pri quarterly policybriefs on bangladesh economy · 2018. 12. 7. · persisting with this tradition...

PRI Quarterly Policy Briefs onBangladesh Economy

January 2015

Policy Research Institute of Bangladesh (PRI) Department for International Development(DFID)

Volume VII

ii

PRI Quarterly Policy Briefs on Bangladesh Economy January 2015

Foreword

This publication is the seventh in the series of PRI Publications on Policy Briefs. It comprises policyresearch papers comprise presented at a seminar in January 2015. The focus of these policy briefs is onregulatory constraints on private investment in Bangladesh. The authors, well known for their understandingof the investment climate, have delved into the plethora of regulations and regulatory framework thatimpinge on trade and investment. The themes covered range from regulatory constraints to local businessand investment, FDI, outdated foreign exchange regime, and the burdensome customs regime governingregional trade in agro-processed and textile products.

The topics discussed specifically deal with the following sectoral issues: low levels of private investment,poor trade logistics along with high costs and Bangladesh’s position in the global value chain, foreigncurrency regulations, private sector liberalization, and, finally, regulatory and institutional issues in land titlingand recommendations for moving towards a more efficient land market.

PRI researchers have argued that substantial changes will be needed in the policy framework for privateinvestment, especially to attract higher FDI inflows and achieving a seven percent GDP growth. Going forward,priority policy agenda for Bangladesh would include integrating into global value chains, realizingdiversification of exports, and bringing essential reforms to its land administration. These papers will be ofimmense value to the business community, academics, policy makers, as well as our development partners.

The range of issues discussed within the papers will furnish readers with a macro-view to the currentissues plaguing private investment in the Bangladesh economy. At a time when objective and professionalassessment of public policies from indigenous institutions are rare, PRI’s endeavor at informing the public ofsome complex economic issues through short and pithy policy papers is highly commendable. PRI’s efforts atpersisting with this tradition in an intellectually challenging landscape are laudable.

Dr. Syed A. Samad (Minister)Executive ChairmanBoard of Investment

Prime Minister’s Office

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Contents

Summary: ....................................................................................................................................... vi

I. Regulatory Framework for Private Investment .................................................................. 1

A. Overview.............................................................................................................................1

B. Lessons of Bangladesh Experience .....................................................................................1

C. Progress with the Enabling Environment for Private Sector ..............................................3

D. Emerging Constraints to Private Investment......................................................................4

E. Policy Implications ..............................................................................................................7

References ....................................................................................................................................... 8

II. Trade Regulations and Trade Facilitation Challenge ......................................................... 9

A. Introduction........................................................................................................................9

B. Standards and Regulations in Trade ...................................................................................9

C. WTO Agreements on Standards and Regulations ..............................................................9

D. NTMs (SPS and TBT) in India--Bangladesh Trade..............................................................12

E. Bangladesh Trade Regulations Covering Imports-Exports ...............................................14

F. Trade Facilitation and Competitiveness ...........................................................................15

G. Trade Costs and Trade Facilitation ...................................................................................15

H. The Bali Package and Trade Facilitation ...........................................................................16

I. Challenges in Conforming to TFA: Bangladesh Perspective .............................................17

J. Conclusions and Recommendations.................................................................................19

References ..................................................................................................................................... 20

Annex 2.1....................................................................................................................................... 21

Annex 2.2....................................................................................................................................... 22

Annex 2.3....................................................................................................................................... 22

III. Foreign Currency Regulations and Implications for Private Investment ........................ 18

A. Introduction and Background...........................................................................................18

B. Current Situation ..............................................................................................................18

1. Macroeconomic stability with high real interest rates ..............................................18

2. Much higher inflation rates relative to trading partners...........................................19

3. Capital account virtually closed with limited access to foreign currency borrowing.20

C. Imperatives for a Phased Capital Market Liberalization and Managing the AssociatedRisks ..................................................................................................................................29

D. Key Findings and Policy Recommendations .....................................................................30

Annex 3.1....................................................................................................................................... 32

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IV. "Regulatory and Institutional Issues in Land Titling and Registering Properties –towards a more efficient land market”.............................................................................. 37

A. Background.......................................................................................................................37

B. Land Governance..............................................................................................................37

C. Land Related Laws and Regulations .................................................................................38

D. Land Markets and Investments ........................................................................................38

1. Inadequate Land Governance a Constraint for Higher levels of Investments............39

E. Land Administration and Institutions ...............................................................................39

F. Conclusion ........................................................................................................................50

Annex 4.1....................................................................................................................................... 51

Annex 4.2....................................................................................................................................... 52

Annex 4.3 – Land Transfer Process .............................................................................................. 53

List of Tables

Table 1.1: Efficiency of the Bangladesh Regulatory Regime 2014............................................... 6

Table 2.1: Trade Costs in Ad Valorem Equivalent (AVE) ............................................................. 16

Table 2.2: Trade Facilitation and Competitiveness Ranking...................................................... 17

Table 2.3: Sub-indicators under Trading across Borders for ...................................................... 18

Table 3.1: Sector-wise Distribution of approved loan (2009-2014) ........................................... 20

Table 3.2: Outstanding Amounts, Disbursements and Debt Service Payments, 2012-13........ 26

Table 3.3: LIBOR as on October 21, 2014 ..................................................................................... 26

Table 3.4: ....................................................................................................................................... 29

Table 4.1: Doing Business 2015 – Comparison of Rankings on Ease of Registering Property. 39

Table 4.2: Summary of time, cost and procedures for registering property in Bangladesh.... 44

Table 4.3: Land Surveys, Coverage, administrative responsibility and rate of completion..... 45

Table 4.4: The land survey process .............................................................................................. 47

Table 4.5: The Appeals Ladder ..................................................................................................... 49

List of Figures

Figure 1.1: Bangladesh Per Capita GDP Growth (% per year) ...................................................... 1

Figure 1.2: Per Capita GDP (US$).................................................................................................... 1

Figure 1.3: Bangladesh Trend in Investment Rate (% of GDP) ..................................................... 2

Figure 1.4: Trend of FDIs in Bangladesh 1996-2013 ..................................................................... 2

Figure 1.5: Global Competitiveness Index (ranking) .................................................................... 4

Figure 1.6: Doing Business Rankings 2015 (out of 189) ............................................................... 5

Figure 1.7: Bangladesh Key Regulatory Constraints to Private Investment 20145 (Ranking,189 Countries)....................................................................................................................... 5

Figure 2.2: Comparative Trends in Trade Costs .......................................................................... 16

Figure 3.1: Interest Rate Spread in Bangladesh .......................................................................... 19

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Figure 3.2: Annual Average Inflation........................................................................................... 19

Figure 3.3: OECD Average Inflation Rate ..................................................................................... 19

Figure 3.4: Real Effective Exchange Rate (REER Index)............................................................... 19

Figure 3.5: Total Approved Foreign Loan to the Private Sector................................................. 20

Figure 3.6: Historical Exchange Rate USD-BDT ........................................................................... 26

Figure 3.7: PCB Lending Rate ....................................................................................................... 27

Figure 3.8: PCB Deposit Rate ........................................................................................................ 27

Figure 3.9: Interest Rate Spread with comparator countries ..................................................... 28

Figure 4.1: Creating and Maintaining Land Records at Sub-national level: Key Roles,Reporting Lines and Supervision....................................................................................... 41

Figure 4.2: Updating of Land Records ......................................................................................... 42

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Summary:

I. Regulatory Framework for Private Investment

The continued high transaction costs of doingbusiness in Bangladesh relative to comparatorssuggest that considerably more attention needs tobe given to the regulatory environment.

Evidence suggests that Bangladesh has madeprogress with many of the deregulation agendabut lags behind in instituting regulations thatfacilitate investments (contract enforcement,business insolvency).

Policy needs to focus on five regulatory constraints,organized into two groups: The first consists of:contract enforcement and resolving insolvency; theother consists of: getting electricity, propertyregistration and trading across border.

While both require further simplification ofprocedures and improving public administrativecapacities, the latter group also involvessubstantial public investments.

The satisfactory resolution of contract enforcementand business insolvency through proper policyactions is imperative in order to modernize theregulatory framework for private investment.

The Government should first, urgently review thelegal framework to check the adequacy of thesetwo important enabling regulations in light ofinternational good practice.

Based on that review, appropriate stepshave to be taken to streamline andstrengthen the related regulations.

Secondly, the government should ensure thatadequate administrative and legal procedures arein place to enforce the sound implementation ofthese regulations.

Once again, the Government can learnfrom the experience of good practiceexamples how business disputes areresolved and how bankruptcyproceedings are implemented

internationally. This review can theninform what actions are needed to enforceproper implementation, includingwhether there is a need for separate legalentities to resolve business disputes in atimely manner and with minimumtransaction costs.

For access to electricity, the high transaction costsreflect mainly the inadequate supply of electricityrelative to demand. Despite considerable newinvestments in power generation, businessresponses show that getting electricityconnections for new investments is a challengingexercise.

While the regulatory procedures needs to befurther simplified by reducing the number ofprocedures and response time to applications, theability to actually respond to new requests forelectricity connection in the required volume andwith lower financial cost will depend critically uponenhancing supply capabilities.

It is now clear that the supply of energy, bothelectricity and gas, has become a bindingconstraint on private investment and GDP growth.The resolution of this constraint requires bothsubstantial public investment as well asimplementation of a well thought out primaryenergy supply strategy

The long delays and high cost of propertyregistration are reflective of another bindingconstraint to private investment: the availability ofland for manufacturing enterprises.

The land market is very inefficient in view of weakland ownership data, lack of computerization ofland records, poor zoning laws, and hightransaction cost. On top, population pressure andrapid urbanization have contributed to a growingscarcity of urban land.

As land prices have sky rocketed so have landdisputes and various forms of corruption includingland grabbing.

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A range of policy actions are needed hereincluding computerized land ownership data;regulatory reforms to simplify land transactionsand registration; institutional reforms to improveland administration and record keeping;investment in economic zones to provide land fordomestic and foreign private investors; andenforcement mechanisms to enforce land usezoning laws.

Since the 1980s there has been substantialsimplification of international trade relatedregulatory policies and procedures. Thequantitative restrictions have given way tocustoms duties based restrictions, which in turnhave been considerably lowered although there isstill a way to go.

Much of the problem lies in internal transportbetween factory gate and the port. The Chittagongport’s handling capacity has improved and porthandling charges are less of a concern.

But the inadequacies of the railway connectionfrom Chittagong Port to factory destinations acrossthe country and the road congestions on the majorhighways are of serious concern. The transportproblem is a third binding constraint to theacceleration of private investment that needsurgent resolution.

The Government has taken a number of initiativesto ease the problems, but progress withimplementation of railway reforms and completionof road projects are lagging behind substantially.

II. Trade Regulations and Trade FacilitationChallenge

On Standards and Regulations

Rules-based trade under the multilateral rubric of WTOhas been good for Bangladesh.

Bangladesh should continue to takeadvantage of the system including its S&Dfacility but will have to invest in complyingwith internationally recognized standards andregulations.

When it comes to tariffs, preferential and duty-freeaccess to LDC exports comes within the purview of

S&D. Not necessarily so with regard to compliance withstandards.

Standards will not be lowered for LDCs. To staycompetitive, Bangladesh will have to scaleheights and make investments to meetglobally recognized standards.

SPS and TBT Agreements within the WTO have set thebenchmarks that must be met by exporting firms indeveloping countries.

Bangladeshi firms should use the standardsdeveloped by the relevant international bodieswhenever they exist: such as InternationalOrganization for Standardization (ISO) and theInternational Electrotechnical Commission(IEC), which develop voluntary consensusstandards, such as the ISO 9000 series onquality and the ISO 14000 series on theenvironment.

Adoption and rationalization of internationalregulations can produce significant net welfare andtrade benefits, particularly for developing countriesthat confront the challenge of cross-country variabilityof standards and certification regimes.

Mutual Recognition Agreements (MRA) canresolve the problems related to variability ofstandards and certification regimes. This iscritical for enhancement of India-Bangladeshtrade.

Regulatory constraints are often a significantimpediment to trade.

While customs reforms have been effective, itis important to continue these efforts and toexpand them to other regulatory functions.

On Trade Facilitation

Trade Facilitation is about reducing trade transactioncosts or trade costs which can be broken down intomany components ranging from transport costs,border related trade barriers, wholesale and retaildistribution costs, to language barrier, currency barrier,information cost barrier and security barrier. Policy makers can make the difference by

ensuring availability of logistics infrastructureand services, a favorable exchange rate, aconducive business environment, and

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transparent and streamlined borderprocedures.

Trade infrastructure composed of transport and portinfrastructure is increasingly becoming the defininginstrument of competitive advantage in bothinternational and intra-regional trade.

To improve competitive advantage ofBangladesh’s exports, it is imperative toundertake a broad range of investments intrade and transport logistics.

While the cost of road transport in Bangladesh isrelatively low, the quality of transport service is alsopoor.

It is important to develop high capacity,limited access highways along the major tradecorridors (e.g. Dhaka-Chittagong Highway) inorder to allow introduction of modern trucktransport.

Rail transport is expected to have a significant role intransport of containerized exports.

It will require introduction of commercialoperations through private sectorparticipation. Private sector participation is aneffective method of improving theproductivity of transport infrastructureincluding in rail services. It is important todevelop a competitive rail service to reducethe demand for road transport and providemore cost effective transport of containersover long distances.

The seaports remain the most important gateways forinternational trade but also that part of the supplychain most often associated with delays.

Considerable improvements have been madein terminal operations and other portinfrastructure. Further investments in portmodernization and associated reforms areneeded to bring port operations at par withsome high performing ports in the region.

Bangladesh has all but missed out the opportunities forintegrating into regional production networks andexploiting global value chains, something East Asian

countries have done successfully, and countries likeMyanmar, Cambodia, and Vietnam are about to join.

To take advantage of production networks andGVCs, getting port infrastructure, customsclearance processes, and regulationsstreamlined are absolutely critical ifBangladesh is to leapfrog into the high-frequency synchronized trade transactionsessential for participating in GVCs.

There are trade opportunities in the South Asian andEast Asian regions for Bangladesh to take.

But Bangladesh must negotiate effectivebilateral and plurilateral trade and transitagreements to facilitate trade in a morediverse range of goods.

There is lack of transparency and complexity in cross-border customs procedures.

There is need for simplification andharmonization of border procedures throughwide ranging customs reforms andstandardization of documents.

Finally, there is growing national and regionalcapability in trade related software development.Modern supply chain analysis is based on the effectiveuse of ICT in monitoring cargo movements and statusfor expediting transactions in moving down the valuechain. Bangladesh is behind on the application of ICT insynchronizing production with trade transactions.

Trade facilitation reforms now beingundertaken with support from multilateral andbilateral donors promises to includesubstantial investment for upgrading ICTcoverage and integration into the entire traderelated transaction from production to port toexternal clients. These reforms must besupported and continued with vigor.

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III. Foreign Currency Regulations and Implicationsfor Private Investment

The linkage with international capital marketshould be deepened further in order to attaingreater access to foreign financing at lower interestrates. As is the case currently, the initial emphasisshould on policies which would facilitate enhancedmarket access for Bangladeshi investors and issuesrelated to outflow should be considered in aproperly sequenced manner.

Establish an automatic approval process forloans up to a certain limit. Given the positiveoutcomes so far, it would be desirable thatBangladesh Government like its Indian counterpartconsiders a two track approach for approval ofrequest for foreign loans: an automatic window forborrowing up to a certain limit; and for higheramounts approval on the basis of current case bycase approach.

Fight against inflation must be intensified anddomestic inflation should be brought down to lessthan 5%. Bangladesh interest rate structure willnever come close to the dollar or Euro interest ratestructures as long as Bangladesh inflation remainssignificantly above the inflation rates of its majortrading partners. The only sustainable approach toreduce the spread over industrial country interestrates would require a steady reduction of thedomestic inflation rate and bring that closer to theinflation rates of industrial countries. The bestexample of this is China with inflation rates rangingbetween 2%-3% and more recently the anti-inflation stance of the RBI (which helped bringdown inflation to 4+% from very high levels.

Exchange rate stability is paramount for deepercapital market integration. Exchange ratestability, which entails a corresponding reductionin exchange rate risk, is an important preconditionfor the private sector to be able to borrow fromabroad in foreign currency. The reduced exchangerisk would encourage foreign lenders and investorsto lend and invest in Bangladesh. As long asBangladesh inflation remains significantly abovethe inflation rates of its major trading partners,there is no way that Bangladesh Bank can preventan appreciation of the REER and an eventualdepreciation of the nominal exchange rate.

More clarity is needed in the regulations forhedging against exchange and interest raterisks. For large investors hedging is veryimportant, and without proper exchange rate andinterest rate hedging they are not like to invest inBangladesh. Currently some aspects of regulationsgoverning hedging are subject to differentinterpretations, particularly with respect to theunderlying transaction (such as anticipatory orcurrent contract). Exchange rate hedging forforeign currency denominated borrowing is hardlyapplied in Bangladesh, whereas in India it ismandatory.

Tax treatment of return on investment needsmuch more clarity. Return on investment may ormay not be subject to taxation and the applicablerates or exemption status (as appropriate) needs tobe very clearly specified. Provisions of bilateralavoidance of double taxation treaties also need tobe clearly spelled out for investors to be assuredabout their post-tax investment return.

Capital account liberalization must be steady,properly sequenced and non-reversible.Bangladesh has a long way to go in its futuremarch toward a more liberal capital accountregime. The liberalization process should becarefully sequenced, closely monitored, and thechanges should be irreversible. Every emergingeconomy has travelled through the liberalizationprocess that Bangladesh needs to travel.Bangladesh cannot fall much behind itscomparators and deprive its private sector thebenefits of lower interest rates, exchange ratestability and price stability through lower inflation.

IV. Regulatory and Institutional Issues in LandTitling and Registering Properties – towards amore efficient land market

Regulatory and institutional challenges arisingfrom land governance related constraints affectsefficient functioning of the land market. Remedialmeasures in the medium and long run can helpbetter ensure property rights through a moretransparent regulatory process.

Bangladesh has undertaken different land related

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reforms that have been supported by Laws andregulations. All the desired goals however couldnot be achieved because the vested interest havealways been able to exploit legislative andregulatory loopholes and institutional undercapacity. On the institutional front efforts weremade to bring in change; for example, there wasthe “Muyeed Committee Report” which never gotimplemented. However, some of therecommendations could be overcome if propercomputerization is completed. For example, thetime for cadastral survey is also unduly long thoughnew technologies are now easily available forcompleting this task efficiently and in shorter time.

There is an ongoing effort of computerization ofsome of the processes in each of the threeinstitutions (agencies), but it does not appearcoordinated but rather on the individual Ministrybasis. This needs to be a priority goal for thegovernment, and a single strategy forimplementation of all land related computerizationshould be undertaken. Effective and well-coordinated computerization of each of theagencies under the two Ministries should be able tobridge the existing gaps and provide more readilyavailable reliable information to the citizen,business, financial institutions, and to the courts.This definitely will help improve businessenvironment in the country while also reducingscope of corruption at different levels.

For the short and medium term:

Computerization of the processes and use oftechnology in AC Land, the sub-registrar’soffice, and the land survey under the e-Government program should be of highestpriority. The target should be accessibility ofinformation to the citizen, reducingunnecessary steps. However, it needs to beensured that there is clear links between thedifferent agencies so that desired results canbe obtained.

The National Land Use Policy needs to berevisited, and if required a new policy thatwill be applicable across the MOL and MOLJalong with other Ministries (Urban, roads,water etc.) should be adopted. Of particularimportance will be to ensure effective acrossinstitutions communications and that also

should be where most of the informationcould get automatically updated limitinghuman interaction between officials ofinstitutions and the citizens. The Land UsePolicy should explicitly recognize thatcompeting demand of food security and theneed for creating jobs and providinghousing, infrastructure. The Governmenthas enacted the Economic Zones Act tofacilitate use of land for industry andservices. However, a more articulated policyis required which would lead to zoning ofthe entire country so that the land use getsdistributed optimally to meet the competingand sometimes complementary needs. Inthis context it needs to factor in other relatedlaws like Special Economic Zones Act.

For the longer haul:

There needs to be a full mapping of thecountry to determine which land will beexclusively kept for agriculture and which forindustry, housing, roads and there shouldproper zoning laws with institutionalenforcement in place. Even Government’sfuture infrastructure and urban relatedinvestments should be built in a way that itcaters to desired zoning needs of thecountry.

Undertake a comprehensive public sectorreform involving Ministries/Institutionsinvolved in land governance.

This longer term action will only be successful if the shortand medium term actions mentioned above areimplemented. These should help in evolving a regulatoryand institutional framework that could make the landmarket more efficient.


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Sadiq Ahmed

A. Overview

The regulatory environment for business can have adetermining influence on private investment (World Bank2004). Complex regulations and bureaucratic hurdles tendto increase the transaction costs of doing business andthereby hurt the growth of investment. On the other handenabling regulations that protect investor interests andsimplify business transactions encourage privateinvestment. In today’s globalized world where capital isfairly mobile, weak domestic investment climate riddledwith too many regulations and bureaucratic hurdles will notonly adversely affect the inflow of foreign investment butcan also cause domestic capital flight to more hospitableinvestment environment.

The development experience of South Asia, especially India,provides an important example of how regulatory burdencan overwhelm and choke private investment. While allSouth Asian economies started their development journeyon the wrong footing with over-dose of regulations (Ahmed2006), the Indian investment climate for private investmentin particular had the dubious distinction of beingdominated by the “license raj” (Mishra 2007). Subsequentderegulation drive in India since the 1980s ushered in a seachange in the investment climate for private investmentthat led to a major private sector led growth experience(Ahmed, 2007; Mishra, 2007).

B. Lessons of Bangladesh Experience

Per capita GDP in Bangladesh has grown at a steady pacesince independence, climbing from an average of below 2%during 1974-1990 to 5.0 % in 2010-14 (Figure 1.1). Theacceleration of per capita GDP during 1991-2014 isremarkable and it laid the foundations for Bangladesh tomove

Figure 1.1: Bangladesh Per Capita GDP Growth (% peryear)

Source: Bangladesh Bureau of Statistics

towards low middle-income status (Figure 1.2)1. A review ofdeterminants of growth shows that the accumulation ofcapital was the most important determinant of growth(Ahmed 2014a; World Bank 2012). This is consistent withthe growth experiences of East Asia when they started theirjourney from their low income stage. While there istremendous scope for improving the contributions of laborforce growth, human capital and efficiency of factor use(total factor productivity), the accumulation of capital willcontinue to be a major driver of growth in Bangladesh inthe coming years.

