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1997 Country Reports
On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1998.

Income, Production and Employment	1995	1996	1997 1/
Nominal GDP	29,112	31,814	32,847
Real GDP Growth (percent)	4.4	5.3	5.7
GDP by Sector:
Agriculture	8,989	9,535	9,796
Manufacturing	2,804	3,042	3,039
Services	15,002	16,667	17,353
Government	N/A	N/A	N/A
Per Capita GDP	242	260	263
Labor Force (000s)	4,800	4,800	5,600
Unemployment Rate (percent) 2/	35.9	35.9	36.5
Money and Prices (annual percentage growth)
Money Supply Growth (M2)	16.0	8.2	10.8
Consumer Price Inflation 3/	5.2	4.1	3.9
Consumer Price Inflation 4/	8.9	6.6	2.6
Exchange Rate (taka/USD--annual average)
Official	40.2	40.9	42.7
Balance of Payments and Trade
Total Exports FOB	3,473	3,882	4,418
Exports to U.S. 5/	1,257	1,343	N/A
Total Imports CIF	5,834	6,881	7,120
Imports from U.S. 5/	325	210	N/A
Trade Balance	-2,361	-2,999	-2,702
Balance with U.S. 5/	932	1,133	N/A
External Public Debt	16,370	17,070	N/A
Fiscal Deficit/GDP (percent)	6.8	5.7	5.3
Current Account Deficit/GDP (percent)	3.5	5.1	2.8
Debt Service Payments/GDP (percent)	10.0	9.8	8.5
Gold and Foreign Exchange Reserves	3,085	2,037	1,719
Aid from U.S. 6/	98.5	65.0	73.6
Aid from All Other Sources 7/	1,605.5	1,378	1,544

1/ The Bangladesh fiscal year is July 1-June 30. Data for FY97 is mostly provisional.
2/ Includes estimated under-employment (34%).
3/ Calculated on old CPI, base year 1973-74
4/ Calculated on new CPI, base year 1985-6
5/ Figures are for the calendar year
6/ Figures are for the U.S. fiscal year (October 1-September 30).
7/ Disbursements.

1. General Policy Framework

Bangladesh is one of the world's poorest, most densely populated, and least developed countries; its per capita income for 1997 is estimated at $263. Most of its population of 125 million is tied directly or indirectly to agriculture, which accounts for 32 percent of Gross Domestic Product (GDP) and employs nearly three out of four Bangladeshis. Economic growth in fiscal years (FY) 1996 and 1997 was above five percent, based in large part on above average agricultural sector growth. The historical average growth rate over the last ten years has been closer to 4 to 4.5 percent. This rate, though positive on a per capita basis, is inadequate to relieve the poverty faced by over half the population. GDP growth historically has been slowed by a number of factors: low growth in the agricultural sector (the long-run trend is about two percent, although the last two years had record production and the outlook is good for FY98), together with a legacy of government control of productive resources, political and policy instability, poor infrastructure, corruption, poverty, special-interest lobbying, and low domestic savings and investment. The state's presence in the economy continues to be large, and money-losing state enterprises have been a chronic drain on the treasury. Nonetheless, over the past six years Bangladesh has steadily opened its economy to greater influence of the free market and private sector activity. The winning party in June 1996 elections, the Awami League, has to a large degree continued the market based economic policies of its predecessor, the Bangladesh Nationalist Party. The Awami League government has placed a high priority on increasing the amount of foreign investment in the economy by improving the investment climate, and has made some regulatory and policy changes designed to attract more foreign direct and portfolio investment. However, implementation of new policy directives by the bureaucracy outside of the energy, gas and telecommunications sectors has been slow. Those sectors are being opened up to private investors, and U.S. firms are making proposals for many projects being tendered. Bangladesh had a trade surplus with the U.S. of $1.133 billion in 1996, due mostly to large U.S. imports of Bangladesh garments.

