FINANCIAL CRISIS IN BANGLADESH

INTRODUCTION: The crisis first emerged as a liquidity crisis. The first symptoms appeared at the beginning of August 2007, when serious disruptions surfaced on the inter-bank market in the Western world. More than a year later, tensions on money markets are still with us. Recent months have witnessed abnormal levels of spreads, a shortening of maturities, and the contraction, or even closure, of some market segments. Through spill-over, these tensions are also affecting non-financial corporations and, more broadly the financing of the economy. They also have spilled over to emerging market economies, which had until the autumn 2008 remained largely unaffected. The crisis also emerged as a crisis of securitization. Securitization is an old and successful technique used to refinance a range of loans. What was new about it is that it got used extensively in highly unstable financial structures. These were financing short-term illiquid and complex assets whose value proved to be uncertain and contingent upon models. The instability of such structures was largely masked. Indeed, cheap money allowed easy refinancing of poor quality debt and of assets with uncertain value. Also, favorable ratings and credit enhancements artificially boosted the quality of loans underlying structured products. The rise in defaults on such loans, first on supreme mortgages, triggered a chain of reactions whose consequences are still unfolding now. Credit protections proved illusory. Liquidity dried up much more quickly than it had appeared. Rating agencies massively, suddenly and sharply downgraded products which until then were deemed of the highest quality. The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.

DEFINITIONS: Financial Crisis is a sharp deterioration of a group of financial indicators, such as short-term interest rates and asset prices, potentially also accompanied by failures of financial institutions. Such crises have been a long-term subject of interest in economics and have begun to generate a broader body of interdisciplinary research in the social sciences as economies become more financially interdependent. A financial boom or bubble is characterized by a shift of wealth out of money holdings and into real and long term financial assets, stocks or bonds, for instance and sustained on the basis of expectations of capital gains. Financial crisis is a situation in which the supply of money is outpaced by the demand for money. This means that liquidity is quickly evaporated because available money is withdrawn from banks (called a run), forcing banks either to sell other investments to make up for the shortfall or to collapse. Financial crisis is a situation when money demand quickly rises relative to money supply. Until a few decades ago, a financial crisis was equivalent to a banking crisis. Today it may also take the form of a currency crisis. Many economists have come up with theories on how a financial crisis develops and how it could be prevented. There is, however, no consensus and financial crises are still a regular phenomenon. A stock market crash is an example of a financial crisis.

TYPES OF FINANCIAL CRISIS:

Banking crises When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits, it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose their savings unless they are covered by deposit insurance. A situation in which bank runs are widespread is called a systemic banking crisis or just a banking panic. A situation without widespread bank runs, but in which banks are reluctant to lend, because they worry that they have insufficient funds available, is often called a credit crunch. In this way, the banks become an accelerator of a financial crisis. Examples of bank funds include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007. The collapse of Bear Stearns in 2008 has also sometimes been called a bank run, even though Bear Stearns was an investment bank rather than a commercial bank. The U.S. savings and loan crisis of the 1980s led to a credit crunch which is seen as a major factor in the U.S. recession of 1990-91. Speculative bubbles and crashes Economists say that a financial asset (stock, for example) exhibits a bubble when its price exceeds the present value of the future income (such as interest or dividends that would be received by owning it to maturity). If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to tell in practice whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur. Well-known examples of bubbles (or purported bubbles) and 5

crashes in stock prices and other asset prices include the Dutch tulip mania, the Wall Street Crash of 1929, the Japanese property bubble of the 1980s, the crash of the dot-com bubble in 2000-2001, and the now-deflating United States housing bubble. International financial crises When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency because of a speculative attack, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight. Several currencies that formed part of the European Exchange Rate Mechanism suffered crises in 1992-93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997-98. Many Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government bonds.

