Analysis on recent Economic and Financial issues of Bangladesh

PRESENTED BYTanvir: -13164042 Faisal: - 13164083

Norman: - 13164082Rajib: - 13164096

Business environmentBUS: 503

Introduction"Tell me and I will forget. Show me and I may remember. Involve me and I will understand" – Confucius (Cited by Ryan, 2007:61)Learning is an important aspect to enhance skills, knowledge and

the way of thinking.It is a continuous life long process and human beings learn in

group as well as individually – both of which is crucial.Growth mind-set is essential and learning becomes more

relevant if managed, identified and action plans are drawn.Reflective learning - working with meaning and transformative

learning.

Global Brands Opting for Sourcing Bangladesh Footwear

The world's renowned shoe brands are opting for Bangladesh to source their footwear because of rising cost and environment concerns of Chinese products.

Export History:Years

Products $ million

TotalLeather Footwear Leather Products

2001 – 2002 207.33 48.49 - 255.82

2002 – 2003 191.23 46.60 0.12 237.95

2003 – 2004 211.41 68.3 3.64 283.35

2004 – 2005 220.93 87.55 7.35 315.83

2005 – 2006 257.27 95.44 7.12 359.83

2006 – 2007 266.08 135.94 11.03 413.05

2007 – 2008 284.41 169.60 8.87 462.88

2008 – 2009 178.20 182.92 18.78 379.90

2009 – 2010 226.10 204.09 28.96 459.15

2010 – 2011 297.83 297.80 55.40 651.03

2011 – 2012 (July – Dec) 155.22 191.62 35.39 382.23

Porter’s Five Forces on Footwear:

Threat of substitute products

Bargaining power

of suppliers Rivalry

Bargaining power

of customers

The threat of new entry

Rivalry Among Existing Competitors: HIGH

R&D costs are high

Brand identity neededTo develop these products

Switching cots is low

Profit margins are low

Threat of new entrants

Threat of new entrants: LowProduct differentiation -an important factor

Access to supply or distribution channel

Fixed assets and capital are high Low transfer cost

Suppliers

Long-term relationship

Stable suppliers

Bargaining power of suppliers: Low

Some portion depend on Indian suppliers

High competition among suppliers

Bargaining power of buyers: High

Alternative suppliers in the market

Product diversification with high-end demand

Product differentiation stimulate the potential purchasing power

2005 2006 2007 2008

Value

(£Million)

Pairs (Million)

Value (£Million)

Pairs (Million)

Value (£Million)

Pairs (Million)

Value (£Million)

Pairs (Million)

Ireland 146.3 14.4 160.7 15.2 171.2 16.8 152.1 16.4

Germany 67.9 3.2 80.1 3.9 74.2 3.8 75.9 4.2

France 42.0 2.8 46.5 3.1 48.0 3.1 49.6 3.4

Netherlands 28.5 1.7 39.1 2.3 40.0 2.3 46.6 3.0

Italy 28.7 1.2 33.4 1.5 34.9 1.7 37.9 2.1

All others 146.9 8.7 166.2 11.1 172.8 11.0 179.2 12.9

Total 460.3 32.0 526.0 37.1 541.1 38.7 541.3 42.0

Threat of substitute products: Moderate

Substitute products

Low switching costs New technologicaladvancement

Current ObjectivesEarn more revenue:

Experts in the industry is expecting to earn $2.0 billion.

Capturing market share:

It is possible to gain 2.0 percent of the

global supplyCapturing new

market:Capturing potential new market, such as

China and Hong Kong.

Advantages:1. Basic raw materials for leather goods as well as for

the production of leather footwear.2. A large pool of cheap but trainable labour force.3. Tariff concession facility to major importing

countries under GSP coverage.4. Bangladesh can be a potential offshore location for

leather. leather goods, footwear and allied products.5. Manufacturing with competitive cost but high

quality.6. New potential markets, such as China and Hong

Kong(for details, please see more in appendices 2).7. Growing export in traditional markets such as Italy,

Germany, UK, Japan and USA etc.8. Imports of new technologies.

Disadvantages:1. Causes environmental pollution. Recently the department of

environment fined a number of tanneries for causing environment pollution in Rayer bazaar area.

2. The government stopped paying incentives to the manufacturing units. recession in EU countries.

3. Crisis of the salt. The government has been urged to allow duty-free import of 40,000 tons of salt in the interest of overcoming any ploy salt traders' syndicate might resort to in hiking price.