Real GDP growth for fiscal year 1997 (July 1-June 30) was 5.7 percent, up 0.4 percent from FY96, mainly due to good agricultural production. Inflation dipped slightly, from 4.1 percent in FY96 to 3.9 percent in FY97, aided by good rice crops (rice has a large weight in the consumer price index. According to a price index based on 1985/86, inflation was even lower in FY97, at 2.6 percent; the older, more established index still more widely quoted, was based on 1973/74). Foreign exchange reserves have stabilized since mid-1996 at around $1.7 billion, worth about 2.6 months of imports. The fall in foreign exchange earnings from $3.4 billion in April of 1995 to $1.7 billion in October 1997 permitted an increase in public and private credit without increasing the money supply, which grew by 10.8 percent in FY97 after increasing by 8.2 percent in FY96. Bangladesh has devalued its currency, the taka, six times in 1997, to support its foreign exchange reserves and to help the country's export competitiveness. The taka was devalued by 8.69 percent against the U.S. dollar between June 1996 and October 1997. However, in view of devaluations in neighboring countries with whom Bangladesh must compete in export markets, many observers, especially those in the export sector, believe the extent of the devaluations to date has not been sufficient. The government's primary monetary policy tools are the discount rate and the sale of Bangladesh Bank bills, though central bank influence over bank lending practices also plays an important role.

Current government expenditures exceeded the budgeted amount by 3.6 percent in FY97 in part due to larger than expected domestic interest payments and subsidies. However, spending on the annual development budget did not increase as planned, because of slow foreign aid disbursements, so that the overall budget deficit for FY97 is estimated to be about 5.3 percent of GDP, versus a deficit of 5.7 percent in FY96. Net foreign financing accounted for 3.4 percent, with the remaining 1.9 percent funded domestically; two-thirds of domestic financing came from the banking system. Some causes of the FY97 deficit include increased domestic interest payments and foodgrain purchases, defense spending and fertilizer subsidies. Domestic revenues for FY97 fell short of budgeted levels by five percent but exceeded current expenditures by $890 million, or 2.8 percent of GDP. This surplus provided the government contribution to the country's development budget, termed the "Annual Development Program" (ADP), estimated at a total of $2.5 billion in FY 1997. While most funding for the ADP comes from donors, the Finance Ministry claimed to have maintained Bangladesh's contribution at about 36 percent in FY97; for FY98 the percentage of Bangladesh's ADP contribution is forecast to be 47 percent. The domestic portion of government debt is financed through the sale of government bonds. Tax revenues reached a level of $3.1 billion in FY97, more than double the amount collected in 1991, but stagnant over the last several years as a percentage of GDP. The Government in its FY98 budget lowered the maximum tariff by 2.5 percent and added some services to the VAT system, but also implemented a 2.5 percent import surcharge, designed to support infrastructure development. The average unweighted tariff actually increased from 21.5 percent in FY97 to 23 percent in FY98.

Although some liberal investment measures were taken by the government to foster private sector involvement in the energy, power, and telecommunications sectors, poor infrastructure (power shortages, port bottlenecks, etc.), bureaucratic inertia, corruption, labor militancy, a weak financial system which keeps the cost of capital high, political unrest and a deteriorating law and order situation continued to discourage some domestic and foreign investors in FY97. The first half of FY98 has shown mixed results, with some indicators pointing to increased commercial and manufacturing growth. Investment, which stagnated at 12 to 13 percent of GDP in the 1985-1992 period, increased slightly from 17 percent in FY96 to 17.4 percent in FY97. It is generally held that only an investment/GDP ratio of 20 to 22 percent and a GDP growth rate over seven percent can begin to alleviate poverty on a large scale.