GENERAL CAUSES OF FINANCIAL CRISIS: Strategic complementarities in financial markets It is often observed that successful investment requires each investor in a financial market to guess what other investors will do. George Soros has called this need to guess the intentions of others 'reflexivity'. Similarly, John Maynard Keynes compared financial markets to a beauty contest game in which each participant tries to predict which model other participants will consider most beautiful. Furthermore, in many cases investors have incentives to coordinate their choices. For example, someone who thinks other investors want to buy lots of Japanese yen may expect the yen to rise in value, and therefore has an incentive to buy yen too. Likewise, a depositor in IndyMac Bank who expects other depositors to withdraw their funds may expect the bank to fail, and therefore has an incentive to withdraw too. Economists call an incentive to mimic the strategies of others strategic complementarities. It has been argued that if people or firms have a sufficiently strong incentive to do the same thing they expect others to do, then self-fulfilling prophecies may occur. For example, if investors expect the value of the yen to rise, this may cause its value to rise; if depositors expect a bank to fail this may cause it to fail. Therefore, financial crises are sometimes viewed as a vicious circle in which investors shun some institution or asset because they expect others to do so. Leverage Leverage, which means borrowing to finance investments, is frequently cited as a contributor to financial crises. When a financial institution (or an individual) only invests its own money, it can, in the very worst case, lose its own money. But when it borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has. Therefore leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy. Since bankruptcy means that a firm fails to honor all its promised payments to other firms, it may spread financial troubles from one firm to another. The average degree of leverage in the economy often rises prior to a financial

crisis. For example, borrowing to finance investment in the stock market (margin buying) became increasingly common prior to the Wall Street Crash of 1929. Asset-liability mismatch Another factor believed to contribute to financial crises is asset-liability mismatch, a situation in which the risks associated with an institution's debts and assets are not appropriately aligned. For example, commercial banks offer deposit accounts which can be withdrawn at any time and they use the proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks' short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reasons bank runs occur (when depositors panic and decide to withdraw their funds more quickly than the bank can get back the proceeds of its loans). Likewise, Bear Stearns failed in 2007-08 because it was unable to renew the short-term debt it used to finance long-term investments in mortgage securities. In an international context, many emerging market governments are unable to sell bonds denominated in their own currencies, and therefore sell bonds denominated in US dollars instead. This generates a mismatch between the currency denomination of their liabilities (their bonds) and their assets (their local tax revenues), so that they run a risk of sovereign default due to fluctuations in exchange rates. Uncertainty and herd behavior Many analyses of financial crises emphasize the role of investment mistakes caused by lack of knowledge or the imperfections of human reasoning. Behavioral finance studies errors in economic and quantitative reasoning. Psychologist Torbjorn K A Eliazonhas also analyzed failures of economic reasoning in his concept of 'copathy'. Historians, notably Charles P. Kindleberger, have pointed out that crises often follow soon after major financial or technical innovations that present investors with new types of financial opportunities, which he called "displacements" of investors' expectations. Early examples include the South Sea Bubble and Mississippi Bubble of 1720, which occurred when the notion of investment in shares of company stock was itself new and

unfamiliar, and the Crash of 1929, which followed the introduction of new electrical and transportation technologies. More recently, many financial crises followed changes in the investment environment brought about by financial deregulation, and the crash of the dot com bubble in 2001 arguably began with "irrational exuberance" about Internet technology. Unfamiliarity with recent technical and financial innovations may help explain how investors sometimes grossly overestimate asset values. Also, if the first investors in a new class of assets (for example, stock in "dot com" companies) profit from rising asset values as other investors learn about the innovation (in our example, as others learn about the potential of the Internet), then still more others may follow their example, driving the price even higher as they rush to buy in hopes of similar profits. If such "herd behavior" causes prices to spiral up far above the true value of the assets, a crash may become inevitable. If for any reason the price briefly falls, so that investors realize that further gains are not assured, then the spiral may go into reverse, with price decreases causing a rush of sales, reinforcing the decrease in prices. Regulatory failures Governments have attempted to eliminate or mitigate financial crises by regulating the financial sector. One major goal of regulation is transparency: making institutions' financial situations publicly known by requiring regular reporting under standardized accounting procedures. Another goal of regulation is making sure institutions have sufficient assets to meet their contractual obligations, through reserve requirements, capital requirements, and other limits on leverage. Some financial crises have been blamed on insufficient regulation, and have led to changes in regulation in order to avoid a repeat. For example, the Managing Director of the IMF, Dominique Strauss-Kahn, has blamed the financial crisis of 2008 on 'regulatory failure to guard against excessive risk-taking in the financial system, especially in the US'. Likewise, the New York Times singled out the deregulation of credit default swaps as a cause of the crisis. However, excessive regulation has also been cited as a possible cause of financial crises. In particular, the Basel II Accord has been criticized for requiring banks to