4. Bangladesh imports a good volume of cattle from India. It's about 10 million cattle annually.

5. Eid ul Azha cattle market has no direction. It is left to the traders and smugglers.

6. Lack of R&D facilities in Bangladesh.

The herd behaviour in capital market:

Investor’s identical behavior in the capital market of Bangladesh again the backdrop of no significant shift in economic fundamentals. Investors are guided more by watching others rather than following the information about risks & growth prospects. And this become more evident when the stock market goes down without any shift in the economic fundamentals & all the market participants,& the so –called financially illiterate individual investors also follow the path & resultantly the path prolongs.

There are some other factors which are overvalued & undervalued the stock market are given bellow:

Political issue: Last month the political stability was good but in current month political stability fall down that’s why share market also affected by this type of political issues like as Caretaker Government Issue, result of judgments of some issue etc.

Market information: Share market related information likes company’s dividend news, right share issue; company current market growth, profitability etc have a great Impact on market.

Political stability: Investors confidence grow overtime by political easiness in recent days, Particularly after the outcome of recent city corporation election and the scenario without any kind of violence has added to the positivity of investor outlook.

Market liquidity: Market Capitalization is one of the most important issues of Share market. The supply of liquid money & and share in the market boosted the capital depth of the market which has a great impact on share market stability.

Budget Effect: In budget 2013, the Finance minister declared to create a capital market fund which boosted the investors’ confidence to back in market.

There are some other factors which are overvalued & undervalued the stock market are given bellow (continue):

Corporate declaration: The poor corporate declaration of the company decreased the confidence of the investors & the good corporate declaration increased the confidence of the investors about the market stability. Recently poor corporate declarations of the market leading company Grameen phone decrease the price of the share which also falls down the market index.

IPO: (Initial Public Offering):To emphasis offloading shares of many companies through IPO for increase the market depth because fundamentally strong share increase the availability of the good share in the market.

GSP factor: Recently, the suspension of generalized system of preferences (GSP) facility by the US government also decrease the share market index & garments related share fall down in market.

Investor confidence: The high turnover has boosted investors confidence as those perceived lower risk now the before that’s why market index of both stock market increased.

Investor knowledge: Investor’s knowledge about the share market, share trade, ability to understand the company’s weight, growth, risk & profitability & over all companies’ fundamental strength are important issues to evaluate the market position & buy & sell the share.

This chart shows the market performance of DSE at June 2013.from this chart we can see that the 1st half of the month, the turnover of DSEX increase from Tk 8000 mn to Tk 9000 mn but the last half of the June month turnover of DSEX was slightly up & down. And the index of DSEX was increase from 4000 point to 4200 point. And the DGEN index, market turnover increase above the Tk 10000mn within 20th June but 30th June market turnover decrease to tk 9000mn and also market index increase from point 4000 to 4500 point during the month. This chart shows the overall raising position of the DSE market during the June month year 2013.from this analysis we can said that the DSE market rapidly increases day by day which shows the positive attitude of the investor, day by day confidence of the investor became again which is possible for the recent city corporation election without any kind of violence. And in CSE Average monthly turnover above Tk 5000 mn and market capitalization up & down between 1885412 mn to 1965995.22mn.

Source: Dhaka Stock Exchange Ltd.

This chart shows the scrotal market capitalization of DSE at June 2013.from this chart we can see that the fundamentally strong Banking Share hold the 21.09% of the market capital, then the fuel & power sector hold the 14.68% of the market capital. Thirdly telecom companies Share hold the 13.73% of the market capital. And the Pharmaceuticals hold 9.99% market capital. Financial Institutions hold 8.59% market capital. And other secretors hold the remaining market capital. We can understand that the Active Participation of investors raised the market capitalization or liquidity of money supply, which increased the capital of market. 

Source: Dhaka Stock Exchange Ltd.

Tax benefit from Share market:

 

The government received Tk 13.23 crore in tax from stock trading in June this year, the highest in last nine months. Transaction in the market was on the rise last month with a recovering tone from the prolonged downtrend in share prices since the market debacle two and a half years ago. The daily average turnover in June was Tk 661 crore, which was low in the previous months, according to data from the Dhaka Stock Exchange. Tax collection is related to trading volume and value. More trading of stocks generates more tax for the government, DSE officials said. Such a high amount of tax, Tk 18.76 corer, was recorded in September last year. The DSE, on behalf of the government, collects the tax as brokerage commission at 0.05 percent and deposits the amount to the state coffer. An official of the premier bourse said it is natural that tax collection will increase if turnover rises on the trading floor, as the tax is collected from turnover value. “Tax collection from brokerage commission marked a significant rise in June, as turnover also went up compared to the previous months,” the DSE official said. The government earned lower tax from sales of sponsor and placement shares in June than the last month. It bagged only Tk 3.19 crore in tax from share sales by sponsor shareholders last month, down from Tk 3.54 crore a month ago. From January to June this year, the government earned Tk 36.88 crore in tax through brokerage commission and Tk 9.7 crore in tax from share sales by sponsor shareholders and placement holders.

