By Mahbuba Mizan Murshed
The history of the Bangladeshi trade policies began with our liberation from Pakistan in 1971. Trade liberalization in the new Bangladeshi economy required some steps, and the reformation of the trade policies during the liberalization can be divided into three phases: restrictive, partially-liberalized and liberalized. In this article, light will also be shed on the policies that have been adopted and implemented after the liberalization process.
Restrictive Phase (1972-1975)
Due to the uncertainty in a new economic and socio-political environment in a new state, the first government of Bangladesh created very restrictive policies for trade and exchange rate after the country gained its independence in 1971. Import levels were controlled, scarce foreign exchange was conserved and the domestic industry was protected using various measures like high tariff rates, quantitative restrictions and an exchange rate that was overvalued, albeit fixed. Import and export licensing were provisioned in this regime.
A de facto dual exchange rate was created where the Export Performance License premium could reflect the selling price of the foreign exchange in the market to an extent. This was done by:
1) Accruing all foreign exchange earnings to the government and allocating that to competing functions through a cumbersome and discretionary import licensing mechanism
2) Giving certain exporters a specified percentage of their export earnings as an Import Entitlement Certificate, under the Export Performance License, which would allow them to either import certain types of goods or to sell to other sellers at a premium for importing those kinds of goods.
Most agricultural commodities were placed on the banned or restricted lists of imports during this time. Simultaneously, restrictions were placed on exporting agricultural products.
Partially Liberalized Phase (1976-1990)
The 1980s saw slower progress when it came to trade liberalization, especially regarding reductions in import tariffs (Bakht, 2001). However, some agricultural exports were being liberalized. E.g.: export duties were withdrawn from raw jutes and tea in 1981, and the same was done for fresh fruits, dried fruits, coriander seed, dry ginger, dry chili, black pepper, oil cakes, tobacco, vegetables, turmeric and potato in 1986.
The exchange rate policy underwent some major reforms in the 1980s. A limited flexible policy was adopted by the state in mid-1979 by fixing the Taka to a basket of currencies of the biggest partners in trading. Simultaneously, there was a rapid reduction in import financing at the official rate of exchange, as well as an increase in the proportion of imports that were subjected to the secondary exchange market, which partially included the foreign exchange that was received under commodity aid. (Ahmed et al., 2007).
Conversely, there was substantial simplification of the export licensing system in 1986 due to the Export Performance Benefit being introduced. This benefit would allow the beneficiary exporters to go to their banks and cash their benefit entitlements directly. The non-traditional exports saw rapid growth in the 1980s, in part due to these policies. Moreover, the market of the secondary wage earners schemes also expanded rapidly.
The gap between the official scheme rate and the wage earners scheme rate was narrowed as a result of the enhanced role being given to the secondary exchange market. The two rates were eventually merged in 1992. With this ended the Export Performance Benefit agreement (Rahman, 1992).
Liberalized Phase (1990-2006)
Due to the trade liberalization in the early 1990s, total tax incidence on the import of primary agricultural goods and import tariffs fell sharply in the 1990s and 2000s. From 2000 to 2008, duties on consumer goods, intermediate good and capital goods also fell sharply. However, there was no significant change in the duties on raw materials during this time.
Import bans and restrictions were largely lifted during this phase, with the number of banned or restricted products going down to 63 in 2003 to 2006, from around 752 in 1985-1886. Two grounds have been used for import restrictions: a) trade-related reasons, i.e., in order to protect domestic industries, or b) non-trade reasons, e.g.: in order to protect public health and safety, ensure public security, protect the environment etc.
All quantitative restrictions were removed from agricultural products in the 1990s. Tariff lines of all of the products that were facing quantitative restrictions were brought down to 0 over the years. The government’s monopoly on the import of food grain was removed through the legalization of private sector imports of rice and wheat in early 1990s.
In 1997, five-year export and import policies were created and implemented. After the termination of these policies, the government announced three-year export and import policies (2003-2006). These are, on one hand, consistent with the principles of market economy. On the other hand, they maintain a favorable balance between imports and exports of the country.
The Import Policy (2003-2006) was adopted to combat the emerging challenges coming
from fast changes, expansion of world trade and free access of commodities. The import policy was made to be consistent with the industrial policy. Therefore, administrative complexities were reduced when it came to obtaining approval from different ministries beforehand for establishing industries.
There were many steps taken during this phase to promote exports. Cash incentives for a number of traditional and non-traditional goods, restructuring of export credit guarantee schemes, creation of export promotion fund, etc. were some of such steps. Moreover, duty-drawback and bonded warehouse facility, and income tax rebate were introduced. Two notable policy supports provided to the exporters were undervalued exchange rate and a subsidized interest rate at 7%.
