Coping with the fallout from the financial crisis
Friday, 17 October 2008
Enayet Rasul
A lot has been written to the effect that the Bangladesh economy would not be immediately facing catastrophe from the global financial turmoil and would even manage to weather the longer term threat to it from the same. This writer has been contributory also to such writings that pointed out how the lack of financial linkages between the institutions of badly affected countries and that of Bangladesh, will mean Bangladesh being spared the havocs that such a relationship could now mean if it existed.
Nonetheless, the financial crumbling round the world cannot be without any significant repercussions on Bangladesh in the medium and longer terms. The challenge, therefore, is to mount ceaseless vigilance to ward off the troubles. It must not be business as usual for our policy planners from a sense of respite provided by the insularity of the Bangladesh economy in relation to financial institutions external to Bangladesh.
For the on-going crisis will likely leave behind its ravages on the richest or most resourceful economies of the world. Not only Bangladesh but all other developing countries in varying degrees have benefited from the huge amount of dole that these countries channeled to them either bilaterally or multilaterally through donor agencies as developmental assistance or foreign aid.
One direct casualty of this financial crisis could, therefore, be the volume of foreign aid that the rich countries have been regularly making available to the poor or developing ones. For example, Bangladesh is noted for having progressively reduced its aid dependence over the years. Its government funds its administrative costs entirely from taxes collected from internal sources. But a lion's share of its developmental expenditures, some fifty per cent of its annual development programme (ADP), is still dependent on foreign aid. If this amount of external resources now drop off from economic downturn in the donor countries with subsequent impact of the same on donor organizations, then the Bangladesh economy would be confronted with a major resource gap to fund its developmental activities-- specially on infrastructure--that would restrict its economic expansion.
Thus, a dwindling down of foreign aid is one thing that our policy planners must start thinking about with no loss of time. It is now seriously speculated that the developed countries are going into a period of recession. The recession could be deep and a long one biting hard into all or nearly all sectors of their economies. Foreign aid from those countries are mobilized from taxpayers' money. With taxpayers in these countries getting so much pressurized to foot the bill for bailout of bankrupt financial institutions, plus the drop in employment and earnings as a consequence of the financial crisis, it is hard to see how the rich or developed countries would be able to maintain their flow of developmental assistance under the present circumstances. A cut in foreign aid may have to be considered at some stage and when it comes, Bangladesh along with other developing countries would have to face a much tougher situation because of substantially reduced foreign aid.
Thus, it is important that this likely reduction of foreign aid in the near future enters into the calculation of our policy planners. They should think up of a plan of how to cope with a situation of drastically reduced foreign aid. The country's export activities will have to be maintained on the high side to go on earning increased foreign currencies as hedging against a shortfall in aid.
Our major trading partners are likely to become weaker from the financial crisis. Maintaining the rate of sale of our export goods to them as well as increasing the rate, will involve price reduction and other concessions to be offered in respect of our export products. Attaining the higher degree of competitiveness, thus, to retain the appeal of our products among the traditional buyers of our export products, will require a mix of private sector-government partnership and new initiatives. The private sector on its own will need to find out quickly how it can improve and squeeze its operations to make the same competitive to a greater degree by producing the same or more at lesser costs. Government should help out by motivating exporters with more incentives, by scaling down different charges and duties, better supply of energy and reduction in infrastructure use related costs.
Government ought to put the greatest stress on maximizing the net of productivity in all sectors of the economy. It should be tried to restrict import activities. This will be possible if more care and planning are devoted to boosting production activities in the country. For example, the government planned well the production of a record output of food grains during the last Boro season. Similar initiatives for major expansion in domestic production must be aimed to get the benefit of import substitution on a large scale covering different areas leading to significant conservation of foreign currency and helping the balance of payments position.
Bangladesh so far has gained from an export-led growth strategy. Considering that depression might linger on and deepen in the developed countries that could be a disincentive for some years to our export led growth strategy, the coping mechanism with this situation should point to the need for an interim strategy of domestic sector-led growth. The rise of remittance from our wage earners abroad is pushing up demands for goods and services in Bangladesh. This trend is likely to continue since most of the oil exporting Middle Eastern countries have reaped windfall in recent years from exporting fuel oils with astonishingly high prices. These countries are unlikely to call off their developmental projects from cash shortages. Thus, the boom in these countries where our workers go in a large number, is likely to last and so also the uptrends in our receipt of remittances.
Thus, demands for goods and services are expected to remain on the high side and advantage from this situation can be taken by encouraging investments within Bangladesh to produce a bigger and wider array of goods and services to satisfy the rising demand. This will mean expansion of the domestic economy creating jobs and income as well as enlargement of the taxation base to garner more revenues. Therefore, government should encourage such a 'domestic sector-led growth strategy' in the interim -- until our major trading partners recover from the traumas-- with appropriate monetary and fiscal policies along with other supports.