Source: Dhaka Stock Exchange Ltd.

Month of July 2013 (Last Week Turnover):

This chart shows that the rapid down & up trend of DSE turnover value & volume. . This week we can see that the DSE turnover decrease Tk 6069.12mn to Tk 4327.83 to 4038 mn from 22th July to 25th July & But when the governments approve the capital market fund then market turnover volume increase. From this analysis we can see that the market situation of DSE is not same trend day by day this trend is change rapidly. That means market is not stable. In month of June DSE & CSE stock market were follow upward trend but the month of July this trend is not stable. Market is going to down ward after the 21th July 2013.at 22th July we can see that the CSE index fall down 25.44% from previous week.

Source: Dhaka Stock Exchange Ltd.

Findings:After analyzing the dominants factors of both Dhaka Stock Exchange (DSE) & Chittagong Stock Exchange(CSE) we found the following some problems or lacks, Which is greatly obstacle to intensifying the stock market In Bangladesh whish are shown below: 

1. Lack of market skillfulness: The general characteristics of the skill market do not exist here. The demand and its controlling management system of securities influence the skillfulness of market. But They are not very satisfactory. 

2. Lack of confidence of the new investors: The devastating fall down of share market in 1996 has shattered the confidence of the new investors. Thus, the challenges ahead for Bangladesh stock market are to revamp the share market by restoring confidence among investors. 

3. Rise share prices inconsistently: The stock market bubbles up but such rises in the shares prices are not consistent with the share market fundamentals.

4. Complexity of tax structure: The tax structure of our country is complex. Sometimes companies hide their real income because of sickness of industrial sector. As a result, the potential investors can't Take appropriate investment decision because of hidden income.

 5. The problems of product market: In our country, the industrialists suffer a lot of problems. They lost their eagerness for the unequal Market positions. As a result, the rolling of capital decreases.

 6. Scarcity of foreign investment: The flow of foreign investment in our country is not satisfactory. But foreign investment is essential for development of the stock market.

 7. The lack of entrepreneur: The demand of capital increases if the sufficient creative entrepreneur exists. But we have want of creative entrepreneur.

 8. Lack of quality securities: For active stock market high quality of stock is essential. But most of the listed companies are in bad position.

 9. Sickness of industrial Sector: The complexity of the capital market increases because of the sickness of industrial sector.

Highest rise in FDI last year:

Summary of the Main Report:

The Foreign Direct Investment (FDI) in Bangladesh has gone up by 13.75 percent in 2012. The Board of Investment said that foreign investment in 2012 for Bangladesh amounted to $1.29 billion, which was 13.75 percent more than in 2011. Last year, Bangladesh got the most of its FDI from Malaysia, Egypt, United Kingdom, South Korea, Netherlands, Thailand and Hong Kong. The highest investment of $ 247.3 million came from Malaysia, $ 136.94 million from the UK, $ 97.59 million from the Netherlands and $ 54 million from Thailand.

Analysis:

During 1980s, FDI to Bangladesh was very little and mostly focused in banking and a few other sectors. Bangladesh started attracting FDI since 1996 in energy and power sector because of favorable and supportive policies for foreign investment, economic reform as well as unexplored gas and oil resources. In 1972, annual FDI inflow was 0.09 million USD and in 1996, it became 231.61 million USD which rose significantly in 2008 to 1086 million USD which declined to 913.32 million USD in 2010 (source: Bangladesh Board of Investment). Bit it rose again in 2011, the inflows of foreign direct investment recorded to $1136.38m. The country received $ 1.13 billion FDI in 2011, the second highest, and $ 1.08 billion as its third highest FDI in 2008.

FDI inflows by countries:Bangladesh receives FDI from both developed and developing countries across the globe. The major investors come from 36 different countries. Figure shows the 7 major developed country-wise sources of FDI inflow to Bangladesh in various years. It is clear from the Figure that the UK and the USA are the major investors. In case of Singapore a fluctuating trend is observable while investment of Hong Kong has increased steadily. From FY 2000-01 to FY 2004-05 South Korea had shown a decreasing trend and after one year South Korea and Netherlands have increased gradually.

