l. General Policy Framework

Bangladesh is a densely populated country situated on a low-lying deltaic plain with little topographic or climactic variation. Its overwhelmingly agricultural economy depends heavily on the vagaries of a semi-tropical monsoon climate. Dependent on adequate rainfall, Bangladesh suffers all too frequently from natural disasters such as floods and cyclones. The Government wrestles with these disasters and urgent problems of development in one of the poorest countries in the world. A major policy objective, feeding the rapidly growing population, is supported by significant U.S. grain exports to Bangladesh under PL-480 programs and commercial sales.

Following the overthrow of former President Ershad's government in December l990, a new democratically elected government led by the Bangladesh Nationalist Party (BNP) assumed power in April l99l. The BNP ran on a platform committed to development of a market based economy, continuation of the Bangladeshi government's IMF and World Bank supported economic reform program and encouragement of foreign investment. In August, the Government announced a new industrial policy which allows l00 percent foreign ownership of domestic industry and opens up to private investment many areas which had been previously restricted to the public sector. Limited resources, a small domestic market, poor infrastructure development, and an erratic political and legal environment remain formidable obstacles to the country's development.

To address mounting macroeconomic imbalances, the Government adopted a stabilization program in l985/86, supported by a standby arrangement from the International Monetary Fund (IMF), which was followed in l987 by a three-year arrangement under the Structural Adjustment Facility (SAF). The adjustment strategy has focused on industrial and trade liberalization, domestic resources mobilization, and financial sector reform. The three-year SAF expired in February l990, but was followed by a three year enhanced structural adjustment facility (ESAF) approved in August l990.

The Second Year ESAF program was approved on September 30, l99l. The macroeconomic objectives for the l99l-94 period are five percent average annual real GDP growth in combination with low inflation and progress toward balance of payments viability. Both the budget deficit and the current account deficit are to be reduced to about six percent while the percentage of GNP devoted to investment is to be increased. Export volume growth is projected to average eight percent annually while average nonfood import volume growth is projected at six percent. Foreign aid continues to finance the government's budget deficit, so much so that it outstrips the total value of government development expenditures. A major step forward in improving the inefficient tax collection system was taken with the introduction of a value added tax on July l, l99l. The government has also made progress in simplifying customs duties and procedures.

2. Exchange Rate Policies

Since August l3, l979, the taka has been pegged within margins to a basket of six currencies in which the dollar and pound sterling predominate. The dollar plays the role of intervention currency. There is also an important secondary exchange market (SEM), also known as the wage earners scheme (WES), where foreign exchange can be obtained for the import of selected goods. The Bangladesh Bank, the nation's central banker, adjusts the secondary exchange market rate to attract inflows of foreign exchange remittances from Bangladeshis working abroad. Practically all exports and almost all non-aid financed imports are now transacted through the secondary market. Currently, the SEM rate exceeds the official exchange rate by less than two percent. Under the ESAF, the eventual goal is to unite the two rates.

Concern regarding the exchange rate has diminished since the government adopted a flexible exchange rate management policy in March, l990. Since then the taka has seen a number of discrete devaluations which have lowered the dollar value of the taka by about ll.5 percent (inflation is now running at about l0 percent).

3. Structural Policies

Despite the adverse effects of the Gulf War, domestic political turmoil, and a devastating cyclone in April l99l, the Bangladesh economy grew by about 3.2 percent in FY 90/9l. Foreign exchange reserves increased from $469 million at the end of fiscal year 89/90 to $775 million by the end of fiscal 90/9l. Much of this increase was due to reduced import activity. With the expectation of improved fiscal measures and tighter budget control, the Annual Development Program budget (ADP) is targeted at 65 billion taka (USD l.7 billion) for fiscal year l99l/92, some l3 billion taka higher than last year's ADP expenditure.

Progress in implementing an IBRD/USAID supported financial sector reform program has been halting. Some success has been achieved in loan classification, provisioning, and liberalizing administered interest rates. Nevertheless, disbursement by the World Bank of the last $50 million tranche of a $l75 million credit to help recapitalize government-owned commercial banks has been delayed, due to unsatisfactory loan recovery rates by the banks. A government effort to promote recovery of loans by publishing a list of loan defaulters last May and denying bank credit to firms controlled by defaulters has had mixed results.

