Bangladesh WT/TPR/S/68
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I. ECONOMIC ENVIRONMENT
(1) MAIN ECONOMIC DEVELOPMENTS
1. Since the previous Trade Policy Review of Bangladesh in 1992, trends in its economic policy
and performance have been rather mixed, judging from several key indicators (Table I.1).  In the early
1990s, considerable progress was made in stabilizing and restructuring the economy through prudent
macroeconomic policies, liberalization of the exchange rate system and the trade  regime, andfinancial sector reform.  The outcome was an average rate of real GDP growth above 5% during the
period 1992-1998, largely led by exports (mainly involving ready-made garments) and an improved
external position, particularly with regard to indebtedness.  During the same period, inflation
fluctuated considerably, jumping from 2.7% in fiscal year 1992/93 to 8.9% in 1994/95 before falling
to 2.6% in 1996/97 and rising again to 7% in 1997/98.
1
Table I.1
Selected macroeconomic and financial indicators, 1992-99
1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99a
(annual % change)
National income and prices
Real GDP 4.6 3.8 5.5 5.5 5.4 5.2 4.2
Inflation (annual average) 2.7 3.3 8.9 6.6 2.6 7.0 9.0
Exports f.o.b. (including EPZ)b1 9 . 5 6 . 33 7 . 11 1 . 81 4 . 01 6 . 8 2 . 9
Imports c.i.f. (including EPZs)c15.5 2.9 39.2 19.1 3.1 5.1 6.6
Broad money and credit (end of year)
Broad money 11.4 14.5 16.0 8.2 10.8 10.4 12.8
Domestic credit 6.4 3.0 23.2 20.4 13.7 12.6 13.1
Exchange rate
Nominal effective exchange rate (1990=100) 2.7 -1.9 -6.6 2.5 0.3 5.1a..
Real effective exchange rate (1990=100) -3.2 0.8 0.0 1.5 3.4 7.8a..
Gross official reserves (months of imports) 5.4 6.8 5.5 3.1 2.7 2.6 2.1
(% of GDP)
Balance-of-payments
Trade balance -5.3 -4.9 -6.3 -7.6 -6.6 -5.5 -6.2
Current account balance (incl. current transfers)a-0.8 -0.3 -1.8 -3.2 -1.3 -0.6 -0.9
Current account balance (incl. current and
capital transfers)0.6 0.9 -0.5 -2.4 -0.4 0.1 -0.1
Aid disbursements 5.3 4.6 4.6 3.6 2.7 2.5 2.8
Central government budget
Total expenditure 16.3 13.9 14.7 13.5 13.8 13.8 14.6
Current expenditure 8.3 6.8 6.8 6.9 7.0 7.4 8.0
Food account balance 0.6 -0.3 0.5 0.3 0.2 0.2 0.3
Annual development programme 6.6 6.5 6.7 5.8 6.1 5.8 5.9
Other capital and net lending 0.8 0.9 0.8 0.5 0.5 0.4 0.3
Total revenue 11.1 9.3 9.4 9.1 9.4 9.6 9.5
Taxes, of which 8.9 7.2 7.4 7.3 7.5 7.6 7.6
Taxes on international trade 2.8 2.2 2.4 2.3 2.3 2.3 2.3
Taxes on income and profits 1.6 1.3 1.0 0.9 0.9 1.0 1.1
VAT and supplementary duties 3.8 3.1 3.4 3.5 3.7 3.6 3.5
Table I.1 (cont'd)
                                                     
1 These rates compare favourably with the double-digit inflation that persisted practically throughout
the 1980s.WT/TPR/S/68 Trade Policy Review
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1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99a
Non-tax revenues 2.2 2.2 2.0 1.8 1.9 2.0 1.9
Overall budget balanced-5.2 -4.6 -5.3 -4.4 -4.4 -4.2 -5.1
Including grants .. .. .. .. -2.6 -2.9 -3.7
Domestic financing 0.3 0.8 1.5 1.7 1.5 1.7 2.1
Banks -1.0 -0.4 0.4 0.9 1.0 0.7 1.0
Other domestic 1.3 1.2 1.1 0.8 1.5 1.0 1.0
Foreign financing 5.2 3.8 3.8 2.8 2.9 2.5 2.6
Total government debt 58.0 56.9 55.5 49.3 47.2 44.5 47.7
External 47.9 45.8 44.6 37.6 34.8 31.4 33.4
Domestic 10.1 11.1 10.9 11.7 12.5 13.0 14.3
Medium and long-term external debt
(US$ million)13,615 15,373 16,767 15,170 15,025 14,019 15,144
Total debt 42.6 45.8 44.6 37.6 36.3 32.8 35.0
Debt service (% of current earnings) 12.0 11.4 10.4 9.4 8.7 8.0 7.9
Saving and investment
National saving 14.4 15 16 14.2 14.8 14.8 14.3
Gross domestic investment 7.0 7.5 8.2 7.5 7.5 8.6 8.4
Nominal GDP (US$ million) 31,900.0 33,600.0 37,600.0 40,300.0 41,345.0 42,700.0 43,292.0
.. Not available.
