effects of the euro crisis

8/12/2019 Effects of the Euro Crisis

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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.

effects of the euro crisis

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