2. Exchange Rate Policies

At present, the Bangladesh central bank follows a semi-flexible exchange rate policy, revaluing the currency on the basis of the real effective exchange rate, taking account of the nominal exchange rates and inflation rates of major trading partners. A level of reserves equal to 2.6 months of imports and a black market rate close to the official rate suggest the central bank has fixed the exchange rate close to the equilibrium level in the short term, although the country's loss of $1.7 billion in foreign exchange reserves between April 1995 and October 1997 highlights Bangladesh's vulnerable foreign exchange position. The World Bank and exporters have called for the taka to be devalued further. Foreign reserves have stabilized at around $1.7 billion through most of the last half of FY97 and through four months of FY98. The taka's market value, however, is bolstered by the large sums of foreign exchange Bangladesh receives every year through aid transfers and by foreign exchange received as remittances from overseas workers. The taka is nearly fully convertible on the current account. The official exchange rate on October 28, 1997 was taka 44.85 to 1 USD.

Most foreign firms are able to repatriate profits, dividends, royalty payments and technical fees without difficulty, provided the appropriate documentation is presented to the Bangladesh Bank, the country's central bank. Outbound foreign investment by Bangladeshi nationals requires government approval and must be in support of export activities. Bangladeshi travelers are limited by law to taking no more than $3,000 out of the country per year. Dollars are bought and sold in the black market, fueled by the informal economy. U.S. exports do not appear to have been negatively affected by the taka devaluations in 1997.

3. Structural Policies

In 1993, Bangladesh successfully completed a three-year International Monetary Fund (IMF) Enhanced Structural Adjustment Facility (ESAF) program, meeting all fiscal and monetary targets. IMF teams visited Bangladesh in 1997 to discuss a new ESAF but to date have not reached an agreement with the Government. Broad money supply growth has been about 10.8 percent in FY 1997, 8.2 percent in FY 1996, and 16.0 percent in FY95. The value added tax (VAT) collections have increased steadily in recent years; the Government added some services under VAT for FY98 to boost revenues but hopes that improved collection and administration practices will enhance overall tax receipts. Government current spending was higher in FY97 compared to the planned level, but was offset by lower than planned development spending. A combination of food imports, lower foreign aid disbursements and slow export growth resulted in a fall in foreign exchange reserves from a peak of $3.4 billion in April 1995 to around $1.7 billion in October 1997.

While Bangladesh has managed to maintain a measure of macroeconomic stability since 1993, despite political instability in 1995 and early 1996, its macroeconomic position in 1997 has remained vulnerable, with relatively high fiscal deficits, increased public sector borrowing from the banking system, and a fall in foreign exchange reserves and stagnant tax revenues. Progress on other important economic reforms has been halting, though the new government has instituted reforms of the capital market and taken some market-friendly decisions to encourage foreign investment. Overall, however, efforts at reform often are successfully opposed by vested interest groups, such as the bureaucracy, public sector labor unions or highly protected domestic producers in import-competing industries. The public sector still exercises a dominant influence on industry and the economy; non-financial state-owned enterprises (SOEs) lost an estimated $364 million in 1997. Most public sector industries, including textiles, jute processing, and sugar refining, are perennial money losers, which drain the treasury. Their militant unions have succeeded in setting high wages which their private sector counterparts often feel compelled to meet out of fear of union action. The Government failed to implement jute sector reforms under a World Bank adjustment credit program in 1997, despite pledges for action; the credit program has been ended. Privatization of state owned enterprises has been advocated by the Awami League government, although little concrete action has been taken as of late 1997.

Private sector productivity is further stunted by the state's poor management of crucial infrastructure (power, railroads, ports, telecommunications, and the national airline), most of which is under government monopolies. Recognizing this shortcoming, and in order to increase foreign investment in the power sector, the Government formalized in October 1996 its private power policy, which grants tax holidays and duty-free imports of plant and equipment for private sector power producers. In October 1997 the Government signed two contracts with International Power Producers, and other international tenders for sizable projects are being evaluated. Private investment is also being allowed in the telecommunications sector for cellular communications, and in the hydrocarbons sectors, where international companies have expressed a high level of interest in a second round of bidding for remaining exploration rights. Four international companies are currently preparing for natural gas production in 1998 or are starting exploration activities. The Government is also trying to attract foreign portfolio investment in domestic capital markets, but a stock market crash in late 1996 appears to have kept many international investors out of the market for most of 1997. Long an easy source of funds for loss-making government corporations and preferred private sector borrowers who did not feel obliged to repay loans, the dysfunctional banking sector continues to be the subject of reform programs. The banking sector is dominated by four large nationalized commercial banks (NCBs). The privatization of one of the four NCBs is still pending as of November 1997. However, entry of foreign and domestic private banks has been permitted, and several new banks have entered the market in 1995, 1996 and 1997.