aE s t i m a t e s .
b On the basis of shipment.  Includes goods procured in ports and repairs on goods.c On the basis of exchange records.  Includes goods procured in ports and repairs on goods.
d Excluding the costs of reform of state-owned enterprises, and bank recapitalization.
Source: International Monetary Fund and authorities of Bangladesh.
2. During the mid 1990s, however, in the face of severe political difficulties and civil unrest,
which manifested themselves in frequent nationwid e strikes ("hartals"), the impetus for structural
reform appears to have waned and financial discipline was eroded.  Moreover, between 1997/98 and
1998/99, real GDP growth dropped from 5.2% to 4.2%.  This was partly the consequence of a sharp
drop in export growth (from 17.1% to 2.9%), which was initially due to devastating floods that
covered one third of the country2, and exacerbated by recurrent power shortages, inadequate port
facilities, and other infrastructural bottlenecks, as well as disruptions owing to nationwide strikes.  At
the same time, inflation increased from 7% to 9% as a result of a surge in food prices, again caused by
the floods.  But as the food supply situation improved and non-food inflation continued to moderate,
the 12-month headline inflation rate fell from a peak of 12.7% in December 1998 to 7.7% in
June 1999.
3. Unfortunately, real GDP growth at an annual average of around 5% during the review period
has not been sufficient to make much, if any, dent in the poverty that pervades in Bangladesh;  GDP
per capita in 1998/99 was only US$345, among the lowest in the world.  According to the
World Bank, more than one third of Bangladesh's population of 127 million still lives below the
poverty line, and more than half is classified as poor.3  Given the country's high incidence of poverty,
                                                     
2 The 1998 floods, which cost the Bangladesh economy an estimated US$1 billion, were the longest in
living memory and affected 30 million people.  They resulted in over 1,100 deaths and damaged an estimated15,000 kilometres of roads, 14,000 schools, hundreds of bridges and culverts, and close to half a million homes(World Bank, 1999a, p. 3).
3 World Bank (1998a).Bangladesh WT/TPR/S/68
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its dense population4, and its vulnerability to natural disasters, including periodic flooding and
cyclones, food security is a major policy objective of the Government.  Bangladesh is a large recipient
of foreign aid, a substantial portion of which entails food.
4. On the structural front, the Government has, inter alia,  further liberalized its trade regime,
broadened the base on which VAT is levied, strengthened the banking sector's legislative and
regulatory framework, implemented significant adjustments in some administered prices, closed orprivatized some loss-making state-owned enterpri ses (SOEs), and taken steps to improve governance.
Nevertheless, the pace of reform in certain key areas, notably the Government's tax revenue base,
customs administration, banking, restructuring/privatization of SOEs, and matters of governance, has
been regarded as slow by the IMF, World Bank and international donors.  Although the Government
appears to recognize the need for reforms in these and other areas, it is constrained by the need tosecure broad political and public support domestically.
(2) M
ACROECONOMIC POLICIES
(i) Monetary policy, the exchange rate and balance of payments
5. During the review period, monetary policy has been broadly supportive of the Government's
efforts to maintain macroeconomic stability.  Since 1991/92, the Bangladesh Bank (BB), the centralbank, has gradually replaced direct quantitative instruments with indirect instruments of monetary
management.  Credit ceilings on individual banks and all direct controls on interest rates, other than
those related to lending to the export sector, have been abolished on the grounds that they are
distorting, hamper competition among banks, and thus inhibit efficiency.  While targets for the
expansion of credit and money supply are set as before, according to the authorities, the purpose of
the calculations has been changed to identify the need to regulate money supply, which is done
through the indirect manipulation of reserve money.
6. The BB is actively involved in the design and implementation of these policies, although it
has limited institutional autonomy in this respect.   While the BB appears to have full institutional
autonomy in respect of licensing, regulation and supervision of banks and other deposit taking
institutions, quasi-fiscal activities, including subsid ized BB lending to specialized credit institutions,
not subject to the scrutiny of the budget process, have tended to undermine the Bank's financialposition.