Figure 1.2: Per Capita GDP (US$)


1 Per capita GDP in US$ is calculated as follows: first, to ensure time seriescomparability nominal GDP is adjusted to reflect the increases in GDPresulting in rebasing GDP estimates. BBS has not adjusted historical data tofully reflect these rebasing (1981-2013 and 2008-2014).; second, to mitigatethe undue influence of yearly fluctuations in prices, exchange rate andoutput, a three year average value is selected (i.e. the value for 1980 is theaverage of 1978,1979 ad 1980)


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Sadiq Ahmed

A. Overview











1.1 1.3

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1974-1980 1981-1990 1991-2000

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Sadiq Ahmed

A. Overview











3.54.5

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1991-2000 2001-2010 2010-2014

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1008

2000 2010 2014


2

The long-term investment trend is shown in Figure 1.3. Theinvestment effort in both public and private sectors startedrising from the very low base in the early 1970s butremained weak well until 1989 hovering on average around5-6% of GDP for each. Indeed, in this sense and from ahistorical perspective, public investment took the leadbased on generous availability of official developmentassistance. The public investment effort gained somemomentum until 2000 but moved to a declining path asODA flows moved to a declining trend and public resourcemobilization effort did not gain adequate speed. Indeed,this trend continued until 2009 when the public investmentrate fell to a low 4% of GDP, down from a peak of 7.6% in1994 and 7.4% in 2000. There has been an importantrecovery in public investment since 2010, growing to 5.7%of GDP in 2014, but it remains below what is needed.

On the other hand, the private investment effortaccelerated after 1989 in response to the initiation ofvarious liberalization measures, especially investmentderegulation (Ahmed 2005; Ahmed 2006). Privateinvestment climbed from a low of 6% of GDP in 1989 to20% of GDP in 2009. In many ways these 20 yearstransformed Bangladesh from a public investment drivenand regulated economy to a private investment ledeconomy. Unfortunately, however, the private investmentmomentum has shown signs of stagnation at the 20-21% ofGDP rate over the past 5 years.

Figure 1.3: Bangladesh Trend in Investment Rate(% of GDP)

Source: Adjusted data based on BBS and Ministry of Finance

This rate of investment is still a solid effort and is adequateto support the 6% overall and 5% per capita GDP growth ofthe past 4 years but this is not adequate to take theeconomy to the next stages of the development pathinvolving 7-8% overall GDP growth and 6-7% growth of per

capita GDP. Another concerning factor is that the responsefrom foreign direct investment (FDI) has been positive butlack luster (Figure 1.4). Although FDI flows have picked uprecently,

Figure 1.4: Trend of FDIs in Bangladesh 1996-2013

Source: Bangladesh Bank

reaching $1.6 billion in 2013, this is still much belowpotential. Total FDI flows in Bangladesh are relativelyinsignificant in relation to total supply to developingcountries (Ahmed and Sattar 2012). For example, ascompared with $1.6 billion FDI inflow in Bangladesh in2013, FDI inflows amounted to $124 billion in China, $29billion for India, $18 billion for Indonesia and $9 billion forVietnam.

Indeed, both public and private investment rate mustexpand to move to the 7-8% GDP growth path. Theinvestment rate needs to go up from the present 26% ofGDP to 32% of GDP to achieve 7% growth rate by 2020 andto 36% to achieve 8% growth by 2020 (Ahmed 2014b). Asin the past, the momentum has to come from privateinvestment. Indicative growth scenarios suggest that theprivate investment rate should grow from the 21% of GDPrate now to at least 27% of GDP while the public investmentrate should climb to 9% of GDP from 6% now to achieve aGDP growth rate of 8% by the end of 2020.

These are fairly steep challenges. Achieving a 6 percentagepoint of GDP increase in the private investment rate in thenext 5 years is not an easy task, especially in view of thestagnation in the investment rate over the previous 5 years.Substantial changes will be needed in the policy frameworkfor private investment, especially to attract higher FDIinflows.

0

5

10

15

20

25

30

1972

-73

1974

-75

1976

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1978

-79

1980

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1982

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1984

-85

1986

-87

1988

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1990

-91

1992

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1994

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1998

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2000

-01


2












2000

-01

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2003

US$

Mill

ions

EPZ


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2003

2004

2005

2006

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Non-EPZ Total


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The objective of this policy note is to highlight the mainregulatory constraints to private investment, both domesticand foreign, based on available evidence from Bangladeshinvestor surveys and cross country experiences. It isimportant to note that the regulatory environment is onlyone, although critical, factor for private investment. Otherfactors include macroeconomic policies, infrastructuresupply, land and labor supply, and political stability.

C. Progress with the Enabling Environment forPrivate Sector

The rapid growth in private investment rate from 6% of GDPin 1989 to 20% in 2009 did not happen by accident. Anumber of good policies including sound macroeconomicmanagement, trade and investment deregulation, theexpansion of infrastructure services and expansion of laborand quality improvements contributed to that effort. Adetailed review of these determinants is available in Ahmed(2005; 2006). A brief summary of these policies areprovided here to set the basis for future reforms.

Sound macroeconomic management: Barring the earlyyears of independence, sound macroeconomicmanagement has been a hallmark of economic policymaking in Bangladesh. Occasional hiccups and deviationfrom this path were quickly corrected and on average thelong term trend of various macroeconomic managementindicators show a facilitating environment for theexpansion of private investment. These include low fiscaland current account deficits, prudent monetary policy, andflexible management of the exchange rate. As a result, thelong-term inflation rate has been in single digit, real interestrate has been relatively stable and the real exchange ratehas avoided extended periods of real appreciation. Totaldebt to GDP ratio is low and declining and externalindebtedness is very manageable. The stability of themacroeconomic environment has been a major enabler ofthe rapid expansion of private investment.

Investment deregulation: In the 1970s and 1980sBangladesh manufacturing and organized services werecharacterized by a domination of state-owned enterprisesand state controls over prices, investment and externaltrade. The deregulation process started in the 1980s butgained momentum after 1989. Since then, there has been amajor and progressive investment deregulation to boostdomestic and foreign investment. The deregulation efforthas involved privatization, removal of quantitativerestrictions, simplifying business registration process andencouraging foreign investment through relaxation of

ownership restrictions. Foreign currency restrictions oninflow of foreign investment and outflow of profits havealso been progressively eased including very recentlyforeign private borrowing for investment, although there isscope for improvement.

Trade liberalization: Much of the trade liberalizationhappened during 1990-2005. Although Bangladesh was alate starter compared with other developing countriesincluding in South Asia, the magnitude of liberalization isimpressive when measured against the starting point. Thisinvolved virtual dismantling of almost all quantitativerestrictions on trade, sharp reduction of average trade tariffsand the establishment of the free trade zones (ExportPromotion Zones (EPZs)). The hugely positive response ofthe readymade garments (RMG) sector to tradeliberalization and related other policies (such as back-to-back LCs, fiscal incentives and access to concession tradefinance) is illustrative of the role trade liberalization inpromoting investments, exports, GDP growth andemployment.

Fiscal incentives: To attract foreign investment and promotedomestic investment the Government offers a fairly liberalset of fiscal incentives involving tax holidays, lower incometax rate, accelerated depreciation and low import duties oncapital and intermediate goods imports. Exports also enjoyduty drawback benefits. In many ways, the fiscal incentivesin regards to exemption of profits or low rates offered toselected sectors (RMG) might be too liberal and an overkilland as such needs to be re-examined to avoid anunnecessary erosion of the tax revenue base.

Supply of labor and employment policies: The abundantsupply of labor is a major positive contributor to privateinvestment and expansion of manufacturing productionand exports, especially in RMG. Low wage cost remains amajor advantage for Bangladesh that contributes to costcompetitiveness in labor intensive manufacturing such asRMG. Government policy in regards to education and labormarkets has played an important facilitating role.Bangladesh labor markets relating to all three major sectors(agriculture, manufacturing and services) work flexibly andthe transaction costs of employment in terms of hiring,termination and wage setting are among the lowest indeveloping countries and certainly within South Asia.While this flexibility is a big plus, recent developments inthe RMG sector suggest that the absence of prudentialregulatory norms regarding worker safety and socialinsurance including coverage of accidents is a seriousproblem that needs to be corrected.


4

D. Emerging Constraints to Private Investment

The above analysis suggests that the returns to goodpolicies can be substantial. But it also begs two questions:first, why the GDI response in Bangladesh has been sluggishin comparison with the dynamic Asian economies? ; andsecond what explains the stagnation of the privateinvestment rate over the past few years? The answers tothese two questions are inter-related and can be obtainedby reviewing the emerging constraints to investment.

In recent years a range of cross- country indicators ofinvestment climate are regularly prepared on an annualcycle by specialized international agencies based oninvestor surveys. These indicators provide very useful dataon the emerging constraints to private investment. Whilethe implications of each constraint will likely vary bycountries, the wealth of knowledge available from theseglobal surveys can be productively used to inform policies.These cross-country comparisons are especially useful tounderstand why some countries are able to attract more FDIinflows than others.

The Global Competitiveness Index (GCI) prepared by theWorld Economic Forum has now become a fairly standardreference point for assessing the competitiveness of aneconomy in relation to other countries in the list. The GCImeasure is available as a composite index as well as byindividual components that comprise the index. Theindividual components (12) provide fairly in-depth viewsabout the regulatory environment faced by investors in anycountry as well other factors affecting competivenessincluding macroeconomic environment, financial services,skills, infrastructure, institutions and technology.

The trend in overall competitiveness of Bangladesh asmeasured by the GCI in relation to its competitors isillustrated in Figure 1.5. Although the number of countriescovered in the surveys between 2008 and 2014 havechanged from 134 to 144 that might affect thecomparability of the inter-temporal rankings, the relativecross-country rankings are not affected. Also, the broadinter-temporal trend showing relative progress acrosscountries remains valid. The two main messages conveyedby Figure 1.5 are that: First, the competiveness of theBangladesh economy relative to competitors remains aserious challenge. China, Indonesia, India, Vietnam and SriLanka are much more competitive than Bangladesh. Andsecond, between 2008 and 2014 Bangladesh has madesome progress with improving its competitiveness, butChina, Indonesia, Vietnam and Sri Lanka have improved

faster. As a result, the competitiveness gap with thesecountries has widened. The one exception incompetitiveness performance is Pakistan. In 2008 Pakistanwas well ahead of Bangladesh but it deteriorated sharplyover the past 6 years and has now fallen much behindBangladesh. Competitiveness of the Indian economy hasalso fallen in the past 6 years; yet its performance remainssignificantly ahead of Bangladesh.

Figure 1.5: Global Competitiveness Index (ranking)

Source: GCI, World Economic Forum (2014-15 and 2008-09)

A big component of the GCI is the regulatory environmentas measured by the International Finance Corporation’s(IFC) cost or ease of Doing Business (DB) indicators. The DBindicators are very helpful to measure the progress withderegulation in terms of results on the ground and not justregulations in the books and as such they reflect both theregulatory gaps and associated implementation challenges.

The DB indicators provide an overall ease of doing businessindex ranking as well as rankings for 10 regulatory areasthat affect business decisions. The overall DB index for 2015for Bangladesh and comparators based on 189 countries isindicated in Figure 1.6. Some interesting results emergefrom this comparison. First, despite past progress, theregulatory environment in Bangladesh is substantially lessfavorable than competitors; it is ranked at a low score of 171as compared with the worst performing country ranking of189 for Chad. Second, all other countries in the comparatorlist have a relatively better regulatory environment thanBangladesh. And third, comparing the results of Figures 1.5and 1.6 shows that while the regulatory environment is animportant determinant of the investment climate andcompetitiveness of an economy, it is only one determinant.It is also important to pay attention to such other factorsincluded in the measurement of GCI as the macroeconomicenvironment, labor skills, labor market, financial sector,infrastructure, technology, institutions and innovation.

111

3050 54

10177 75

109

28

71

34

129

73 68

020406080

100120140

2008 2014


5

Progress in these other areas can compensate for the highertransaction costs of negotiating the regulatory environmentwhile weaknesses in these other areas can strongly offsetthe regulatory ease of doing business (Bangladesh versusPakistan). Nevertheless, the inescapable conclusion is thatthe overall investment climate for private sector is weak inBangladesh by both measures (GCI and DB) and the bestapproach to reforming policies for improving theinvestment climate is to focus attention on both theregulatory environment as well as other enablers.

Figure 1.6: Doing Business Rankings 2015 (out of 189)

Source: IFC Doing Business Database

Drilling down the composite DB index by its 10 individualcomponents provides substantial insights of where themain regulatory constraints bite most. The Bangladeshrankings by components are shown in Figure 1.7. The threebiggest constraints are getting electricity, enforcingcontracts and registering property. The ranking in theseareas, especially in regard to getting electricity andenforcing contracts, puts Bangladesh at the near bottom ofthe global list of countries. Trading across borders, resolvinginsolvency and getting construction permits are alsoproblematic and involve substantial transaction costs.

Figure 1.7: Bangladesh Key Regulatory Constraints toPrivate Investment 20145 (Ranking, 189 Countries)


One area where Bangladesh performs well is regarding theprotection of minority investors. Bangladesh also performsrelatively well in the area of starting business and payingtaxes. These are encouraging aspects of the investmentclimate and Bangladesh can build upon these to strengthenthe overall investment climate.

The implications of these rankings in terms of transactioncosts are illustrated in Table 1.1. The costs are given interms of number of procedural requirements, the amountof time involved in meeting the regulatory requirements,and some measure of financial cost of complying with theregulation. In some sense the later two are morefundamental because what matters to a business are thetransaction costs of complying with regulations in terms oftime and money. Ceteris paribus, the lower the compliancecost in terms of procedures and time and money spent, thesimpler and more efficient is the underlying regulatoryregime.

The indicators show that the Bangladesh regulatory regimerelating to contract enforcement, getting electricity andregistering property is unduly complex and expensive. Thehigh transaction costs of compliance with the regulatoryregime in these three areas are a fundamental reason forthe very low ease of doing business ranking and therelatively low inflow of FDI in Bangladesh. In some sense,these three issues are a binding constraint to FDI becauselocal investors would likely have a way to get through withtheir local knowledge and connections, while foreigninvestors will be heavily disadvantaged.

For example, on average it takes 1442 days to enforce acontract and the financial cost of enforcement is as high as67% of the claim. As compared with this, it takes only 400days in Vietnam and 453 days in China to enforce acontract; the financial cost is 29% and 16% respectively.The performance gap between Bangladesh and the bestperformer is commensurately much larger: 150 days toresolve a conflict involving only 9% of the cost of claim. Thedifficulty of getting access to electricity is equally telling. Ittakes 429 days to get access to electricity in Bangladesh ascompared with 91 days in Indonesia, 104 days in Sri Lanka,106 days in India, 117 days in Vietnam. Additionally therelative cost of getting electricity measured as percentageof per capita GDP is much higher in Bangladesh relative tocomparators. The performance gap with best practice ishuge. Regarding, property registration, Bangladesh takes244 days while it is only 20 days in China, 27 days inIndonesia and 47 days in India. The transaction costs ofresolving insolvency and trading across nations are similarlyhigh in relation to the comparators.

90

114

128

85

78

Bangladesh

China

India

Indonesia

Pakistan

Sri Lanka

Vietnam

4383

115

0 50 100

Protecting InvestorsPaying taxes

Starting businessGetting Credit

Construction PermitsTrading across borders

Resolving insolvencyRegistering property

Enforcing contractsGetting electricity


5











171

142

114

128

115131

144140

147184188188

150 200


5












6

Table 1.1: Efficiency of the Bangladesh Regulatory Regime 2014

Regulation/Country Performance Bangladesh China India Indonesia Pakistan SriLanka

Vietnam Bestperformer

1.Starting a business---No. of procedures--Time (days)--Cost (% of income per capita)

--9--22--18.8

--11--31--0.7

--12--28--12.2

--10--53--21.1

--10--19--9.6

--9--11--20.7

--10--34--5.3

--1--6--0.3

2.Dealing with construction permits--No. of procedures--Time (no of days)--Cost (% of warehouse value)

--13--269--2.1

--22--244--7.6

--25--186--28.2

--17--211--4.3

--10--249--3.5

--12--169--0.3

--10--114--0.7

--5--26--0.0

3.Getting electricity--No. of Procedures--Time (no. of days)--Cost (% of income per capita)

--9--429--3890

--6--143--459

--7--106--488

--5--91--354

--5--178--1353

5--104--902

--6--115--1433

--3--18--0.0

4.Registering property--No. of procedures--Time (no. of days)--Cost (% of property value)

--8--244--7.2

--4--20--3.6

--7--47--7

--5--27--10.8

--6--50--7.6

--951--5.1

--4--57--0.6

--1--1--0

5.Getting credit--Strength of legal rights index (0-12)--Depth of credit info index (0-8)--Credit registry coverage (% of adults)--Credit bureau coverage (% of adults)

--6--0--0.9--0

--4--6--0--33.2

--6--7--0--22.4

--4--6--0--46.4

--3--3--7.3--4.5

--3--6--0--44.5

--7--6--14--41.8

--12--8--100--100

6. Protecting minority investors--Extent of conflict of interestregulation index (0-10)--Extent of shareholder governanceindex (0-10)--Strength of minority investorprotection

--6.3

--5.8

--6.1

--5.0

--4.0

--5.4

--6.7

--7.8

--7.3

--6.0

--6.2

--6.1

--6.0

--7.3

--6.7

--6.0

--5.8

--5.9

--3.7

--5.7

--4.7

--9.3

--7.8

--8.2

7. Paying taxes--No. of payments per year--Time (no. of hours)

--21--302

--7--261

--33--243

--65--254

--47--594

--47--167

--32--872

--3--55

8.Trading across borders--No. of export documents--Time to export (days)--Cost of export (US$/container)--No of documents to import--Time to import (no. of days)--Cost to import (US$/container)

--6--28--1281--9--34--1515

--5--9--810--5--8--1615

--7--17--1332--10--21--1462

--4--17--572--8--28--647

--8--21--765--7--13--690

--7--16--5607--13--590

--5--21--610--8--21--600

--2--6--410--2--4--440

9. Enforcing contracts--No. of procedures--Time (days)--Cost (% of claim)

--41--1442--67

--37--453--16

--46--993--40

--40--471--116

--46--993--23

--40--1318--23

--36--400--29

--21--150--9

10. Resolving insolvency--Time (years)--Cost (% of estate)--Recovery rate ((%)--Strength of insolvency frameworkindex (0-16)

--4.0--8.0--26--5.0

--1.7--22--36--11.5

--4.3--9.0--26--6.0

--1.9--22--31.7--9.6

--2.7--5.6--39.4--8.0

--1.7--10--42.4--8.0

--5.0--15--18.6--10.0

--1.0--1.0--92.9--15

Source: Doing Business 2014, International Finance Corporation


7

E. Policy Implications

These high transaction costs in key areas of policy makingaffecting business decision even after significantderegulation since the 1990s are indicative of an importantaspect of the weakness of the private sector regulatoryenvironment that has not received adequate attention.Much of the effort so far has focused on deregulating andsimplifying bureaucratic interventions in private investmentdecisions. But there are a number of areas whereinvestment facilitation requires enabling regulations andenforcement. The inadequacy of legal framework forcontract enforcement and resolving insolvency are twoprimary examples of the absence of appropriate enablingregulations. Another important area is labor protectionlaws. However, the low DB ranking is also indicative of thefact that most other countries have moved much fasterthan Bangladesh in improving the investment climate. Therelative stagnation in the private investment rate despitevery favorable macroeconomic performance and robusteconomic growth are indicative of the investor concernwith the business environment that has made progress butfalls short considerably in relation to other countries. Thehighest priority is to address the three binding constraints:contract enforcement; getting electricity; and propertyregistration. Additionally, policy focus is required in thematter of resolving insolvency and lowering the cost oftrading across border.

It is helpful to classify these five regulatory constraints intotwo groups: One consists of contract enforcement andresolving insolvency; the other consists of gettingelectricity, property registration and trading across border.While both require further simplification of procedures andimproving public administrative capacities, the latter groupalso involves substantial public investments.

Contract enforcement and resolution of insolvency areindicative of weak procedures and inadequateimplementation capacity and or lack of responsiveness inthe concerned public agencies. The satisfactory resolutionof these two substantive constraints through proper policyactions is imperative in order to modernize the regulatoryframework for private investment in Bangladesh. There isan urgent need for the government to first review the legalframework to check adequacy of these two importantenabling regulations in light of international good practice.Based on that review, appropriate steps have to be taken tostreamline and strengthen the related regulations. This is afirst step. The other important reform is to ensure thatadequate administrative and legal procedures are in place

to enforce the sound implementation of these regulations.Once again, the Government can learn from the experienceof good practice examples how business disputes areresolved and how bankruptcy proceedings areimplemented. This review can then inform what actions areneeded to enforce proper implementation, includingwhether there is a need for separate legal entities to resolvebusiness disputes.

Regarding access to electricity, the high transaction costsreflect mainly the inadequate supply of electricity relative todemand. Despite considerable new investments in powergeneration, getting electricity connections for newinvestments is a challenging exercise as reflected in theresponses to business surveys. This problem cannot besolved by a simple deregulation drive. While the regulatoryprocedures needs to be further simplified by reducing thenumber of procedures and response time to applications,the ability to actually respond to new requests for electricityconnection in the required volume and with lower financialcost will depend critically upon enhancing supplycapabilities. It is now clear that the supply of energy, bothelectricity and gas, has become a binding constraint onprivate investment and GDP growth. The resolution of thisconstraint requires both substantial public investment aswell as implementation of a well thought out primaryenergy supply strategy (Ahmed, 2015).

