Media Workshop on 'Global Financial Crisis and the State of Bangladesh Economy'

Opening Remarks by Xian Zhu, Country Director, The World Bank, Dhaka

 

Thank you for joining us today to discuss the state of Bangladesheconomy in the context of the ongoing global financial crisis.      

 

The developed world and the emerging market economies are currently fighting a financial Tsunami that epicenters on the U.S.   Fallout from the subprime mortgage market in the US has spilled over into the credit and stock markets globally. Instability has surged from sector to sector, first from housing into banking and insurance markets, and then on into all parts of the real economy.  It has surged across national borders within the developed world and now there are reasons to fear that the crisis will swamp the emerging markets and other developing countries, cutting into the substantial economic progress of recent years.

 

The focus of policymakers so far has mostly been on the actions of the governments at the epicenter of the crisis as well as those of other developed countries like EU and Japan. It is about time we focus on the developing world as it faces the threat of instability.  The 1.4 billion people who live in or on the verge of extreme poverty are all in the developing world.  Given their slim margin of survival, any economic crisis will have its most severe human consequences in the developing countries.

 

Developing countries, such as Bangladesh, are most likely to be affected through exports and remittances.  While the fall in export volume growth is projected to be greater for developed economies than for developing economies, the latter may also suffer more from declines in the terms of trade—especially in the case of commodity exporters such as Bangladesh.   We expect non-oil commodity prices to fall by perhaps 20 percent in 2009.  Furthermore, as labor markets slacken, foreign workers are likely to suffer disproportionate impacts on their earnings, which may reduce remittances. 

 

The good news is that many developing countries, Bangladesh in particular, enter this crisis with advantages that they lacked during the shocks of 1980s and 1990s. Bangladesh’s foreign exchange reserves have been well managed, with very limited exposure to the securities markets and commercial banks; net inflow of FDI has been relatively stable while private debt transactions are limited and strictly monitored by Bangladesh Bank; the external current account is in surplus still; and the financial sector has reasonable resilience and is relatively immune to the global financial crisis. There is however the risk of increasing payment default to banks by foreign buyers against export orders in the event of their going bankrupt and also by local importers who are stuck with high priced commodity stocks.  The presentation that follows will discuss in much greater detail the likely impact on Bangladesh through various channels.

 

Let me conclude with two points: 

 

First, Bangladesh Bank should continue to pursue a monetary policy keeping in view the downside risk of slowing economic activity as external conditions deteriorate while at the same ensuring that the recent high growth in private credit is moderated to ensure quality.  A major concern in recent times has been to ensure that high inflation does not become a permanent feature of the economy.  It would therefore be important to balance the concerns about inflation while ensuring adequate flow of credit to the real sector.  It is also important to monitor closely the exchange rate movements of currencies that compete with Bangladesh in its export markets and assess the imperative of the current exchange rate policy of maintaining external competitiveness and exchange rate stability. Recent decline in international commodity prices is likely to provide policymakers some fiscal space, which may prove handy in accommodating assistance to sectors adversely affected by the crisis. The World Bank stands ready to provide help for expanding safety nets if needed.  The IFC has provided trade financing and has also established a fund for infrastructure and another one for bank recapitalization. The World Bank Group has announced around two weeks ago that it would substantially increase financial support for developing countries, including support to the crisis-hit private sector that is critical to employment, recovery and growth.

 

Second, the international architecture designed to deal with such circumstances needs to be reformed. Hence the World Bank President’s recent call for a New Multilateralism designed to suit our times.  This new multilateralism will need to be a flexible network. It needs to build a sense of shared responsibility for the health of the global political economy and must involve those with a major stake in that economy. The world needs this new network so that global problems are not just fire-fought after the fact, but also anticipated. Furthermore, the world must redefine economic multilateralism beyond the traditional focus on finance and trade. Energy, climate change, and stabilizing fragile and post-conflict states are economic issues today. They are already part of the international security and environmental dialogue. They must be the concern of economic multilateralism as well.

 

Thank you very much.