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Likely Effects of the Euro Crisis
The looming Euro crisis can affect the Bangladesh economy through exports,
remittance, and aid inflows. World Bank projections anticipate euro zone growth
to decline to -0.3 percent in 2012 and rise slightly to 1.1 percent in 2013, compared
with 1. percent in 2010 and an estimated 1.! percent in 2011.13 "he initial major
impact on Bangladesh would arise #rom a decline in $% imports and trade #inance,
with a smaller impact e&pected in the %' market. Bangladesh can (e e&pected to
su##er #rom second round e##ects as well, including impact on non-garment e&ports
and remittance due to reductions in deri)ed demand #rom regions hit hardest in the
#irst round. $&port growth in *+12 has already slowed considera(ly to less than percent, and this may impro)e only marginally to 12 percent in *+13. While the
direct e##ect o# the $uro zone crisis on remittances may (e small, the indirect
e##ects could (e more signi#icant.
The previous global recession undermined growth in Bangladesh by
stagnating real exports and adversely shifting the terms of trade in fiscal 2009 .
"he impact on e&ports (ecame apparent around cto(er, 200. "he e##ect lasted 1/
months (e#ore gi)ing way to a short-li)ed (oom a(out ten months, led (y
knitwear in early 2010 *igures -12. nother downturn appears already to (e
underway, since pril 2011. Bangladeshs terms o# trade declined (y /.! percent in
*+10 and (y another !. percent in *+11. "he (anking system had )ery low le)els
o# e&posure to the 4to&ic assets5 which caused the crisis and a )ery low reliance on
international (orrowing #rom commercial sources. "his insulated Bangladeshs
#inancial system #rom the crisis to a large e&tent and limited the impact to a
moderate slowdown. "he #all in oil prices, #rom a high o# %'61/0 in 7uly 200 to
a(out %'6/8 o)er the ne&t si& months also helped, (y reducing import (ills at
precisely the time when the e##ects o# the crisis were (eginning to (e #elt. 9rowth
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in payments on account o# non-oil imports (egan declining #rom pril 200 and
continued until :ecem(er 2010. 9rowth in payments #or oil imports were in
negati)e territory #rom ;o)em(er 200 through cto(er 200. :eclining
international commodity prices also helped to reduce energy '$ losses and
contri(uted to lowering in#lation.
The first-round impact on Bangladesh in a new international recession would
stem from a collapse of E imports and trade finance. $uro-zone import
demand growth turned negati)e in
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@=9 e&port to $% was resilient in the last crisis period. ?n cto(er 200, the
countrys @=9 market share in $% was around /.3 percent, and gained
momentum due to the so-called 4Wal-=art e##ect5, increasing to !.2 percent in
pril 2010. owe)er, e)en market-share gains might not (e su##icient to a)oid the
shock to e&port growth in a new $uro-zone crisis, (ecause last time e&ports slowed
noticea(ly in all categories #rom cto(er 200. ;on-@=9 e&ports to the $% may
su##er more than those o# @=9, as Bangladeshs share o# non-@=9 e&ports in the
$% ha)e a)eraged just 0.08 percent o)er the last three years.
$%& export growth to the ' may be hit as well C "he %' is the second-largest
e&port destination #or Bangladesh a#ter the $%, and $urope is the largest market
#or %' e&ports. ence, the %' economy would also likely grow slowly o)er the
ne&t 1 months at 2.3 percent in 2012 and 2./ percent in 2013. ?# so, %' o)erall
import growth would #all to 1. percent in 2012 rising to !./ percent in 2013. 'o,
e)en i# the share o# Bangladeshs @=9 e&ports to the %' were to rise #rom their
current share o# 8 percent to ! percent, they would still lose ground through most
o# 2012.1 @=9 e&port growth may (egin to impro)e in the latter part o# /< 2012
and is predicted to increase in the #irst >uarter o# 2013. Bangladeshs share o# the
%' non-@=9 market has (een 0.02 percent #or the last #our years and there are no
early or signi#icant signs o# product di)ersi#ication.
( number of scenarios are possible) "he Bangladesh e&port market is highly
concentrated in the $% and %'. ?n *+11, Bangladesh e&ported around /./ percent
o# its total e&ports to these markets, (ut during the last #inancial crisis, 200-2010,
this #ell to 0 percent. ?t is reasona(le to presume, there#ore, that a similar #all-o##
would occur i#, as #orecast, another $uro crisis were to occur o)er the ne&t 1
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months. worst-case scenario en)isages #lat, or e)en declining, e&ports in that
period. (ase case #oresees a signi#icant decline in e&port growth #rom what
occurred during the #irst eight months o# *+12.
Remittances
The direct effect of the Euro-"one crisis on remittances may be small, but the
indirect effects could be significant* $uropes share in Bangladeshs total
remittances is only a(out percent, mostly #rom the %nited Dingdom and
9ermany. "hus, the direct e##ect o# a $uro crisis on remittance in#lows may not (e
signi#icant. owe)er, the indirect e##ects could (e su(stantial, (ecause o# a
possi(le slowdown o# economic acti)ities in the oil-e&porting 9ul# countries,
com(ined source o# a(out percent o# Bangladeshs total remittances. decline
in oil prices due to a $uro crisis would likely slow economic acti)ity in those
countries, the se)erity depending on the e&tent o# the slowdown. "his would harm
remittance in#lows #rom non-9ul# countries.