4. Debt Management Policies

Assessed on the basis of disbursed outstanding principal, Bangladesh's external public debt was $15.8 billion as of December 1996, down 3.1 percent from $16.3 billion in December 1995. Because virtually all of the debt was provided on highly concessional terms by bilateral and multilateral donors (i.e. one or two percent interest, 30-year maturity, 20-year grace period), the net present value of the total outstanding debt is significantly lower than its face value. Bangladesh as of late 1997 owes approximately $518 million to the United States government, primarily incurred under the old PL-480 Title I program. Debt servicing (principal and interest) for 1996 was $670 million. Debt service as a percentage of current receipts has fallen from 20 percent in FY 1991 to an estimated 8.5 percent in FY 1997. Debt service as a share of GDP was 2.0 percent in 1997, while the debt service to export ratio was 15.1 percent. In late 1996 Bangladesh began talks with the IMF over a possible new Enhanced Structural Adjustment Program; these talks continued in 1997 but no agreement has been reached as of late 1997. It maintains good relationships with the World Bank, Asian Development Bank, the International Monetary Fund and the donor community. While Bangladesh's total external debt has increased as a share of GDP in the last decade, its ratio of debt service to exports has been falling, due to high export growth and the highly concessional nature of most of its debt.

5. Aid

No military aid is included in the figures in the tables.

6. Significant Barriers to U.S. Exports

Since 1991, the government has made significant progress in liberalizing what had been one of the most restrictive trade regimes in Asia, although Bangladesh continues to raise relatively high shares of its government revenues--nearly 60 percent--from import-based taxes (custom duties, VAT and supplementary duties on imports). Tariff reform was accelerated significantly in 1994 and 1995 by the compression of customs duty rates into a range of 7.5 to 15 percent for most products and the maximum rate being set at 50 percent (with the exception of certain luxury goods, for which duties remained in excess of 100 percent). The trade-weighted average import tariff rate was 28 percent in FY94, compared to 40 percent in FY92. Changes in the FY97 budget reduced the maximum tariff rate to 45 percent, with duty on some items falling to 2.5 percent. In FY98 the maximum tariff was reduced to 42.5 percent; this decrease was offset by a 2.5 percent import surcharge slated to go towards infrastructure development. In addition, some supplemental duties were also increased in the FY98 budget. Government estimates indicate that the weighted average tariff rate was brought down to below 25 percent by the FY97 tariff reductions. The World Bank estimated the average unweighted tariff increased to 23 percent in FY98 from 21.5 percent in FY97.

In July 1992 the government replaced an import sales tax with a trade-neutral VAT, leaving only the 2.5 percent "advance income tax" to be removed to make customs duty the only protective instrument for most imports. The number of products subject to an import ban or restriction was further reduced in 1996 and import procedures have been streamlined. The formerly cumbersome procedure for opening letters of credit also has been simplified. Bangladesh is a founding member of the World Trade Organization (WTO). It is not a signatory to WTO plurilateral agreements on government procurement or civil aircraft.

Some barriers to U.S. exports or direct investment exist. The Government monopoly controls basic services and long-distance service in the telecommunications market, although the Government granted three licenses to private cellular companies in late 1996 to end a private company's monopoly. Some lack of national treatment exists in the pharmaceutical sector, where manufacturing and import controls imposed by the national drug policy and the Drugs (Control) Ordinance of 1982 discriminate against foreign drug companies. Policy instability, where policies are altered at the behest of special interests, also creates difficulties for foreign companies.

Government procurement generally takes place through a tendering process, which is not always perceived as a transparent process by foreign companies. Bangladesh has some countertrade arrangements with countries in Central and Eastern Europe, Central Asia, China and North Korea.

