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Tuesday, April 14, 2009

WB suggests caution in bailout request response

The Financial Express

The World Bank (WB) Monday said the current economic situation in Bangladesh is stable, but it cannot be taken for granted as the impacts of global recession are very much visible, reports UNB.

"Recession in the developed markets and slowdown in the Middle East have already begun posing a threat to Bangladesh exports and remittances," WB senior economist Zahid Hussain said in his keynote presentation at a workshop.

WB country director Xian Zhu chaired the workshop titled 'State of Bangladesh Economy and Policy Response to the Global Financial Crisis.'

Zahid Hussain said economic growth in recent years has come mostly from the industrial and services sectors. "So far, economic growth has been on track to achieve a 5.5 per cent growth in FY09. In the worst case scenario it could be as low as 4.5 per cent, if export and remittance collapse in the last quarter of FY09."

Hussain said inflation has declined to 6.1 per cent in January 2009 from a nine-year high of 11.6 per cent in December 2007. "The unbriddled horse (inflation) is drowsing. It's neither dead nor asleep. It's not a near-term threat, vigilance must continue in this regard," he added.

About the macro-economic management of the country, the WB economist said although the government's current macro-economic stance is sustainable, it remains highly vulnerable.

Narrating the impacts of recession, he said frozen food export during July 2008 to February 2009 declined 11 per cent, while that of leather by 33 per cent, jute goods by 18.1 per cent and pharmaceuticals by 15.5 per cent. "Remittances have held up so far, but monthly growth rates are rapidly declining," Hussain said.

Describing the present scenario of manpower export, which is the key to remittance inflow, he said during the first nine months of FY09 (July-March), 5,37,000 migrant workers got jobs abroad compared to 7,20,000 during the same period last year.

He said at least 2.0 to 2.5 million new local jobs will be needed until the global economy recovers fully, compared to 1.0 to 1.1 million local jobs needed prior to the economic crisis.

The World Bank prepared a checklist of things need to be avoided. Those are: new large-scale entitlement programmes, increase in public sector wage bill, increase in subsidies to specific industries, reduction in corporate tax rates, dividends, and capital gain taxes, which are likely to have a small effect since they usually fall during a crisis, increases in tariffs, tax amnesties for companies in trouble, as this may seem as unfair industrial policy by competitors, and interest rate ceiling.

The World Bank economist also listed some constraints regarding the demand for bailout packages. These constraints are: the government does not have adequate fiscal space to finance large bailout packages, there is some room for higher fiscal deficit, because of savings from subsidy provision, but it needs to be used wisely, there are better candidates for spending the improved fiscal space: infrastructure, support to small and medium enterprise, micro-credit schemes, health and education, safety net programmes, there is a need for structural reforms to improve the investment climate and these may not benefit the poor.

About promoting the regional connectivity and trade, he said, "Bangladesh can earn an additional US$ 1.0 billion or more from exports, transit charges and port fees."

WB country director Xian Zhu in his speech on the occasion said the government should be cautious in responding to the requests for bailout amid worldwide recession.

"The government has received requests for different kinds of bailout packages. In deciding how to respond to these requests, it'll be important to keep in mind that the government is in resource constraint, and therefore, the tradeoffs would have to be made," Xian Zhu said.

He said whatever policy-package the government designs, protecting the poor through new job creation and adequate well-targeted safety net programmes should remain the highest priority. "It is the poor who are hardest hit in times of such crisis."

The WB country director said Bangladesh entered the crisis this time with advantages that it lacked during the shocks of 1980s and 1990s.

"Bangladesh's foreign exchange reserves have been increasing in recent months, remittance inflows continue to remain strong, the current account is still in surplus, and fiscal balances are well managed despite revenue shortfall."

He, however, said there is no room for complacency because the uncertainty is still too high and the impact of the crisis is beginning to be felt.

"For instance, all non-RMG exports have declined in recent months, growth of woven and knitwear exports have slowed, and export orders for garment have weakened considerably."

He said the monthly growth rate for remittance is also declining.

Xian Zhu said various projections about the FY09 growth coming from different institutions, including the World Bank, the IMF and ADB, have created confusion among the public about the magnitude of the impact of the crisis on GDP growth in Bangladesh, and distracted attention from the more important question about what kind of policy response is appropriate.

"Given the pervasive uncertainties surrounding the depth and duration of the global economic crisis, it is not at all surprising that we have such different numbers on growth."

He said it is true that the impact on Bangladesh's growth may not be as severe this fiscal year, "but the key message to me is to prepare for the worst while planning for the best."

Zhu added: "We must remember that it is not about numbers, it is about the people."



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