Concerning property registration, the long delays and highcost are reflective of another binding constraint to privateinvestment: the availability of land for manufacturingenterprises. The land market is very inefficient in view ofweak land ownership data, lack of computerization of landrecords, poor zoning laws, and high transaction cost. Ontop, population pressure and rapid urbanization havecontributed to a growing scarcity of urban land. As landprices have sky rocketed so have land disputes and variousforms of corruption including land grabbing. The challengefor policy is acute and a resolution will take a long time. Arange of policy actions are needed here includingregulatory reforms to simplify land transactions andregistration; institutional reforms to improve landadministration and record keeping; investment in economiczones to provide land for domestic and foreign privateinvestors; and enforcement mechanisms to enforce landuse zoning laws. The land regulation issue is discussed ingreater detail in an accompanying paper (Alam, 2015).

Finally, regarding trading across border, since the 1980sthere has been substantial simplification of internationaltrade related regulatory policies and procedures. The


8

quantitative restrictions have given way to customs dutiesbased restrictions, which in turn have been considerablylowered although there is still a way to go. The lowerranking on this count reflects the considerably longerdelays in trade transactions and associated costs related toweakness of trade logistics (Sattar, 2015). Much of theproblem lies in internal transport between factory gate andthe port. The Chittagong port’s handling capacity hasimproved and port handling charges are less of a concern.But the inadequacies of the railway connection fromChittagong Port to factory destinations across the countryand the road congestions on the major highways are ofserious concern. The transport problem is a third bindingconstraint to the acceleration of private investment thatneeds urgent resolution. The Government has taken anumber of initiatives to ease the problems, but progresswith implementation of railway reforms and completion ofroad projects are lagging behind substantially (Ahmed,2015).

References

Ahmed, Sadiq. 2015. Growth with Equity: ContemporaryDevelopment Challenges of Bangladesh. Forthcoming.Bangladesh Institute of Bank Management: Dhaka

Ahmed, Sadiq. 2014a. “Sources of Growth in Bangladesh”,Paper prepared for the First Conference of theBangladesh Economist’s Forum, June 21-22: Dhaka

Ahmed, Sadiq. 2014b. “GDP Growth Planning”, The FinancialExpress, December 18, 2014: Dhaka

Ahmed, Sadiq. 2007. India’s Long-Term Growth Experience:Lessons and Prospects. Sage: New Delhi.

Ahmed, Sadiq. 2006. Explaining South Asia’s DevelopmentSuccess: The Role of Good Policies. The World Bank:Washington DC.

Ahmed, Sadiq. 2005. “Development Performance and PolicyReforms since Independence” in Sadiq Ahmed (ed).Transforming Bangladesh Into a Middle Income Economy.Macmillan: New Delhi.

Ahmed, Sadiq and Zaidi Sattar. 2012. Prospects for andConstraints to Export Diversification in Bangladesh. PaperPrepared for the Asian Development Bank: Dhaka

Alam. Khurshid. 2015."Regulatory and Institutional Issues inLand Titling and Registering Properties – towards amore efficient land market” Background Policy Note forthe Second DFID-PRI Policy Brief 2014-15, Policy ResearchInstitute: Dhaka

Mishra, Deepak K. 2007. “From Inhibiting to Enabling: India’sChanging approach to the Role of the Private Sector” inJob Creation and Poverty Reduction in India, edited bySadiq Ahmed. SAGE: New Delhi

Sattar, Zaidi. 2015. “Trade Regulation and TradeFacilitation”. Background Policy Note for the SecondDFID-PRI Policy Brief 2014-15, Policy Research Institute:Dhaka

World Bank. 2012. Bangladesh: Towards Accelerated, Inclusiveand Sustainable Growth—Opportunities and Challenges.Bangladesh Development Series, Volume 1 and 2,World Bank: Dhaka

World Bank. 2004. A Better Investment Climate for Everyone.World Development Report 2005. Oxford UniversityPress and the World Bank: Washington DC.


9

II. Trade Regulations and Trade Facilitation Challenge

Dr. Zaidi Sattar

A. Introduction

Trade has been the engine of growth and prosperity formuch of the world since the end of the Second World War.Trade has also been a boon to the Bangladesh economyparticularly since the launching of extensive liberalization oftrade through reduction and rationalization of tariffs andquantitative restrictions. The volume of trade in relation toGDP has been rising steadily and is now close to 50%against a mere 19% in 1990. Without invoking causality, it isfair to say that for over two decades higher GDP growth andaccelerated poverty reduction has been closely associatedwith the expansion of trade. Given its favorable impact onlivelihoods of a large segment of the population, facilitatingtrade and augmenting competitiveness by removingbarriers and streamlining of regulations becomes a nationalimperative.

As a member of the multilateral trading system symbolizedby WTO, Bangladesh subscribes to a rules-based and non-discriminatory regime of global trade, except for the specialand differential (S&D) treatment that is justifiably meted outto developing and least developed economies. In theabsence of conformable and compatible rules governinginternational trade, it would be a free-for-all resulting in achaotic global trading system in which the least developedcountries would lose out the most. So, with all the flaws inthe multilateral regime of WTO, it has brought some orderin what would otherwise have been an unmanageabletrading environment scarcely better than the system thatprevailed in the Middle Ages. Rather than policing globaltrade, WTO lays down certain guiding principles that helpcountries and institutions frame standards and regulationsto govern an orderly exchange of goods as well as servicesbetween nations and firms. It then acts as a watchdog toensure that fair and non-discriminatory trading rules arebeing complied with in order to foster and not impede theexpansion of global trade. In this effort it also serves as awidely favored dispute resolution body adjudicating ondisputes arising between trading parties.

Rules exist to facilitate trade and contribute to prosperityand human wellbeing. When it comes to tariffs, preferentialand duty-free access to LDC exports comes within thepurview of S&D. Arguably, that sort of preferentialtreatment cannot be meted out to developing countries

when it comes to compliance with standards andregulations intended for the safety and protection ofconsumers. Nevertheless, several developing countrieshave sought S&D treatment under WTO in meeting thestandards. In that spirit, Bangladesh will have to face up tothe challenge of meeting whatever gaps or shortcomingsthat might exist in the compliance of standards andregulations governing trade if it aims to maintain a highperforming export sector for the medium- to long-term.That, in the practice of global trade, is the bottom line. Costsassociated with adhering to globally recognized standardsand regulations will have to be factored into any exportcompetitiveness strategy over the longer term.

B. Standards and Regulations in Trade

Product standards refer to standards which are mostcommonly associated with specifications and characteristicsof particular products (auto parts), services (accountingpractices) and materials (chemical polymer). In contrast,process standards specify manufacturing or quality controlmeasures to be taken to ensure that product quality ismaintained. These standard are developed in various ways,with the most effective being created through privatesector driven systems. For instance, in the case ofinformation technology, product standards are developedthrough voluntary consensus of companies engaged inproducing competing products (e.g. operating software).Regulatory standards on the other hand are mandated bygovernments and are formulated in a manner that protectshealth, safety, or environmental objectives. For bothproduct and regulatory standards, a process described asconformity assessment involves testing and certificationrequirement to be fulfilled.

C. WTO Agreements on Standards andRegulations

By and large, world trade is governed by a number of WTOAgreements covering various aspects of goods (underGATT) and services (under GATS) trade:

For goods (under GATT)

Regulations for food safety, animal and plant healthprotection (SPS)


10

Product standards (technical barriers to trade-TBT)

Textiles and clothing

Agriculture

Investment measures

Anti-dumping measures

Customs valuations methods

Pre-shipment inspection

Rules of origin

Import licensing

Subsidies and counter-measures

Safeguards

For services (the GATS annexes)

Movement of natural persons

Air transport

Financial services

Shipping

Telecommunications

The first two WTO agreements guide the compliance ofgoods trade in respect of conformable standards andregulations, and comprise the most fundamental of rulesgoverning trade. These are the Agreements on (a) SPS(Sanitary and Phytosanitary Measures), and (b) TBT(Technical Barriers to Trade). A key objective of the WTOSPS Agreement is to minimize the effect of adoption andenforcement of SPS measures (that is, food safety andanimal and plant health regulations) on trade. TheAgreement recognizes the rights of the WTO membernations to apply stricter standards, but such standards haveto be grounded on sound scientific basis and they shouldnot arbitrarily or unjustifiably discriminate betweencountries where identical or similar conditions prevail. TheTBT Agreement addresses ‘product characteristics or therelated processes and production methods’ reflected intechnical regulations and requires that these regulationsconform to basic principles of transparency and non-discrimination. Relevant international standards developedby bodies such as the International Organization forStandardization (ISO) -- if they exist-- must be used as thebasis for technical regulations unless this would beinappropriate because of climatic, geographic, ortechnological factors. SPS standards generally apply to alltraded agricultural and agro-processed products (HS-01-24)

while TBT regulations guide trade in industrial goods (HS-25+). However, some overlap can be expected as in the caseof TBT regulation on quality, grading and labeling ofimported fruit.

Compliance Requirements and Enforcement: The SPS andTBT Agreements within the WTO have set the benchmarksthat must be met by exporting firms in developingcountries. These agreements strongly encourage importingnations to adopt product standards that are at least asrigorous as those developed by international standardsetting bodies. Over time, all WTO members can beexpected to adopt such regulations, with the richermembers choosing even stronger rules. Thus, developingeconomies like Bangladesh desiring to expand exports toglobal markets have no choice but to meet recognizedinternational standards. The positive fallout is that whilecomplying with standards for export products, it isexpected that such standards would eventually be appliedto all production within the country simply to inspireconfidence in importing markets that goods are producedsafely by all potential supply sources.

It is important to note that the WTO does not develop orwrite standards nor does it require that member nationshave product standards. Instead the WTO rules in this areaaim at ensuring that technical regulations, voluntarystandards, and testing and certification of products do notconstitute unnecessary barriers to trade.

Sanitary and phytosanitary measures, by their very nature,may result in restrictions on trade. All governments acceptthe fact that some trade restrictions may be necessary toensure food safety and animal and plant health protection.However, governments are sometimes pressured to gobeyond what is needed for health protection and usesanitary and phytosanitary restrictions to shield domesticproducers from economic competition. A sanitary orphytosanitary restriction which is not actually required forhealth reasons can be a very effective protectionist deviceand, because of its technical complexity, it can be aparticularly deceptive and difficult barrier to challenge.

WTO member countries are encouraged to use thestandards developed by the relevant international bodieswhenever they exist. With regards to standards developingbodies, numerous such entities exist at national andinternational levels. International organizations, such asInternational Organization for Standardization (ISO) and theInternational Electrotechnical Commission (IEC), whichdevelop voluntary consensus standards, such as the ISO


11

9000 series on quality and the ISO 14000 series on theenvironment, are also involved in the development ofproduct standards.

Developing Country concerns: Developing economies faceseveral constraints in managing problems associated withstandards, such as:

Lack of modern technical infrastructure. They generallylack capacity to engage in international standardsdevelopment activities and to provide internationallyrecognized testing and certification procedures forproducts. Without the resources necessary for building andmaintaining modern standards and conformity assessmentsystems, it is difficult either to ensure rights or to exerciseresponsibilities under existing WTO rules. If developingcountries lack resources to access information oninternational standards or to participate in theirdevelopment, a key link between the rule of law as specifiedin the WTO system and developing countries' ability tofulfill their obligations and defend their rights is called intoquestion. Many developing countries support a targetedreview of the TBT and SPS agreements in light ofdevelopment needs.

Provisions relating to special and differential treatmentin the TBT and SPS agreements. For example, India hadrecommended extending timeframe for compliance bydeveloping country members with existing provisions ofWTO agreements referencing standards. In a related vein, anumber of developing countries have cited problems withtheir ability to react to notifications of new TBT and SPSmeasures.

Adherence to environmental standards. Imports fromdeveloping nations may be restricted on grounds ofmaintaining environmental standards. This has beenviewed with serious alarm by many countries with regardsto both manufactured and agricultural goods. Among otherissues, the lack of clear rules on the appropriate use oflabels to indicate environmental impact and the rise in theuse of standards for process and production measures inindustrial countries have been noted in developing countrysubmissions to the WTO.

Cross-country Variability of standards and certificationregimes across countries often stand as detriments totrade. Differing standards and regulations across differenttrading countries may lead to lack of faith in such standards inthe importing country, concerning goods from the exportingcountry. In such circumstances these standards and

regulations become effectively non-tariff barriers, and canprovide a serious impediment to trade.

Thus adoption and rationalization of internationalregulations can produce significant net welfare and tradebenefits. This is particularly true for developing countriesthat confront the challenge of meeting differing,duplicative, or discriminatory standards with their scarceresources. An international focus on rationalization oftechnical regulations worldwide, for further facilitation oftrade, would involve a commitment to the following:

Ending discriminatory treatment Eliminating duplicative testing requirements Recognizing that foreign standards may achieve

the same level of social or consumer protection asdomestic standards

Making regulation more transparent Scaling regulation at levels that do not impose

excessive costs on consumers and firms.

Mutual Recognition Agreements (MRA). This has beenraised as part of the resolution of the problems related tovariability of standards. Such agreements are used toreduce the trade-impeding effect of technical barriersthrough mutual recognition of national product testing andcertification procedures. However to date they have onlybeen negotiated between industrial countries, althoughboth TBT and SPS agreements encourage all WTO membersto enter into MRAs. The related trade policy issue arisesfrom the extent to which mutual recognition agreementsmay divert exports from non-signatories out of traditionalmarkets or even preclude entry of firms in the first place.

Cost impacts of standards. One important issue is thatrelatively little is known about the cost impacts of differingproduct standards and how they affect exporters indeveloping countries. In addition to the direct costs ofmeeting prescribed process standards and certification andtesting requirements, there are numerous costs associatedwith variability in standards across export markets and overtime. At the same time, adopting stronger regulations mayenhance technology transfer and raise confidence in theproducts of exporting countries. Hence a concerted effort isneeded to be made to study cost and productivity impactsof meeting international mandates. The results of suchstudies may feed directly into international efforts to limitthe trade-restraining impacts of proliferating and non-transparent technical barriers to trade.


12

When compared to classic trade barriers as tariffs andquotas (which are inefficient and discriminatory), standardsand regulations primarily exist so as to achieve objectiveswhich would not be served well by the private market. Thusthese standards and regulations produce net social gainsand have public goods features. However there are alsocosts associated with their compliance. Some of these costsare inevitable: they arise from the testing and certification(conformity assessment) procedures necessary todetermine whether a product, such as fresh fish or produce,meets standardized requirements. Inefficient andduplicative testing and certification requirements, however,represent unnecessary and significant costs tomanufacturers, consumers and society. In particular, thecost and complexity of determining conformity withvarying national technical regulations is high and rising.This is especially true with regard to the growth ofmandatory third party certification of conformity withtechnical requirements. Among the most important costsare those associated with mandates that industry retest andrecertify products that have already been tested forconformity with similar standards in multiple markets. Thisresults in higher costs to consumers and marks a key pointat which trade policy intersects with standards systems andregulation.

Standards and regulations for protection? Sanitary andphytosanitary measures, by their very nature, may result inrestrictions on trade. All governments accept the fact thatsome trade restrictions may be necessary to ensure foodsafety and animal and plant health protection. However,governments are sometimes pressured to go beyond whatis needed for health protection and use sanitary andphytosanitary restrictions to shield domestic producersfrom economic competition. A sanitary or phytosanitaryrestriction which is not actually required for health reasonscan be a very effective protectionist device and, because ofits technical complexity, it can be a particularlycumbersome for exporters to comply.

In practice, countries are found to adopt several differentapproaches: (a) Technical regulations may discriminateagainst foreign suppliers, and may be used to gain strategictrade advantages for domestic firms over foreign firms. (b)Standards are often non-transparent and in some casesneedlessly force firms to duplicate testing and certificationcosts. (c) Regulations may be drafted to exclude bothdomestic and foreign entrants into a particular market, so asto support entrenched monopolies. (d) Finally, standardsmay be stronger than necessary for achieving optimal

levels of social protection, thus imposing excessive costs onconsumers and reducing net welfare.

D. NTMs (SPS and TBT) in India--Bangladesh Trade

Based on information contained in recent Trade PolicyReviews (TPRs) of South Asian countries, a WTO assessmentstates that, in general, SPS and TBT measures in South Asiadid not always adhere to WTO obligations. The report notedthat some countries made more progress than others in thedegree of harmonization between national andinternational standards, though clearly there was a lotmissing in the matter of mandatory notifications ofstringent SPS measures that goes beyond requirements ofthe SPS Agreement. The major concern with regard to theseNTMs (Non Tariff Measures) is their potential of becomingNTBs (Non-Tariff Barriers) in intra-regional trade, in whichcase transaction costs (sometimes referred to as trade costs)become significant enough to impede trade growth. Banikand Gilbert (2008) have attributed high trade costs in SouthAsia to (a) poor infrastructure, (b) stifling regulations, (c)port inefficiency, (d) corrupt practices, etc. Drawing fromrecent empirical research, De (2011) argues that a 10%reduction in transaction costs at the border could raiseintra-regional exports in South Asia by 2%. Getting a bitmore ambitious, Wilson and Otsuki (2007) present the casethat if South Asian countries were to raise their capacities to50% of East Asian levels, that would raise intra-regionaltrade by some $2.6 billion which is about 60% of total intra-regional trade in South Asia. NTB reforms have thereforebecome a regional imperative and have moved in twotracks: one track addresses policy-induced NTMs in the formof SPS and TBT measures, and the other seeks to addressthe deficiencies in technical capacities in customsadministration and trade infrastructure through theprovision of Aid for Trade. The results will only becomevisible in the medium- to long-term.

Listed below are some of the key products exported fromBangladesh to India and imported from India to Bangladeshalong with the distribution of SPS (Sanitary & PhytosanitaryMeasures) and TBT (Technical Barriers to Trade) measuresassociated with each traded product:

SPS Agro-Food Processing firms exports subjectto 20 SPS measures

TBT Jute Bag exporting firms exports are subject to 11TBT measures

TBT RMG exporting firms exports are subject to 17TBT measures


13

TBT Pharma importing firms imports must complywith 11 TBT measures

Exports in the agro-food processed category are subject tothe most comprehensive coverage of SPS measures asthese edible products have to meet very stringent foodsafety and health standards laid down under India’s FoodSafety and Standards (Packaging and labelling) Regulationsof 2011. . The law is administered by the Food Safety andStandards Authority of India (FSSAI), under the Ministry ofHealth and Family Welfare. It may be noted that while theseregulations appear to be WTO compliant, the process andprocedures are cumbersome, which unsurprisingly raisestransaction costs and causes delay such that only largefirms can engage in exporting activity while small firms areleft out.

RMG exporters also find themselves held to very highstandards with 17 TBT measures applied on their exports.However, thanks to their international experience inexporting to EU and North America, the RMG exporters arequite at ease with much of the regulatory requirements byIndian authorities. Jute Bag exporters and Pharmaceuticalimporters are subject to 11 TBT measures each. While JBexporters face limited but manageable competition in India,they have occasionally complained about importersinsisting on unnecessary labelling requirement notmandated by TBT rules. Pharma imports, which are tightlycontrolled by the DGDA (Director General, DrugAdministration), are subject to several approval processes,from list of drugs permissible for import to registration andcertification requirements. But importers by and large havecome to terms with some delays and transaction costsarising from the cumbersome processes involved. The sumtotal of all import regulations subjected to pharma importsconstitute a ban on import of pharmaceuticals, except forAPIs (active pharmaceutical ingredients).

With respect to the trade of agro processed goods some ofthe key problems that emerge are:

(a) Indian rules are different from international standardscreating additional requirements for exporters;

(b) Restricted use of certain substances such aspreservatives;

(c) Labeling and marking requirements are discriminatoryand not always WTO consistent. National treatmentagreement required;

(d) Testing and certification; as BSTI certification orBangladeshi standards are not accepted. Lengthy retestingdone at port costing exporters. It may be stated further thatBSTI certification is not recognized by the Indian Customs asBSTI’s accreditation has not been officially acknowledgedby the relevant Indian authorities. This creates close to amonth’s delay as samples are sent to BIS laboratories inDelhi or Kolkata by normal post for retesting.

With regards to trade in jute bags, a key problem that holdsfor Bangladeshi exporters to India is the labellingrequirement. On the Indian side, it is mandatory that everyimported jute bag and bale to be sealed with the label,‘Made in Bangladesh’, as notified by the Office of the IndianJute Commissioner. However it has been found in a surveythat Indian buyers do not want any labeling on the bags.This is because these bags are used to pack Indian productsfor export with the seal of the Indian company beinglabeled on the bag. This discrepancy between IndianCustoms’ and buyers’ terms can cause hassle at the portduring consignment clearance.

In the area of RMG (Readymade Garments) Bangladeshiexporters to India are comfortable with high standards asthey are used to the standards and regulations in Europeand North America. It is in the administration of standardsin India that create problems: (a) Restricted use of certainsubstances, such as azo dyes. Accreditation ofinternationally recognized testing facilities in Bangladesh isneeded. (b) Mandatory certification and testing for RMGproducts at Indian ports often cause delays and extra costs.(c) Port infrastructure and capacity constraints (e.g. inPetrapole). (d) In the application of standards andregulations, exporters have complained of discriminatorytreatment between local production and imports.

Finally, in the area of trade in pharmaceuticals rawmaterials, the key problems are (as highlighted by a PRIsurvey): (a) Block List meeting not held on time; (b) Specialpermission for acid, narcotics, ethyl and methyl requiring aseparate set of laws; (c) Certification from DGDA (DirectorGeneral of Drug Administration).

Pharmaceutical firms also face restrictions (under a TBTregulation) when importing certain substances such as acid,narcotics and specific alcoholic groups such as ethyl andmethyl as raw materials. In such instances specialauthorization is required from the Department of NarcoticsControl under the Narcotics Control Act 1990 as suchsubstances are deemed harmful for human health.


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A list of specific examples of NTMs, under SPS and TBT,which could be described as NTBs, are presented in Annex2.1.

E. Bangladesh Trade Regulations CoveringImports-Exports

Although Bangladesh had witnessed significant tradeliberalization since the 1990s, the procedures for export-import cargo clearance remains cumbersome and doggedby various issues arising from stiff paperwork requirements(alongside fees, taxes and levies) to multiple process stepsdone manually, all of which increase time and costs andserve to inhibit trade. Although there has been someprogress in customs clearance processes, there remainserious candidates (i.e. documents and formalities thatneed to be completed/observed) for removal to save timeand transaction cost to importers and exporters.

