RESTRICTED
WORLD TRADE WT/BOP/S/1
18April 1997
ORGANIZATION(97-1690)
Committee onBalance-of-Payments Restrictions
1997 CONSULTATION WITH BANGLADESH
(SIMPLIFIED PROCEDURES)
Background Paper bytheSecretariat
1. Thispaper hasbeenprepared inaccordance withparagraph 7ofthe1979Declaration onTrade
Measures taken forBalance-of-Payments Purposes (BISD 26S/205) toassist theCommittee intaking
thedecision referred toinparagraph 8oftheDeclaration andparagraph 8oftheUnderstanding on
Balance-of-Payments Provisions oftheGATT 1994.
I. Previous Consultations withBangladesh
2. Thisisthefirstconsultation withBangladesh under theWTO. TheGATT Balance-of-Payments
Committee heldeleven simplified consultations withBangladesh (1973, 1976, 1978, 1980, 1982, 1984,
1986, 1988, 1990, 1992, 1995). Nofullconsultations were held.
II. Recent Changes inTrade Policy
3. Overthelastseveral years, Bangladesh hasconsiderably liberalized itstraderegime, reducing
itsreliance onquantitative restrictions andlowering boththelevelandthedispersion oftariff rates.
(a) Import Restrictions
4. During thelastconsultations, theCommittee wasinformed that111items remained subject
toimport control, ofwhich 19werefortradereasons, mainly toprotect domestic producers.1According
toinformation fromtheIMF, 26items (seven ofwhich arebanned and19restricted) aremaintained
fortrade "BOP" reasons.2
5. Based oninformation provided during thelastconsultations (BOP/W/160), imports ofsugar,
dextrose andsaline, salt,anumber oftextile items andsingle phased electric meters arerestricted for
(trade) balance-of-payments reasons.
(b) Import Duties
6. During theUruguay Round, Bangladesh bound 32tariff lines(0.7percentofallsix-digit
HStarifflines), at50percentandbound "other duties andcharges" at30percent. Agricultural tariff
linesarebound at200percent, except for13four-digit Htariff linesbound at50percent. Under
theGeneral Agreement onTrade inServices (GATS), Bangladesh hasspecifically committed itself
1BOP/323, 21February 1995.
2IMF, Bangladesh: Recent Economic Developments, March 21,1996.WT/BOP/S/1
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toallow upto100percentforeign direct investment intheluxury hotelsub-sector andrelated foreign
employment inmanagerial positions.
7. Average tariffs, there areseven (0,2.5,7.5,15,22.5, 30,45)tariff rates, havebeenlowered
inrecent years toanunweighted average of21.8percentin1996/97. Inthe1995/96 Budget, customs
duties werereduced oreliminated onalarge number ofitems; e.g.,thetariff rateonsome 1,028 raw
materials wasreduced from 30to22.5percentandtariff exemptions oncapital machinery andraw
cotton forthetextile industry maintained. Themaximum tariff hasbeenlowered from 60to50in
1995/1996 andto45percentinthe1996/1997 Budget.
(c) Exchange Regulations Affecting Trade
8. Bangladesh accepted theobligations ofArticle VIII,Sections 2,3and4oftheIMF'sArticles
ofAgreementwitheffectfrom11April1994,andthusimposesnorestrictionsonpaymentsandtransfers
forcurrent international transactions. During 1995-96, thebilateral payments agreements withBulgaria,
China, theCzech Republic, Hungary andthePeople 'sDemocratic Republic ofKorea lapsed andwere
notrenewed. Alloutward transfers ofcapital require approval.
9. Theauthorities pursue apolicy ofloosely targeting therealeffective exchange rateofthetaka.
Following adepreciation infiscal year1994/95, therealeffective exchange rateappreciated slightly
thefollowing year, inspiteofseveral adjustments ofthetakavis-à-vis theU.S.dollar.3
III. Macroeconomic Developments
(a) Overview
10. Since thelastconsultation inFebruary 1995, Bangladesh ’strade regime hasbeen further
liberalized andtrade growth hasbeenmuch faster thantheworld average. However, thecountry ’s
balance-of-payments position deteriorated asdomestic distortions, government intervention, demand
pressures emanating from fiscal andmonetary policies, andpolitical uncertainty inearly 1996 have
adverselyaffectedsavings,investment,andcontributedtoagrowingcurrentaccountdeficitanddeclining
reserves.
