Bangladesh's battered economy to take another hit

From the Economist

POLITICAL instability, natural disasters, and corrupt politicians: Bangladesh’s economy has withstood a lot in recent years. But the global economic crisis will test its resilience as much as any of its traditional afflictions. Both its main sources of foreign exchange, workers’ remittances and garment exports, are at risk.

By January 2007, when the army stepped in to install a two-year interim government of unelected technocrats, Bangladesh had topped international corruption rankings for five consecutive years. Yet the economy had grown at more than 6% a year since 2004, and poverty had fallen faster than ever. Donors called it the "Bangladesh paradox".

Of course, no one ever believed in such a paradox. It was a polite way of telling politicians that the country could do even better if they kept their hands out of the till. Think of the progress it could make if they tackled power shortages, invested in education and infrastructure, and improved farm yields!

One of the world’s poorest countries, only twice the size of Ireland, Bangladesh already finds it hard to feed its people. According to the World Bank, nearly 56m out of a population of 147m are still poor. There will be 100m more mouths to feed by the middle of the century. Bangladesh is trading its only abundant resource, labour. Clothing exports, which account for 75% of total exports, more than doubled in the past five years to nearly $11 billion a year.

Over the same period, annual remittances by 5.5m Bangladeshis nearly tripled to $7.9 billion, or 10% of GDP, among the highest share in the world. So the economy is heavily dependent on spending in the high streets of Europe and America and on the demand for labour in the Gulf. Both are dropping off alarmingly (see chart). A closed capital account has protected the financial system. But Bangladesh’s banks are far from robust. In February Fitch, a rating agency, called them among the weakest in emerging Asia.

Domestic policymakers, who long denied the crisis would have a big impact in Bangladesh, now acknowledge that its pricing advantage over rival garment producers counts for little as demand in the West plummets. Yet no one knows how bad things will get. The IMF has said it is ready to assist, but the government has responded that it does not need help. The central bank insists that GDP will grow by around 6% this financial year (ending in June), compared with a 4.8% forecast from the World Bank last November.

Social unrest in Dhaka and Chittagong, the two big cities that account for about 60% of GDP, is already a real concern. This week, the government announced that it would sell rice at highly subsidised prices to millions of garment workers. But a fall in exports alone is unlikely to trigger a balance-of-payments crisis, since it will be accompanied by a big fall in imported inputs. Foreign-exchange reserves, hovering between $5 billion-$6 billion, are enough to cover two to three months of imports.

And a sharp fall in food and oil prices has already considerably reduced the import bill. But remittances remain a worry. Last year 875,000 Bangladeshis took on jobs abroad. Saudi Arabia, the biggest employer, has hired only a few thousand workers since the start of the year. Airlines have already cut the number of flights ferrying workers to and from the Gulf.

Until the global financial crisis hit, Bangladesh was on track to meet the Millennium Development Goal of halving poverty by 2015. Progress on overall poverty reduction will depend on a number factors, including the birth rate. But "cash injections", either through microcredit loans or workers’ remittances, have hitherto played a huge role. Alas, it might not be long before this changes.