increase their capital when risks rise, which might cause them to decrease lending precisely when capital is scarce, potentially aggravating a financial crisis. Fraud Fraud has played a role in the collapse of some financial institutions, when companies have attracted depositors with misleading claims about their investment strategies, or have embezzled the resulting income. Examples include Charles Ponzi's scam in early 20th century Boston, the collapse of the MMM investment fund in Russia in 1994, the scams that led to the Albanian Lottery Uprising of 1997, and the collapse of Madoff Investment Securities in 2008. Many rogue traders that have caused large losses at financial institutions have been accused of acting fraudulently in order to hide their trades. Fraud in mortgage financing has also been cited as one possible cause of the 2008 sub prime mortgage crisis; government officials stated on Sept. 23, 2008 that the FBI was looking into possible fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers, and insurer American International Group. Contagion Contagion refers to the idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk. One widely-cited example of contagion was the spread of the Thai crisis in 1997 to other countries like South Korea. However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages.

10

Recessionary effects Some financial crises have little effect outside of the financial sector, like the Wall Street crash of 1987, but other crises are believed to have played a role in decreasing growth in the rest of the economy. There are many theories why a financial crisis could have a recessionary effect on the rest of the economy. These theoretical ideas include the 'financial accelerator', 'flight to quality' and 'flight to liquidity', and the Kiyotaki - Moore model. Some 'third generation' models of currency crises explore how currency crises and banking crises together can cause recessions. Market instability The recent market instability was caused by many factors, chief among them a dramatic change in the ability to create new lines of credit, which dried up the flow of money and slowed new economic growth and the buying and selling of assets. This hurt individuals, businesses, and financial institutions hard, and many financial institutions were left holding mortgage backed assets that had dropped precipitously in value and werent bringing in the amount of money needed to pay for the loans. This dried up their reserve cash and restricted their credit and ability to make new loans. There were other factors as well, including the cheap credit which made it too easy for people to buy houses or make other investments based on pure speculation. Cheap credit created more money in the system and people wanted to spend that money. Unfortunately, people wanted to buy the same thing, which increased demand and caused inflation. Private equity firms leveraged billions of dollars of debt to purchase companies and created hundreds of billions of dollars in wealth by simply shuffling paper, but not creating anything of value. In more recent months speculation on oil prices and higher unemployment further increased inflation.

11

The housing market declined The housing slump set off a chain reaction in our economy. Individuals and investors could no longer flip their homes for a quick profit, adjustable rates mortgages adjusted skyward and mortgages no longer became affordable for many homeowners, and thousands of mortgages defaulted, leaving investors and financial institutions holding the bag. This caused massive losses in mortgage backed securities and many banks and investment firms began bleeding money. This also caused a glut of homes on the market which depressed housing prices and slowed the growth of new home building, putting thousands of home builders and laborers out of business. Depressed housing prices caused further complications as it made many homes worth much less than the mortgage value and some owners chose to simply walk away instead of pay their mortgage.

12

CAUSES OF FINANCIAL CRISIS IN BANGLADESH: Causes of recent manufacturing industry crisis Bangladesh is primarily an agricultural based economy. However, in this new world of technology, Bangladesh must transform itself into a IT nation. Currently there is no large scale production of computer hardware or peripherals. Some Bangladeshi companies, located on the web, claim to make computers. In reality, they buy the parts from elsewhere, and assemble the homemade computers in Bangladesh. In addition, Beyond.com has strong web presence on Bangladeshi sites. Due to these factors, one can conclude that Bangladesh does not produce, export, or develop computer hardware. However, the Bangladesh Computer Samity does hold a computer fair once a year at which there is a section for product launching. Brand Names- Pentium, Intel, Hewlett Packard, Apple, IBM, and Seagate- None of these world wide computer hardware manufacturers have formal distribution, sales offices, or dealers located in Bangladesh. However, many shops in Bangladesh offer these products. Local Computer ResellersClone computers are big in Bangladesh. In order to fulfill the rapidly growing demand of IT in Bangladesh, CITech Communications was established. They offer various product and services including hardware and peripherals. Other web companies in Bangladesh have sprung, offering similar services, such as the company 3A. I found 25 computer companies located on the web that assembles computers locally from foreign made components. Competitive Market- In a developing country like Bangladesh, all computer stores are equal players. But some are more equal than others. For instance, Dofin Computers have a much bigger market presence than anyone else. With 5,000 clients, this company sells micro computer systems for both home and professional use.Most of them are located in Dhaka.