Success in improving the operations of commercial banks, and of other institutions in the financial sector, will play a critical role in promoting expanded investment activity in Bangladesh. While U.S. capital equipment manufacturers may benefit from any resulting increase in industrial investment, they face strong competition from suppliers of lower priced, reconditioned, low-technology equipment from Korea, Singapore, Taiwan, and Thailand.

The impact of a supposedly high-powered Board of Investment, designed to reduce red tape and speed the investment approval process, has been marginal. Investment applications still face considerable bureaucratic inertia and the board has yet to become the one-stop investment center promoters envisioned. Reportedly, the government is drafting a new Board of Investment Act intended to turn the BOI into an investment promotion entity. The new l99l Industrial Policy restates the government's commitment to treating foreign capital on a par with domestic investment.

4. Debt Management Policies

With an estimated $ll.l billion foreign debt at the end of FYl990/9l, most of which was incurred on concessional terms, Bangladesh maintained its debt level at about 48 percent of GDP. The debt service ratio in fiscal year l990/9l is estimated at about 22.7 percent, up from l9.5 percent in the previous year. Projections for Bangladesh's ESAF program indicate a declining debt service ratio in the future.

The U.S. and the government of Bangladesh signed a bilateral debt forgiveness agreement on September 28, l99l that wrote off approximately $293 million in old U.S. development assistance debt.

5. Significant Barriers to U.S. Exports and Investment

The Government continues to liberalize the import regime by relaxing quantitative restrictions, simplifying import procedures, rationalizing tariffs, and transferring additional import financing into the secondary exchange market. The Bangladesh Government has established three general tariff categories for most products: 0 to 20 percent for raw materials, 30 percent for intermediate goods, and either 50 or l00 percent for final goods. Large vehicles, alcohol, cigarettes and air-conditioners are some important exceptions to this policy. Tariffs on these products are well over l00 percent. Bangladesh continues to raise relatively high shares of its government revenue from customs duties. Bangladesh is a member of the General Agreement on Tariffs and Trade and is a participant in the ongoing Uruguay Round.

Bangladesh continues to engage in countertrade activities, but this is diminishing with the changes taking place in Eastern Europe. Currently, Bangladesh's only active countertrade agreement is with China.

The Government has moved to ease barriers to foreign investment, a fact underscored by the l99l Industrial Policy and by the U.S.-Bangladesh Bilateral Investment Treaty. The new Industrial Policy expands the areas open to foreign investment and reduces the need for investment approvals. It also promises equal treatment to foreign and domestic investors, but this has yet to be translated into action. Government continues to provide tax incentives and tax holidays for investments in areas such as rural development, import substitution, and employment and export generation. Requests for investments not meeting the above criteria can be delayed in processing for years.

The cumbersome approval processes required in Bangladesh are still a major discouragement to potential investors. Final government approvals occur slowly, and are on occasion reviewed by new incumbents, leading to further delays and higher costs. On a more positive note, there are indications that government is reviewing a l982 Drug Control ordinance that bars foreign-owned firms from manufacturing and marketing various non-prescription drugs. Perhaps the most hopeful sign that such a change will occur is the government's recent revocation of a l989 Drug Law which appeared to discriminate against multinational pharmaceutical companies.

6. Export Subsidies

The Bangladesh Government attempts to encourage export growth through measures such as ensuring duty free status for some imported inputs and providing easy access to financing for exporters. In addition, the export performance benefit entitlement, a government scheme which allows exporters to sell foreign exchange earnings in the secondary market, has now been extended to all export products except raw jute and unprocessed leather. The export promotion bonus is, however, based on the difference between the exchange rate prevailing in the secondary exchange market and the official rate. This difference is scheduled to be eliminated by the end of calendar year l99l. Under pressure from donors to reduce subsidies in the budget, the government reduced interest rate subsidies by one percent as of October l, l99l. It has so far resisted domestic exporters' demands for increased export subsidies.

Jute exports have continued to decline due to erratic supply and continuing competition from synthetics. Government efforts to prop up the industry have been expensive and unsuccessful.

