Global Financial Crisis Discussion Series Paper 12: Bangladesh Phase 2

Although Bangladesh was initially spared the worst consequences of the global financial crisis, the lagged impacts have started to become visible, transmitted by means of various channels. Overall, export earnings have remained robust, driven by readymade garment exports, but volatility has increased. In the third quarter of 2009, there was a significant fall in exports, with apparel exports also falling victim to sluggish demand. At the same time, policies pursued by competitors have had an adverse impact on Bangladesh’s competitive strength in the global market. To address the emerging tasks of stimulating domestic demand and increasing export competitiveness, Bangladesh put in place two consecutive stimulus packages, went for a higher budget deficit and adopted a number of other countercyclical measures. Remittance inflows have remained robust until now: the number of terminally returned workers is insignificant against the large stock of workers managing to stay working overseas. However, a lower number of outward migrants has given rise to concerns with regard to future inflows of remittances, and has also put pressure on the domestic labour market. The gross domestic product (GDP) growth projection of 5.5% for 2009/10 is the lowest in recent years, holding consequences for jobs and incomes. The available evidence does not suggest a large number of factories being shut down as a result of the crisis, nor does it indicate significant retrenchment in apparels and other export-oriented sectors; however, overtime payments and new recruitments have suffered. On the other hand, with the majority of the population making a living from agriculture, good harvests have meant that the poverty impact of the crisis may have been limited. An earlier fall in commodity prices has also been beneficial with regard to the real incomes of the poor. With remittance inflows holding, these factors have had a positive impact on the poverty situation in Bangladesh. Bangladesh has been somewhat of an outlier in this crisis. However, in view of a jobless recovery, Bangladesh will need to pursue a proactive policy, one which continues with countercyclical measures and at the same time is forward looking, to exploit the advantages arising from the expected global economic recovery. Effective and timely implementation of the recently announced support measures will be of importance in this context. To do this, Bangladesh will need to improve its investment climate significantly through better power and infrastructure provisions.