7. During 1998/99, monetary policy was geared primarily to accommodating the impact of the
floods.  Broad money growth and domestic credit expansion, and thus inflation, remained within
tolerable limits.  The expansion of BB credit to agricultural banks was such that total disbursements of
agricultural loans from the banking system nearly doubled their pre-flood average to around 1.7% ofGDP in 1998/99.
8. In March 1994, the Bangladesh taka became convertible, with respect to current international
payments and transfers.  Consequently, individuals and firms resident in Bangladesh may now
conduct all such transactions, including those related to trade and investment, through banks in
Bangladesh authorized to deal in foreign exchan ge (Authorized Dealers) without the BB's prior
approval.  Restrictions still apply to capital account transactions, however, a situation that has helped
                                                     
4 Bangladesh's land area is 145,570 square kilometres.  With a current population of 127 million, this
implies a population density of 872 persons per square kilometre, which is nearly three times the density ofIndia, more than five times that of Pakistan, and around eight times that of Indonesia.WT/TPR/S/68 Trade Policy Review
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to insulate Bangladesh from the Asian crisis.5  But, with the BB having little, if any, autonomy in the
conduct of monetary and exchange rate policy, responsibility for which resides in the Ministry of
Finance, the exchange rate has been subject to political influence.
9. Exchange rate policy has been based on discrete, periodic adjustments of the taka related to
movements in the real effective exchange rate (REER) index and other macroeconomic indicators6, a
practice that has made exchange rate policy unduly susceptible to political considerations.  Despiteseveral devaluations against the U.S. dollar during the past two years, and partial recovery of the
currencies of Bangladesh's main trading partners and competitors from the low-points reached during
the Asian crisis, these adjustments have not been sufficient to reverse the considerable appreciation of
the REER that that occurred in 1997 and the first half of 1998 (Table I.1 and Chart I.1).  Indeed, prior
to the devaluation in November 1999, the REER was still about 8 percentage points above the levelthree years previously.  The outcome has been a considerable erosion of Bangladesh's export
competitiveness, particularly vis-à-vis South East Asian garment manufacturers, which threatens
future export-led growth.  Clearly, a competitive exchange rate, together with an open and
non-distorting trade and investment regime, is necessary to foster export-led growth and economic
development.
80859095100105
1992/93 1993/94 1994/95 1995/96 1996/97 1997/98
IMF (1998), Staff Country Report No. 98/131, Statistical Appendix, Washington, D.C.Chart I.1                                               
Indices of real and nominal exchange rates, 1992/93-1997/98 
1990=100
Source :Real effective exchange rate
Nominal exchange rate
                                                     
5 These restrictions afforded Bangladesh some protection against capital flow volatility.  Bangladesh
was also shielded by the fact that only 1.6% of its exports  are destined for the crisis-hit countries.  By contrast,
with over 13% of imports coming from these countries, Bangladesh has probably benefited from thedepreciation of their currencies, which has reduced Bangladesh's import payments.
6 The REER index is calculated on the basis of the trade-weighted basket of currencies of Bangladesh's
15 main trading partners;  the U.S. dollar is used as the intervention currency.Bangladesh WT/TPR/S/68
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10. Imports grew faster than exports in 1994/95 and 1995/96.  The outcome was a substantial
widening of the trade and current account deficits (Table I.2).  In the two subsequent fiscal years,
these deficits dropped owing to the fact that ex port growth outstripped imports, and increased
wage-earners' remittances from abroad.  The deficits rose again in 1998/99, however, largely due to a
sharp increase in imports of food grain in the wake of devastating floods.