The clearance for import-export cargo, i.e. Customs control,comes under Section 197 of Customs Act 1969, and thus thedocuments required to be submitted to Customs areactually necessary to facilitate clearance of such goods.These documents and formalities involved in import andexport trade are divided into two broad headings:documents required for imports and those required forexport cargo. These broad headings are further segregatedas follows: (i) documents mandatory with everyconsignment, (ii) eligible for tax exemption and rebatepurposes, (iii) related to particular requirements underImport Policy Order (IPO), (iv) Export Policy (EP) conditionsand specifications, and finally (v) documents needed forclassification of items, customs valuation and otherpurposes.

Imports: With regards to mandatory documents forclearance of imports, from the 10 stated documents (seeAppendix below), the first seven are mandatory, while inactual practice the number of documents should be takento be five only. For purposes of establishing duty exemptionclaims, duty rebate or drawback, amongst the listeddocuments, some of them in fact appear redundant (e.g.item no. (h) of NBR’s Order in Appendix B). For example,importers need not produce any document to prove theirentitlement to duty exemption or duty rebate or drawback.On the other hand, the Import Policy Order calls forsubmission of additional documents for specific goods fordifferent purposes such as public health, social safety,protection of animal and plant life, etc. For example, forselect food imports, a Radiation Certificate issued from theexporting country is necessary, alongside another post

importation certificate from the Bangladesh Atomic EnergyCommission to ensure the products’ safety. Regardingdocuments needed for items classification, customsvaluation and other purposes, it should be mentioned thatmany of the documents mentioned Item Nos. (i) and (j) ofthe Order of the NBR aren’t required to be submitted toCustoms for clearance. For example, while PSI Certificationis required for proper identification of goods prior toshipment, valuation certificate may be redundant, if theitem does not come under those HScodes listed formandatory PSI certification. Thus it can be stated that thatonly five documents as listed in paragraph 5 of the Order ofthe NBR, are mandatorily required to be submitted with theBill of Entry for assessment and clearance of all importedgoods. Although additional documents are required forcertain specified goods for specific purposes, the number ofactual documents should not exceed 9-10 (as compared to 66total officially listed documents), even if a particular good issubject to qualifications under conditional import.

Thus the problem in this regard is not the multiplicity ornumber of customs documents, but rather it is the varioussteps in the clearance process, and these are particularlycompounded when such steps for clearance of imports aredistributed across clearance agencies which are oftengeographically distant from each other, contributing totime delays. Other important challenges may beinfrastructural constraints at port and/or behind-the-border,inadequacies in transport (which results in long transporttimes for goods to and from factories/ports).

For example, at Benapole land port, there is zerocontainerized cargo handling, and cargo is downloadedfrom one truck and uploaded on to another across theborder. Thus pilferage and losses are significant atBenapole.

Introduction of electronic forms (when clearance of variousagencies other than customs is necessary, e.g. clearancefrom Drug Administration or Chief Inspector of Explosives)can also contribute to streamlining of clearance procedures.Customs clearance facilitated by an electronic system cansave time and transaction costs to importers.

Exports: For Customs clearance of exports, the processstarts with submission of Bill of Export by the exporter. Billof Entry and Bill of Export are delivered to Customsrespectively under section 79 and section 131 of theCustoms Act. Paragraph 6 of Order of NBR lists thedocuments for export clearance. These are for assessmentand clearance of goods from customs control. Paragraph 6


15

of Prescribed Bill of Entry and Bill of Export Form Order,2001 (dated August 08, 2001), lists the documents forexport clearance (See Appendix B for document list). Themajority of the documents are the same as in case forimports. Thus each export consignment requires the Bill ofLading, Packing List, Freight Certificate, Insurance Bill,Invoice, Certificate of Origin, Purchase Order, Value Slip, Billof Exchange, Bangladesh Bank NOC Letter of CreditAuthority, VAT and TIN number and finally ERC (ExportRegistration Certificate).

Furthermore export consignments require 2 moremandatory papers: Bank EXP, which allows BangladeshBank to keep track of export payments and Sight Draft,which document serves as immediate payment for goodsupon delivery.

Regarding documents required for tax purposes a keydocument is the Utilization Permission, which is issued bythe BGMEA and is required for raw material importclearance by export-oriented RMG industries. As relating todocumentation for Export Policy related purposes,documents of interest include the Fisheries DirectorateCertificate, put in place following the presence of nitrofuran, which is used to inhibit bacterial growth in foodstuffsetc; Quarantine Certificate, required with exportconsignment related to live animals, plant and plantproducts in line with Quarantine Act of the GATT Law andRadiation Free Certificate, necessary for food exports.With regards to documentation required for ItemClassification, Customs Valuation and Other Purposes, thedocuments are similar to those required for importclearance.

When compared to the situation facing import clearance,the roadblocks (in form of NTMs) are much less significantwhen it comes to export clearance. As an example,compared to import clearance procedures at Benapole landport, the clearance is much faster and consequentlydamage/losses to export cargo are less, as export cargoremains in the port area for fewer hours and, that too,loaded in the carrying truck. However some of thedifficulties as explained earlier concerning import clearancealso hold true for export clearance. One may be thebottlenecks in communications/transport infrastructure ofBangladesh, which in the form of additional transport timeof goods (from port to factory or vice versa) could bedetrimental to export competitiveness.

F. Trade Facilitation and Competitiveness

Trade facilitation is important for fostering greater trade notonly for Bangladesh, but also in the region and the world atlarge. Trade facilitation would be crucial for the four tradeexpansion strategies of Bangladesh: (a) exportdiversification, (b) moving up the value chain, (c) integratewith production networks and global value chains (GVCs),and (d) promoting export-oriented entrepreneurship. Tradefacilitation also enhances competitiveness by reducing costsinvolved in import-export activities.

A number of studies provide strong evidence thatimprovements in trade-facilitation— for exampleimprovement in port and information infrastructure, morerapid customs clearance time, or regulatory reform toremove duplicative technical requirements on imports havea positive impact on trade. The definition of tradefacilitation varies depending on the extent of measures tobe included. In a narrow sense, TF simply addresses thelogistics of moving goods through ports or customs at nationalborders. A broader framework for understanding tradefacilitation and its impact on international commerceincludes a number of interrelated factors which, in additionto transport logistics, might include streamlining regulatoryrequirements and harmonizing standards, as well as reformand the modernization of ports and customs. To this must beadded improvements in communications services, increaseduse of information technology to monitor product flow, andsupply chain integration.

Wilson and Otsuki (2007) use indices to measure four areasof trade facilitation, namely port efficiency, customsenvironment, regulatory environment, and the service-sectorinfrastructure. They find that South Asian countries lagbehind East Asia and are well below the global average intheir performance in trade facilitation. While estimates ofthe quantitative impacts of TF on Bangladesh trade are notavailable, Wilson et al find that, for South Asia, raising thelevel of TF to ASEAN standards will enhance intra-regionaltrade by 60% (or by some $5 billion considering currentvolume of intra-regional trade).

G. Trade Costs and Trade Facilitation

Trade facilitation initiatives, with the aim of lowering tradetransactions costs, can enhance trade, expand trade flows,while at the same time playing an important role insupporting a positive business climate. At bottom,therefore, TF is about reducing trade transaction costs ortrade costs. As tariffs decline in the South Asia region and


16

around the world, non-tariff factors dominate transactioncosts of trade. Trade costs are described in most theories ofinternational trade as the set of factors that drive a wedgebetween export and import prices. Anderson and Van Wincoop (2004) made a comprehensive review of the literatureon trade costs. They find a headline number for trade coststhat is an ad valorem equivalent (AVE) of factory gate priceof an exportable. This figure for trade costs can be brokendown into many components ranging from transport costs,border related trade barriers, wholesale and retaildistribution costs, to language barrier, currency barrier,information cost barrier and security barrier. Traditionaltrade policies such as tariffs account for a portion of theborder related trade barriers only.

Although trade costs are experiencing an overall decliningtrend, it is observed that trade costs (including intra-regional trade costs) are generally higher for developingcountries than they are for developed countries. Kee at al.(2009) show that tariff rates as well as selected non-tariffbarriers in developing countries tend to remain higher thanthose of developed countries. This is in line with theobservations that we make when we compare trade costs ofBangladesh with those of Malaysia and Thailand usingselected trading partner countries of India, USA andGermany. Trade costs for Bangladesh with various tradingpartners range from an ad valorem equivalent of 110% to200% whereas it ranges from 50% to 110% for Malaysia and80% to 160% for Thailand respectively with the sametrading partners for the period 1995-2007. Some othercountry-specific observations include, the significantlydeclining trade costs of Bangladesh, Malaysia and Thailandwith partner country India, and lowest trading costs ofMalaysia and Thailand with partner country USA whichhowever was not observed in the case of Bangladesh.

Table 2.1: Trade Costs in Ad Valorem Equivalent (AVE)

Trading Partners

India USA Germany

1995 2007 1995 2007 1995 2007

Bangladesh 147 114 142 135 162 125

Malaysia 108 93 59 66 82 77

Thailand 147 117 89 90 105 109

Source: UNESCAP Database of Trade Costs, World Bank

Figure 2.2: Comparative Trends in Trade Costs

Source: World Bank UNESCAP Trade Costs Database

Even as Bangladesh is becoming more integrated into theworld trading system, it has to be careful about its positionas other countries are making fast progress. In addition totraditional sources of trade costs, such as tariffs andtransportation charges, a range of other factors like logisticsperformance, customs performance, port infrastructure,maritime transport connectivity and behind-the-bordermeasures play a great role in determining trade costs andneed to be considered. Therefore one of the foremostregulatory challenge that Bangladesh faces is to streamlinethese various factors so as to reduce its trade costs.

H. The Bali Package and Trade Facilitation

The Bali Package was promulgated in December 2013 at theNinth Ministerial Conference of World Trade Organization inBali, Indonesia. One of the key areas covered in this Packagewas the Trade Facilitation Agreement (TFA), which containsprovisions for expediting the movement, release andclearance of goods, including goods in transit, setting outmeasures for effective cooperation between customs andother appropriate authorities on trade facilitation andcustoms compliance issues and containing provisions fortechnical assistance and capacity building in this area.Accordingly, it will be legally binding, and would require acertain level of investment for LDCs, for whom support will

100

200

1995 1999 2003 2007

Bangladesh

India Germany USA

AVE (in %)

80

120

160

1995 1999 2003 2007

Thailand

India Germany USA

AVE (in %)

50

70

90

110

1995 1999 2003 2007

Malaysia

India Germany USA

AVE (in %)


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be extended in building capacities to implement thechanges.

The Trade Facilitation Agreement has 3 sections:

1. Section I contains provisions for expediting themovement, release and clearance of goods,including goods in transit, as well as for customscooperation.

2. Section II contains special and differentialtreatment (SDT) provisions that allow developingand least-developed countries (LDCs) to determinewhen they will implement individual provisions ofthe Agreement and to identify provisions that theywill only be able to implement upon the receipt oftechnical assistance and support for capacitybuilding.

3. Section III contains provisions that establish apermanent committee on trade facilitation at theWTO, require members to have a nationalcommittee to facilitate domestic coordination andimplementation of the provisions of theAgreement.

After considerable delay and protracted negotiations onnon-TF issues, such as the capping of agricultural subsidies,on November 27, 2014, WTO members adopted a Protocolof Amendment to set in motion the contents of the TFAwhich will enter into force once two-thirds of membershave completed their domestic ratification process. It isexpected that full implementation of the TFA will add Onetrillion dollars to world GDP.

I. Challenges in Conforming to TFA: BangladeshPerspective

The TFA gives scope to Bangladesh to stagger the adoptionprocess based on its level of preparedness andimplementation of several critical aspects of tradefacilitation that will be supported by technical assistancefrom development partners. By current assessment,Bangladesh has a poor trade facilitation regime resultingfrom deficiencies in customs administration, portinfrastructure and internal transport and communicationinfrastructure. Bangladesh customs administration lackselectronic procedures and is beset with excessive manualprocedures and documentation requirements, thuscontributing to delays in customs clearance and hightransaction cost of trade. A comparison of trade facilitationefficiency of 160 countries as measured by the LPI (LogisticsPerformance Index) in 2014 puts Bangladesh tradefacilitation performance at 108 as compared with a

performance rating of 28 for China, 25 for Malaysia, 35 forThailand, 57 for Philippines and 48 for Vietnam (Table 2.2).Out of top 10 low income countries, Bangladesh gets theworst ranking. It shows that improvements in some facetsof trade facilitation have not gone in hand with growth intrade. Furthermore, Bangladesh had also scored low on anumber of dimensions in trade – including customsperformance, infrastructure quality and timeliness ofshipments – that have been recognized as important todevelopment (details in Annex 2.3). The World EconomicForum has also ranked Bangladesh pretty low, just barelyahead of Myanmar, in its Global Enabling Trade Index(GETI). Competitive advantage in both international andregional trade is increasingly defined by trade logistics asother factors like labor costs decline in importance. What isevident from the rankings is that there is a strongcorrelation between a nation’s global competitiveness andtheir LPI and GETI indices. Noting that Bangladesh is thesecond largest exporter of garments after China, that factthat it is being ranked by international agencies in its tradeperformance indices close to Nepal and Bhutan speaksvolumes about the formidable barriers that RMG exportersof Bangladesh must surmount before they can get theirgoods to their destinations.

Table 2.2: Trade Facilitation and CompetitivenessRanking

Countries GlobalCompetitivenes

s Index (GCI)2013-2014*

LogisticsPerformance

Index (LPI)2014**

GlobalEnabling

Trade Index2014***

South AsiaBangladesh 110 108 115India 60 54 96Sri Lanka 65 89 84Bhutan 109 143 107Nepal 117 105 116Pakistan 133 72 114Afghanistan n/a 158 n/aASEANMalaysia 24 25 25Thailand 37 35 57Indonesia 38 53 58Philippines 59 57 64Vietnam 70 48 72Lao PDR 81 131 98Cambodia 88 83 93Myanmar 139 145 121CHINA 29 28 54* The Global Competitiveness Index (GCI) 2013-14 ranks are out of 152 countries** The Logistics Performance Index (LPI) 2014 ranks are out of 160 countries*** Global Enabling Trade Index 2014 ranks are out of 138 countriesSource: GCI ranks of 2013-2014 from Global Competitiveness Report 2013-2014 andGlobal Enabling Trade Index ranks of 2014 from Global Enabling Trade Report 2014,World Economic Forum ; LPI 2014 ranks from Logistics Performance Index (LPI) Dataset,World Bank


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Indeed, international trade costs faced by developingcountries remain high, including for intra-regional trade.This is also the case in Asia, where trade facilitationperformance varies greatly across sub-regions, as well aswithin countries in each sub-region. For Bangladesh, tradefacilitation, broadly defined here as the reduction of (directand indirect) trade costs, has become a priority in order tomaintain competitiveness of its exports. While Bangladesh

may have witnessed some improvement in the customsclearance process over the years, under various donor-supported projects, that, for instance, reduced the numberof documents and signatures required throughout theclearance process, there are still some formidablechallenges ahead for adopting measures to save time andtransaction cost to importers and exporters.

Table 2.3: Sub-indicators under Trading across Borders for

Bangladesh and selected comparators Trading Across Borders

Country RankDocumentsto export(number)

Time toexport(days)

Cost toexport

(US$ percontainer)

Documentsto import(number)

Time toimport(days)

Cost toimport

(US$ percontainer)

Bangladesh 140 6 28.3 1,281.00 9 33.6 1,515.00

India 126 7 17.1 1,332.00 10 21.1 1,462.00

Malaysia 11 4 11 525.00 4 8 560.00

Singapore 1 3 6 460.00 3 4 440.00

Thailand 36 5 14 595.00 5 13 760.00

Vietnam 75 5 21 610.00 8 21 600.00

Source: Doing Business Report, 2015, World Bank-IFC

Amongst the 189 nations which were listed in the DoingBusiness Report 2015 (Table 2.3), in the broad category ofTrading Across Borders, Bangladesh came at number 140.This is slightly worse in comparison to India, but muchworse than Vietam which ranked 75, with Singaporeheadlining the list. A comparison of the several benchmarkindicators show Bangladesh as worst performer in thisparticular field for the select group of countries, withBangladesh faring badly on almost all counts except forNumber of Documents to export and import (6 and 9respectively) and costs to export (deflated US$ percontainer), where India has come up last. With regards toprogress of Bangladesh in these individual sub-indicators,while the number of documents to export and import haveremained the same since 2009, there were decreases incosts to export (in terms of deflated US$) while cost ofimports has increased since 2009. Regarding time to export(and import) these figures have also witnessed a steadyimprovement (in form of decline) since 2009.

What are the priority trade facilitation measures thatBangladesh needs to adopt? Though trade facilitationperformance is affected by a wide range of factors, thepreceding analysis indicates that the focus must be onadoption of measures and investing in facilities that reducetrade costs. Policy makers can make the difference byensuring availability of logistics infrastructure and services,a favorable exchange rate, a conducive businessenvironment, and transparent and streamlined borderprocedures. These measures, by reducing trade costs, willstimulate Bangladesh exports by making them morecompetitive in the world market where, at leasttheoretically, Bangladesh exports are not expected to face ademand constraint, Bangladesh being characterized as asmall open economy for much of its trade.


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J. Conclusions and Recommendations

On Standards and Regulations

Rules-based trade under the multilateral rubric of WTOhas been good for Bangladesh.

Bangladesh should continue to take advantageof the system including its S&D facility but willhave to invest in complying with internationallyrecognized standards and regulations.

When it comes to tariffs, preferential and duty-freeaccess to LDC exports comes within the purview ofS&D. Not necessarily so with regard to compliance withstandards.

Standards will not be lowered for LDCs. To staycompetitive, Bangladesh will have to scaleheights and make investments to meet globallyrecognized standards.

SPS and TBT Agreements within the WTO have set thebenchmarks that must be met by exporting firms indeveloping countries.

Bangladeshi firms should use the standardsdeveloped by the relevant international bodieswhenever they exist: such as InternationalOrganization for Standardization (ISO) and theInternational Electrotechnical Commission (IEC),which develop voluntary consensus standards,such as the ISO 9000 series on quality and theISO 14000 series on the environment.

Adoption and rationalization of internationalregulations can produce significant net welfare andtrade benefits, particularly for developing countriesthat confront the challenge of cross-country variabilityof standards and certification regimes.

Mutual Recognition Agreements (MRA) canresolve the problems related to variability ofstandards and certification regimes. This iscritical for enhancement of India-Bangladeshtrade.

Regulatory constraints are often a significantimpediment to trade.

While customs reforms have been effective, it isimportant to continue these efforts and toexpand them to other regulatory functions.

On Trade Facilitation

Trade Facilitation is about reducing trade transactioncosts or trade costs which can be broken down intomany components ranging from transport costs,border related trade barriers, wholesale and retaildistribution costs, to language barrier, currency barrier,information cost barrier and security barrier.

Policy makers can make the difference byensuring availability of logistics infrastructureand services, a favorable exchange rate, aconducive business environment, andtransparent and streamlined border procedures.

Trade infrastructure composed of transport and portinfrastructure is increasingly becoming the defininginstrument of competitive advantage in bothinternational and intra-regional trade.

To improve competitive advantage ofBangladesh’s exports, it is imperative toundertake a broad range of investments in tradeand transport logistics.

While the cost of road transport in Bangladesh isrelatively low, the quality of transport service is alsopoor.

It is important to develop high capacity, limitedaccess highways along the major trade corridors(e.g. Dhaka-Chittagong Highway) in order toallow introduction of modern truck transport.

Rail transport is expected to have a significant role intransport of containerized exports.

It will require introduction of commercialoperations through private sector participation.Private sector participation is an effectivemethod of improving the productivity oftransport infrastructure including in rail services.It is important to develop a competitive railservice to reduce the demand for road transportand provide more cost effective transport ofcontainers over long distances.

The seaports remain the most important gateways forinternational trade but also that part of the supplychain most often associated with delays.

Considerable improvements have been made interminal operations and other portinfrastructure. Further investments in port


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modernization and associated reforms areneeded to bring port operations at par withsome high performing ports in the region.

Bangladesh has all but missed out the opportunities forintegrating into regional production networks andexploiting global value chains, something East Asiancountries have done successfully, and countries likeMyanmar, Cambodia, and Vietnam are about to join.

To take advantage of production networks andGVCs, getting port infrastructure, customsclearance processes, and regulations streamlinedare absolutely critical if Bangladesh is to leapfroginto the high-frequency synchronized tradetransactions essential for participating in GVCs.

There are trade opportunities in the South Asian andEast Asian regions for Bangladesh to take.

But Bangladesh must negotiate effectivebilateral and plurilateral trade and transitagreements to facilitate trade in a more diverserange of goods.

There is lack of transparency and complexity in cross-border customs procedures.

There is need for simplification andharmonization of border procedures throughwide ranging customs reforms andstandardization of documents.

Finally, there is growing national and regionalcapability in trade related software development.Modern supply chain analysis is based on the effectiveuse of ICT in monitoring cargo movements and statusfor expediting transactions in moving down the valuechain. Bangladesh is behind on the application of ICT insynchronizing production with trade transactions.

Trade facilitation reforms now being undertakenwith support from multilateral and bilateraldonors promises to include substantialinvestment for upgrading ICT coverage andintegration into the entire trade relatedtransaction from production to port to externalclients. These reforms must be supported andcontinued with vigor.

References

Banik, N. and J. Gilbert (2008). ‘Regional Integration andTrade Costs in South Asia’. ADB Institute WorkingPaper No. 127, Asian Development Bank, Manila.

De, Prabir (2011). ‘Why is Trade at Borders a Costly Affair inSouth Asia? An Empirical Investigation.’ Researchand Information System for Developing Countries(RIS), India Habitat Centre, New Delhi.

Wilson, John S. and Otsuki, Tsunehiro (2007). ‘Cutting TradeCosts and Improved Business Facilitation in SouthAsia.’ South Asia Growth and Regional Integration(pp 236 – 270). Washington DC: The World Bank,MacMillan

Anderson, J. and E. Van Wincoop. (2004). ‘Trade Costs’.Journal of Economic Literature, vol. 42 (3), pp. 691-751.

