BOP crisis: a classic
scenario
1. Export dollars are used to
purchase necessary imports: oil, capital goods, and pharmaceutical drugs.
2. A fall in the world price of
the country’s export reduces export earnings.
3. At the same time a rise in oil
prices increases the import bill.
4. Result: current account deficit
explodes.
5. Must be financed somehow:
initially by drawing down foreign exchange reserves. Then by borrowing abroad:
say IMF, WB.
6. Developing country whose main
source of export dollars is an agricultural commodity: tea, rubber, cocoa, etc.
After
the intensification of the financial crisis :
Ø
Exchange rate markets have turned more unstable.
Ø
Equity markets experienced a strong downward
adjustment.
Ø
Country risk spreads spiked.
Ø
The stock of international reserves either
stopped growing or decreased.
Ø
Credit growth has slowed down considerably in
most developing economies.
Experience from past financial
crises show that they have negative effects on poverty and welfare, and tend to
slowdown progress towards the MDGs.
Unemployment rates are increasing;
together with real wages reduction impede household’s ability to provide
adequate food and necessities.
Employment is shifting from
dynamic exports oriented sectors to low productivity informal sectors.
Declining in remittance and
migrant return could undermine poverty gains.
The reduction of systemic risk
entails:
Ø
Liquidity facility as a permanent component.
Ø
The consideration of surveillance as a public
good.
Ø
A consistent and widely accepted regulation and
supervision framework is required.
Improvement in governance
requires:
Ø
Incorporate the demands and adequate
representation of developed and developing countries.
Ø
Reflect the current and growing role of emerging
market economies.
Ø
Include an active role for the United Nations
and other Bretton Woods institutions.
Causes of financial crises
◦
Fragility
of financial systems
◦
Intermediation,
asset-liability mismatch
◦
Strategic
complementarity
Amplifying factors
◦
Imperfect
knowledge and herd behavior
◦
Credit
and high leverage
Collapse of asset prices
◦
Liquidity
problems
◦
Possible
contagion
Regulatory failures
Policy for Bangladesh government
and Bangladesh bank and ministry of finance
Need a permanent stabilization or
counter-cyclical fund
1. Need to encourage
competitiveness through policy incentives and tax cuts. So that new opportunities
can be seized
2. Encourage capacity expansion, technology up
gradation and build up of key inventories
3. Selective bail-out for smaller
firms – mostly in terms of easy credit and repayment terms
4. Should aggressively pursue an
expansionary monetary and fiscal policy, encourage consumption of domestically
produced goods, inject purchasing power in the farm sector
5. Impact on RMG and textile
sectors require close monitoring – only those units that have adopted good
management practices and cut all extra costs should get benefits
6. Should insistently pursue an
expansionary monetary and fiscal policy, encourage consumption of domestically
produced goods, inject purchasing power in the farm sector
7. Need to pay particular
attention to selected sectors for example leather, jute and sea food;
8. It is now clear that low farm
prices for rice is also an impact of the GFC – this will have a
9. Overall: the focus should be on
the medium term, post-recession policy rather than being immersed in immediate
problems and concerns.
World bank/IMF requirements
—
Fiscal discipline.
• Increased public expenditure on
primary health care, primary education, and infrastructure.
• Tax reform (to lower marginal rates and broaden the tax base).
• Financial liberalization.
• A competitive exchange rate.
• Trade liberalization.
• Liberalization of FDI inflows.
• Privatization
• Deregulation
• Secure property rights.
Lessons from the Crisis
—
Avoid
high volatility in monetary policy
—
Appropriate
response of monetary policy to asset prices
—
Manage
capital flow volatility
—
Look
for signs of over leveraging
—
Active
dynamic financial regulation
◦
Capital
buffers, dynamic provisioning
◦
Look
for regulatory arbitrage incentives/ possibilities
