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International economic tumult and Bangladesh
Fear is now in the driving seat not only in the Asia Pacific Stock Markets but also in the western hemisphere. The deteriorating scenario includes Europe, the USA and also several important countries in Latin America. The wide coverage in the media has also added fuel to the fire. Rescue packages are being funneled into financial institutions of different categories to save them from a possible melt down. In the meantime there have also been attempts directed towards coordinated action between the bigger ball players.
The massive shocks generated within the financial systems have affected credit extension, real estate prices as well as varied sectors in trade and commerce. The United States, led by a worried lame duck President initiated the largest ever bail-out prospect but that does not appear to have helped very much. This has now forced its policy makers to return to their drawing boards to examine how re-structuring can be achieved within the financial matrix. The economic tumult and the debate over 'Main Street' being affected by the shenanigans of 'Wall Street' have now taken centre stage and is directly affecting the electoral map in the forthcoming US presidential election and other associated elections in the US Congress. It is directly influencing the tight margins in key states.
Several analysts have commented in the international print and electronic media about the storm that is presently raging all over the world and how it might affect the world financial future. John Monks, General Secretary of the European Trade Union Confederation (ETUC) has revived the interesting term 'casino capitalism' (first used in the ETUC Congress in Seville in 2007). It is also being felt that 'short-termism' needs to be decisively dealt with through taxation, regulations and greater worker involvement at the grassroots level. Many are pointing out that the absence of this course of action led to the mishandling of the sub-prime crisis and jumpstarted the catastrophic slide. I agree that there is great connectivity but one finds it difficult to totally exclude the role of consumer confidence from this equation. This last factor seems to have played a critical role in Europe.
The emerging markets have taken a severe battering in the past few days as bourses around the world have repeatedly touched new lows. Fear has gripped the scene and it is being widely speculated that the collapse in the banking system, as we know it, might eventually trigger a global recession that will cast a long shadow for a few years to come.
Quite understandably, this scenario has resulted in the United Nations also calling for tougher regulations of financial markets to deal with the 'crisis of the century'. It has also warned that the global policy response risked creating a prolonged deflationary downturn. The United Nations Conference on Trade and Development (UNCTAD) has also blamed the free-market model of the United States and Britain for the debacle. I agree with the surmise of UNCTAD that the market-fundamentalist argument against stronger regulation, based on the idea that market discipline along can most efficiently monitor banks' behaviour has clearly been discredited by this crisis.
I believe that time has come for - (a) re-assessing the role of credit rating agencies which have made the market more opaque instead of increasing transparency. We should start in this regard within Bangladesh itself. Our own bourses have many in-built deficiencies and weaknesses, and they need to be addressed before we stumble into our own Wall-Gate; (b) creating incentives for simpler financial instruments and ending the regulatory stance that creates a bias in favour of sophisticated but poorly understood financial products. The authorities responsible for managing our systems need to carefully examine how the financial process that guides and operates our systems can be made more accountable. I recall in this regard the calamity that many faced in 1996-97 in Bangladesh over the then trading of stocks and shares. That should not happen again; and (c) dealing with maturity mismatches in non-bank financial institutions that leave firms and funding long-term liabilities in volatile short-term markets (a common feature within our country).
Within the selling spree that has been sweeping international markets, Europe has shown great resilience. Various governments have pledged that they will not allow a single bank to fail. It has also been interesting to see how Ireland and Iceland have tackled their problems in this regard.
Comparative studies initiated since the beginning of October have indicated surprisingly that Asian banks are better positioned than most others in being able to withstand the current pressure because of the high savings rates of the region. Asian banks have in fact been net lenders in the international monetary market. Europe's big cross-border banks are also trying to conserve capital by cutting lending to local business. They, as well as their partners in the United States, are looking at the possibility of moving toward the creation of a central counterpart for credit default swaps. I am sure that such an effort will be watched very closely by the important Security Exchange Commissions all over the world. I hope that our SEC will not lag behind in monitoring such a sensitive attempt (if it does eventually take place).
In the meantime Chinese Premier Wen Jiabao has stated that China's financial institutions have gained in 'strength, profitability and risk-taking ability'. He has claimed that this has been possible because China has taken necessary steps towards improving predictability and flexibility in macro-economic control policies. He has also suggested that China will try its best to restore global stability. This latest comment is being seen against two perspectives- (a) that China holds some 500 billion US dollars worth of US treasury bonds and also another large amount in US asset-backed securities, and (b) that China is ready to be included within an expanded G-8 Club. This subtle hint appears to have borne fruit. Australia's centre-left Labour Party Prime Minister has already stressed that western nations, in view of the changed situation, need to demonstrate visible support for a more responsible stakeholder position for China.
India's corporate optimism is already showing signs of decline and a cross-sector survey indicates that India's economy has grown 'moderately to substantially worse' in the latest April-June period. The Indian BSE benchmark 30-share Sensex index has also been performing adversely.
We in Bangladesh have been reasonably lucky till now. However, we have to understand that in this globalized world, the ripples of this convulsion will be felt throughout the world and is bound to also hit our shores. The upheaval is bound to affect the potential of foreign direct investment.
Bangladesh has witnessed an increase in both its imports as well as exports. However, its mainstay for balance has come from its steady growth in the remittance sector. It has been reported that we have had 44 percent growth in remittance earnings during the first quarter of the 2008-09 financial year. Bangladeshis living abroad remitted to Bangladesh US dollar 802.58 million in September alone. Historically, this was the third highest for any given month. Despite import costs having increased by 34 percent in the month of July, we still, as a result, have a healthy foreign exchange reserve. So far so good. This has helped our Taka to maintain a more or less stable exchange rate against the US dollar. From that point of view we have done better than Pakistan.
However, I am worried about the longer term picture. I do not discount the possibility of an eventual chain reaction where because of a prolonged economic depression in the developed countries in North America, Europe and the Far East, we suffer an erosion in our export value on the one hand and also have to face a larger import bill due to increase in the price of commodities and energy. There could also be retrenching of our workers abroad. There may also be decrease in terms of aid flow. It could be a multiple of factors. We have to be prepared.
The sensitivity of the scenario is further heightened by the fact that we may ourselves lapse into political instability due to difficulties arising within the political process in the coming months. I am not being a Cassandra. I am just being realistic.
It is this anxiety that persuades me to suggest to the responsible authorities that they should immediately convene a Committee of Experts consisting of economists, bankers, important stakeholders in our Stock Market and the relevant officials from the government, not only to carefully monitor the evolving crisis but also to ascertain and identify solutions for emerging problems. This Committee could be headed by the Governor of Bangladesh Bank and be charged with the responsibility of preparing a Report for the Cabinet every two weeks. Political parties should try to refrain from politicizing of its activities. Such a Committee is fundamentally required right away to guard our national interests. A proviso might also exist whereby the party which forms our next political government could change its structure and composition.
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