Source: Bangladesh Bank,2012

FDI position of Bangladesh in South Asia:

Among the eight economies of South Asia, Bangladesh ranked fifth in FDI inflow, Maldives ranks to top and Sri Lanka, Pakistan, Nepal ranked 2nd, 3rd and 4th respectively. Bangladesh has a better position than India and Pakistan in getting Construction permits and starting business. Bangladesh takes highest time for getting electricity and registering property and ranked eighth in South Asia. If the government of Bangladesh takes initiative and provides more facilities to get electricity and register property, the position of Bangladesh in South Asian countries will go up.

Table: Position of Bangladesh in South Asian countries:

Source: Doing Business, the World Bank, 2012

FDI inflows by sectors:According to the report the FDI of last year was $374.97mill that came to telecommunication sector and it was highest investment next the second biggest FDI was $307.48 million to the textile and wearing sector; due to this investment the impacts are:

Economic Growth: According to the World Bank, an extra 10 mobile phones per 100 people in a typical developing country added 0.6 percentage points of growth in GDP per capita , and this impact is about twice as large in developing countries than in developed countries.

Employment Creation: including direct and indirect employment, more than 11,790 jobs have been created by the industry to date.

The gap between the inflow of FDI in textile–wearing and telecommunication is increasing in recent years. It creates a negative impact on our economy. FDI inflow increases only in those areas that are highly profitable. At the same time, it creates lower employment. There creates a lower opportunity of employment in telecommunication sector than that of manufacturing sector.

The third, $126.63 million FDI went to power, gas and petroleum sectors.

In the FY 2003 -04 to FY 2006-07, FDI inflow in power, gas & petroleum increased due to the investment of “Asia Energy” in Fulbari coal mining project. However, FDI in power, gas and petroleum in FY2006-07 was USD 229.93million and after that year, it started to decline and might follow an increasing trend in the fiscal year with an FDI flow of only USD 128.40 million.

Three years ago Bangladesh power generation capacity was nearly 4000mw a day, which has short up to 6500mw now. In 2015 the generation capacity is expected to cross 15000mw a day. (Source: Energy and Power Report of Bangladesh. Website: ep-bd.com)

FINDINGS:Major determinants of FDI inflow in Bangladesh

FDI is considered as a crucial ingredient/factor for economic development of a developing country like Bangladesh. The determinants which play an important role for attracting FDI more are:Macroeconomic environment –(Macroeconomic factors like monetary policy, fiscal policy, business climate etc.)

Geographical locationcheap labor costincentives for investorsexisting laws of the host countryLarge trainable manpower exemption of taxes and Bank interest rate

On the other hand, FDI inflows mostly depend on the quality of good infrastructure such as roads and highways, power, telecommunications and so on, because better infrastructure of the host country attracts foreign investor to invest.

FINDINGS:Major obstacles of FDI inflow in Bangladesh

physical infrastructure Political instabilityinsufficient power supplyhigh inefficiency costinconsistent policy implementationabsence of autonomous regulatory bodiestax authority’s discretionlack of effective cooperation of Board of Investmenttime wasting customs processinglegal irrationality

Disadvantages of Foreign Direct Investment

(Host Country)Political Lobbying : In the past, there have been many instances in which MNCs have resorted to political lobbying in order to get certain policies and laws implemented in their favor.

Exploitation of Resources: Exploitation of natural resources of a host country is not an very uncommon phenomenon in the case of FDI. MNCs of other countries have been known to indiscriminately exploit the resources of hosts countries in order to get short run gains and profits and have even chosen to ignore the sustainability factors associated with the local communities and local habitat

Threaten Small Scale Industries : MNCs have large economic and pricing power due to their large sizes so smaller industries in the domestic market of the host country cannot compete with them. MNC having cheaper products and more visibility due to the higher amounts of advertising and have been known to push out smaller industries out of business.

Technology: Although, the MNCs have access to new and cutting edge technology, they do not transfer the latest technology to the host country with a fear that their home country may loose its competitive advantage, hence the maximum potential of the host economy cannot be achieved as a result of old technology transferred

The FDI can bring huge change in any country’s economic growth. Foreign direct investment may be very advantageous to the host country that is the country which receives the investment flows in terms of helping the country progress economically and financially. However, foreign direct investment can remain beneficial only when the governments of the host countries put in needed regulations so as to prevent the country from being exploited and used as a profit generating machine for such corporate giants.