13

Causes of recent garments sector financial crisis The tremendous success of readymade garment exports from Bangladesh over the last two decades has surpassed the most optimistic expectations. Today the apparel export sector is a multi-billion-dollar manufacturing and export industry in the country. The overall impact of the readymade garment exports is certainly one of the most significant social and economic developments in contemporary Bangladesh. With over one and a half million women workers employed in semi-skilled and skilled jobs producing clothing for exports, the development of the apparel export industry has had far-reaching implications for the society and economy of Bangladesh. Causes of foreign investment Bangladesh is a developing country and globalization integrates us with the global market in diverse areas. The recent table talks of different formal bodies presumed that Bangladesh will likely to be equally affected by the global turmoil in the short run as well as in the long run. It is very difficult to predict the scenario in the long term; however, short term impacts should duly be taken into consideration. It is imprudent to consider the economy of Bangladesh as vulnerable as US economy which is basically credit oriented rather than savings oriented that ultimately results in enhancement of debt burden on individuals and the country as a whole. As a consequence, the economy is poised towards vulnerability. The above is eventually the outcome of the deregulations of the so-called regulated countries. However, in the case of Bangladesh, it is unlikely to experience such debacle as our regulatory bodies including Bangladesh Bank (BB) regulates and supervises the financial market strictly. The overall financial leverage in Bangladesh is low and unlike the global financial institutions, Bangladeshs banking system has no toxic derivative engagements that could make overnight default of the financial sector. Even we dont have severe liquidity problem that could lead to a credit squeeze. Moreover, prudential regulations and monitoring by BB has kept the lendingdeposit ratio of private banks within a tolerable limit.

14

Causes of financial crisis in banking sector There are three causes of recent world financial crisis in banking sector1. Relentless lending of mortgage loans (even to people who would not be able to repay their mortgages) i.e. sub prime loans 2. Mortgage backed securities 3. Real estate market crash The incidence of systemic banking crises has risen over the past twenty years and the costs have been high. Although each country's experience has country-specific factors, several common elements appear in most crisis countries: (1) Volatility in the macro economy (2) The inheritance of structural weaknesses in the economy and financial system (3) Hazardous banking practices (4) Hazardous incentive structures and moral hazard within the financial system (5) Ineffective regulation (6) Weak monitoring and supervision by official agencies (7) The absence of effective market discipline on banks (8) Structurally unsound corporate governance mechanisms within banks and their borrowing customers. Causes of such crises are complex and a myopic focus on single factors misses the essential feature of interrelated and multidimensional causal factors. Although macroinstability has been a common feature, and may often have been the proximate cause, banking crises usually emerge because instability in the economy reveals existing weaknesses within the banking system

15

IMPACT OF FINANCIAL CRISIS ON BANGLADESH:

Bangladesh's economy is expected to grow at a slower pace of 5.6 per cent in the current fiscal year as the global financial crisis starts to weigh on exports, remittances and government revenues, the Asian Development Bank (ADB) said in its latest forecast. The prognosis came in the donor agency's Asian Development Outlook 2009 (ADO 2009) released Tuesday where the ADB projected a further decline in GDP growth to 5.2 per cent in the next fiscal year as the effects of the global slowdown continue to weigh on the economy. Bangladesh was largely unaffected by the first-round fallout of the global economic crisis, mainly because of the limited exposure of the financial system to international markets. However, the country is vulnerable to the second round of impacts of the global slowdown that could come through reduced export earnings, remittances, which are the main drivers of economic growth in Bangladesh. The financial crisis that started in the US in March of this year has now turned into a fullfledged economic crisis that has pushed the European Union, Japan, Hong Kong and others into recession. There is a saying that when America sneezes, countries around the world get flu. This has been evident from the fact that the American financial crisis has left everyone in a state of shock. October 10 was the day when stocks and shares dropped to the lowest level in US, Japan, Britain and Australia and pretty much across the world. No country was spared from the financial crisis because of globalization and interlocking of financial interests. Some economists have compared October 10 to September 11, 2001 when terrorists attacked the World Tower in New York. Financially 10/10 is the new 9/11 because the financial system and the money markets will never the same. 10/10 has dramatically changed forever, according to economists, the global financial system. Governments have intervened with funds to avoid collapse of reputable banks and some say nationalization in part of banks was unthinkable during 21st century. But it has happened in a free market economic system. The crisis is compounded by the fact that the Bush administration has not been prudent in having a deficit budgets for several years. It is reported the current budget deficit of the US in this financial year that ended on October 1st hit a record high to $ 455 billion, partly because of the on-going huge

