 6.17 16.25 16.87

Industrial raw materials

28.13 15.33 12.27 33.77

Others 18.69 17.32 13.73 24.9

Total 21.37 17.25 4.24 22.44

Source: Bangladesh Bank

33

Inflation Impact: World prices% Change in commodity price index

Dec/Nov Dec 08/Dec 07 Jan/Dec Jan 09/Jan ‘08

Commodity -14.1 -36.4 4.1 -37

Non-Energy -6.8 18.4 4.2 -25.5

Energy -18.5 -42.7 4 -43

Crude -23.2 -53.6 5.7 -51.6

Agriculture* -4.0 na 7.7 na

Food -2.7 -18.4 6.4 -16.8

Corn -3.0 -40.3 9.5 -16.1

Wheat -3.6 -23.2 8.7 -35.2

Soybean Oil -6.5 -33.7 10.8 -34

Sugar -4.0 -1.7 7.1 na

Industrial Metals -10.9 -36.4 1 -41.4

Gold* 7.3 na 5.2 na

Fertilizers* -10.9 na -3 na

Sources: IMF; Estimations based on data provided by the IMF.* World Bank Index

34

Growth of manufacture & import of capital machinery

02468

101214

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08(p

)

taka

in c

rore

(000

)

024681012

grow

th(%

)

Capital Machinery grow th of manufacture

Growth of manufacturing/Industrial production & import of capital & indutrial raw materials

-5

0

5

10

15

20

Jan,

07Fe

b,07

Mar

,07

Apr

,07

May

,07

Jun,

07Ju

ly,0

7A

ug,0

7S

ept,0

7O

ct,0

7N

ov,0

7D

ec,0

7Ja

n,08

Feb,

08M

ar,0

8A

pr,0

8M

ay,0

8Ju

n,08

July

,08

Gro

wth

(%)

0

500

1000

1500

2000

impo

rted

raw

&

capi

tal

good

s(m

illio

n U

S $)

indutrial/manufacturing growthtotal raw & capital machinery

Import of textile by month(2007 & 2008)

130

140

150

160

170

180

190

200

Jan

Feb

Mar

Apr

May Jun

July

Aug

Sept

Oct

Nov

Mill

ion

US

$

textile-07 textile-08

Import of RMG raw materials by month (2007 & 2008)

250

300

350

400

450

500

Jan

Feb

Mar

Apr

May Jun

July

Aug

Sept

Oct

Nov

Mill

ion

US

$

RMG raw material-07 RMG raw material-08

Sources: Bangladesh Bank & ADB website

Production/Productivity Impact

35

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

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 RMGsector; 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 countriesFinal 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

THANK YOU

38