(b) Output andPrices
11. Economic growth inBangladesh hascontinued atamoderate rateofjustbelow 5percentper
yearsince thelastconsultation twoyears ago(Chart 1).However, thismasks considerable sectoral
differences. In1994-95, agriculture posted adrought-related realdecline, while thenonagricultural
economy grewat6.6percent. Although thecorresponding figures for1995/96 arenotyetavailable,
there arestrong indications thatmostgrowth in1995/96 wasduetoarebound inagricultural output
withshortfalls inmostother sectors. Ontheexpenditure side,domestic growth appears tohavebeen
recently driven mainly bystrong consumption.
12. Thedecline ininflation from theearly 1990s hasbeenpartly reversed inthepasttwoyears.
Inflation accelerated from lessthan4percentin1993/94 toalmost 9percentin1994/95 (Chart 2),
inpartaresult ofdrought-related priceincreases offooditems. In1996, pressures onprices somewhat
eased offasagricultural output rebounded butinflation stillseems tobeabove thelevelachieved two
years ago.
3The1995/96 average taka/dollar exchange ratewas40.9.WT/BOP/S/1
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(c) External sector developments
13. Bangladesh ’sbalance-of-payments situation hasweakened overthepasttwoyears. Imports
havegrown much faster thanexports resulting inatrade deficit of9percentofGDP in1995/96.
Thecurrent account balance worsened fromadeficit oflessthan2percentin1993-94 toover5percent
in1995-96 (Table 1andChart 3).In1995/96, thecurrent account deficit hadtobefinanced from
foreignreservesasaiddisbursementsfellshortofexpectations,andaccesstointernationalcapitalmarkets
continued tobeverylimited. Asaresult, reserves inmonths ofimports declined fromalmost seven
months ofimports attheendoffiscal year1993/94 toonlythree months ofimports inJuly1996
(Chart 4).Since then,thefallinreserves hasslowed down considerably asimport growth hasdecreased
andexports haveshown signs ofrecovery.
Table 1
Bangladesh -Balance ofPayments, 1991/92-1995/96
1991/92 1992/93 1993/94 1994/95Prel.
1995/96
(Inmillions ofUSdollars)