The recent rise in manpower exports provides some cushion. "here is anecdotal
e)idence that many Bangladeshi migrant workers returned #rom trade-intensi)e
countries such as 'ingapore and 'outh Dorea during the last glo(al economic and
#inancial crisis. owe)er, at that time the oil price plummeted, there(y mitigating
the weakening o# remittances to Bangladesh. "he jump in manpower 4e&ports5,
#rom an a)erage 20,000 annually during *+03-0! to 30,000 during *+0-0
dwar#ed any possi(le impact o# lower oil prices on the earnings o# the Bangladeshi
workers a(road *igure 13. =anpower 4e&ports5 slowed to /30,000 in *+10 and
//0,000 in *+11, though these were still signi#icantly higher than the pre-*+0
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le)el. =anpower e&ports in the #irst se)en months o# *+12 ha)e (een / percent
higher than the corresponding period o# the pre)ious year. "his suggests a
cushioning o# a negati)e impact o# a new $uro crisis.
The impact may be most pronounced if &++ economies were infected . ?t is
there#ore not clear yet how strongly the remittance in#lows o# Bangladesh would
(e a##ected (y a $uro crisis. ?t should (e (orne in mind, howe)er, that 9EE
economies are )ulnera(le to a $uro-zone crisis, not just through weaker oil prices
(ut also through weaker trade in general which may reduce their growth. "a(le 2
shows the possi(le e##ects o# a -10 percent short#all in remittances #rom Duwait,
%nited ra( $mirates,
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Revenue growth could weaken. During the last global crisis, revenue growth in
Bangladesh started slowing from August, 2008 and lasted until July, 2009 before
entering a eriod of strong recovery !"igure #$%. A &uro crisis could imact total
revenue through declining growth of nominal 'D(, deending on the ta)
buoyancy of the country. *he crisis would li+ely reduce the growth of nominal
'D( by reducing the growth of real 'D( and inflation.
9i)en the a(o)e ta& (uoyancy, total ta& re)enue will #all short (y a(out / percent
o# the original, passi)e target in the #iscal 2012 (udget. Because o# new re)enue
measures in the acti)e case, the projected ta& re)enues are 1.8 percent higher
relati)e to the (udget.
o exogenous shoc to public expenditure is expected from a new Euro crisis
other than the need for austerity that may be forced by a shortfall in revenues
and perhaps external financing. "here has already (een an endogenous response,
with the go)ernment e&panding its cash su(sidies #or e&port (y "k 8 (illion a(out
6!8 million. glo(al or regional crisis tends to constrain market-(ased #inancing.
?t would (e di##icult #or the go)ernment to access the international capital market
with an issue o# so)ereign (onds or (y (orrowing #rom #oreign #inancial
institutions. Bangladesh traditionally has relied mostly on o##icial (ilateral and
multilateral #inancing. "hese sources did not dry up during the last glo(al crisisF a
decline in aid in#low in recent years is primarily attri(uta(le to slower project
implementation rather than ad)erse e&ternal #actors. short#all in the #oreign aid
pipeline due to the crisis is not likely. owe)er, it is possi(le that (ecause o#
growing #iscal and de(t crunch, the $% may not (e a(le to #ul#ill its e&isting and
new commitments under )arious (ilateral and multilateral initiati)es. But this
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should not cause any serious pro(lem i# the Bangladesh go)ernment intensi#ies
e##orts to accelerate use o# the e&isting aid pipeline, which now e&ceeds %'612
(illion.
Overall Macroeconomic Impact
Bangladesh has very little room for maneuver. ?n the worst-case scenario,
slowdown in remittance reduces pri)ate consumption growth, uncertainties with
respect to glo(al outlook reduce pri)ate in)estment growth, and e&port growth is
directly a##ected (y an $% recession and slower growth in the %'. decline in
e&port growth also reduces import growth. %nder these conditions, 9:A growth in
*+12 is estimated to ha)e declined to !.3 percent. "he implied macro (alances,
particularly #iscal de#icit at /. percent o# 9:A and domestic #inancing at 3.!
percent o# 9:A lea)e )ery little room #or maneu)er. Bangladesh cannot a##ord to
see reser)es depleting #urtherF it cannot allow more su(sidies (ecause the de#icit is
(eing #inanced domestically and is crowding out the pri)ate sector, and monetary
#inancing o# the de#icit has already (een o)er-used.
.uantitative ad/ustment is needed* "his would re>uire macro policy measures
on the #ollowing #rontsC a tightening o# monetary policy, increased e&change-rate
and interest-rate #le&i(ility, scaling (ack o# energy su(sidies, and measures to
contain risks to #inancial-sector sta(ility. "hese will restore in)estor and consumer
con#idence leading to higher consumption growth and in)estment growth. ?t will
also contain the decline in the e&port growth rate, thus ena(ling the economy to
maintain ! percent-plus growth.
The impact on inflation in Bangladesh will depend on the extent to which
global commodity prices soften as a result of recession in the Euro "one. 9i)en
the time lag in the transmission o# international commodity price changes to
changes in domestic prices, the impact is more likely to (e )isi(le in *+13. ?# a
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deep recession in $urope were to spill o)er to slow growth in Ehina and ?ndia then
international commodity prices could decline noticea(ly, leading to a decline in
in#lation in Bangladesh in ways similar to that e&perienced in 200. ?n Bangladesh,
the di##erence this time is rising non-#ood in#lation which has constrained space #or
stimulus packages in response to the crisis. nother key di##erence is the resilience
o# international oil prices around %'6100-%'6110 per (arrel, despite recession in
$urope, weak demand in the %', and growth slowdowns in Ehina and ?ndia. "his
is additional (ad news #or Bangladesh (ecause it remo)es the mitigating e##ect on
the (alance o# payments and prices that glo(al recession (rought in 200 #or net oil
importers.