Table I.2
Balance of payments, 1992-99
(US$ million unless otherwise indicated)
1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99a
Trade balance -1,688 -1,657 -2,361 -3,063 -2,735 -2,352 -2,694
Exports f.o.b. (including EPZs)a2,383 2,534 3,473 3,884 4,427 5,172 5,324
Imports c.i.f. (including EPZs)b4,071 4,191 5,834 6,947 7,162 7,524 8,018
Net services 76 21 -89 -104 163 182 198
Receipts 523 523 657 553 656 707 707
Payments -447 -502 -746 -657 -493 -525 -509
Net income -73 -31 -41 55 -107 -100 -135
Receipts 94 147 162 253 89 91 91
Payments -167 -178 -203 -198 -196 -191 -226
Current transfers 1,430 1,578 1,827 1,821 2,145 2,017 2,237
Official current transfersc363 331 401 346 375 267 266
of which food 121 118 137 138 101 99 177
Private transfers 1,067 1,247 1,426 1,475 1,770 1,750 1,975
of which workers' remittances 944 1,089 1,198 1,217 1,475 1,525 1,706
Current account balance -255 -89 -664 -1,291 -534 -253 -374
Capital account (net) 455 379 489 331 360 304 348
Capital transfers 455 379 489 331 360 304 348
Financial account 556 668 706 447 331 760 469
Direct investmentd71 6 6 71 6 2 4 91 9 8
Portfolio investment 9 53 61 -21 -132 3 -6
Other investment 540 599 639 461 447 508 277
Medium and long-term loans 857 849 849 767 746 748 867
Medium and long-term amortization
payments-239 -264 -314 -316 -316 -308 -341
Other long-term loans (net) -17 -20 -8 33 50 -50 -30
Other short-term capital (net) -61 34 112 -23 -33 118 -219
Errors and omissionse-283 -166 -79 -504 -326 -729 -594
Overall balance 473 792 452 -1,017 -169 82 -171
Financing items -473 -792 -452 1,017 169 -82 171
Bangladesh Bank -532 -673 -277 941 197 -131 218
Commercial banks 59 -119 -175 76 -28 49 -47
a On the basis of shipment.  Includes goods procured in ports and repairs on goods.
b On the basis of exchange records.  Includes goods procured in ports, and repairs on goods.c Food and commodity grants including technical assistance.
d These figures differ considerably from the World Bank estimates found in Table I.3.
e Includes excess of shipment over actual receipt from exports.
Source: Data provided by the authorities of Bangladesh.WT/TPR/S/68 Trade Policy Review
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(ii) Fiscal policy
11. Whereas annual government expenditure has averaged around 14% of GDP during the review
period, tax revenues have averaged only 7.5%, which is low both by international and neighbouring
countries' standards.  The ratio of taxes to GDP is even lower when allowing for the underground
economy, which is thought to account for roughl y half of GDP.  With other sources of revenue
amounting to approximately 2% of GDP, the outcome is a persistent central government budgetdeficit of around 5%.  The budget deficit means that during the review period national saving has
been insufficient to finance domestic investment, which has increased Bangladesh's dependence on
inflows of foreign capital;  the consequent saving-inve stment gap is reflected in the persistent current
account deficit.  The Government's weak revenue base also jeopardizes its ability to undertake
essential social expenditures on health and education, etc., and to provide reliable basic infrastructure.
12. The overall fiscal position of the public sector as a whole (that is, consolidated to take into
account non-financial state-owned enterprises) is  even worse, owing to the weak operational
performance of these enterprises and their burgeoning capital expenditure programme, which together
added 2.8 percentage points of GDP to the overall deficit in 1996/97.  The operations of non-financial
SOEs are sustained largely through government-gua ranteed borrowing from state-controlled banks,
official external donors, and an accumulation of domestic and external arrears.
(3) M
AIN DOMESTIC STRUCTURAL POLICY ISSUES
(i) Taxation and the Government's revenue base
13. Aside from its low taxes/GDP ratio, one of the most striking features of Bangladesh's tax
system from the standpoint of international trade is its heavy reliance on customs duties, VAT, and
other charges levied at the border.  Indeed, taxes on imports into Bangladesh account for over half of
total tax revenues.  Furthermore, a large share of co rporation taxes (which account for two thirds of all
income taxes) are derived from export profits and/or are paid by foreign investors.
14. High overall levels of border taxation contribute to domestic inefficiency by penalizing
efficient activities, including exports, which rely on imported inputs.  Thus, the international
competitiveness of Bangladesh's exporters is impaired, insofar as measures to offset the effects of
such taxation on exporters are insufficient.  Bangladesh does in fact use a variety of measures(including duty concessions for specific purposes, duty drawbacks, bonded warehouses, EPZs, and
cash grants) in an attempt to offset the adverse effects of import taxes on exporters;  but such
measures contribute to the complexity of its trade (and tax) regime (Chapter III(4)(ii)).
15. Bangladesh's low level of taxation in relation to GDP is to some extent due to weak tax
administration exacerbated by reportedly endemic corruption among tax and customs officials, arisingpartly from their discretionary power.  Moreover, tax evasion (and smuggling) is widespread,
apparently costing the Government US$2 billion annually in lost tax revenues.
