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Text File | 1994-05-02 | 17KB | 340 lines

<text> <title> Bangladesh: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Bangladesh </hdr> <body> 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