In the context of Bangladesh, though the country has the huge potentiality to attract the FDI but one key factor is making everything in vain, is bad political culture although some changes are occurring and FDI inflow trend is increasing. . If the political culture is stabilized i.e. less political chaos then it can create a good business environment and more FDI can be flown to the country.

E-Banking: The benefits and challenges

E- banking also known as electronic funds transfer (EFT), is simply the use of electronic means to transfer funds directly from one account to another, rather than by cheque or cash.

Benefit of E Banking: a) Reduced costs, b) Convenience, c) Speedy d) Better fund management e) Increased comfort and time-saving, f) Quick and continuous access to information, g) Better cash management

E-banking challenges:a)Technologicalb)Managerial andc)Business-related

 

Analysis:Unemployment will rise in banking sector. At present the unemployment rate of Bangladesh is 5%. If e-banking is fully introduced the unemployment rate will rise because one to one service is reduced.

Employment opportunity will rise in Technological sector. As E-banking is growing very faster, we need more advance technology to support this. As a result more employment opportunity is created.

As e-banking expands, financial transaction costs can decline significantly and the effectiveness of the domestic monetary policy may also be affected.

Debit Point- of-Sale. An advanced payment system which enables consumers to use an AT M Card to pay for goods and services, electronically debiting the cardholders account and crediting the account of the merchant.

E-banking offers some smart services benefiting both banks and customers compared with traditional banking system, it has become imperative to make necessary room for the scheduled banks to flourish e- banking. Among others, attractiveness of e-banking includes: it lowers transaction cost; provide 24-hour services; ensure increased security and control over transactions; reduces fraud risk; performs higher volume of transactions with less time; increases number and volume of value payment through banks.

E-banking allows remote transactions facilities that replace physical presence of a customer in a bank branch and; increases transaction speed and accuracy. On the other hand, traditional banking is time-consuming and more costly and therefore, e-banking is replacing traditional banking all over the world. In Bangladesh, e-banking facilities are yet to be fully developed although some technology driven products and services have been in operation over the last few years.

Recommendation:1. Good governance is a pre-requisite for any development. It can bring necessary reformation and qualitative development in judiciary, legislation and administration of a country which will help to reduce corruption, complicacy in bureaucracy and dishonesty of human resources of a government body.

2. The government agencies should be well co-ordinate to make better business environment, smooth and efficient activities for the investors.

3. Accountability and transparency must be ensured.

4. Political stability required in order to attract more FDI.

Recommendation(continues):5. To make to rules to easy to pay income tax.

6. To provide tax benefit of the listed companies in order to encourage non-listed companies to be listed with the stock exchange.

7. Proper implementation of E-governance required for E-Banking.

8. Government should take steps to import more salt to likely to cover up the off season and meet the demand required by leather goods company.

9. Government should take pre-caution during Eid ul Azha to prevent smuggling of hides and skins.

Conclusion:Business environment is very much important to know for doing business. We found a lot business issues but covered only a few due to the time constraint. We have focused in the recent economic and financial issues in which we have covered the highest FDI we have received last FY, potential leather goods sector and vast international market for our leather goods which attracting global brands to come and invest locally, E-banking a very demanding service which we are lacking at the moment due to government rules and regulations and herd behaviour on capital market. These things will help us to know the current business situation of the country. While covering the issues we have found positive and negative impact of those incidents. If we can take necessary measures in correct time, we will be able make the negative impacts in to positive ones.

References:Bangladesh Finished Leather, Leathergoods & Footwear Exporters'

Association. [Online] available from <www.bfllfea.org/index.php/top-blocks/item/45-bfllfea-profile>

Dhaka Stock Exchange Ltd. [Online] available from <www.dsebd.org/recent_market_information.php>

Eurostat. [Online] available from <epp.eurostat.ec.europa.eu>

R.P. Maheshwari(2012) Principles of Business Studies. New Delhi: Pitambar Publishing Company LTD.

Stock Bangladesh Limited. [Online] available from <www.stockbanglanews.com> [July, 2013]

The Lawyers & Jurists. [Online] available from www.lawyersnjurists.com/articles-reports-journals/bank-and-financ

The World Bank. [Online] available from <www.worldbank.org> [July, 2013]

Webster Dictionary. [Online] available from <www.webster-dictionary.org> [July, 2013]

Q&A