Kee, H. L., Nicita, A. and Olarresga, M. (2009). ‘EstimatingTrade Restrictiveness Indices’. Economic Journal,vol. 119 (534), pp. 172-199.

World Bank-UNESCAP (2014). ‘Trade Costs Database’.http://data.worldbank.org/data-catalog/trade-costs-dataset.


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Annex 2.1

A list of NTMs approaching NTBs (Non-Tariff Barriers) facingexports of specific commodities from Bangladesh to India:

1. Agro-Food Processing Sector:

a. Exports in in the agro-food processed category aresubject to the most comprehensive coverage of SPS(Sanitary and Phyto-sanitary) measures as these edibleproducts have to meet very stringent food safety andhealth standards laid down under India’s Food Safetyand Standards (Packaging and labelling) Regulations of2011. The law is administered by the Food Safety andStandards Authority of India, under the Ministry ofHealth and Family Welfare. One example of an NTMmay be the notion that while these applicableregulations are WTO compliant, process andprocedures are cumbersome, which causes delay andraises transaction costs such that only large firms canengage in exporting activity while small firms are leftout.

b. Under SPS measure A22, restricted use of certainsubstances in foods and feeds and their contactmaterials, Bangladeshi exporters use the agent,xenthen gum, as a preservative in fruit juices anddrinks. Thus far, these products are being exported tonearly 100 countries with this additive without anycomplaint. On the other hand, this type of preservativeused has been the cause of trade dispute betweenIndia and Bangladesh. India uses pectin as preservativeand restricts all juice and drink products imported fromBangladesh from the use of xenthen gum.

c. A specific example may be in case of Tolerance limitsfor residues of or contamination by certain (non-microbiological substances) (A21), for products such asfruit drinks which have also received accreditation.Indian Customs requires BIS certification over BSTI’sHealth Certificate. This creates close to a month’s delayas samples are sent to BIS laboratories in Delhi orKolkata by normal post.

d. Also, Bangladesh exporters complain that with regardsto labelling, packaging and marking regulations, Indianbuyers often require too many details to be printed onthe product (candies and lollipops) body often timeswhere the wrappers do not have enough space todisplay all the required information. Such stringentconditions are in violation of the national treatmentdecree under WTO as local firms producing similarproducts are not mandated to follow these rules.

e. Also, according to the exporters, (as pertaining toconformity assessment standards, including Testingrequirement, Certification requirement and Inspectionrequirement), despite BSTI laboratory and productaccreditation, the exporters have to go through thelengthy process of sample retesting and recertificationfor consignment clearance which can take up to amonth.

2. Jute Bags:

a. With regards to labelling, marking and packagingrequirements, while Indian Customs requires that thatevery imported Jute Bag be sealed with the label,‘Made in Bangladesh,’ apparently Indian buyers do notwant any labeling on the bags. This discrepancybetween Indian Customs and buyers terms can causehassle at the port during consignment clearance.

b. Furthermore apparently Indian Customs may demandretesting to recheck for JBO content despite themandatory testing and certification already conductedand provided with the consignment. In such instances,exporter’s agent clears the consignments through thepayment of speed money.

3. Ready Made Garments:

a. Restricted use of certain substances, such as azo dyes.However it is currently not a major issue. ‘No Azo dye’certifications can be taken from Textile EngineeringCollege or any other institution/s approved by buyers,of which there are several in Bangladesh. BGMEAlaboratory can test for Azo dye but lack approval ofbuyers. Testing for azo dye used to be a problem 5years back when samples had to be taken to India fortesting; this process was time consuming andexpensive. But now Indian buyers have selected someinstitutions for Azo dye testing, and the process nowtakes a maximum of 3 to 4 days.

b. Other problems that stand out as barriers in this sectorare Port infrastructure and capacity constraints,payment problems, the complex visa processing forBangladeshi traders and recent rupee depreciation. Itmay be mentioned that Indian Rupee recently wentthrough a phase of depreciation, losing value to the USdollar. During this time it was quite unprofitable forBangladeshi RMG exporters to export to India, sinceprofit margins tend to be lower in India as it is; henceRMG firms looked for European markets where profitmargins are highest, thanks to the EBA facility.


22

Annex 2.2

I). Paragraph 5 of the NBR Notification No.120/2001/Customs dated 8th August, 2001 provides forthe documents to be submitted with the Bill of Entry forimport clearance. These documents are as follows:

(a) Letter of Credit (L/C)(b) Bill of Lading /Airway Bill/Truck

Receipt/Railway Receipt (as applicable)(c) Invoice(d) Packing List(e) Letter of Credit Authorization (LCA Form), as

applicable(f) VAT/BIN Certificate(g) Value declaration(h) Other required documents as evidence to

prove the importability and /or to establish theclaim of exemption from or rebate of duty andtaxes

(i) Documents to be submitted as proof inaccordance with the orders issued by theGovernment, NBR and/or any other authorizedGovernment office.

(j) Any other relevant document, as the case maybe.

II). Documents Essential for Conditional Import: TaxExemption/Rebate Purpose:

(a) Warehouse License:(b) Baggage Declaration Form(c) Back-to-back Letter of Credit(d) Certificates for Relief Goods(e) Education or Science Agency Certificate(f) Bank Guarantee Bank Draft(g) Undertaking(h) ATA Carnet(i) UNESCO Coupon

III). Documents required for submission for ExportClearance as provided for under Paragraph 6 ofPrescribed Bill of Entry and Bill of Export Form Order,2001, dated August 08, 2001:

(a) Invoice(b) Packing List(c) EXP Forms(d) Certificate of Origin(e) Documents to be submitted as evidence in

accordance with Orders issued by Govt, NBR orother authorized bodies.

(f) Any other relevant document, as the case maybe.

Annex 2.3

Trade Logistics Performance (LPI 2014)

Coun

try

LPI r

anki

ng

LPI s

core

Cust

oms

Infr

astr

uctu

re

Inte

rnat

iona

lsh

ipm

ents

Germany 1 4.12 4.1 4.32 3.74Singapore 5 4 4.01 4.28 3.7Malaysia 25 3.59 3.37 3.56 3.64China 28 3.53 3.21 3.67 3.5Thailand 35 3.43 3.21 3.4 3.3Vietnam 48 3.15 2.81 3.11 3.22Indonesia 53 3.08 2.87 2.92 2.87India 54 3.08 2.72 2.88 3.2Pakistan 72 2.83 2.84 2.67 3.08Bangladesh 108 2.56 2.09 2.11 2.82Source: Logistics Performance Index Dataset, The World Bank


18

III. Foreign Currency Regulations and Implications for Private Investment

Ahsan H. Mansur

A. Introduction and Background

Bangladesh has been very slow and cautious in opening upof its capital account transactions including private sectorborrowing in foreign currency from abroad. The foreignborrowing market in Bangladesh was highly controlled andvirtually non-existent even a decade ago and access toforeign financing by the private sector was strictlycontrolled. Until 2008, the domestic private sector, barringsome special cases/circumstances, were not allowed toborrow from foreign sources, even though foreignborrowings could be made at lower lending rates thanthose charged by the domestic banks and other financialinstitutions. Following an improvement in the foreignexchange reserve position of Bangladesh Bank, thegovernment decided to liberalize such borrowing in theyear 2008 primarily for the import of capital goods of newprojects and modernization of existing projects, and forsectors defined in the country’s industrial policy.

The isolation of domestic financial sector from internationalcapital market was a deliberate policy which, in part wasalso dictated by the weakness of the country’s balance ofpayments and inability of Bangladesh to access theinternational market in the absence of strengthenedmacroeconomic stability and a respectable country ratingfor foreign investors to assess country risk. The isolation ofdomestic financial market—particularly for borrowing fromabroad by the domestic private sector—has contributed tohigh domestic interest rates, inefficient bankingoperations/management as reflected through high spreadbetween deposit and lending rates and high levels ofnonperforming loans, and also encouraged governments tocontinue with much higher inflation rates compared withBangladesh’s major trading partners. Since banking sectoris the most important component of Bangladesh’s financialsystem, these inefficiencies and the consequent highinterest rates contribute to higher cost of doing business inBangladesh compared to most other countries.

This paper essentially puts forward the case for furtherintegration of Bangladesh financial system with theinternational capital market. It argues that Bangladesh Bankand government’s efforts to lowering of domestic interestrates and maintaining exchange rate stability have beenfrustrated in the past largely due to higher domestic

inflation (compared to trading partners) and a lack ofintegration with the international capital market. The paperpresents the evidence that recent modest liberalization ofprivate sector foreign currency denominated borrowingand deceleration of inflation have contributed to loweringof domestic interest rate structures. While closer monitoringof the opening up process will be important in order toavoid situations like the East Asian Crisis with overexposureto international capital market and vulnerability toeconomic contagion, Bangladesh cannot allow itself toremain disconnected from the international capital market.

B. Current Situation

Bangladesh enjoys continued macroeconomic stability overa reasonably long time in terms of strong balance ofpayments, manageable public debt and good fiscalmanagement. This stability notwithstanding, Bangladeshhas high interest rates structure (both in nominal and realterms), much higher inflation rates compared to its tradingpartners, and very limited access to private foreignborrowing. These unfavorable developments tend to limitdomestic investment and contribute to exchange rateinstability in both real effective and nominal terms.

1. Macroeconomic stability with high real interestrates

Despite macroeconomic stability Bangladesh economycould not come out of the steady 6% plus growth rate levelsbecause of stagnation of domestic investment in the rangeof 24%-26% of GDP levels over more than one decade. Inaddition to a number of other factors such as infrastructuredeficiency and lack of serviced land, higher lending ratescharged by banks is often quoted as an importantimpediment against investment by the private sector. Untilrecently, the borrowing rates used to be 16%-18% innominal terms. Only recently the interest rate structure hasstarted to come down to 12%-14% range due to increasedcompetition from foreign currency borrowing, adeceleration of the domestic inflation rate, and slowerdomestic economic activity.

The spread between the lending and deposit rates howeverstill remain high at 5.5%-6% range and somewhat wideningin recent months, indicating inefficiencies in the banking


19

system. Higher and growing burden of classified loans andthe associated provisioning requirements have alsocontributed to this widening of the spread. Foreigncommercial banks are taking advantage of this situation bycharging even higher spread and making greater profits inthe domestic market. The recent decline in deposit rateshave not been fully passed on to the borrowers in terms oflower lending rates, allowing banks to pass on theirinherent inefficiencies to the depositors and borrowers, atleast to a large extent.

The spread in Bangladesh banking system is certainlyexcessive. In most well managed banking system, due toenhanced competition and better risk management of theirloan portfolios, the spreads generally tend to be at or below3%.

Figure 3.1: Interest Rate Spread in Bangladesh

2. Much higher inflation rates relative to tradingpartners

Bangladesh has generally experienced higher inflation ratescompared to its trading partners, which are mostlyindustrial and emerging economies. The 10-year (FY2004-FY2014) average inflation rate in Bangladesh was 7.9%,while the corresponding average for the industrialeconomies was only 2.3%.

Figure 3.2: Annual Average Inflation

Figure 3.3: OECD Average Inflation Rate

Certainly the differential inflation rates cannot continueforever without a corresponding impact on the relativeexchange rate. The Purchasing Power Parity (PPP) principlewhile not relevant or significant in the short-term, over thelong term would certainly impact the levels of bilateralexchange rates. The currency of the relatively high inflationcountry would depreciate in nominal terms as happened inthe case of Bangladesh steadily over the long term. In theevent the nominal exchange rate is kept unchanged, theexporters would tend to lose export competitiveness withthe appreciation of the domestic currency (high inflationcountry) in real effective terms.

In recent months, with Bangladesh inflation remaining high,the relative stability of Bangladesh Taka against the USdollar has simply contributed to a sharp appreciation ofBangladesh Taka in real effective terms. The loss of exportcompetitiveness is already significant and if the level ofinflation in Bangladesh remains high in the coming months,the competitiveness of Bangladeshi exports in the worldmarket will suffer.

Figure 3.4: Real Effective Exchange Rate (REER Index)

5.05.15.25.35.45.55.6

Jun-

12

Aug-

12

Oct

-12

Dec-

12

Feb-

13

Apr-

13

Jun-

13

Aug-

13

Oct

-13

In P

erce

ntag

es

0

5

10

15

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

%General Food, beverage & tobacco

Source: BBS

Average: 5.3% Average: 7.9%


19











Dec-

13

Feb-

14

Apr-

14

Jun-

14

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

Food, beverage & tobacco Non-food

Average: 7.9%

01234567

1994

1995

1996

1997

1998

1999

2000

2001

2002

OECD Inflation Rate

Average: 4.2%

Source: OECD

86.080.00

90.00

100.00

110.00

FY 03 FY 04 FY 05 FY 06 FY 07

REER Index; index 2000-01= 100

REER IndexBangladesh Economic Review, Minitry of Finance


19











2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

OECD Inflation Rate

Average: 2.3%

86.0

97.7

89.4

106.4

FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY14*

REER Index; index 2000-01= 100

REER IndexBangladesh Economic Review, Minitry of Finance


20

3. Capital account virtually closed with limitedaccess to foreign currency borrowing

Recent Liberalization in foreign borrowing byBangladesh Bank

Until 2008, the local businesses, barring some special cases,were not allowed to borrow from the foreign sources thatoffer loans at lower lending rates than those charged by thedomestic banks and other financial institutions. Aftersubstantial improvement in the foreign exchange reserveposition, the government decided to allow such borrowingin the year 2008 only for the import of capital goods of newprojects and modernization, and other sectors defined inthe country’s industrial policy. Due to a healthy reserveposition, outside lenders and others started makingavailable a considerable volume of funds to Bangladeshientrepreneurs. In the past six years, Bangladesh Bank hasallowed private firms to borrow $5.56 billion from foreignsources at lower interest rates of around 5%-6%. In itsmonetary policy for July-December FY15, the central bankset the private sector borrowing ceiling at 16.5 percent forthe second half of the year, with 2.5 percent coming fromforeign borrowing. This is an explicit recognition thatforeign currency denominated borrowing will continue toplay an important role in the sourcing of private sectorcredit.

Figure 3.5: Total Approved Foreign Loan to the PrivateSector


A sectoral classification of the approved foreign loanportfolio for the private sector during 2009-14 shows that,

the telecommunication/ISP sector accounted for 42.6% ofthe total. The second and third highest approved loanamounts were granted for the Power and RMG/Relatedfirms, which accounted for 18.6% and 12.5% of thecumulative approved loans for the period. The highestrecipient of foreign loans, the telecommunication/ISPsector, is exposed to relatively less risk since most of themare subsidiaries of large international parent telecomcompanies/congolomerates. In comparison, most of thepower sector and RMG sector projects are owneddomestically.

Table 3.1: Sector-wise Distribution of approved loan (2009-2014)

Num

ber

ofC

ompa

nies

Tot

al S

ecto

rw

ise

App

rova

l(U

SD in

mill

ions

)

Sect

orw

ise

loan

as

% o

fT

otal

RMG/Related Products 98 693.7 12.5Power 22 1028.8 18.6Telecommunications/ISP 11 2356 42.6Agriculture Products/DairyProducts/Food & Allied

11 127.2 2.3

Pharmaceuticals/Healthcare 8 140.5 2.5Cement 7 85.5 1.5Shipping, Water Transport. CargoHandling

5 111 2.0

Packaging 4 6.2 0.1Footwear 3 20 0.4Electronic Goods Manufacturing 3 34 0.6Air Transport 3 98.9 1.8Steel 3 232.5 4.2Conglomerate 1 365 6.6Other 24 236.8 4.3

Total 203 5536.1 100


A study conducted by Bangladesh Bank on the foreignborrowing by the private sector indicates that while theamount of loans approved has increased significantly in thelast five years, the amount of loan disbursed has in factdeclined. The total loan approved for 2012 was $1.58 billionof which only $0.528 billion was disbursed. The amountdisbursed in 2013 was $0.393 billion while total approvedloan was $1.55 billion. The low disbursement rate of 35%and 25.3% for the two years is a cause for concern, as itindicates weakness on the part of the borrowers in terms oftheir ability to meet the financial standards set byinternational lenders in the context of granting such loans.The Table below also shows the net outstanding foreigncurrency denominated loans was only $1.52 billion in 2012and $1.74 billion in 2013.

412.61302.77

936.30

1579.57

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

1800.0

2009 2010 2011 2012

USD

in M

illio

nsPRI Quarterly Policy Briefs on Bangladesh Economy January 2015

20









Num

ber

ofC

ompa

nies

Tot

al S

ecto

rw

ise

App

rova

l(U

SD in

mill

ions

)

Sect

orw

ise

loan

as

% o

fT

otal


11 127.2 2.3


5 111 2.0


Total 203 5536.1 100



1579.57 1554.43

2012 2013


20









Num

ber

ofC

ompa

nies

Tot

al S

ecto

rw

ise

App

rova

l(U

SD in

mill

ions

)

Sect

orw

ise

loan

as

% o

fT

otal


11 127.2 2.3


5 111 2.0


Total 203 5536.1 100




26

Table 3.2: Outstanding Amounts, Disbursements and Debt Service Payments, 2012-13

USD in Billions 2012 2012 2013 2013

Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total

Outstanding of Private NonguaranteedExternal Debt (PNED) at end quarter

1.23 1.32 1.50 1.52 1.52 1.74 2.04 1.75 1.74 1.74

Drawing during the period 0.06 0.15 0.26 0.07 0.53 0.23 0.05 0.04 0.08 0.39

Debt Service Payments during theperiod

0.09 0.07 0.08 0.05 0.30 0.05 0.03 0.02 0.01 0.11

Source: Bangladesh Bank, Foreign Investment & External Debt Division (FIED), Statistics Department.

A survey report of Bangladesh Bank states that these loanswere mostly used for importing foreign capital machineries,expansion of existing projects and establishing new ones.The report also states that ‘some of the external loans havebeen used to pay off more expensive local loans and onecompany used the loan to settle its LC payment obligations(Deferred LC). The survey pointed to three majorpotential/actual difficulties in external borrowing:

Exchange rate fluctuations: Companies which arenot export-oriented do not earn in foreigncurrency. Hence unfavorable exchange ratefluctuations lead to losses in local currency whenservicing their foreign currency denominatedloans.

Borrowing from off-shore banking units: Onecompany which borrowed from the off-shorebanking unit of a local bank, faced significantlosses as the bank was unable to continue foreignexchange financing and switched to higher costlocal financing.

Lengthy procedure of loan approval: The loanapplication and approval process takesconsiderable time, which acts as hindrance forsome companies which require financing urgently.

How effective has been the Liberalization of Borrowingin Foreign Currency Borrowing?

The main reasons for the private sector to seek foreign loanis the interest rate differentials between foreign currencydenominated (international) borrowing and takadenominated borrowing from domestic banks. Interestrates charged on foreign currency denominated loansprovided to the private sector are generally set in the rangeLIBOR plus 3%-4.5%, the spread over LIBOR (at 3%-4.5%)being the combined mark-up charged by the facilitatingdomestic commercial banks and the counterpart foreignlenders. The domestic lending rates at present varybetween [11%-14%] depending on the customer, which isstill high and is acting as a deterrent for investment and

private sector borrowing. In terms of foreign rates, there aretwo main contributing variables--the level of LIBOR and theexchange rate between US Dollar and Bangladesh Taka.

Table 3.3: LIBOR as on October 21, 20141month

2month

3month

6month

12Month

HSBC

0.1557 0.198 0.232 0.323 0.547AB Bank

JANATABank

Figure 3.6: Historical Exchange Rate USD-BDT

Despite this enhanced stability of the exchange rate of Takaagainst the UD dollar in recent years, the market and theborrowers however still continue to expect the annualexchange rate depreciation of about 3% or more whilemaking their decisions to go for dollar denominated loans.Therefore, considering the LIBOR to be 0.55%, anintermediation mark-up of 4.5%, and additionallyaccounting for the exchange rate risk factor of about 3%,the cost of borrowing (in Taka equivalent terms) from theforeign lenders would be about 8% (Mark-up 4.5%+Libor0.55%+Expectation with respect to exchange ratedepreciation of 3%= cost of borrowing 8%). This rate is stillsignificantly lower than the rates charged by the domesticbanks to domestic prime borrowers.


26


USD in Billions 2012 2012 2013 2013



1.23 1.32 1.50 1.52 1.52 1.74 2.04 1.75 1.74 1.74



0.09 0.07 0.08 0.05 0.30 0.05 0.03 0.02 0.01 0.11










2month

3month

6month

12Month

HSBC

0.1557 0.198 0.232 0.323 0.547AB Bank

JANATABank



0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

FY90 FY92 FY94 FY96 FY98 FY00

USD

-BDT

Exc

hang

e Ra

te

Averagechange: 4%


26


USD in Billions 2012 2012 2013 2013



1.23 1.32 1.50 1.52 1.52 1.74 2.04 1.75 1.74 1.74



0.09 0.07 0.08 0.05 0.30 0.05 0.03 0.02 0.01 0.11










2month

3month

6month

12Month

HSBC

0.1557 0.198 0.232 0.323 0.547AB Bank

JANATABank



FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14

Averagechange: 3%

Averagechange: 2%


27

The main reason behind the exchange rate fluctuations isusually the inflation rate differential between Bangladeshand its major trading partners. As we know it very well,domestic inflation rate in Bangladesh is much higher thanthe inflation rates of its trading partners. Additionally, ifborrowers are concerned about the uncertaintiesassociated with the exchange rate depreciation inducedincrease in cost of fund, they may hedge their risk in theforward foreign exchange market which would give themadditional security.

Liberalization of access to foreign loans will definitely createpressure on the local banks to reduce their lending rates inorder to compete with foreign lenders. Since 2012, therehas been a steady decline in private sector credit demandas private sector credit growth came down to a 13-year lowof 11 percent at the end of November 2013 and banks' loan-to-deposit ratio declined to around 71 percent in December2013. While this deceleration has been primarily caused bya slowdown in the economy and a lack of investorconfidence due to the political instability in the country, thegrowing presence of foreign lenders has also been a factor.It is interesting to observe that domestic average lendingrate charged to the private sector has seen a modestdecline of 1 percentage point--from 14.69% in December2012 to 13.68% in June 2014. This coincides with the periodduring which borrowing from foreign lenders picked upsignificantly. While this decline in the domestic averagelending rate is a positive sign, the interest rate differentialvis-à-vis foreign currency borrowing is still too large toignore and the domestic lending rates must come downfurther for the domestic currency lenders to be able tocompete with foreign currency denominated lenders.