Trade balance -1532 -1688 -1657 -2361 -3046
Exports 1994 2383 2534 3473 3882
Imports -3526 -4071 -4191 -5834 -6928
Netservices -21 3 -10 -95 -100
Private transfers
Ofwhich: Workers 'remittances975
8481067
9441247
10891426
11981445
1215
Current account balance1-578 -618 -420 -1030 -1701
Aiddisbursements21611 1675 1559 1739 1450
Ofwhich: Project aid3984 1182 990 1269 1075
Amortization payments -210 -239 -264 -314 -325
Short- andmedium-term loans (net)4-149 -177 -86 -257 -516
Foreign direct investment 10 16 69 67 0
Capital account balance, net 1262 1275 1278 1235 609
Neterrors andomissions -87 -63 -185 27 242
OVERALL BALANCE 597 594 673 232 -850
Financing from gross foreign reserves
(-=increase)-742 -518 -625 -274 1031
Other financing 145 -76 -48 -42 -181
Memorandum items
Export volume (in%change overprevious year) 17.7 15.8 1.1 29.9 6.0
Import volume (in%change overprevious year) 2.8 14.5 2.1 33.0 14.2
Worker remittances (in%change overprevious
year)11.0 11.3 15.4 10.0 1.4
Merchandise trade/GDP 22.0 24.7 24.4 29.9 33.1
Current account balance (in%ofGDP) -2.3 -2.4 -1.5 -3.3 -5.1
Official reserves (inmonths ofimports) 4.7 5.4 6.8 5.5 3.1
External public debt(in%ofGDP, endof
period)53.3 52.1 55.3 54.1 51.4
Debt service (in%ofcurrent foreign exchange
receipts)15.1 12.0 11.4 9.8 10.2
1 Excluding official grants.
2 Including official grants.
3 IncludesIMFTrustFund,aircraftloans,foodloans,tradecredits,short-termpetroleumloans(net),andothercommercialborrowing.
4 Includes valuation adjustments.
Source: International Monetary Fund.WT/BOP/S/1
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14. Bangladesh ’sforeign debtsituation hasslightly improved because, withlimited capital market
access, foreign loanrepayment washigher thanthedisbursement ofnewloans. Between 1993/94 and
1995/96, theindebtedness declined from55.3to51.4percentofGDP, andthedebtservice ratiocame
down from 11.4to9.9percentofcurrent receipts.
(d) Savings andInvestment
15. Since thesavings andinvestment balance isthemirror image ofthecurrent account balance,
changes insavings andinvestment provide animportant cluetounderstanding thechanges inthebalance
ofpayment. Improvements inthesavings andinvestment balance intheearly 1990s havebeenpartly
reversed inthepasttwoyears (Chart 5).Gross fixed investment increased slightly in1994/95 and
remained constant thereafter atnearly 16percentofGDP while national savings declined byover
2percentofGDP toonlyabout 10percentofGDP overthesame period.
16. When looking forexplanatory factors fortheweaker external position andforthemodest
economic performance overthepasttwoyears itisnecessary tosingle outthepaceofeconomic reform,
fiscal andmonetary policies, andpolitical developments inearly 1996.
- Thesavings andinvestment ratios arerelatively low-onlyabout halftheAsian average.
Thisprovides oneofthemainexplanations ofBangladesh ’srelatively modest growth
record. Government intervention intheeconomy, shortcomings inaccountability and
transparency, aweak financial sector, alackofphysical infrastructure andhuman
capital, andinefficient public enterprises, areontheGovernment ’sreform agenda toWT/BOP/S/1
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move theeconomy toahigher growth path. Atpresent, however, thesefactors continue
tobeamajor obstacle tofoster growth.
- Relatively loosefiscal andmonetary policies havecontributed tothegrowing imbalance
betweendomesticsavingsandinvestment,andrisingimports.Regardingfiscalpolicies,
higher drought-related expenditures onfoodinfiscal year1994/95 andanincrease
incurrent expenditures andlocally financed public investments in1995/96 haveresulted
inanoverall deficit of6.4percentofGDP in1994/95 and5.5percentin1995/96.
Thisbyitselfwasnotmuch above thetrend fromprevious years, butforeign financing
ofthedeficit declined, andagrowing share hadtobefinanced through thedomestic
banking system (Table 2).Thisinturnputpressures ondomestic credit markets.
Table 2
Bangladesh -Summary ofCentral Government Budget, 1991/92-1995/96
1991/92 1992/93 1993/94 1994/95 Prel.
1995/96
(Inpercent ofGDP)
Total revenue 10.4 11.1 11.3 11.4 11.0
Total expenditure 15.1 16.3 16.7 17.9 16.3
Ofwhich: Current expenditure (incl. food
account)8.5 8.9 7.8 8.9 8.7
Annual Development Program 6.0 6.6 7.8 8.1 7.0
Overall balance -5.6 -5.4 -5.5 -6.4 -5.5
Domestic financing (net) 1.0 0.3 1.0 1.8 2.1
Foreign financing (net) 4.6 5.2 4.5 4.6 3.4
Source: International Monetary Fund.
- Monetary policy wasexpansionary starting from1994/95, andthebudgetary pressure
wasoneofthereasons fortheexpansion. Another reason wasasharp increase in
private sector credit which resulted inbroad money growth accelerating to16percent
in1994/95. Inflation increased while interest ratesdidnotfollow suit,andrealinterest
ratesdeclined andbecame negative. 1995/96 posted another rapid increase inprivate
sector lending andnetlending totheGovernment. Theexpansion ofbroad money,
however, wasmoderated bythelossinforeign reserves, andmore recently, positive
realinterest rateshavehelped totighten monetary policies.
