Mismatch between import liberalisation and export competitiveness

MS Siddiqui | Saturday, 9 November 2019

After liberation in 1971, Bangladesh adopted an industrial policy pursuing an import-substituting industrialisation. Its key objectives were to safeguard the country's infant industries, reduce balance of payments deficit, use scarce foreign exchanges efficiently, ward off shocks coming from international capital market and exchange rate fluctuations, lessen fiscal imbalance, and to achieve higher economic growth and self-sufficiency.

However, this policy could not deliver desired outcomes. Increasing internal and external imbalances led to trade policy reforms in the early 1980s. It was time when Bangladesh's number one exportable product jute and jute goods was losing market. The country then successfully expanded export-oriented garment industry, introduced high-yielding varieties rice and a few other crops, increased exports of leather products, and still continued tea export. Remittances rose simultaneously.

Trade liberalisation has also become an integral part of Bangladesh's trade policy. Trade openness has generally left positive effects on economic growth, exports, imports, foreign direct investment (FDI) and remittances of a country.

Bangladesh has attained certain competitiveness in products like garments by gaining efficiency. Trade openness has also resulted in competitiveness of some other products.

Still, the relationship between import trade liberation and export competitiveness remains a confusing state of affairs for policymakers.

An important element of trade policy reform was introduction of generous promotional measures for exports. Such measures include permitting exporters of non-traditional items to convert some of their earnings at higher exchange rate, simplification and rationalisation of tariff structure, and deregulation of import process as well as export incentives such as export performance licensing, export performance benefit scheme, special bonded warehouse scheme, back-to-back letter of credit (L/C) system, export credit guarantee scheme, export promotion fund, bank loans, and tax holiday.

Some reforms were initiated with prescriptions from the International Monetary Fund (IMF), the World Bank and other multilateral agencies with certain conditions on financial assistance. Structural Adjustment Programme (SAP) was introduced1980s. The reforms included liberalisation of interest rates, amendment to monetary policy, abolishing priority sector lending, strengthening central bank supervision, regulating banks, improving debt recovery and broadening capital market development. Well-known elements of adjustment policy were reduction in subsidy on agricultural inputs and food, strictness in disbursing bank credit, raising interest rates, rationalising tax system, avoiding multiple currency practice, and import liberalisation.

Bangladesh signed an agreement on import programme credit (IPC) with the IMF in 1982 pledging policy reforms. This was considered as a major turn in trade and industrial policy reforms. Henceforth, since the mid-1980s the government of Bangladesh initiated numerous trade policy reforms, resulting in trade liberalisation.

The country's trade policy between 1972 and 1980 was characterised by significant import controls. Import Policy Orders (IPOs) specified if certain items could be imported, prohibited for imports or if they required special permission for imports. With exception of a few cases, licenses were required for all imports. All these made the process inefficient and the inefficiencies are seen at poor port, rail, and road transport infrastructures, poor customs management, administrative and licensing restrictions and non-transparent trade rules.

As import liberalisation began in the 1980s, the import-licensing system was abolished and imports were permitted against letters of credit (L/C). The long positive list in the Import Policy Orders (IPOs) of importable items was replaced by two lists - negative list (for banned items) and restricted list (for items importable on fulfilment of certain prescribed conditions) - and imports of any items outside the lists were allowed. The range of products subject to quantitative restrictions (QRs) had been curtailed substantially during the 1980s, the 1990s and the 2000s.

According to the World Bank (2004), one important aspect of the tariff structure in Bangladesh relates to use of import taxes which have protective effects (also known as para-tariffs) over and above protection provided by customs duties. These taxes include infrastructure development surcharge (IDSC)supplementary duties (SDs), and regulatory duties. At least one reason of this policy that value added tax (VAT),introduced in the early 1990s,it was not successful in the early years as tax base for VAT was too low. Therefore, para-tariffs did not significantly lower the total protection rate during the 2000s.

The overall tariff regime has been increasingly liberalised since the late 1980s. In 1991-92, the un-weighted average rate of tariff was around 70 percent and by 2013-2014 it fell down to 13.2 percent (Sattar, 2014). Much of this reduced protection was achieved through reduction in maximum rate, which was 350 percent in 1991-92 and came down to only 25 percent in 2004-2005 (Raihan & Razzaque, 2007). The rate has been kept at this level in recent years. The number of tariff bands was 24 in the 1980s, 18 in the early 1990s and only 4 in recent years.

Conventional trade barriers were lowered in world trade. To achieve higher productivity and export competitiveness, it was necessary to take policy measures on trade-related infrastructure and improving domestic facilities.

All stakeholders are already aware that high cost of formal trade due to poor trade facilitation promotes informal trade, brings loss of revenue for the government and in many instances transaction costs exceed the cost of duties to be paid. For developing economies, inefficiencies in areas such as customs and transport can be roadblocks to integration into the global economy and may severely impair export competitiveness or inflow of FDI.

Costs of trade involve all costs incurred in getting goods to a final user other than the cost of producing the good itself: transportation costs, tariffs and non-tariff barriers, information costs, contract enforcement costs, costs associated with use of different currencies, legal and regulatory costs, and local distribution costs. Ultimately, these costs make goods more expensive for consumers, often affecting competitiveness of the domestic economy. Accordingly, trade costs contribute to a very high percentage of product costs in South Asia.

However, a drastic reduction in un-weighted tariff rates during the 1990s also resulted in the fall in import-weighted tariff rates. The import-weighted average tariff rate declined from 42.1 percent in 1990-91 to around 13 percent towards the end of 2000s (Raihan & Razzaque, 2007).

To understand the state of trade facilitation in a country Global Competitiveness Index was introduced. Bangladesh scored 52.08 points out of 100 in the 2018 index published by the World Economic Forum. The study covers institutions, infrastructure, ICT adoption, macroeconomic stability, health, skills, product market, labour market, financial system, market size, business dynamism, and innovation capability. The GCI emphasises the role of human capital, innovation, resilience and agility, as not only drivers but also defining features of economic success in the 4th Industrial Revolution.

The latest statistics show significant improvement in trade and economy. Bangladesh's trade-GDP ratio reached 46.30 per cent during fiscal year 2012-13 rising from 37.8 per cent in FY '10. But such a ratio has fluctuated during the next six fiscal years until FY '19.

The Bangladesh economy's degree of openness has seen a mixed trend in the last 10 years as economic expansion outstripped rise in foreign trade. Thus the trade-GDP ratio came down to 38.89 per cent in the FY '19 from 44.51 per cent in the FY'14, Bangladesh Bureau of Statistics (BBS) data suggest.

Bangladesh has been ranked 168 among 190 economies in the ease of doing business, according to the latest WB report. The country's position was 176th in 2018 and 177th in 2017.To attain its economic goals, Bangladesh will require huge investments in physical capital, human capital, and innovation.

The WB continues to support the government's reform efforts to create jobs apart from addressing the needs of other development challenges. Sustained reforms are needed in areas such as banking sector, tax structure and public financial management, infrastructure financing strategy in partnership with the private sector, skills development, and ease of doing business.

MS Siddiqui is a legal economist.

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