Figure 3.7: PCB Lending Rate

The slower growth in domestic private sector creditexpansion, sluggish domestic private sector investmentoutlook and increased completion from foreign currencydenominated lending, are likely to keep pressures on forfurther lowering of domestic lending rates. Faced withthese intensifying pressures, domestic banks are alsopushing down the interest rates on Taka denominated bankdeposits. The average private commercial bank (PCB)deposit rate has already declined from a recent peak of9.3% in April 2013 to about 8.1% at the end of June 2014.This declining trend in both deposit and lending rates islikely to continue in the near term, in particular, if theinflationary pressures decelerate further in the comingmonths.

Figure 3.8: PCB Deposit Rate

Are lower international borrowing rates stimulatingcompetition within the Banking System?

It is generally believed that despite the presence of a largenumber of banks operating in the domestic market, interestrates in Bangladesh (both deposit and lending) have alwaysconsidered (particularly the business community) to bemuch higher than what they should be. It is also observedthat the spread between lending and deposit rates hasalways been much higher than many of Bangladesh’scomparators and regional countries.

As mentioned above, the domestic lending rates are alreadyon the decline due to the increased competition fromforeign lenders. The deposit rate has also declined from9.04% to 8.13% from June 2012 to June 2014, whichindicates an increase in spread. The spread in Bangladesh isalso relatively higher than other comparator countries likeChina, Malaysia and Thailand, shown in figure. In a well

1313.213.413.613.8

1414.214.414.614.8

Jun-

12

Aug-

12

Oct

-12

Dec-

12

Feb-

13

Apr-

13

Jun-

13

Aug-

13

Oct

-13

Dec-

13

Feb-

14

Apr-

14

Jun-

14

Lending Rate

7.47.67.8

88.28.48.68.8

99.29.4

Jun-

12

Aug-

12

Oct

-12

Dec-

12

Feb-

13

Apr-

13

Jun-

13

Aug-

13

Oct

-13

Dec-

13

Feb-

14

Apr-

14

Jun-

14

Deposit Rate


28

managed and relatively efficient banking system the levelof spread could be as low as below 3%, compared to 5% ormore for Bangladesh. The higher spread in Bangladesh is amanifestation of structural weaknesses or inefficiencies ofthe banking system as a whole. This increase in spread maybe explained by the increase in loan loss provisions due toprovisioning requirements associated with increasedclassified loans in the banking system. In particular, therecent series of loan scams and defaults have left manycommercial banks, especially public sector ones, in aprecarious position. The very high corporate tax rateapplied on pre-tax profits of commercial banks (at 42.5%)may also partly explain the greater spread in Bangladesh.

Figure 3.9: Interest Rate Spread with comparatorcountries

However, the weak credit demand and increased externalborrowings by the private sector have led to the swelling ofexcess liquidity in the country’s banking sector. Bankers saidthe local banking industry is now sitting idle on surplusliquidity more than BDT 800 billion because of non-utilization of funds. The excess liquidity of the country’sbanks increased by BDT 240 billion or 40% during January-September 2013 and stood at BDT 840 billion from BDT 600billion in January, 2014 according to Bangladesh Bank data.

Bangladesh Bank is in positive mood to approve foreignloan applications as the policy decision has positiveimplications on the domestic banking sector such as putpressure on banks to bring down the lending rate by raisingcompetition. Big entrepreneurs are more interested intaking foreign loans as they can borrow at lower rateswhich are as low as 6%. However, these entrepreneurs willbecome interested in taking loans in local currency if thetrend of lowering the lending rates continues and theinterest rate in the international capital market picks upwith the US economy gaining momentum.

Comparison of Bangladesh Capital Account Regime withIndia and China

Bangladesh’s capital account transactions in terms ofinflows are generally liberal for FDI inflows, portfolio equityinvestment inflows, portfolio bond investments. However,outflows of capital by residents for investment purpose--beit for FDI, portfolio equity investments, and portfolio bondinvestments--are not permitted. Foreign investors are notallowed to invest in Bangladesh money market and infinancial derivatives. Resident Bangladeshi’s are also notallowed to invest in money markets abroad and AuthorizedDealers (ADs) are allowed in a very limited way to acquirehedging instruments abroad against exchange rate risk orprice risk for commodities on behalf of their customers.

A review of the Indian and Chinese capital account controlregimes however indicates much higher degree ofopenness, particularly in terms of outflows by the residentIndian and Chinese institutions and persons. Indiancompanies and registered partnerships may invest up to400% of their net worth abroad without approval. No limitsapply for investment using funds earned in foreign currencyor out of funds raised through ADRs/GDRs. Conditions mayapply for unregistered partnerships and proprietorshipfirms. In the case of China, companies may purchase ortransfer foreign exchange for outward FDI subject toregistration only and can also use renminbi in countries thataccept such settlement.

While there are some restrictions on what percentage ofIndian and Chinese companies’ shares may be purchased byforeign institutional investors (FIIs) or qualified FIIs (QFIIs inthe case of China), investment by qualified domesticinstitutional investors (QDIIs) in the case of China and byresidents in the case of India are quite liberal. Residentcorporations in India may invest up to 50% of their networth in shares of listed companies abroad. Indian mutualfunds are permitted to invest abroad within an overall capof US$7 billion. In China, QDIIs’ can invest abroad inportfolio bonds subject to overall ceilings and regulatorylimits on the type of security. In India, only residentindividuals may invest in debt securities abroad subject to ayearly limit of US$200,000. As regards investment in moneymarket abroad, Indian residents may purchase instrumentswithout Reserve Bank of India (RBI) approval followingprescribed norms. Only QDII in China can invest abroad inmoney market instruments subject to their respectiveforeign exchange quotas and regulatory limits. Indiancommercial banks and resident companies maypurchase/use such derivatives for asset management or

5.11

6.24

5.47 5.85

4.564.30

2.95

2.00 1.81

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2008 2009 2010 2011 2012

Spre

ad (%

)

Indonesia ThailandChina Malaysia


29

hedging against commodity price and foreign exchangedebt exposures.

Private sector external borrowing from abroad is allowedliberally in India through automatic and approval routes.The borrowing limit under the automatic channel is US$20million for loans up to 3 year maturity and the limit is up toUS$750 million for a minimum of 5-year maturity. However,external borrowings are subject to all-in-cost ceiling, whichis adjusted automatically, and also subject to end-userestrictions. In China, private sector borrowing is subject toindividual limits and subject to approval for maturitieslonger than one year.

In the case of Bangladesh, lending abroad by the residentsis not allowed. In the case of India and China lendingabroad are generally subject to approval, except for tradecredit and lending to foreign subsidiaries. On repatriation ofexport proceeds, all three countries have repatriationrequirements ranging from 4 months (Bangladesh) to oneyear (India). In China, export proceeds may be deposited inforeign exchange with domestic banks or abroad.Depositing of proceeds abroad are regulated based onbalance of payments and foreign exchange managementneeds.

The summary comparisons presented above indicate howmuch behind is Bangladesh compared to India and China.As a matter of fact, India started its liberalization process inearly 1990s as part of its broader economic transformationand moved quite speedily in the opening up process. Evenduring the recent economic and BOP crisis, RBI and theGovernment of India did not impose very many restrictionsand all of them have been withdrawn within a short time.

Can Bangladesh Afford to Liberalize its Capital Accountlike India and China?

International experience indicates that capital accountliberalization is most successful when the process iscontinued in a good macroeconomic and strong BOPenvironment. Our preliminary assessment is that, based ontraditional indicators for strengthened external position,Bangladesh compares quite well with India, China, Vietnam,and Malaysia all of which have much more open capitalaccount regimes than Bangladesh. Traditionally countriestry to build up a respectable level of foreign exchangereserve to self-insure against BOP pressures and fend offunanticipated sudden surge in outflow as part of itsopening up of capital accounts in phases.

As shown in the cross-country Table (Table 3.4) below forsuch indicators, Bangladesh’s current reserve coverage of 7months of import payments, reserve level at 123% of M1(cash in circulation and demand deposits) and 24% of broadmoney, and reserve levels at 14% of GDP are quiterespectable to protect itself from external shocks orcontagion effect. In terms of almost all importantindicators, Bangladesh outperforms India, while Bangladeshcapital account is much less open compared with the Indiancapital account regime.

Table 3.4:

Mon

ths

ofIm

port

Cov

erag

e

Res

erve

s as

% o

fE

xpor

ts

Res

erve

s as

% o

f B

road

Mon

eyR

eser

ves

as%

of

Nar

row

Mon

ey

Res

erve

s as

% o

f G

DP

Bangladesh 7 66 24 123.7 14China 20 159 22 88 42India 6 62 19 86.8 16Malaysia 7 52 33 128 43Vietnam 3 25 17 - 21

C. Imperatives for a Phased Capital MarketLiberalization and Managing the AssociatedRisks

Capital account liberalization has its well known benefitsand that is precisely the reason every developed countrymaintains an open capital accounts regime and allemerging and growing developing countries tend toliberalize their capital account transactions and betterintegrate with the international capital market. As theeconomies grow domestic savings may not keep pace withdomestic investment growth and financing of the higherlevel of investment from domestic sources alone would notbe possible. Capital account liberalization is believed to be amajor way to alleviate financing constraint through inflowof foreign capital into the domestic economy in variousforms.

The fast growing economies in Asia like Korea, China,Indonesia, Malaysia, Vietnam, and India have used externalprivate financing quite extensively in achieving higherinvestment and growth in recent decades. Bangladesh onthe other hand did not try to exploit this channel forsecuring additional financing effectively. Bangladesh publicand private sector have very little presence in theinternational capital market except some foreign currencydenominated borrowing by some private and public sectorentities. Bangladesh has not issued any sovereign bonddespite favorable external environment, and Bangladesh


30

corporate sector has very limited exposure to theinternational capital market through issuance of bonds orborrowing from other sources.

The limited access has also limited private sectors ability toaccess funds from the cheapest sources and underminedtheir competitiveness by increasing their cost of doingbusiness. As discussed earlier, the higher domestic interestrates are partly attributable to the lack of competition andinefficiencies in the domestic financial system in anenvironment of captive/closed market. Like every othermarket price of capital would ultimately depend on supplyand demand for capital in the financial sector. Increasedfunds made available for lending would contribute to lowerinterest rates and increased portfolio investment fromabroad would contribute to support equity/stock prices andenhance market discipline and performance.

What Kind of Risks and Rewards this Type of LendingPoses for the Various Actors

Bangladesh Bank has to be aware of the potential risks ofliberalizing external sector borrowing. Most importantly,the default risk in foreign loans always has to be kept understrict observation to prevent crisis of confidence. The mainthing that all actors need to be aware of is the risk offinancial liberalization leading to a financial crisis,somewhat like the Asian Crisis of 1997.

Many developing and transition countries opened upfinancially by the early 1990s and became "emergingmarkets" attracting foreign loans and investments. Indeveloping East Asia, short-term commercial bank loanswere the dominant form of capital inflow (Asian securitiesmarkets were underdeveloped). At first, this causeddomestic booms and asset market inflation. But later, as themarket sentiment turned for the worse and foreigninvestors pulled their money out, the balance of paymentscame under a severe pressure. Speculative attacks rapidlydepreciated Asian currencies, and the illiquidity problem--inability to rollover the short-term bank loans since foreignbanks demanded immediate repayment--occurred. Thedomestic banking sector froze up and domestic demand fellsharply, causing a serious recession that lasted for one totwo years.

This macro shock was amplified by the balance-sheetvulnerability caused by the weaknesses of Asian banks,nonbanks and corporations. Firms in developing East Asiawere highly dependent on indirect finance such as bankloans for working and investment capital and had high

debt/equity ratios. Moreover, the local banks and nonbankswere exposed to two kinds of balance-sheet mismatches.They borrowed in USD and lent to domestic projects in localcurrency (currency mismatch). In addition, they borrowed inshort term loans but lent to long-term domestic projects(maturity mismatch). When the currency depreciationbegan, the balance sheets of these financial institutionswere immediately hit and bad debt increased. Whenforeigners demanded repayment, they had no foreign cash.This started as a liquidity problem, but as the crisisdeepened, it created insolvency as well.

The Asian crisis was primarily caused by the wrong speedand sequencing of external financial liberalization.Countries liberalized capital accounts too quickly andwithout preparation, which caused over-borrowing by theprivate sector and asset price bubbles. Furthermore, thegovernments did not properly monitor what washappening or unwilling to stem the inflows. The lessontherefore is that countries must open up their financialsector gradually and in the right order/sequence. The paceof financial liberalization must match the pace ofstrengthening of the domestic financial sector and themonitoring capability. The government must make utmosteffort to improve domestic banks and securities. It isimportant to note that Bangladesh’s corporate bankingsector is still at early stage of its learning process andtherefore, it will take some time to come up to the desiredform. Large scale liberalization would be dangerous andirresponsible.

China, India, Vietnam, Myanmar and Cambodia were notaffected by the Asian crisis as much as Korea and ASEANeconomies (Thailand, Indonesia, the Philippines, andMalaysia). This was not because productivity and financialinstitutions of the first group were superior. In many ways,their domestic systems were much worse than Korea or theASEAN Four. They were not directly hit because they didnot open up financially at that time.

D. Key Findings and Policy Recommendations

Key Findings

Bangladesh has just started its journey to accessinternational capital market by allowing residentcorporations to borrow abroad in foreign currency terms ona case by case basis. Most other emerging economies inAsia and Latin America are way ahead of Bangladesh interms of integration with the international capital market.With strengthened BOP—as reflected through surplus


31

external current account and overall balances in most of theyears—Bangladesh has gained the capacity to liberalize itscapital accounts both in terms of inflows and in selectedcases for outflows.

Recent experience with foreign currency borrowing hasbeen generally favorable and has contributed to loweringof the domestic interest rate structure. Although $5.5 billionworth of loans have been approved by the High PoweredCommittee Chaired by the Governor of Bangladesh Banksince 2008, the outstanding stock of such debt is only about$2 billion, slightly over 1% of GDP or less than 4% of exportand remittance receipts. In most other comparatorcountries the corresponding figures are several timeshigher than Bangladesh, and accordingly Bangladesh hasthe capacity to go a long way in terms of foreign borrowingto support domestic investment, including infrastructuredevelopment. Bangladesh Bank should continue with itsmonitoring mechanism to avoid any bulging of paymentsto external creditors.

Recommendations

The linkage with international capital marketshould be deepened further in order to attaingreater access to foreign financing at lower interestrates. As is the case currently, the initial emphasisshould on policies which would facilitate enhancedmarket access for Bangladeshi investors and issuesrelated to outflow should be considered in aproperly sequenced manner.

Establish an automatic approval process forloans up to a certain limit. Given the positiveoutcomes so far, it would be desirable thatBangladesh Government like its Indian counterpartconsiders a two track approach for approval ofrequest for foreign loans: an automatic window forborrowing up to a certain limit; and for higheramounts approval on the basis of current case bycase approach.

Fight against inflation must be intensified anddomestic inflation should be brought down to lessthan 5%. Bangladesh interest rate structure willnever come close to the dollar or Euro interest ratestructures as long as Bangladesh inflation remainssignificantly above the inflation rates of its majortrading partners. The only sustainable approach toreduce the spread over industrial country interestrates would require a steady reduction of thedomestic inflation rate and bring that closer to theinflation rates of industrial countries. The best

example of this is China with inflation rates rangingbetween 2%-3% and more recently the anti-inflation stance of the RBI (which helped bringdown inflation to 4+% from very high levels.

Exchange rate stability is paramount for deepercapital market integration. Exchange ratestability, which entails a corresponding reductionin exchange rate risk, is an important preconditionfor the private sector to be able to borrow fromabroad in foreign currency. The reduced exchangerisk would encourage foreign lenders and investorsto lend and invest in Bangladesh. As long asBangladesh inflation remains significantly abovethe inflation rates of its major trading partners,there is no way that Bangladesh Bank can preventan appreciation of the REER and an eventualdepreciation of the nominal exchange rate.

More clarity is needed in the regulations forhedging against exchange and interest raterisks. For large investors hedging is veryimportant, and without proper exchange rate andinterest rate hedging they are not like to invest inBangladesh. Currently some aspects of regulationsgoverning hedging are subject to differentinterpretations, particularly with respect to theunderlying transaction (such as anticipatory orcurrent contract). Exchange rate hedging forforeign currency denominated borrowing is hardlyapplied in Bangladesh, whereas in India it ismandatory.

Tax treatment of return on investment needsmuch more clarity. Return on investment may ormay not be subject to taxation and the applicablerates or exemption status (as appropriate) needs tobe very clearly specified. Provisions of bilateralavoidance of double taxation treaties also need tobe clearly spelled out for investors to be assuredabout their post-tax investment return.

Capital account liberalization must be steady,properly sequenced and non-reversible.Bangladesh has a long way to go in its futuremarch toward a more liberal capital accountregime. The liberalization process should becarefully sequenced, closely monitored, and thechanges should be irreversible. Every emergingeconomy has travelled through the liberalizationprocess that Bangladesh needs to travel.Bangladesh cannot fall much behind itscomparators and deprive its private sector thebenefits of lower interest rates, exchange ratestability and price stability through lower inflation.


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Annex 3.1

Table 1: Comparison of Bangladesh Capital Account Regime with China and India

Type ofCapital

TransactionBangladesh China India

FDI-Inflow Foreign investors are free to make investmentin Bangladesh excepting a few reserve sectors2,There is no ceiling on percentage of equity to beheld by foreign investors. There is no upperlimit/ceiling/cap of FDI by foreign investors.There is no mandatory holding period forforeign investors.FDIs may be in the form of inward remittancefrom abroad through banking channel or bybringing capital machinery from abroad by theforeign investor, payment of which must bemade from abroad. Reinvestment of reptariabledividend/profit of foreign investor considered asinvestment also.

Only foreign investors ingood standing may investin excess of 10 percent ofthe company’s shares up tothe limits determined forthe specific sector. A three-year mandatory holdingperiod applies for thoseforeign strategic investors.

FDI is allowed under two routes:automatic route and governmentapproval route. In several sectors,investment up to 100 percent is attowed, while a few other sectors havesector-specific caps and guidelines.There are 10 sectors in which FDI isprohibited.

FDI-Outflow Sales proceeds of shares are freely remittable ifthe company is listed with any stock exchange;otherwise requires prior permission fromBangladesh Bank.Residents (individual/corporate) are not allowedto invest abroad

Companies may purchaseand transfer foreignexchange for outward FDIsubject to registration onlyand they can also userenminbi in countriesthat accept suchsettlement.

Indian companies and registeredpartnerships may invest up to 400percent of their net worth withoutapproval. The ceiling, however, is notapplicable where the investment ismade out of balances held inExchange Earners' foreign Currencyaccount or out of funds raisedthrough ADRs/GDRs. Lower huntsand additional conditions apply tounregistered partnership andproprietorship firms.

PortfolioEquityInvestments-Inflow

Nonresident person/institutions including NRBsmay buy Bangladeshi shares and securities inBangladesh against freely convertible currencyremitted from abroad through banking channel.Transactions relating to such investmentsincluding repatriation of dividend/interestearnings and sale proceeds are made through aNon-resident Investor’s Taka Account (NITA)according to the procedure described in Para24, Chapter 14, of the ‘Guidelines for ForeignExchange Transactions 2009 (Vol-1). Like FDI,there is no cap on investment either in the formof percentage of total ownership or totalamount.

Only QFlls may invest in “A”shares. Investments aresubject to caps on foreignownership in Chinese listedcompanies (10 percent ofthe shares of the companyfor a single foreign investor20 percent for all foreigninvestors). Every QFII has itsown quota limit to invest indomestic securities. Amandatory principal lock-inperiod of 3 months or 1year applies depending onthe type of QFII. Othertransfers, such as principalinjections, repatriations

Registered FIIs, such as pension funds,mutual funds, investment trusts,university funds, endowments,charitable trusts, and charitablesocieties are allowed to invest inequity. The ceiling for overallinvestment for FIIs is 24 percent of thepaid up capital of the Indiancompany, which can be raised up tothe sectoral cap/statutory ceiling,subject to the approval of the boardand the general body of the companypassing a special resolution to thateffect. The limit is 20 percent of thepaid up capital in the case of’ publicsector banks.

2 Investments in four sectors are restricted, seventeen sectors are controlled (Industrial Policy, 2010).


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Type ofCapital


and remitting revenues, aresubject to StateAdministration of ForeignExchange approval.

Foreign investors,including institutions andindividuals, can also investin “B” shares subject toforeign exchangemanagementrequirements.

Nonresident Indians (NRIs), andPersons of Indian Origin (PIOs) arealso allowed to invest in equity with alimit of 10 percent of the paid upcapital of the Indian company, whichcan be raised to 24 percent subject tothe approval of the general body ofthe company passing a resolution tothat effect. Holders of OverseasCitizenship of India certificates havethe samerights to invest in India as NRIs(except to invest in agricultural landor plantations).

The ceiling for FIIs is independent ofthe ceiling for NRIs/PIOs. However,there is no overall limit on suchinvestments.

PortfolioEquity

Investments-Outflow

Proceeds from sales, including capital gains anddividends earned on sjares/securities purchasedin Bangladesh, may be remitted abroad in freelyconvertible currency through NITA ibid.

Only QDIIs may invest inequities abroad withintheir respective purchaseand foreign exchangequotas and regulatorylimits.

The overall limit on residents’investments in companies listedabroad is US$200,000 a year. Residentcorporations may invest up to 50percent of their net worth in shares oflisted companies abroad.Indian Mutual Funds are permitted toinvest within an overall cap of US$ 7billion.

Portfolio BondInvestments-

Inflow

Foreign investors are allowed to invest intreasury bonds issued by Bangladesh Govt. Theymay also buy debt securities listed on the stockexchange. Issuance of bond abroad bycorporate/selling of debt securities to non-residents (without listing those on the stockexchange) is subject to prior approval ofScrutiny Committee, BOI.

Only QFIIs may invest inthose bonds and similarsecurities traded onstock exchanges. Foreignbanks engaged in cross-border trade settlements inrenminbi, Hong Kong SAR,and Macao SAR renminbiclearing banks, and foreigncentral banks andmonetary authorities mayinvest in the inter-bankbond market with renminbisubject to limits, but thereis no minimum holdingperiod.