Chittagong, Bangladesh's second largest urban center and principal seaport, is the site of the country's only export processing zone (EPZ). Established in l983, the Chittagong EPZ currently contains 38 active factories, including four U.S. firms. In all, 72 investment proposals have been sanctioned for the EPZ representing a total investment of USD 470 million. Projects in the EPZ benefit from duty free imports of capital goods and raw materials. The Government plans to open an additional EPZ near Dhaka in l992, and a third in the city of Khulna at a later date.

7. Protection of U.S. Intellectual Property

Bangladesh has been a member of the World Intellectual Property Organization (WIPO) since l985 and is represented on two of the organization's permanent committees. Bangladesh deposited its instrument of accession to the Paris Convention on November 29, l990 and the Convention entered into force in Bangladesh on March 3, l99l.

Bangladesh intellectual property law dates from the colonial era and has many similarities with the current British system. The Patent and Design Act of l9ll, as amended by the Patent and Design Rule of l933, the Trademark Act of l940, and the Copyright Ordinance of l962 govern patent, trademark, and copyright law in Bangladesh.

Efforts are underway to revise and update Bangladesh's Patent and Trademark legislation. This does not, however, appear to be a priority item for the Government of Bangladesh, which hopes to introduce new legislation sometime in calendar year l992. Intellectual property infringement in the domestic market is common, but is of limited significance for U.S. firms, with the possible exception of pharmaceutical products and audio and video cassettes.

8. Worker Rights

a. The Right of Association

The Constitution guarantees the right of association subject to restrictions imposed by law. Workers in trade associations or unions may draw up their own constitution and rules, elect officers, develop programs, and conduct business without government interference. The right to strike is not recognized by law but is an accepted and frequent form of protest. The Essential Services Ordinance of l958 permits the Government to bar strikes for three months in any sector deemed "essential." Most unions are dominated by political parties and the International Labor Organization (ILO) has expressed concern over restrictions on the right of association and other issues.

b. Right to Organize and Bargain Collectively

The Constitution provides for the right to form labor unions subject to governmental approval. Public sector employees cannot form unions or bargain collectively. Except in the Chittagong Export Processing Zone, where union activity has been suspended since l985, unions in the private sector can generally bargain collectively without government interference. However, laws against antiunion discrimination are often violated, and workers are frequently fired from their jobs for union activities.

c. Prohibition of Forced or Compulsory Labor

The Constitution prohibits forced or compulsory labor. Although this prohibition is substantially respected, bonded labor has been reported on some tea and rubber plantations. The Government actively seeks to prevent the trafficking of bonded laborers into other South Asian countries.

d. Minimum Age for Employment of Children

While numerous laws prohibit the employment of any person under l4, they are not enforced. Sanctioned by tradition and encouraged by dire economic necessity, child labor is quite prevalent. There is at present no compulsory education. In 1986 the Bureau of Labor Statistics estimated the number of child laborers at approximately three million, although informed sources assert the number is higher.

e. Acceptable Conditions of Work

Regulations regarding minimum wages, hours of work, and occupational safety and health are not strictly enforced. Minimum wages as set by law vary depending on occupation but are generally ignored. The Factories Act of l965 and the Shops and Establishments Act of l965 limited normal working hours to a maximum of eight hours per day and 48 hours per week (with overtime, not more than 60 hours per week). Enforcement of this legislation is weak to non-existent, as is that of health and safety regulations.

f. Sectors with U.S. Investment

U.S. investment in Bangladesh is very small, totalling approximately $50 million. It is concentrated in the physical assets of one life insurance company, the American Express and Citibank offices and a few manufacturing operations (one pharmaceutical firm and some firms in the food and garment/textile sectors).

All the major manufacturing firms with U.S. investment have unions and bargain collectively. Worker layoffs or the threat of reductions-in-force can cause serious management-labor disputes. As far as can be determined, firms with U.S. capital investment abide by the labor laws and the provisions of the 3l ILO Conventions ratified by Bangladesh.

Similarly, these firms respect the minimum age for the employment of children. According to both the Bangladesh Government and representatives of the firms, workers in firms with U.S. capital investment generally earn a much higher salary than the minimum wage set for each specific industry. In some cases, workers in these firms enjoy shorter working hours than those worked in comparable indigenous firms.

Source: National Trade Data Bank, Agency: U.S. Department of State