- Political uncertainty, culminating incrisis inearly1996, undermined monetary control
when lossofconfidence sparked aliquidity crunch inthealready weakbanking system.
Asaresult, theCentral Bankhadtoextend considerable assistance tothebanking sector
through itsrediscount window andnetredemptions ofCentral Bank bills. Moreover,
strikes inthemain export industries andworsening political environment resulted in
aslowdown ofeconomic activity andexports, discouraged thetransfer ofworker
remittances andforeign investments, andtriggered capital outflows, thereby further
weakening thecountry 'seconomic performance andexternal position.
IV. Trade Developments
17. Trade continued toexpand much faster thantheworld average, andtheratioofmerchandise
trade toGDP -anindicator ofacountry ’sopenness -grew from25to33percent. Involume terms,WT/BOP/S/1
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exports increased by30percentin1994/95. However, export growth slowed to6percentin1995/96
withstrikes affecting particularly thetextile andgarment industries, themainstays ofindustrial and
export capacity. Asnoted above, imports havegrown faster thanexports inthepasttwoyears (at
33and14.2percentinvolume terms, respectively) andthetrade deficit almost doubled innominal
terms. Theservices account moved fromanalmost balanced position in1993/94 toadeficit, largely
duetoamarked increase intourist expenditures following theremoval offoreign exchange restrictions
fortravel.
18. Thedevelopments intrade composition follow thetrend oftheearly 1990s (Table 3).Onthe
export side,theshare ofrawjuteandjuteproducts hasslightly declined while ready-made garments
havemaintained theirdominant position atabout 50percentofthetotalexport value. Ontheimport
side,capital goods andtextiles together account foralmost halfthevalue ofimports, butthe1994/95
drought alsorequired significantly higher imports offeedgrains. Thegrowing share of“other imports ”
includes, amongst others, consumer goods whose recent increase mainly reflects theabove mentioned
demand pressures.
Table 3
Bangladesh -Merchandise Trade byMain Product Categories, 1991/92-1995/96
1991/92 1992/93 1993/94 1994/95 Est.
1995/96
(Inpercent oftotalmerchandise exports andimports)
EXPORTS
Rawjuteandjutegoods 19 15 13 11 11
Tea 2 2 1 1 1
Leather andleather products 7 6 7 6 5
Frozen shrimp andfrogs legs 6 7 8 7 7
Ready-made garments 53 52 51 53 50
Other 13 18 20 22 26
Total 100 100 100 100 100
IMPORTS
Foodgrains 7 6 4 8 9
Edible oilandoilseeds 5 5 4 5 4
Crude petroleum andpetroleum products 9 8 7 7 6
Cotton andstaple fiber 3 3 2 3 3
Yarn 3 3 4 3 4
Textiles 14 16 20 18 16
Fertilizers 3 3 3 2 1
Cement 3 3 2 2 2
Capital goods 37 33 31 29 26
Other 16 20 23 23 29
Total 100 100 100 100 100
Source: International Monetary Fund.
19. Geographical composition oftrade hasbeenslowly changing, reflecting therapid economic
development ofAsian economies withwhom trade links havebeenstrengthening. Western Europe
andtheUnited States remain themain export markets (Chart 6).Theshare ofexports toWestern
Europe (where ready-made garments arefreeofquotas) evenincreased from43to49percentbetweenWT/BOP/S/1
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1993/94 and1995/96 butsome regional customers including Hong Kong, Japan, orChina arealso
becoming moreimportant. Thebiggest decline ofexport market share isrecorded fortheUnited States,
where twothirds ofexports aresubject toquotas under theMulti-Fibre Agreement. Theexport share
oftheUnited States fellby4percentto30percentin1995/96. Ontheimport side,themarket share
ofIndia andChina hasalsobeen growing rapidly whereas theshare ofsupplies from Western
industrialized countries hascome down.