Registered FIIs may invest in debtsecurities issued by Indiancorporate with an additional limit ofUS$20 billion, with an additional limitof US$25 billion in infrastructurebonds and a US$ 1 5 billion limit ongovernment securities. Infrastructurebonds are subject to mandatoryholding periods. Different limits applyto NRIs.

Portfolio BondInvestments-

Outflow

Residents are not allowed to invest abroad tobuy bond or security.

QDIIs’ investments aresubject to overall ceilingsand regulatory limitson the type of security.

Only resident individuals may investin debt securities abroad subject to ayearly limit of US$200,000.

Investmentsin

the moneymarket-Inflow

Foreign investors are not allowed to invest inthe money market in Bangladesh.

Only QFIIs’ may invest inmoney market fundssubject to their prescribedminimum lock-in periods

Only NRIs may invest in moneymarket mutual funds.


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Type ofCapital


and limits, depending onthe type of QFII (see“Portfolio Equityinvestment” above).Additionally, Hong KongSAR, and Macao SARrenminbi clearing banks,and foreign central banksand monetary authoritiesmay invest with renminbiin the money marketsubject to limits, but thereis no minimum holdingperiod.

Investmentsin

the moneymarket-Outflow

Resident Bangladeshis are not allowed to investmoney market abroad.

Only QDIIs may invest inmoney market instrumentswithin their respectiveforeign exchange quotasand regulatory limits.

Residents may purchase theseinstruments abroad without ReserveDank of India approval according tothe prescribed norms.

Derivatives-Inflow

These transactions are not allowed. These transactions are notallowed.

These transactions are generallysubject to limits and approval.Hedging of nonresidents’investments in India is allowed.

Derivatives-Outflow

Very limited or not mentionable. ADs mayacquire hedging instruments abroad againstexchange rate risk on underlying tradetransactions of their customers. ADs may hedgethe price risk of commodities (traded onexchanges or OTC) of their customers throughstandard exchange-traded futures and optionsand OTC derivatives on commodities, subject toBB approval. The use of commodity derivativesis permitted when customers have genuineunderlying commodity-price risk exposure(s).However, since the introduction of this facilityfor Bangladeshi traders in 2006, only a very fewno of cases have been submitted to BB againstwhich permission were accorded.

These transactions aregenerally subject toapproval and limits.

Commercial banks may purchasesuch instruments for their own assetand liability management. Residentcompanies may use derivatives tohedge commodity price and foreignexchange debt exposures.

Loans-Inflow Short term: Such credits are available for tradefinance (import) only in the form of eithersuppliers’ credit or buyers’ credit for import ofcertain items (mainly capital machinery andindustrial raw materials) for a maximum periodof 360 days for capital machinery and 180 daysfor industrial raw materials without prior BBapproval; 6% interest p.a.is allowed on suchtrade financing.Short term loan by banks: ADs may obtainshort-term and overdraft loans from overseasbranches and correspondents for a period notexceeding seven days at a time.Term borrowing abroad by corporate:

Short-term borrowing issubject to individual limits.Borrowing for maturities inexcess of one year issubject to approval. Loansto enterprises with foreignparticipation are limited tothe difference betweentotal investment andregistered capital. All loansmust be registered. Moregenerally, rules governingaccess to external loansvary according to different

External commercial borrowing isallowed through automatic andapproval route. External commercialborrowing through automatic route issubject to limits of US$20 million for aminimum three-year averagematurity and US$750 million for aminimum five-year average maturity.External commercial borrowingthrough approval route can be higherthan US$750 million. External loansare subject to an all-in-cost ceiling,which is adjusted occasionally, andalso end-use restrictions.


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Type ofCapital


Industrial enterprises may borrow funds fromabroad or make deferred payments for importsfor a period beyond 360 days, with prior BOIapproval.

criteria, including thesectors concerned (e.g.,Chinese-funded/foreign-funded institutions,financialinstitutions/enterprises)and instruments attachedto these borrowings.For instance, banks thatattach derivatives to theseloans (either buying orselling them) that tireissued abroad would comeunder the jurisdiction ofthe relevant authorities.

Loans-Outflow

Lending abroad by residents are not allowed. Lending abroad isgenerally subject toapproval. Banks may lendabroad in accordance withbanking regulations, aswell as other relevantregulations such ascompliance with rulesgoverning derivativestransactions.

Lending abroad is generally subjectto approval, except for certain tradecredits and lending to foreignsubsidiaries.

Domesticcurrency

accounts ofnonresidents-

Inflow

(i)Foreign missions and embassies and theirexpatriate personnel, foreign airlines andshipping companies, and internationalnonprofit organizations in Bangladesh mayopen interest-bearing convertible takaaccounts, but the interest earned may bedisbursed in local currency only. (ii)Takaaccounts of individuals, firms, or companiesresiding outside Bangladesh are designated asnonresident accounts. (iii) For portfolioinvestments in Bangladesh through the stockexchange, a nonresident may open anonresident investor’s taka account (NITA) withany AD with foreign exchange remitted fromabroad through normal banking channels orthrough transfer of funds from a foreignexchange account. Balances from the accountsmentioned in (i) & (iii) above are freelyremittable without prior BB approval. RecentlyBB has allowed remittance from the balance ofthe accounts mentioned in (ii) above with priorpermission from BB.

In addition to financialinstitutions in Hong KongSAR, non-resident nonbankinstitutions with renminbifrom trade transactionsmay deposit renminbi incorrespondent accountswith Chinese mainlandbanks. Limited tradefinancing is also allowedthrough the correspondentaccounts.

Only NRIs and nonresident PIOs maymaintain rupee accounts.

Repatriation/surrender

requirement-Outflow

Export proceeds must be repatriated withinfour months of shipments. Exporters must sell toADs 90% of the proceeds from exports of ready-made garments and other goods with highimport content and 50% of the proceeds from

Proceeds must be generallyrepatriated within 180 daysof exportation and may bedeposited with in foreignexchange domestic banks

Proceeds must be repatriated within12 months of shipment and may bedeposited in accounts with domesticbanks. These accounts ‹to not caninterest.


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Type ofCapital


exports of merchandise, computer dataentry/data processing, offshore IT services,software services, business process outsourcingservices (BPO) such as business services,professional/research, advisory services, etc.Retention level for RMG units is 10% of netexport proceed. However, RMG exporters/otherexporters operating under bonded warehousesystem, can meet their payment liabilities ofback to back (BTB) lc from the repatriated exportproceed without converting them into Taka.Suppose, USD 100 has been repatriated againstexport, BTB liability is USD 75. In this case, USD75 will be kept/used for making BTBliability, USD 10 (being 10% of 100) may beretained in the exporter's retention quotaaccount, remaining USD 15 shall have to be soldto bank against Taka.Besides, exporters whose imports are not BTBbasis, are also allowed to retain their exportproceeds to meet import liabilities of inputprocurement for maximum thirty days.Moreover, retention levels for the units ofEPZ are 100% for Type-A, 80% for Type B&C(non-RMG), 75% for Type B&C (RMG).

or abroad. The conditionsfor depositing abroad areregulated based on thebalance of payments statusand foreign exchangemanagement needs.


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IV."Regulatory and Institutional Issues in Land Titling and RegisteringProperties – towards a more efficient land market”

G.M. Khurshid Alam

A. Background

Land inequality remains a problem in Bangladesh and isexacerbated by elite land grabs and the inadequatecapacity to execute legislation on land ownership ceilings.The land situation in Bangladesh is marked by three majorcharacteristics: (i) very high population density and anadverse land-man ratio, (ii) land reforms at different times(See Table in Annex 4.1 for a list of the reforms) (iii) Quite ahigh percentage of total population are marginal and smallfarmers and landless laborers, as well as urban landless. Itis well articulated that Bangladesh will be facing twoenormous challenges in the coming decades: food securityand climate change3. However, while these challenges areenormous, it is further aggravated by the challenges ofproviding housing for a large and growing youngpopulation and creating jobs for them, which by allcalculations, will have to primarily come from industry,services and other off-farm activities. These challenges areconstrained by availability of limited quantity of land, andso there are policy, institutional, and regulatory challengesthat will have to be overcome to help optimum use of landgiven the above four pronged challenge that the countrywill face. So at the heart of it are land governance and thepolicies, regulations and institutions linked to it.

B. Land Governance

Land governance refers to institutional and legal systemsand procedures on ownership, use and transaction of land.Before getting into the regulatory issues, there needs to bea better understanding on the roles and responsibilities ofthe public institutions governing the land sector. This willpave the way to unbundling of the issues relating to thefunctioning of the land market and the regulatory andinstitutional impediments there. For land markets tooperate efficiently there needs to be a legal andinstitutional framework that clearly defines the rules forallocation of property rights and, by allowing cost-effectiveenforcement, encourages and facilitates land-related

3USAID Country Profile, Bangladesh, Property Rights and ResourceGovernance

investment.4 Besides, there should also be reliable andcomplete information on land and property right, whichshould be made easily available to interested parties.Access to land information would then allow for low-costverification of land-ownership status, which in turn wouldform the basis for low-cost land transfers to moreproductive use or users and may facilitate the use ofproperty as collateral in financial markets.

While Bangladesh has long had the legal and institutionalframework with rules for allocation of property rights, it isthe processes (which makes access to information difficult),and inadequate transparency in the enforcement andapplication of processes that are causing the different landrelated problems. In fact a majority of the civil and criminalcases in different courts has its roots in land rights. Landgovernance is caught up with social, economic, andpolitical power in Bangladesh. Moreover, land rights areinsecure in large measure because of a not so efficient butexpensive, and corruption-prone system of land titling andregistration5. Access to land is inequitable. In rural areas89% of landowners own less than 1 hectare and thirty-ninepercent have less than 0.2 hectares. The number of landlesshouseholds is growing6. With such high numbers ofmarginal holdings makes the poor people owning thoselands susceptible to land grabs by the influential, and alsonot being able to adequately participate in the land marketbecause of non-transparency involved in differentregulatory processes. Since the poor lack other assets,access to land is more important to them and better landgovernance could help them.

Weak governance of the land sector and a failure to performthese functions effectively will, therefore, negatively affectdevelopment by reducing investment levels, propertytransfers, financial sector activity, and the scope formeaningful decentralization. This policy brief will examinethe different regulatory and institutional challenges arisingfrom land governance related constraints and in the process

4 World Bank LGAF work5(GOB BS 2008; Uddin and Haque 2009; USAID 2010; ADB 2004c; IMF 2005;ANGOC 2001; USAID, 2010)6(USAID, 2010)


38

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affecting efficient functioning of the land market, and suggestremedial measures that could in the medium and long runhelp better ensure property rights through a more transparentregulatory process.

C. Land Related Laws and Regulations

Some of the key land-related legislation includes: Transferof Property Act of 1882; Registration Act 1908; NonAgricultural Tenancy Act of 1947; State Acquisition andTenancy Act of 1950; Acquisition of Waste Land Act of 1950;Bangladesh Land Holding Limitation Order of 1972; LandReforms Ordinance of 1984; Land Reform Board Act of 1989.(see Table at Annex 4.1 for all the important land relatedlegislation and regulations, and other actions since 1950).

The State Acquisition and Tenancy Act of 1950 established a33-acre land ceiling on private landowners, and the LandReforms Ordinance of 1984 placed a 21-acre ceiling onacquisition or holding of agricultural land and invalidatedbenami transactions, in which a person purchases land inthe name of another so as to evade the land ceiling. Neitherland ceiling law has been widely implemented7.

The government also adopted a National Land Use Policy in2001, which sets forth guidelines for improved land-use andzoning regulations. Issued by the Ministry of Land, thisdocument recommends: (1) stopping the high conversionrate of agricultural land to non-agricultural purposes; (2)utilizing agro-ecological zones to determine maximumland-use efficiency; (3) adopting measures to discouragethe conversion of agricultural land for urban ordevelopment purposes; and (4) improving theenvironmental sustainability of land-use practices. In a 2004Actionable Policy Brief, the government acknowledgeddifficulties in implementing the National Land Use Policy,which it attributed to the dispersion of land administrationauthority among many different ministries (GOB MOA2006). However, as evident from the land use policy it wasmore looking at preserving the characteristics of agricultureland. Given the competing demand for industry, urbanization,and infrastructure these need to be factored in policy designand also properly synchronize with other policies on industry,economic zones, urban sector growth, road and rail transportplans.

7(USAID, 2010)

D. Land Markets and Investments

Better land governance should lead to a more efficient landmarket that will allow even a poor person to effectivelyparticipate in it and not get cheated. Both rural and urbanland is scarce in Bangladesh, and land prices are rising.Land grabbing of both rural and urban land by domesticactors is a problem in Bangladesh. Wealthy and influentialpeople on public lands with false documents and obtainedcourt decrees to confirm their ownership, often with help ofofficials in land-administration and managementdepartments8. Among other examples, hundreds ofhousing companies in urban areas have started todemarcate their project area using pillars and signboardbefore receiving titles. They use local musclemen with gunsand occupy local administrations, including the police. Mostof the time, land owners feel obliged to sell their productiveresources to the companies at a price inferior to marketvalue. Sometimes, civil servants may be acting favorably tothese companies and receive some plot of land inexchange. According to the Land Minister’s statement of04.02.2010 in Parliament; total 1.3 million-acre public landhas been grabbed. The Land grabbing culture has beenincreasing because of non-transparent administration.9

Land in Bangladesh is owned either by private individualsand entities or the state. Individuals acquire ownership-rights to land through purchase, inheritance, or gift. Titlingand registration of land ownership is set out in the Transfer ofProperty Act 1882 and Registration Act of 1908. Procedures areexpensive and complex, as detailed in Tables and Figures laterin this paper. Under formal law, land sales, leases of a yearor more, and land received through inheritance must beregistered. Land registration requires 8 procedures and anaverage of 244 days to complete. The total cost of thetransaction averages 7.2% of the value of the property.However, the registration process is cumbersome andexpensive which impede formal-sector land transactions, asgovernment approvals are necessary at various levels, thoseseeking such approvals are subject to demands for bribes.Of course government also has legal process for acquiringland for public use. Article 42 of Bangladesh’s Constitutionprovides that land can be acquired, nationalized, orrequisitioned upon authority of law and withcompensation. The Acquisition and Requisition ofImmovable Property Ordinance, 1982, permits governmentland-acquisitions as needed for any public purpose. Here

8Uddin and Haque 2009, Feldman and Geisler 20119Source: Bangladesh Land Governance Fact Sheet


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the compensation is linked to the price in the market.

1. Inadequate Land Governance a Constraint forHigher levels of Investments.

Inadequate land governance leads to insecure title to land,which prevents people from taking full advantage of theproductive uses of the land. Where people have proper titleto their land, however, they can use the property ascollateral for a loan or transfer land parcels in which theyhave invested10. And titles can serve as a valuable insuranceand savings tool for families, providing protection duringdifficult times and in retirement. Indeed, with theprotection of secure title guaranteed by a reliable landregistration system, land can be used to create wealth forthe broader benefit of society and contribute to theeradication of poverty. In many economies land andbuildings could account for between half and three-quarters of the wealth and so having a reliable system forregistering and transferring property titles matters.Because of the lack of transparency and also havingmultiple agencies responsible for administering differentaspect of land property rights creates difficulty inregistering properties in Bangladesh; and so Bangladeshcontinues to perform poorly in this index of Doing Business(see Table below).

Bangladesh has overall ranking of 173 in the Doing Businessindicators for 2015, and that for Registering Properties itsrank is 184. As evident from the Table 4.1 below,Bangladesh does poorly even comparing to other SouthAsian countries with similar legislative and regulatoryprocesses. So Bangladesh has scope for improvement inthis front. Since efficient administration of property rightsare important for higher investments, economiesworldwide have been making it easier for entrepreneurs toregister and transfer property— such as by computerizingland registries, introducing time limits for procedures andsetting low fixed fees. Many have cut the time requiredsubstantially— enabling buyers to use or mortgage theirproperty earlier11.

10 Doing Business 201511 Doing Business 2015

Table 4.1: Doing Business 2015 – Comparison ofRankings on Ease of Registering Property

Indi

cato

r

Bang

lade

sh

DB2

015

Bang

lade

sh

DB2

014

Indi

aD

B201

5

Paki

stan

DB2

015

Sri L

anka

DB2

015

UK

DB2

015

RegisteringProperty(Rank)

184 183 121 114 131 68

Procedures(number)

8 8 7 6 9 6

Time (days) 244 244 47 50 51 21.5Cost (% ofpropertyvalue)

7.2 7.2 7 7.6 5.1 4.6

Source: Doing Business 2015

The Registering of Property index of Doing Business onlylook at one part of land governance - the Registrationprocess. In case of Bangladesh, that falls under thejurisdiction of Ministry of Law and Justice (MOLJ). However,a very important part is land tile and record of rights andthe cadastral survey for periodic update on the ownership,maps, and use of land, which fall under the jurisdiction ofthe Ministry of Land (MOL). To understand the full extent ofregulatory and institutional challenges it will be importantto understand the working and jurisdiction of each of theseinstitutions.

E. Land Administration and Institutions

The Ministry of Lands (MOL) is entrusted with landadministration and management, settlement of thegovernment-owned lands (khas), and vested andabandoned properties. The Ministry is responsible for landacquisition, collection of land development tax, and landsurveys, and is responsible for record-keeping, overseeingland-use planning, implementing land reforms, andmanaging government land development programs.

While overall land administration and management is therealm of the MOL, only property transfer throughregistration is under the jurisdiction of the MOLJ. TheDepartment of Registration in the MOLJ records landtransactions (through the Sub-Registrar’s Offices across thecountry) and collects the Immovable Property Transfer Tax.

It should be noted that are few other Ministries and theiragencies which also has land governance issues – theMinistry of Forest and its agency dealing with forest land,the Ministry of Fisheries dealing with water bodies, theMinistry of Works through its agencies like RAJUK, CDAdealing with urban land, and the Ministry of Roads and


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Highways with land along the roads. However, for this briefwe will only focus on areas of land titling and land registrationand the institutions and regulations therewith.

The Structure of Ministry of Land: The MOL have fourAgencies; (i) Land Administration through the FieldAdministration under Divisional and DeputyCommissioners, (ii) Land Appeal Board, (iii) Land ReformBoard and (iv) Directorate of Land Record & Survey (DLRS).

I. The Land Administration part is responsible forrecord keeping and updating, protection of publicland-water bodies, Khas and water bodymanagement. It also deals with land tax fixationand collection, land transfers and land acquisitionfor public interest. It leases out public land andwater body for limited year, is in charge ofimplementing the sharecropping law, andidentifying alluvial or dilluvial land.

II. The Land Appeal Board is mainly responsible forresolving cases which had judgment by AC (land),ADC (Revenue) and Assistant Commissioner(Revenue). After the judgment of the Appeal Board,people could appeal at the judge court (under LawMinistry), which is the first step of judicialprocedure. The Land Appeal Board has to resolveissues of tax fixation, mutation or records updateand ownership settlement.

III. The Land Reform Board is mainly responsible formonitoring law implementation processes,facilitating study or collecting citizens’ demand onany reform related to land management oradministration. Accordingly the Board makessuggestions, recommendations or proposesalternative laws and sends them to the LandMinistry. Accordingly, the Ministry takes theinitiative to reform issues.

IV. DLRS mainly responsible to prepare map & recordsaccording to the position/possession anddocuments. According to the manual, theyconcentrate more on position/possession thendocuments. DLRS do not correctposition/possession and documents but only doesprepare new map and records accordingly.Bangladesh is a museum of manual land recordsystem; DLRS is still using tools from the lastdecades; digitization of land record has beenintroduced only at very small scale and the processis very slow. Only 2 sub-districts have yet beencompleted.

The Land Administration and Registration OrganizationStructure in Figure 4.1 below (also see the Figure at Annex4.3) is a good starting point to understand the complexityof land administration and the challenges to governance.


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Figure 4.1: Creating and Maintaining Land Records at Sub-national level: Key Roles, Reporting Lines and Supervision

Director of surveys(MOL)

SettlementOfficer

AssistantSettlement Officer

Surveyor (amin)**

Director of LandRecords (MOL)

Land ReformsBoard (MOL)

Deputy Commissioner (DC) (ChiefRevenue Officer)

Additional DC (revenue)

Revenue DeputyCollector

Assistant Commissioner Land

Revenue Collector (tehsildar)

RegistrationDepartment (MLJPA)

Inspector GeneralInspectors

Registrar

Sub-registrar

Commissioner

Additional Commissioner

** Surveyors (amin) only exist where survey is taking place, not in alllocations

Reporting Supervision Informing


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SettlementOfficer


Surveyor (amin)**










Registrar

Sub-registrar

Commissioner





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41



SettlementOfficer


Surveyor (amin)**










Registrar

Sub-registrar

Commissioner





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Regulatory maze aggravated by institutionalcomplexity.

It is evident from the above schematic chart (Fig 1 above)that the land administration moves in a parallel way amongthree institutions – the Director of Surveys though theSettlement Officer, the Director of land records thoroughDeputy Commissioner and Assistant Commissioner (ACLand), and Inspector General of Registration through theDistrict Registrar and the Sub-Registrar. Land related

complications arise because the Land records maybeupdated: (i) as a result of land surveys (via the SettlementOfficer); (ii) (via the sub-registrars office) registering ofdeeds of sale; and (iii) through in heritance (through ACland office). The process of updating land records is shownin Figure 4.2 below. Each of this units have there own timeframe of completing their individual tasks, which can be acause for lack of adequate transparency when dealing withthe citizen.

Figure 4.2: Updating of Land Records

1. New maps andkhatians sent from

DLRS after completionof a land Settlement

Survey

2. Notification oftransfer by sub-

registrar

Records held by ACland at Upazilla andTehsildar at Union

level

3. Application byinheritor

Can be delayed by 10-15 yearsand be seriously out of date

May be delayed by several months,illegible and/or not acted upon byAC (Land)

Inheritor may notunderstandsystem and fail toapply for a hearing


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The issues can be further unbundled by analyzing theprocesses involved in land transfer and those in updatingthe land titles, both of which are linked; and the outcomesare dependent on how well coordinated is the functioningamong each of the three institutions. Each can easily proveproblematic because besides time required in each of theprocesses, among the three there is only informationsharing mechanism, and accountability is only verticallyestablished in each of the three departments. The diversityof ways in which land records maybe updated, and theproblems associated with each give rise to numerousdisputes and also proliferation of land related civil andcriminal cases, in which the rich and powerful inevitablyenjoy the upper hand.