Customs procedures are lengthy and burdensome, and further complicated by corruption. The systems of customs valuation has been supplemented by the acceptance of pre-shipment inspections (PSI) certificates from four international inspection companies, but customs' acceptance of these certificates is not yet mandatory and some products have been removed from PSI eligibility. The Government removed more items from PSI eligibility in its FY98 budget. Customs duty revenues are scheduled to be higher in absolute terms in the FY98 budget, although they have been falling as a share of total revenue over the last several years. Reform attempts of customs practices are ongoing.

Other drawbacks to investment in Bangladesh include low labor productivity, poor infrastructure, excessive regulations, and uncertain law and order. The lack of effective commercial laws makes enforcement of business contracts difficult. Officially, private industrial investment, whether domestic or foreign, is completely deregulated, and the government has significantly streamlined the investment registration process. However, while registration has been simplified, domestic and foreign investors typically must obtain a series of approvals from various government agencies in order to implement their projects. Bureaucratic red tape, compounded by corruption, slows and distorts decision-making and procurement. Existing export processing zones (see below) have successfully facilitated investment but are still too small to have changed significantly the overall investment picture in the country.

U.S. investment stock in Bangladesh until recently was very small, totaling around $25 million, primarily in the assets of service companies and a few manufacturing operations. This total has now risen significantly due to investment in natural gas exploration and production. As work begins in late 1997 or 1998 based on earlier agreements between the Government and U.S. companies in gas exploration, lubricants and energy production, the amount of U.S. investment will rise significantly. Many other opportunities for significant investment in gas exploration and power generation could further swell U.S. investment and trade, if U.S. companies do well in negotiations underway in October 1997.

7. Export Subsidies Policies

The Bangladesh government encourages export growth through measures such as ensuring duty-free status for some imported inputs, including capital machinery, and providing easy access to financing for exporters. Ready-made garments producers are assisted by bonded warehousing and back-to-back letter of credit facilities for imported cloth and accessories. The central bank offers a 25 percent rebate to domestic manufacturers of fabric for ready-made garment exports. Exporters are allowed to exchange 100 percent of their foreign currency earnings through any authorized dealer. Government financed interest rate subsidies to exporters have been reduced in stages over the last five years. Bangladesh has established export processing zones (EPZs) in Chittagong and Dhaka, and has plans to open two more. The government in late 1996 gave the private sector the authority to build and operate private export processing zones; Korean investors have come forward with a plan for the first private EPZ.

8. Protection of U.S. Intellectual Property

Bangladesh has outdated intellectual property rights (IPR) laws, and an unwieldy system of registering and enforcing intellectual property rights. Intellectual property infringement is common, particularly of computer software, motion pictures, pharmaceutical products and audio and video cassettes. Despite the difficulties, U.S. firms have successfully pursued their IPR rights in Bangladeshi courts.

Bangladesh has been a member of the World Intellectual Property Organization (WIPO) in Geneva since 1985. The WIPO and the United Nations Development Program (UNDP) in 1995/6 funded a small project providing automation and training for the Bangladesh government's patent office. The Government and WIPO hosted a seminar on IPR issues in April 1997. Bangladesh has begun reforms to increase the level of IPR protection in order to meet its obligations under the WTO TRIPS (Trade-related Aspects of Intellectual Property Rights) Agreement. In consultation with WIPO, the Bangladesh government began drawing up IPR reforms laws in 1992 and has hired consultants to review the IPR draft laws in view of WTO TRIPS provisions. The completion of the review and subsequent modification and vetting of the drafts are expected to take at least a year, with parliamentary passage taking further time. As a result, Bangladesh is unlikely to have effective IPR laws before mid-1998. Bangladesh is not on either the Special 301 watch list or the priority watch list.

Piracy, especially of computer software, reduces the number of legitimate sales of U.S. products. It is difficult to estimate a dollar value.

