Bangladesh: Cyclone deals blow to faltering economy - 30 Nov 2007

EVENT: Environmental disasters will slow economic growth to below 6% this fiscal year (ending June), the Asian Development Bank warned on November 26.

SIGNIFICANCE: The country has been hit by severe flooding and a cyclone this year, weakening an economy that is already struggling with high inflation, record oil prices and export challenges. It is also in the grip of an uncertain political climate that is affecting the business environment and investor perceptions.

ANALYSIS: Cyclone Sidr, which hit southern districts on November 15, claimed the lives of at least 4,000 people and affected some 5.5 million others. The region is one of the most cyclone-prone areas of the world. In 1971, cyclones killed almost 500,000 people while 130,000 lost their lives in 1991. As a result, an early warning system was introduced, involving:

- advanced meteorological forecasting;

- creation of some 1,800 shelters; and

- a system of community-based volunteers with megaphones and bicycles.

This system ensured that the death toll from Cyclone Sidr was comparatively low (the World Meteorological Organisation has indicated that it would otherwise have been in the hundreds of thousands). Over 2 million people were in shelters when the cyclone hit. However, while disaster preparedness has clearly improved, response systems are still inadequate.

Aid inadequacies. The patchy nature of relief has meant that people in some towns have received far more food aid than they need and are profiting from selling the excess. At the same time, others in outlying islands have still received little or no food aid or water. This occurred despite serious attempts to coordinate aid efforts:

- The communications minister took charge of an office to coordinate relief activities of different agencies in the town of Barisal.

- Donors and the domestic business community shared out roles among themselves, with UNICEF taking responsibility for water and sanitation, while the UNDP took care of providing shelter to cyclone victims.

Governance weaknesses. Weaknesses in governance, especially poor coordination between different sectors of political society, have undermined relief efforts:

- Non-governmental organisations -- especially those from the West -- provided supplies in areas where they already have a substantial presence, leaving other areas without aid.

- Poor transport infrastructure, in particular a lack of ferries to cross the region's many rivers, has meant that relief vehicles have remained stuck at district capitals.

- An inflexible command structure within the army has hampered aid delivery. Aid has often been left in warehouses because the government has failed to issue instructions on distribution.

- While politicians assisted their support bases -- they are able to respond more effectively than the military or the bureaucracy -- their responses were partisan.

Political parties, with extensive local networks (and a need to win votes), have often been effective providers of disaster relief -- though distribution has always been partial. They were less inclined to operate after flooding earlier this year because of a ban on political activities imposed in January as a military-backed government took power under emergency rule (see BANGLADESH: Army has growing, unpopular political role. This ban was subsequently eased. However, efforts to tackle corruption and overhaul the political system have shrunk political networks, while party machineries have been weakened and factionalised, meaning that party-provided relief has been distributed to smaller and smaller groups of core supporters.

Political impact. The poor response to the cyclone has had a negative impact on the popularity of the emergency government, and there have been riots and protests about aid distribution. The government came to power amid hopes that it would oversee a transition to a less corrupt political era, but its credibility has waned in the face of perceptions that its key interest is in maintaining power.

Nonetheless, the limited and inconsistent involvement of the main political parties has meant that this loss of support for the government has not benefited the Awami League or the Bangladeshi Nationalist Party. Indeed, the lack of any inter-party coordination on aid relief further suggests that parties pose little threat to the government. At the same time, Dhaka has been keen to downplay the role played by political parties, and by foreign supporters (including the US military), in an effort to boost the profile of its own relief mission.

Growth concerns. The economic impact of the cyclone may be more significant than the political implications. Confidence in the economy was already low before the cyclone hit:

- Higher oil prices are sapping government budgets and increasing fertiliser and transport costs.

- Domestic investment has slowed considerably amid perceptions that the government is anti-business (fuelled, for example, by its failure to approval a long-delayed proposed investment by India's Tata conglomerate).

- Flooding and fuel costs have led to a drop in the profitability and volume of garment exports.

Rice risk. The area hit by Cyclone Sidr is often described as the national rice basket and the destruction of crops there will have a significant short-term impact:

- Some 2,000 square kilometres of rice crops have been completely destroyed, pushing up prices by 15% in some places. They are likely to increase further as the government moves to boost dwindling rice reserves.

- The government has requested 500,000 tonnes of rice from donor countries in order to make-up a shortfall -- the country is normally self-sufficient in rice.

- Rice imports mean that problems with grain supply are unlikely to result in a severe shortage of food or famine (as occurred after the 1970 cyclone), though the peak of any shortages will not be clear until March -- when rice stocks are traditionally at their lowest.

- Other agriculture sectors have been affected -- livestock worth 44 million dollars was destroyed.

- Reconstruction will put further pressure on budgets that are already strained by the need to cover higher oil subsidies.

The Asian Development Bank warned this week that growth for the 2007-08 fiscal year (ending June) will slow to below 6.0% from 6.5% last year, falling even further short of government targets of 7.0%. It identified as key concerns environmental disasters, but also inflation, exports and the political situation.

CONCLUSION: The consequences of Cyclone Sidr will have serious but not devastating effects on the economy, with external support likely to ensure that food security will not be endangered at a national level for the next few months. Nevertheless, rising food prices and greater pressure on government budgets will contribute to the slowdown in growth. Politically, the impact will be less severe, but the inadequacies of the relief effort have further undermined the government's credibility.