16

expenses ($10 billion per month) in the misconceived war in Iraq. (It is noted President Bush inherited a surplus budget of $79 billion from the Clinton administration). Furthermore the US regulators have not supervised adequately the way the banks were providing loans to all kinds of people during the housing- boom period. And the financial regulatory bodies in the US ignored the warning signs of financial storm since August 2007 and believed that free-market system would take care of it. America with its $13 trillion economy, the world's biggest economy, can absorb and come out of this crisis after a certain period of time but other countries with much less economies of strength will suffer heavily (Bangladesh's GDP is around $79 billion dollars). Bangladesh is captive to what transpires in international markets and economies of leading countries. Against the background, Bangladesh cannot be immune from the global economic slowdown and is most likely to be adversely affected sooner or later. Why this crisis? To put it simply, it has been argued the whole meltdown of the financial system was "Made In America" for having relaxed rules of providing loans to jobless people with no income for buying houses, called "sub-prime housing loans" or now known as "toxic loans or assets" amounting to about $2.1 trillion dollars. Banks and financial institutions that bought security-paper have lost money. In its latest calculations, the IMF reckons that worldwide losses on "toxic assets" originated in America will reach $1.4 trillion and so far $760 billion has been written down by banks and financial institutions. Normally the banks and financial institutions lend and borrow money and the money market works well. During the crisis, money markets ceased to function as investors and banks who ordinarily arrange foreign exchange swaps among themselves for a set time period are nervous about the risk that their counter-party will go bust because of liability of "toxic assets" while the swap is being put into place and so have shied away from such deals. Thus the global money market was closed and a severe credit-crunch was felt across the world. If it were allowed to continue further it would have led to depression. How does it affect Bangladesh? In the industrialized countries, it is reported that manufacturers are not making money, the retailer is not making money and the consumer is complaining because they are paying more. An unprecedented gloom in the confidence of consumers is being experienced in these countries. The global slowdown in the leading economies such as US, Europe, and Japan is likely to adversely affect principally, in three sectors,

17

namely exports, aid-flow and foreign direct investment and remittance from workers. About 75 % of the exports of garments and knitwear go to the US and Europe. The exports of knitwear and ready made garments to the US and Europe are likely to fall because there will be no demand in those countries as people would keep money with themselves for meeting their basic needs during rainy days. Everyone will be tight with spending money for non-essentials. Bangladesh needs foreign direct investment (FDI) up to 28% per cent of GDP (almost 415 billion) every year to reduce poverty in the country. Whatever FDI was coming to Bangladesh was encouraging but it is likely to slow down considerably. Likewise the volume of foreign aid and loans to Bangladesh may also likely to be affected from the industrialized countries. It is noted that during the financial year, nearly 14% of its expenditure of the development budget of Bangladesh relies on foreign aid and loans. It is reported that remittances during the last financial year stood to almost $7 billion dollars, 25% per cent were from the industrialized countries in the West and 75% per cent come from the Middle East. The Middle East has not been immune from the crisis and stocks fell over in the oil-rich countries, even in Dubai. Given the background, it is likely that remittances will be less because there will be jobs-cut in the countries of economic slowdown. There is one flip side of the financial crisis in that price of oil has plummeted to a level, unimaginable this summer. At the time of writing it was less than $50 dollars, from the highest $147 dollars per barrel. That would enormously help Bangladesh which imports oil. Suggested steps against the background, private sectors are likely to shed employees in the country and as a result, unemployment is likely to increase in the country. The government's principal aim is to keep unemployment in check. Many economists suggest that one of the ways to keep unemployment at bay is to spend money on infrastructure with the benefit of enhancing employment and ultimately increasing productivity. Second, purchasing power must be increased to vulnerable groups by directly giving money or food for works so that their basic needs are met. Furthermore new business friendly policies may be adopted to attract foreign investment and a cut in interest rate by Bangladesh Bank is an option to be considered to boost investment by private sectors. Real estate developers and garment manufacturers may be given more incentives in cutting taxes and customs duties in importing raw materials so

