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Tuesday, April 26, 2011

Bangladesh: The Arab spring's chill winds - An unexpected downside

Photo: Trapped in Misrata, miserable in Dhaka

WHEN THE Arab spring was in its infancy something unusual happened in the world’s second-largest Muslim-majority democracy. Following violent protests, Bangladesh’s prime minister, Sheikh Hasina, scrapped plans for a new airport near the capital, a pet project to be named after her father, Sheikh Mujib Rahman. A former Bangladeshi diplomat said he could remember no occasion on which an elected leader had reversed an important decision so quickly. He attributed the change of mind to what was happening in Egypt.

The diplomat was not referring to fears that there might be a Bengali version of the Arab spring, though the opposition Bangladesh Nationalist Party (BNP) has talked about an “Egypt-like uprising” in their country. Instead, the economic consequences of the Arab spring are what matter. Bangladesh depends on remittances from the Middle East more than any other large country. Two-thirds of its recorded remittances—$7.2 billion in the year ending June 30th 2010—came from countries in The Economist’s shoe-thrower’s index of regional flashpoints. The Middle East contributes slightly more to Pakistan’s total remittances but these account for only 6% of Pakistan’s GDP, whereas Bangladesh’s remittances are 12% of GDP.

The impact is certain to be bad, though how bad is unclear. Remittances are closely correlated with the number of migrant workers, lagged by about a year. On the eve of the global recession, about 6m Bangladeshis worked abroad. The figure is lower now. Saudi Arabia is by far the most important overseas labour market. It hired a mere 22,000 Bangladeshis in 2009-10, compared with 335,000 in the previous two years. Libya was Bangladesh’s fastest-growing market, albeit from a low base. Thus far, 34,000 Bangladeshi workers have returned from Libya and many others are trapped under fire in the docks of Misrata (they are now subjects of an international rescue mission).

Bangladesh’s earnings from remittances tend to be volatile anyway, because its workers are mostly unskilled and get laid off quickly when economies turn down. (In contrast, remittances from higher-skilled Pakistanis are still rising).

But the country is less badly affected than it might have been because its other main source of foreign exchange—textile exports—is doing well. This is partly because of rising labour costs elsewhere, and partly thanks to a rule change by the European Union. This allows clothes and other finished goods made in Bangladesh (and other least-developed countries) to come in duty-free as long as the value of their imported components does not exceed 70%. Previously, the EU granted duty-free access to manufactures with an import content of 30%. Bangladesh’s main competitors—China, Pakistan, India and Sri Lanka—do not have “least developed” status, so the value of Bangladesh’s garment exports surged to $14 billion in the eight months to March 2011, up 40% at an annual rate.

This will offset but not reverse the decline in remittances. The currency, the taka, is falling. So are foreign-exchange reserves. The IMF reckons the current-account balance will deteriorate sharply, from a surplus of 3.75% of GDP in 2010-11 to a deficit of 0.75% in 2011-12. Unless something extraordinary happens—perhaps a resumption of large-scale hiring by the Saudis—remittances and the external position will get worse before they recover. [ENDS]

First published in The Economist magazine, London, Britain, April 20, 2011

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