Sherpa Hossainy's Blog

Bangladesh exports may feel US debt crisis pinch

Posted in Bangladesh, Business, Dhaka, Economy, Export and Import, RMG and textile by Sherpa Hossainy on August 5, 2011

Published in The Independent on 05 August 2011

Read the article on Independent website

Digital print version

Leading economists warned of an inauspicious ripple-effect of US debt crisis on Bangladesh despite America averted a disastrous financial default in a last-ditch effort.

President Barack Obama on Wednesday signed a legislation to raise the US debt ceiling after Congress voted in favour of a bipartisan compromise deal. The bill raises the US debt limit by up to $2.4tn (£1.5tn) from $14.3tn, and makes savings of at least $2.1tn in 10 years.

The economists think Bangladesh and other developing nations will still be affected by the US austerity bill, which will mete out US government expenses and public expenditure and see the interest rates on mortgages, car loans, student loans and credit cards soar.

Professor Mustafizur Rahman, executive director of Centre for Policy Dialogue, said: “The dollar will weaken from the impact, so Bangladesh’s export competitiveness will be undermined as our currency (Taka) will be appreciated against the dollar.”

“US public expenditure will be toned down as an effect, so the recovery from recession will be sluggish and there will be negative impact on input demands,” he said.

Rahman said US external commitments in ventures like climate change fund and Millennium Challenge Account (MCA) will wane, and the underdeveloped countries dependent on those funds could take a hit.

“As these funds will be low-priority for the US, the aid from those funds will plunge,” he said.

Rahman said that there may not be any immediate impact on the country’s Balance of Payment (BOP); however, if US demand falls there could also be some problems with regard to BOP.

The economist also warned of a possible negative impact if credit rating agencies like Moody or S&P downgrade US sovereign debt rating from the coveted AAA+ rating.

“The cost of borrowing would increase for US if the credit rating drops and that could again make global investors lose their faith in the dollar,” he said.

Abu Ahmed, professor of Economics at Dhaka University, said the increase in US debt ceiling will increase US inflation, which is already very high.

“The confidence in US dollar as a reserve currency will aggravate as an impact, and our forex reserve is all about US dollars,” Ahmed said.

The blow on dollar as a standard forex reserve currency is already being felt as many countries are shifting to gold and other currencies to use as reserves.

“The impact will be felt throughout the world. For India and China who has over trillion dollars of reserves, there is a much severe problem. Now the world is slowly moving to use gold as reserves,” Ahmed said.

Bangladesh Bank recently bought some gold for reserve, but a second thought should be given on other currencies to use as reserve, Rahman said.

He said the debt deal did not raise the taxes so there would be a possible investments surplus for US entrepreneurs and that might be a boon.

Bangladesh’s exporters also remained skeptic about any positive outcome from the eleventh-hour debt deal as they feel a hike in lending rate in the USA and demand contraction, as a result of declining purchasing capacity of US consumers, will hurt exports.

“The orders from the US are decreasing already. There is no intimation or confirmation on orders,” Abdus Salam Murshedy, president of Exporters Association of Bangladesh, said.

The US market is the largest importer from Bangladesh; if purchasing power of the US consumers goes down, the exports will take a hit, Murshedy added.

Bangladesh exports apparel items worth over $5 billion, nearly 25 per cent of the country’s total exports, to the USA.


2 Responses

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  1. Sherpa Hossainy said, on August 6, 2011 at 6:33 pm

    US loses AAA credit rating after S&P downgrade:

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