Land Transfer and the Land Registration Process andthe official Costs involved.

Land Transfer is undertaken through a process by which theland gets registered and the registration document getshanded over to the new owner. The Table 4.2 below liststhe steps and costs of registration for Bangladesh (also seeFigure in Annex 4.3). There are eight steps and total of 244days to complete the registration process. While thenumber of steps is comparable with other countries, the bigdifference is in the number of days it takes to complete theprocess even compared to India, Pakistan, and Sri Lanka,and so has scope for improvement. However, the cost aspercentage of the value would probably be much lower asthe full value of the property is not reflected in theregistered deeds. So there are policy and regulatorychallenges in this aspect especially from transparency pointof view.


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Table 4.2: Summary of time, cost and procedures for registering property in Bangladesh

No. Procedure Time to Complete Cost to Complete1. Verify the record of rights from the Land Office (also known as

Land Revenue Office)"Parties check that land tax payments are up to date. The LandAdministration system in Bangladesh separates Records of Ownershipand Records on Revenue as such: (a) Land Records Office for landrecords, surveys, publication and maintenance of records under theDirectorate of land records and survey (Ministry of Land). (b) LandOfficeor Land Revenue Office under Ministry of Land. There are 11administrative offices in each upazila (sub district) (c) There are 64districts in Bangladesh but 61 registration districts. 3 hill districts donot have registration centers. In Dhaka, the district land registrationoffice has 13 sub-registrar offices under the Ministry of Law."Agency: Land Office or Land Revenue Office

30 days(simultaneouswith procedures 2 and 3)

BDT 3,000-6,000

2. * Conduct BS Mutation on propertyAgency: Assistant Commissioner of Lands (Tahsil)

30 days(Simultaneouswith procedures 1 and 3)

BDT 15000

3. * Obtain inspection for BS MutationAgency: Assistant Commissioner of Lands (Tahsil)

30 days(Simultaneous withprocedures 1 and 2)

BDT 15000

4. Obtain the non-encumbrance certificate from the relevant Sub-registry office.Agency: Sub-registry and Land Revenue Office

30 days BDT 2500

5. Prepare deed of transfer and pay stamp duty"A lawyer may prepare the transfer deed, but it can be prepared bythe parties themselves. If a lawyer does it, the fees will be around BDT6,000. The deed must be prepared in stamped paper that will cost 3%of the property value to get it. This represents the stamp duty."Agency: Registry Office and Designated Bank

1 day 3% of propertyvalue (Stamp duty)

6. Pay capital gains tax, registration fee, VAT and other taxes at adesignated bank"Registration fee = 2% Local Government Tax = 1% The 2%registration fee is payable to the Bank in favor of the sub-registryoffice and the receipt is to be presented at the moment of applyingfor registration. Also, Capital Gains Tax = 2% (Not applicable in ruralareas for agriculture. Applicable to land above 100 000 Takas,irrespective of when the transfer was made) and VAT = 1.5%(Applicable only for municipal corporation area payable by privatehousing and flat developers an commercial businesses) have to bepaid at this stage."Agency: Designated Bank

1 day Municipal tax (3%)+ registration fee(2%) of propertyvalue

7. Apply for registration at the relevant Sub-registry"The buyer applies for registration at the Municipal Deed RegistryOffice, presenting the receipts of payment for the registration feesobtained in Procedure 6. A certified registration document isobtained within a week for the buyer’s record. The original saledeed/certificate requires about 6 months to be obtained."Agency: Municipal Deed Registry Office

180 days(Simultaneouswith procedure 8)

Already paid inProcedure 6

8. * Register the change in ownership at the Land Revenue OfficeThe change of ownership must be registered in the Land RevenueOffice. The property is recorded under the name of the new owner,who is responsible for paying the land taxes from the day it istransferred.Agency: Land Revenue Office

60-90 days(Simultaneouswith procedure 7)

BDT 5,000

*Takes place simultaneously with another procedure.Note: Online procedures account for 0.5 days in the total time calculation.Source: Doing Business database 2015.


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While the Registration process apparently has clearly laidout steps, the problem is within those steps, and as a result itbecomes very difficult for the average citizen to navigatethrough those maze of steps and processes without thesupport of intermediaries, which also leads to informalpayments. The Doing Business indicators log this process –the number of steps, the time taken and the costs (seeTable 4.2 above). The land transfer process (also see Figurein Annex 4.3) involves the necessity of the buyer tocrosscheck the authenticity of title with AC Land officebefore registration of transfer. The Registration processcould become faster if the AC Land/Tehsil office workbecame better synchronized with the Registration work.But in reality as noted in the Care Report the followingcould happen:

"Some transfers occur on an entirely unofficialbasis, perhaps when land is mortgaged, but this isbecoming less common.

Some buyers may not try to check the AC recordsfirst…

and even if they do, these may well not be up todate.

The deed writers and Sub-Registrar collude toensure that this step only proceeds if a bribe is paidfirst, whilst the buyer and seller may also collude toreduce the amount of Immovable Property

Transfer Tax (IPTT). There is no requirement tocheck the legality of the transaction and it is notuncommon for the same plot to be “sold” toseveral different buyers, although this is muchmore frequent in urban areas

Once the transfer is registered the authorized deedis supposed to be issued within a month, butfrequently takes a year and the payment of a bribe.

Once the transfer is registered the land transferrecord is supposed to be sent to the AC Land officeimmediately, but is also subject to delays of severalmonths. Notifications are frequently illegible.

The AC (Land) generally does not update therecord unless informal payments are made.

Land Survey. Land survey is an important ingredient inupdating of land records as evident from Figure 4.1 and 4.2above. The survey, which leads to Settlement, is seen as atemporary process where only certain parts of the countryare covered at particular points of time. The Table 4.3below shows time span of a typical land survey along withadministrative responsibility and completion rate at eachstage. It could very well take 15 years to complete in onepart of the country.

Table 4.3: Land Surveys, Coverage, administrative responsibility and rate of completion

Level Operating in1997 (a)

Span ofcontrol (b)

Averagecoverage

Personsresponsible

(c)

Average rateof work

Zone 12

209

1150

(17-18)

(5-6)

2-3districts

125squaremiles

1.33squaremiles

Zonal SettlementOfficer (ZSO)

Assistant SettlementOfficer (ASO)

Amin+2chainmen

12-15years tocomplete

5-10years tocomplete

1.5perseason

Upazilla

Mouza

Source: CARE Report

(a) Settlementisseenasatemporaryprocesswhereonlycertainpartsofthecountryarecoveredat particular points of time.

(b) The average number of Upazill as per Zone and Mouzas (Revenue Villages) per Upazilla.

(c) FordetailsofresponsibilitiesseeFigure4above.


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The steps involved in the process are listed below in Table4.4. A very important regulatory process is preparingkhatian (record of rights)- t h e form g i v i n g p l o tn u m b e r s -, t h e khatian number, classification of land(that affects land revenue), area, crops grown, name ofowner, agricultural practices along with a mouza map. Thisis done through periodic cadastral surveys. As evident fromthe Table 4.4 below, this cadastral survey administered byDirectorate of Land Records and Surveys (DLRS) itself couldtake 15 years to finish, and by the time it gets completedlot of the land features may change, especially in riverineareas and major urban centers where frequent changes ofownership take place. The time required in each step ofthe survey at a particular location is shown in Table 4.4below. The cadastral survey starts with creating the initialmaps by very low paid, low-level temporary employee, theAmin.

The Tables 4.4 and 4.5 below and the two Figures (Fig 4.1and 4.2) above on the land title and transfer process clearlyspell out the regulatory challenges affecting landgovernance. It is difficult for any average citizen to fullyunderstand and navigate through this maze, and takingadvantage of such non-transparency arising from

complexity of processes the citizen has to depend oninformal intermediaries, and also it provides scope forproducing fake documents. The Table 4.4 also highlightsthe institutional and governance challenges facing thecritical survey part of land administration. For example, theAmin has to depend on boarding and lodging with someinfluential people in the village which runs the high riskcomprise the authenticity of maps and draft of the khatians.

The survey process and the appeal process are themselvesalso lengthy. The survey process itself could take anywherebetween 6 months to 2 years, depending on whether a re-survey is ordered. There is definitely scope forimprovement here if necessary regulatory steps andinstitutional changes are brought in backed up by use oftechnology. Similarly the scope for reducing Appeal timeand steps needs to be looked into. There is process forreview and rectification but the appeal process could take along time and also costly. Where a decision relating to therecording of land title is disputed, the appeals processstarts at the lowest rung of the ladder represented inTable 4.5 and then moves progressively upwards until theappell ants and other interested partiesither accept thejudgment given or lack there sources to proceed further.


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Table 4.4: The land survey process

No. StepsTimeTaken

1

3 – 4months

2

3

4

From 6months to

2 years

5

6 1 month

7 6 months

8 6 months

9More than

10 years

10

Survey (kistwar) and mapping

Byamin & 2 chainmen

Preliminary record (khanapuri)writing by amin

Local explanation(bujharati) byamin

Attestation (tasdik)

Draft publication of Khatian byamin

Re-survey may beordered

Hearing of objections byASO? Kanungo?

Appeal to ACR or TNO & ZSO

Final checking (janch) by amin

DLRS prints map and ZSO printskhatian

Records handed over to Upazillaand Union

40% 10%

80% 30%


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Table 4.4 (Continued)

Explanation of procedure Potential problems arising1. Cadastral survey (kistwar)

Aminand2chainmentodrawrevisedmouzamap showingchanges in area, location and characteristics of land

Followed by demarcation of boundaries

These are temporary junior staff. Insecurityand low pay affect morale, performance,accuracy and reliability

They have to depend on the local elite forboard and lodging during season and arethus open to their influence

2. Preliminary record writing (khanapuri) Display of notices and beating of drums summons owners,

neighbors and interested parties to khanapuri at which eachclaimant presents their case

Amin fills up the columns of the khatian (record of rights) formgiving plot number, khatians number, classification ofland(that affects land revenue), area, crops grown, name ofowner, agricultural practices

Khatian also officially contains information on tenancy since1984 Land Reform

Poorly paid field workers are againsusceptible to bribery here

In practise tenancy is rarely recordedbecause of pressure from the rich

3. Local explanation (bujharat)

Amin hands draft khatian over to the “owner” and entries areexplained

4. Attestation (tasdik)

Tehsildar, assisted by clerk, hears from each owner, listens toany disputes and, if satisfied, attests the khatian by signing it inred.

Otherwise are-survey maybe ordered

60 may beat tested in a day, but there areparticular backlogs at this stage. It may taketwo years to clear the work of one fieldseason

5. Draft publication

Senior amin records all details on a draft khatian and presentscertified version to “owner”

Regarded by villagers as culmination of the exercise6. Hearing of objections

Where objections arise, cases heard by ASO with decisionsrecorded in violet

Midlevel staff have few chances forpromotion and extra field allowances thatused to be provided have been stopped.This encourages corruption

7. Appeal

ZSO and ASO hear appeals at Upazilla Some referred on to District level where decisions marked in

black.

Long delays caused by shortage of suitablyqualified staff to hear appeals

8. Final checking (janch) Entails map correction, amalgamation and splitting up of

jamas (interests) by the permanent survey or sand theirsupporting staff

As documents about to be dispatched forprinting, powerful local people oftenintervene to lobby for changes


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9. Printing and publication

Formerly both khatians and maps were printed centrally atDLRS presses

Zonal offices now produce khatians, which has speededprocess, but maps continue to be printed centrally

Compositors names are now printed on khatians which hassignificantly reduced tampering at this stage

Methods antiquated and equipmentobsolete

Newly promoted, inexperienced officialsgiven responsibility for complex tasks

Khatians and maps arriving heavily exceedcapacity to process, causing increasingbacklog(estimates of size of which varywidely)

10. Handover of records

Once completed, copies of the ROR are passed to DC, than andunion land offices for land management with originals retainedat district under lock and key

Records are then updated as a consequence of sale andtransfer through mutation process (see Section5)

Tehsil registers are not freely open to inspection, but forpayment of a small fee, landowners are formally entitled to acertified copy of the ROR and mouza map

Local officials unable to keep recordsupdated. (If they could, there would be noneed for revisional settlement)

In practice a substantial bribe must be paidto access registers, effectively restrictingaccess to the better off

Source: CARE Report

Table 4.5: The Appeals Ladder

National Land Appeals Board

Divison Commissioner

District

Deputy Commissioner

AdditionalCommissioner Revenue

Upazilla

Nirbahi Officer

Assistant Commissioner(Land)*

Local* Tehsildar

Source: CARE Report

One factor that becomes apparent is that the links betweenthe three key institutions, the Survey, The AC Land, and theSub-Registrar’s office, are very weak as accountabilitymechanisms only moves vertically in each of theinstitutions, though for a efficient and transparent systemthere needs to well synchronized linkages across the three

institutions. The issue gets further complicated as two ofthe agencies report to Ministry of Land the Registry iswithin the jurisdiction of MOLJ. So there has also to begood synchronization between the two Ministries.

In the short and medium term, the regulatory andinstitutional challenge will be in bridging these gaps across


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the institutions as well as brining efficiency within eachagency. It will be particularly important to reduce time forundertaking surveys, simplifying the appeal process,reducing the number of days in the registration process toat least come to the India level, which had also inherited asimilar system, and finally coming up with a moredependable and readily available certificate of title that isprotected from abuse that is now prevalent in the system.

F. Conclusion

Bangladesh has undertaken different land related reformsthat have been supported by Laws and regulations. All thedesired goals however could not be achieved because thevested interest have always been able to exploit legislativeand regulatory loopholes and institutional under capacity.On the institutional front efforts were made to bring inchange; for example, there was the “Muyeed CommitteeReport” that had recommended that functions of LandRegistration (sub-registrar) and Record (tehsil) be broughttogether in a single office at field level, but it was neverimplemented because of political economy challengesthough if implemented should have solved lot of thepresent problems. However, some of it could be overcomeif proper computerization is completed. The time forcadastral survey is also unduly long though newtechnologies are now easily available for completing thistask efficiently and in shorter time.

There is an ongoing effort of computerization of some of theprocesses in each of the three institutions (agencies), but itdoes not appear coordinated but rather on the individualMinistry basis. This needs to be a priority goal for thegovernment, and a single strategy for implementation of allland related computerization should be undertaken.Effective and well-coordinated computerization of each ofthe agencies under the two Ministries should be able tobridge the existing gaps and provide more readily availablereliable information to the citizen, business, financialinstitutions, and to the courts. This definitely will helpimprove business environment in the country while alsoreducing scope of corruption at different levels.

For the short and medium term:

Computerization of the processes and use oftechnology in AC Land, the sub-registrar’s office,and the land survey under the e-Government

program should be of highest priority. The targetshould be accessibility of information to the citizen,reducing unnecessary steps. However, it needs tobe ensured that there is clear links between thedifferent agencies so that desired results can beobtained.

The National Land Use Policy needs to be revisited,and if required a new policy that will be applicableacross the MOL and MOLJ along with otherMinistries (Urban, roads, water etc.) should beadopted. Of particular importance will be to ensureeffective across institutions communications andthat also should be where most of the informationcould get automatically updated limiting humaninteraction between officials of institutions and thecitizens. The Land Use Policy should explicitlyrecognize that competing demand of food securityand the need for creating jobs and providinghousing, infrastructure. The Government hasenacted the Economic Zones Act to facilitate use ofland for industry and services. However, a morearticulated policy is required which would lead tozoning of the entire country so that the land usegets distributed optimally to meet the competingand sometimes complementary needs. In thiscontext it needs to factor in other related laws likeSpecial Economic Zones Act.

For the longer haul:

There needs to be a full mapping of the country todetermine which land will be exclusively kept foragriculture and which for industry, housing, roadsand there should proper zoning laws withinstitutional enforcement in place. EvenGovernment’s future infrastructure and urbanrelated investments should be built in a way that itcaters to desired zoning needs of the country.

Undertake a comprehensive public sector reforminvolving Ministries/Institutions involved in landgovernance.

This longer term action will only be successful if the shortand medium term actions mentioned above areimplemented. These should help in evolving a regulatoryand institutional framework that could make the landmarket more efficient


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Annex 4.1

1950 Abolition of Zamindari system. Control of land passes to the RevenueDepartment, which subsequently becomes the Ministry of Land (MOL).

1951 East Bengal State Acquisition and Tenancy Act (EBSATA) 1951 promotes the goal of retaining theagricultural character of land by giving cultivators first right of purchase and prohibiting other use; but thelarge number of exceptions and pooren for cement dilute impact. A land ceiling of 33.3 acres is imposed.

1950-early70s

A leftist movement targets landless poor and marginal farmers, but whilst land reform continues to excitethe popular imagination, little is done by way of implementation.

1956-62 A State Acquisition Survey is conducted based on the CS blueprint1961 Land ceiling raised to125 acres1965- Survey and revision al settlement operation commences, but progress is very slow and by 1995 it has only

been completed in 10% of all than as1972 A land ceiling of 33.3acresis re-established and various presidential orders provide for the distribution of

khas land amongst the landless. Expected that 2.5 million acres of excess land will be released, but in realitythere is far less. Newly formed land vested in government, becoming a second type of khas.

Exemptionfromlandtaxgrantedforfamiliesowning<8.33acres.1976 A variety of land related charges are consolidated into the Land Development Tax (LDT), which covers the

whole country except CHT, but deficiencies in the record system mean individual holdings cannot bechecked, and switches to more heavily taxed non-agricultural uses frequently go unrecorded.

1984 The Land Reform Ordinance limits future land acquisitions to 21 acres whilst retaining present ceilings.Benami (ceiling avoiding) transfers to relations are outlawed, but again evasion is easy.Legal recognition to the rights of share-croppers is given for the first time and share-cropping isestablished as the only admissible form of tenancy contract.

Late1980s Only 0.2% of value added in agriculture collected as LDT revenue, of which collection cost is two thirds.

Bangladesh period Annex 4.1 (Continued)

Late1980s Muyeed Committee recommends that functions of Land Registration (sub-registrar) and record (tehsil) bebrought together in a single office at field level but this is ignored.

1988 Cluster village programmer settles landless people on state land, but only 800, with some 32,000households, have been formed by1996.

1989 Board of Land Administration split into Land Appeals Board and Land Reforms Board to deal with the everincreasing volume of quasi-judicial appeals.

1991 A survey shows 90% of the rural population are unaware of the 1984 reforms.1991 A land administration manual lays down detailed instructions regarding inspection and supervision of

Union and Thana land offices.1992 Farms of up to 8.33 acres are exempted from LDT. 8.33–10 acres are charged at BDT 0.5 per acre, and larger

holdings at BDT 2per acre.1997 New Agricultural Khas Land Management and Settlement Policy introduced.1998 Total khas land is found to be 0.75 million acres (or 3% of arable and area). But the actual amount remains

unclear as a result of de facto private control arising from informal local settlements.2015-20 Estimated date for completion of survey of land rights.

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Annex 4.2

DIRECTORATE OFLAND RECORDSAND SURVEYS

(DLRS)

DIRECTOR OFSURVEYS

Oversees traverse andcadastral mapping

DIRECTOR OF LANDRECORDS

Establishes and maintainsall property records

LAND REFORMS BOARD (LRB)Assesses and collects LandDevelopment Tax

(LDT).Settles khas land. Manages abandoned & vestedproperty + fishing fights. Protects tenants’ rights

Other agencies with more minor roles include: the Ministries of Forests and Fisheries; the Directorate of Housing and Settlement; and theDepartment of Roads and Railways.

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Annex 4.2

MINISTRY OF LAND (ML)Secretariat makes policy but is

often drawn into administrativematters

DIRECTOR OF LANDRECORDS

Establishes and maintainsall property records

LAND REFORMS BOARD (LRB)Assesses and collects LandDevelopment Tax

(LDT).Settles khas land. Manages abandoned & vestedproperty + fishing fights. Protects tenants’ rights

LAND APPEALS BOARD (LAB)Highest revenue court

settling appeals on khasland, changes in records of

rights, plot demarcation and LDT

MINISTRY OF LAW,JUSTICE & PARLIAMENTARY

AFFAIRS (MLJPA)

REGISTRATIONDEPARTMENT

Records changes in landownership arising from sale.Collects immovable property

transfer tax


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Annex 4.2

MINISTRY OF LAW,JUSTICE & PARLIAMENTARY

AFFAIRS (MLJPA)

REGISTRATIONDEPARTMENT

Records changes in landownership arising from sale.Collects immovable property

transfer tax


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PRI Quarterly Policy Briefs on Bangladesh Economy January 2015Annex 4.3 – Land Transfer Process

Buyerchecksownership withAC (Land)

Buyerandselleragree a price

Buyerarrangesdeedpreparation

Buyerandseller go tosub-registry

Sub-registrar establishes thatmoney has been paid, collects theimmovable property transfer tax,and registers the transfer

Authorizeddeed collectedby new owner

Land transferrecord sent to

AC (Land)

Tehsildarinspects andAC updatesrecord

AC (Land)Khatian Record

Start

3

2

1

4

6 5

7

and how reality may differ1. Some transfers occur on an entirely unofficial basis, perhaps when land is mortgaged,but this is becoming less common.2. Some buyers may not try to check the AC records first…3. ….and even if they do, these may well not be up to date.4. The deed writers and Sub-Registrar collude to ensure that this step only proceeds if abribe is paid first (see Table 4.2 for typical amounts), whilst the buyer and seller may alsocollude to reduce the amount of Immovable Property Transfer Tax (IPTT), which islevied at 10% of the sale value. There is no requirement to check the legality of thetransaction and it is not uncommon for the same plot to be “sold” to several differentbuyers, although this is much more frequent in urban areas5. This is supposed to be issued within a month, but frequently takes a year and thepayment of a bribe.6. This is supposed to happen immediately, but is also subject to delays of severalmonths. Notifications are frequently illegible.7. The AC (Land) generally does not update the record unless first paid a bribe to do so

End