18

that engine of growth is maintained. Bangladesh seems to be in unchartered territory because such global economic crisis has never occurred before. It is qualitatively different from earlier economic break down in 1987 and in 1997 in South East Asia. Bangladesh's economic security is likely to be threatened. No one can be sure what lies ahead for at least two years. It is commendable that the government has set up a task force with local think-tanks and private sectors as to how to address slowing economic growth in the country. The volatile situation is both a challenge and an opportunity for Bangladesh to show innovation and creativity to come out from the likely adverse effects of global economic crisis. Impact of financial crisis on share market The global financial crisis is only 25% complete, says a recent study by one of the worlds biggest hedge funds. A study by Bridgewater Associates estimates that total credit crisis losses will amount to $1.6 trillion worldwide. A far cry from the nearly $400 billion lost already. The people at Agora Financial certainly seem to think so and that is reportedly what Bridgewater Associates seem to be predicting. "The funds call was based in particularly simple reality bean counters at Bridgewater estimate financials handle around $26.6 trillion in debt-based assets. If such assets were valued at todays market rates, around $1.6 trillion would be instantly lost. ET voila Bridgewater thinks were only a quarter of the way through. "Thus, well join with Agora Financial to tack on another prediction onto their write-down rundown. Impact of financial crisis on manufacturing industry There are many factors that cause global economic crisis. If one believes in free markets then, it is said that institutional polices that attempt to exploit the market can cause serious fluctuations on the global scale. According to most "free market" theorists, the market is an exchange between two constituents, who agree on a price without of need of an "arbitrary agent". This creates a natural supply and demand defined by their agreed price. The situation that occurs is that this model is affected by economic events

19

such as weather; availability of resources, institutional policies and technology, which all can be either positive or negative. For the case in point, let's say that there is an arbitrary agent who decides to charge a fee for conducting an exchange for six individuals (this example could be substituted for any of the mentioned economic events uniquely affecting the price). Each of the three pairs would have a supplier and consumer. Let us also suppose that 2 out of the 3 pairs can afford to do business but one of them cannot due to this fee. This would thus create an inefficient market. On a global context, if we were to have this model to represent the sum of all markets, the 2 pairs that can afford to do business would be all functioning markets and the one that cannot would be the market failures influenced by the arbitrary agent which can be viewed as all ineffective economic policies. In a sense, a global economic crisis is the occurrence of market inefficiencies due to economic events. Impact of financial Crisis on travel Industry The travel industry is influenced by the crisis in the economy worldwide. The soaring price of crude oil led to increased cost for airlines, trains, cruise lines, and bus lines. The travel industry had no option but to pass on their increased costs to consumers in the form of higher ticket prices. This was at the same time that consumers had less discretionary income for travel. Even though the price of oil has dropped tremendously, the airlines still predict multi-million dollar losses in 2009 due to the expected three percent drop in passengers. Because of the banking crisis, carriers who were having financial difficulties have been unable to get the credit necessary to weather the economic storm. The British travel industry began to feel the impact when tour operator travel scope and carrier MAXjet Airways collapsed at the end of the year in 2007. This illustrates one consideration that travelers have when making reservations: is the carrier going to be in business still when it's time to travel? Many travelers are postponing making arrangements until the last minute, hoping that they will get a deal on last-minute fares, and ensuring that the carrier will be in business.

20

Impact of financial crisis on food sector Spiraling food prices have pushed an estimated four million Bangladeshis below the poverty line despite the country's strong economic growth. "Food price inflation has caused enormous hardship in Bangladesh by eroding purchasing power of the poor. "Four million people have been pushed back into poverty this year because of rising food prices." Strong economic growth between 2005 and 2008 was expected to reduce poverty in Bangladesh by five percent -- from 40 percent to 35 -- but projections had been scaled up to 38 percent because of the higher prices. "If there was no food crisis, the poverty numbers would have looked very different in 2008. The figures were compiled using the definition of poverty as those living on less than a dollar a day. In its annual report, issued this week, the Consumer Association of Bangladesh said the price of food and other essentials had risen 45.5 percent in the past year. The latest data reported inflation at 10.14 percent for the month of June. However, many financial experts say the actual figure is about 20 percent. "Increasing productivity is the only option where every year over two million people are added to the population, while the availability of cultivatable land is decreasing by one percent. Bangladesh, which has a population of 144 million, is one of the world's poorest countries. It is building a stock of 2.5 million tones of rice this year to protect the country from natural disaster or further global price hikes. Impact of financial crisis in banking sector By allowing banks to open new branches & set up ATM machines without taking prior permission of RBI leads to the development of the banking system in Bangladesh. As our 70% of the population resides in rural Bangladesh, it is beneficial for both the banking industry & the public at large.