Cash incentives were a notable part of the export policy during this phase, beginning to encompass many kinds of goods along with the jute and local textile products. They were introduced for leather goods in April 2000 and in December 2000 for agricultural goods, notably shrimp and other fish, vegetables/fruits and processed agricultural products. Bone metal, hogla commodities, sugarcane, eggs, potato, day-old chicks, liquid glucose that were produced at Ishwardi EPZ, halal meat, light-engineering products etc. were also given cash incentives.
Post-liberalization Policies (2006-present)
The tariff remained the main trade policy instruments of Bangladesh. The primary challenges in developing the tariff policy were to ensure revenue generation, rationalize a structure for setting the tariff and support domestic industrial growth while keeping the price of necessary goods as low as possible by providing tariff assistance to domestic industry. Tax burden, which Bangladesh depends on when it comes to import, was reduced for this purpose. Bangladesh continued to keep 5 tariff slabs from 2006 to 2012 with maximum tariff at 25%. In 2012, 99.7% of total HS lines were under ad-valorem rates. Merely 0.3% of all HS lines covering the 22 HS lines were subject to any specific rate.
During this period, some essential commodities had specific duties enforced on them, in order to decrease tax burden on import. This would be done by minimizing customs duty because of the fluctuation of overseas price of these products. Major efforts were made to decrease the number of national HS lines so that tariff structures could be rationalized. Moreover, tariff rates were harmonized within the same HS heading for avoiding any dispute over the classification of tariffs.
The government created Export Policy 2015-2018 for the promotion and facilitation of export, improved quality of the items, usage of environment-friendly technologies and production of labor-intensive and high value-added products. It selected 12 sectors as the Highest Priority Sectors and 14 sectors as the Special Development Sectors.
The Highest Priority Sectors were: high value-added readymade garment and garment accessories; software and IT enable services, ICT products; pharmaceutical products; ships and ocean-going fishing trawlers; footwear and leather products; jute products; plastic products; agro-products and agro-processed products; furniture; home textiles and terry towel; home furnishing; and luggage. The government designed special programs to increase the export of these sectors. The Government is still promoting export through different promotional activities held by the Export Promotion Bureau.
The Government of Bangladesh formulated the Import Policy Order (IPO) 2012-2015 and 2015-2018 for preserving the continuity and predictability of the policy initiatives. From 2015, conditional approval of the Ministry of Commerce is required for importing of formaldehyde, formaldehyde solutions and formalin in line with Formalin Control Act 2015. The purpose of this act was to prevent any misuse of these products as food preservatives or even additives.
Bangladesh also attempted some major reforms of the Customs Administration to facilitate trade. It had introduced ASYCUDA World in September 2013 and formulated a new Customs Act. A specific format, which was known as Single Administrative Document (SAD) was developed as well.
Since January 2017, the Government has been implementing a four-year National Single Window (NSW) project. Its aim is to fulfil the government’s commitment to expedite ease of doing business. This will bring all the support services activities under one category and reduce the cost of doing business. The new NSW system will automate the certificates and licenses to be issued and permits for import, export and transit of goods.
A new export policy was created in 2018, which will cover from 2018-2019 to 2020-2021. There have been many incentives to facilitate the receipts of USD 60 billion by 2020-2021, including low-interest loans. This policy will also place focus on the leather industry so that the dependency on garment can be decreased. The same benefits that are being given to the RMG industry will be given to the leather industry. Moreover, there will be programs for upgrading the leather goods-related industries, including shoes, to green standards. In order to store the raw materials of these industries and decrease their lead time, the government will set up central bonded warehouses.
The number of highest priority sectors were increased to 15 from 12, with the inclusion of active pharmaceutical ingredients, reagents and denim. Moreover, 5 new sectors were added to the special development sector category, taking the number to 19 from the previous 14. These 5 sectors are: photovoltaic module, raw and processed cashew nuts, toys, processed crabs and light engineering products such as motorcycle batteries. There will be special benefits for the priority and special development sectors, which include subsidies and tax benefits.
The Export Development Fund (EDF) of the Bangladesh Bank took special measures to provide easy term loans and other such banking facilities to export-based industries. Two funds were created by the central bank: green fund and technology development and upgradation fund. Export-based industries are now given loans for the modernization and technological upgrades.
Conclusion
Over the course of the decades, the trade policies of Bangladesh have shifted in order to accommodate more industries and products in an attempt to diversify. Breaking into new industries is more important than ever now, which has been reflected in the recent developments in the import and export policies. This is a trend that can be expected to appear in the future as well, albeit the degree will depend on the state of the local and global economies.
About The Author:
Mahbuba Mizan Murshed is a final year student at IBA, University of Dhaka