A lot has been written to the effect that the Bangladesh economy would not be immediately facing catastrophe from the global financial turmoil and would even manage to weather the longer term threat to it from the same. This writer has been contributory also to such writings that pointed out how the lack of financial linkages between the institutions of badly affected countries and that of Bangladesh, will mean Bangladesh being spared the havocs that such a relationship could now mean if it existed.
Nonetheless, the financial crumbling round the world cannot be without any significant repercussions on Bangladesh in the medium and longer terms. The challenge, therefore, is to mount ceaseless vigilance to ward off the troubles. It must not be business as usual for our policy planners from a sense of respite provided by the insularity of the Bangladesh economy in relation to financial institutions external to Bangladesh.
For the on-going crisis will likely leave behind its ravages on the richest or most resourceful economies of the world. Not only Bangladesh but all other developing countries in varying degrees have benefited from the huge amount of dole that these countries channeled to them either bilaterally or multilaterally through donor agencies as developmental assistance or foreign aid.
One direct casualty of this financial crisis could, therefore, be the volume of foreign aid that the rich countries have been regularly making available to the poor or developing ones. For example, Bangladesh is noted for having progressively reduced its aid dependence over the years. Its government funds its administrative costs entirely from taxes collected from internal sources. But a lion's share of its developmental expenditures, some fifty per cent of its annual development programme (ADP), is still dependent on foreign aid. If this amount of external resources now drop off from economic downturn in the donor countries with subsequent impact of the same on donor organizations, then the Bangladesh economy would be confronted with a major resource gap to fund its developmental activities-- specially on infrastructure--that would restrict its economic expansion.
Thus, a dwindling down of foreign aid is one thing that our policy planners must start thinking about with no loss of time. It is now seriously speculated that the developed countries are going into a period of recession. The recession could be deep and a long one biting hard into all or nearly all sectors of their economies. Foreign aid from those countries are mobilized from taxpayers' money. With taxpayers in these countries getting so much pressurized to foot the bill for bailout of bankrupt financial institutions, plus the drop in employment and earnings as a consequence of the financial crisis, it is hard to see how the rich or developed countries would be able to maintain their flow of developmental assistance under the present circumstances. A cut in foreign aid may have to be considered at some stage and when it comes, Bangladesh along with other developing countries would have to face a much tougher situation because of substantially reduced foreign aid.
Thus, it is important that this likely reduction of foreign aid in the near future enters into the calculation of our policy planners. They should think up of a plan of how to cope with a situation of drastically reduced foreign aid. The country's export activities will have to be maintained on the high side to go on earning increased foreign currencies as hedging against a shortfall in aid.
Our major trading partners are likely to become weaker from the financial crisis. Maintaining the rate of sale of our export goods to them as well as increasing the rate, will involve price reduction and other concessions to be offered in respect of our export products. Attaining the higher degree of competitiveness, thus, to retain the appeal of our products among the traditional buyers of our export products, will require a mix of private sector-government partnership and new initiatives. The private sector on its own will need to find out quickly how it can improve and squeeze its operations to make the same competitive to a greater degree by producing the same or more at lesser costs. Government should help out by motivating exporters with more incentives, by scaling down different charges and duties, better supply of energy and reduction in infrastructure use related costs.
Government ought to put the greatest stress on maximizing the net of productivity in all sectors of the economy. It should be tried to restrict import activities. This will be possible if more care and planning are devoted to boosting production activities in the country. For example, the government planned well the production of a record output of food grains during the last Boro season. Similar initiatives for major expansion in domestic production must be aimed to get the benefit of import substitution on a large scale covering different areas leading to significant conservation of foreign currency and helping the balance of payments position.
Bangladesh so far has gained from an export-led growth strategy. Considering that depression might linger on and deepen in the developed countries that could be a disincentive for some years to our export led growth strategy, the coping mechanism with this situation should point to the need for an interim strategy of domestic sector-led growth. The rise of remittance from our wage earners abroad is pushing up demands for goods and services in Bangladesh. This trend is likely to continue since most of the oil exporting Middle Eastern countries have reaped windfall in recent years from exporting fuel oils with astonishingly high prices. These countries are unlikely to call off their developmental projects from cash shortages. Thus, the boom in these countries where our workers go in a large number, is likely to last and so also the uptrends in our receipt of remittances.
Thus, demands for goods and services are expected to remain on the high side and advantage from this situation can be taken by encouraging investments within Bangladesh to produce a bigger and wider array of goods and services to satisfy the rising demand. This will mean expansion of the domestic economy creating jobs and income as well as enlargement of the taxation base to garner more revenues. Therefore, government should encourage such a 'domestic sector-led growth strategy' in the interim -- until our major trading partners recover from the traumas-- with appropriate monetary and fiscal policies along with other supports.