21

Impact of financial crisis on remittance

Remittance inflows have recorded a 34 percent rise in the first five months of the current fiscal year, which runs counter to the World Bank's gloomy forecast about the money to be remitted by Bangladeshi workers abroad. From July to November, Bangladesh recorded $3.75 billion in remittances, up from $2.80 billion in the year-earlier period. Remittance inflows increased to $767 million in November, recording a rise from $648 million a month ago. The remittances in November followed a usual upward curve, driven by the rising inflow of money ahead of the Eid-ul-Azha in December. In OctoberNovember of the last fiscal year, the country recorded $559 million and $617 million respectively, according to the data provided by the central bank. In a recent press briefing on "Global financial crisis and its likely impact on Bangladesh", the World Bank said the current fiscal-year remittances are likely to fall by 20 percentage points from fiscal 2007-

22

08. For the current fiscal year, the WB projected remittances at $9.2 billion, which means 16.8 percent growth. In the worst-case scenario, the figure will hover around $8.9 billion with 12.4 percent growth. Last year, the remittances were recorded at $7.9 billion with a 32.4 percent rise from a year ago. In the current fiscal year, an additional eight lakh migrant workers were projected to go abroad, but the figure may come down to two to three lakh in the worst-case scenario, according to a forecast by the WB. Officials with Bangladesh Bank said about 80 percent remittances of Bangladesh come from Middle Eastern countries. "The remittance flow is still okay. There are no signs of an adverse impact of the global financial crisis on remittances," one of the officials said. The BB official also said oil prices had dropped substantially in Middle Eastern countries, eroding their income. The remittance inflows show the negative impact of the falling oil prices is yet to be felt in their economies. Exports also showed an upbeat trend. In the July-toSeptember period, exports showed 43.39 percent growth from the same period a year ago. But the World Bank forecast that the export growth might fall 4.3 percentage points this fiscal year. According to the WB projection, exports will earn $16 billion this fiscal year, with 13.1 percent growth from a year earlier. In the worst case, export earnings may slow to $15.7 billion with 11.6 percent growth. In the last fiscal year, the exports were worth $14.1 billion with 15.9 percent growth.

23

FINDINGS OF THE REPORT: During the time of preparing this report we find that the negative impacts of global financial crisis are beginning to show on the increasingly globalizing economy of Bangladesh: Bangladeshs export growth rate experienced has turned negative. Export of non-apparels items has seen a significant deceleration . Depreciation of currencies by competing countries ranging from 6-30 per cent over the last one year and their stimulus packages that provide wide ranging incentives to export-oriented sectors, have led to erosion of Bangladeshs competitive strength in the global market Remittance earnings could be adversely affected in near future as number of jobseekers going abroad halved as some countries have either revoked earlier jobcontracts or have stopped issuing new visas. The adverse affects are likely to have negative implications for GDP growth, labor market and consequently attainment of poverty alleviation targets and MDGs by Bangladesh. There are clear indicators of weakening macroeconomic performance.

24

RECOMMENDATION: We all know that a financial crisis is going on all over the world. So, from businessman to general investor everyone is worried about it. But this crisis period will not remain same, everyone will overcome it. But now what you need to know is how you can manage your business & keep the consistency in this competitive market. So, in this post I am trying to tell some possible ways to overcome this crisis. It may helpful for you. This is not a right time for the new investor; wait for sometime while the market will become stable. Stay focused on the long term, It is very important. In this crisis keep the good relation between you & your employee for mental support. Try to use every possible communications channel. Before taking any financial step, just look into its authentication. If customer service you are providing be smart about your customers. Don't go for any finance related projects which may increase your financial pressure. Try to estimate very professionally before investing. Make a budget of your minimum expenses also. Don't miss to pay the monthly installment to recover your debt (If you have). Try to avoid taking credit from any non government financial organization. Keep avoids providing credit to any other person (But keeping a good relationship with everyone).

25