US debt crisis likely to leave adverse impact on BD economy

Express (August 1, 2011)

The deepening concerns stemming from the US debt crisis are expected to have an adverse impact on the Bangladesh's economy, especially on its foreign exchange (forex) reserves, the country's economists said.

Fears are rising in the country's apparel industry about the possibility of the world's largest economy defaulting on repayment of its debt as the US politicians still remain split over how to raise the borrowing limit, with the August 2 deadline just one day away.

Such a default may lead to a hike in lending rate in the USA and a demand contraction, arising out of a decline of purchasing capacity of the US consumers, the RMG exporters said.

The world is paying a close attention to whether the US can reach a deal, before the deadline.

Economists said the failure to resolve the problem could send shockwaves across the globe, threatening the plunge of the US dollar, freezing investor sentiment and prompting yet another worldwide economic recession.

Dr Zaidi Sattar, Chairman of Policy Research Institute, one of the country's leading think-tanks, said: "Around 70 per cent of Bangladesh's foreign exchange reserve are invested in the US treasury bonds. So if the crisis over the US debt-ceiling lingers on -- without a decision by the US Congress by the deadline, we will have reasons to be worried over."

He said the worsening impact will particularly be felt if the rate of interest rises as a result of any failure to reach a deal in time.

Economists said a plunge in the U.S. dollar which will undercut the country's overall export price competitiveness.

General Secretary of Bangladesh Economic Association (BEA) Mr. Toufic Ahmed Chowdhury said the issue of most concern is about the intensification of the overall volatility in the foreign currency markets, in the event of the US's failure to raise its debt ceiling.

He said: "Excessive financial market volatility could exacerbate Bangladesh's major export products."

Inflationary pressures on the US economy will lead to low prices for garment items, Mr. Toufic feared.

Professor Abu Ahmed of Dhaka University said: "Our forex reserves are mostly in US dollars and the real value of dollars will plunge if the US cannot reach a deal.

The country's balance of payment (BoP) situation which is already under some pressure might face another blow following any unwelcome development over the US debt ceiling, he stated.

Anwar-ul-Alam Chowdhury Parvez, a former president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) told the FE: "Demand for RMG items will drop, if the crisis lingers."

Bangladesh exports apparel items worth over $5.0 billion, nearly 25 per cent of the country's total exports, to the USA.

Mr Parvez said the government should take cautionary steps to help avert any possible adverse impact of the still-unfolding situation.

The central bank should have diversified much earlier its reserve portfolio, according to, at least, two other professional economists who preferred anonymity.

The Bangladesh Bank should have taken steps, at least several months earlier about reshuffling of its reserve portfolio, they noted.

They pointed out that China, India and other economies had partly deployed their reserves in purchases of gold and holding of other currencies much earlier.