9. Worker Rights

a. The Right of Association.--The Bangladesh constitution guarantees freedom of association, the right to join unions, and, with government approval, the right to form a union.With the exception of workers in the railway, postal, telegraph, and telephone sectors, government civil servants are forbidden to join unions. However, some workers covered by this ban have formed unregistered unions. The ban also applies to security-related government employees, such as in the military and police. Bangladesh civil servants forbidden to join unions, such as teachers and nurses, have joined associations which perform functions similar to labor unions.

b. The Right to Organize and Bargain Collectively.--Unions in Bangladesh are highly politicized. Virtually all the National Trade Union centers are affiliated with political parties, including one with the ruling party. Pitched battles between members of rival labor unions occur regularly. Some unions are militant and engage in intimidation and vandalism. General strikes were used successfully by the political opposition in early 1996 to pressure the government to call elections and step down. Rising political tensions again led to several general strikes during 1997. General strikes cause economic and social disruption through lost production and, more significantly, transportation delays causing missed shipping dates for exports. Strikes motivated by labor issues increased from 1996. A nationwide industrial strike was called on July 30 by a confederation of labor organizations to support demands for a minimum wage and increased investment in state-owned industries.

The Essential Services Ordinance permits the Government to bar strikes for three months in any sector deemed "essential." Mechanisms for conciliation, arbitration and labor court dispute resolution were established under the Industrial Relations Ordinance of 1969.

There have been numerous complaints of garment workers being harassed and fired in some factories for trying to organize workers. Workers in Bangladesh's two export processing zones (EPZs) are prohibited from forming unions, though some workers have skirted the ban by setting up associations. The government has not fulfilled promises that labor law restrictions on freedom of association and formation of unions in the EPZs will be lifted in 1997.

c. Prohibition of Forced or Compulsory Labor.--The constitution prohibits forced or compulsory labor. The Factories Act and the Shops and Establishments Act, both passed in 1965, set up inspection mechanisms to guard against forced labor, but resources for enforcement are scarce. Nevertheless, there is believed to be little use of forced labor, though conditions for some domestic servants resemble servitude, and some trafficked women and children work as prostitutes.

d. Minimum Age for Employment of Children.--Bangladesh has laws that prohibit labor by children. The Factories Act bars children under the age of 14 from working in factories. In reality, enforcement of these rules is inadequate. According to United Nations estimates, about one third of Bangladesh's population under the age of 18 is working. In a society as poor as Bangladesh's, the extra income obtained by children, however meager, is sought after by many families.

In July 1995, Bangladesh garment exporters signed a memorandum of understanding that has sharply reduced child labor in the garment sector. Under the MOU, schools and a stipend program were established for displaced child workers. By September 1997, more than 300 schools serving some 8,000 former child workers were in operation. A system of fines and possible suspension of import/export privileges exists, and a monitoring system has been set up by the International Labor Organization.

e. Acceptable Conditions of Work.--Regulations regarding minimum wages, hours of work and occupational safety and health are not strictly enforced. The legal minimum wage varies depending on occupation and industry. It is generally not enforced. The law sets a standard 48-hour workweek with one mandated day off. A 60-hour workweek, inclusive of a maximum 12 hours of overtime, is allowed. Relative to the average standard of living in Bangladesh, the average monthly wage could be described as sufficient for minimal, basic needs. The Factories Act of 1965 nominally sets occupational health and safety standards. The law is comprehensive but appears to be largely ignored by many Bangladeshi employers.

f. Rights in Sectors with U.S. Investment.--Manufacturing firms with U.S. investment have unions and bargain collectively. Worker layoffs or the threat of reductions-in-force can cause serious management-labor disputes. As far as can be determined, firms with U.S. capital investment abide by the labor laws. Similarly, these firms respect the minimum age for the employment of children. According to both the Bangladesh government and representatives of the firms, workers in firms with U.S. capital investment generally earn a much higher salary than the minimum wage set for each specific industry. In some cases, workers in these firms enjoy shorter working hours than those working in comparable indigenous firms.

(1) Suppressed to avoid disclosing data of individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis

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