16. Furthermore, given the lack of investment and FDI, which has clearly hampered Bangladesh's
economic development, the Government offers a wide and complex array of tax incentives and
customs duty exemptions (notably tax holidays), w hose effectiveness in stimulating investment and
attracting FDI is doubtful.  Not only do these tax measures complicate tax and customs
administration, they increase the scope for tax avoidance, if not, evasion.  Such measures, and the
prospect of others, also encourage "rent-seeking" activities involved in the lobbying necessary to
secure them.  A more uniform corporate tax  involving a lower across-the-board tax rate with much
fewer incentives, but raising the same amount of revenue, would arguably be a much more efficient
tax from the standpoints of economic and administrative efficiency.Bangladesh WT/TPR/S/68
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17. The tax regime is also characterized by a lack of transparency regarding the cost of various
tax measures, in terms of tax revenue forgone, and their cost-effectiveness in achieving stated
objectives.  Lack of transparency constitutes a major impediment to ensuring public accountability in
respect of tax and customs policies as well as their administration.
18. The 1999/2000 budget, like several previous budgets, contained important steps aimed at
improving revenue collection and addressing corruption in tax and customs administration.
(ii) State-owned enterprises and privatization
19. State intervention in the Bangladesh economy c ontinues to be pervasive, with state-owned
enterprises accounting for one fifth of manufacturing output, most of the services provided by
utilities, and a large share of bank assets.  The large number of inefficient loss-making SOEs
constitutes a further drain on the Government's budget particularly those supplying fertilizer, jute,textiles, and power, which are in some instances required to set their prices below long-run marginal
costs, thereby subsidizing the use of such products.
7  The budget situation could deteriorate if the cost
of restructuring of SOEs and the weak banking sector turns out to more than expected; the cost of
such reforms is thought to be around 10% of GDP.
20. Inefficient SOEs together with inappropriate ad ministered pricing has also contributed to the
lack of reliable basic infrastructure, including power, transportation, and telecommunications, which
are essential business inputs.  The lack of infrastructure undermines domestic producers' international
competitiveness and discourages FDI, thus hampering the country's economic development.
21. While the Government has taken action to restructure and privatize SOEs, progress has
hitherto been very slow as a consequence of strong opposition from trade unions as well as from
vested interests within ministries responsible for traditional industries (Chapter III(4)).  Indeed, since
1986, only 17 relatively small manufacturing SOEs have been privatized, the proceeds of whichamounted to only Tk 1.2 billion (US$26 million), or less than 1% of SOE assets.
8  In the face of such
opposition, the Government is making an effort to build the necessary consensus among stakeholders
that would permit more rapid restructuring and privatization of SOEs, hopefully in the near future.
(iii) Banking reform
22. All the nationalized commercial banks (NCBs), specialized banks, and most of the private
domestic banks (PDBs) in Bangladesh were technically insolvent.  By June 1999, the ratio of
non-performing loans (NPLs) to total loans had reached an average of 43%, with the four NCBs
among the worst performing banks.  Rehabilitation of the banking system, including the assumption
of bad loans to SOEs, retrenchment of redundant NCB staff and, the recapitalization of NCBs, could
involve huge cost;  according to one estimate, it could reach as much as 10% of GDP.
23. The manifest weakness of the banking sector can be attributed, inter alia , to the Bangladesh
Bank's failure to close banks that do not comply with prudential regulations and perform poorly;  poor
corporate governance in both NCBs and PCBs, which has permitted insider lending and fraud;  banks'
quasi-fiscal operations;  and the use of these banks by the Government to channel loans to favoured
                                                     
7 In 1997/98, the SOE sector as a whole earned a negative rate of return of 0.9% on assets (net of
taxes), which pales in comparison with the 10% return on investment education, for example.  Out of the
38 non-financial SOEs, 19 loss-making entities made a combined loss of Tk 10.2 billion (US$224 million).  The
consequent SOE deficit and financing requirement was as high as 1.7% of GDP.  (World Bank, 1999a,pp. 50-53).
8 World Bank (1999a), p. 53.WT/TPR/S/68 Trade Policy Review
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sectors for industrial policy purposes.  The weakness of the sector has hampered the financing of
exports and investment.
24. Several recent steps have been taken in an attempt to address the weakness of the banking
sector.  In particular, the BB has acted to strengthen its prudential and supervisory regulations, with a
view to bringing them into line with international standards, and has reorganized its operations so as
to improve its monitoring of problem banks and facilitate loan recovery.  Moreover, new laws on debtrecovery and bankruptcy have been enacted.  In addition, under a technical assistance project
supported by the World Bank, independent audits have been undertaken of all four NCBs, confirming
the need for their urgent restructuring. The BB has also established a monitoring cell for NCB
activities.
(iv) Labour market policies
25. Bangladesh has an abundant supply of labour, nearly two thirds of which is engaged in
agriculture.  While cheap unskilled labour is readily available, there is a shortage of skilled labour,
which constitutes a major impediment to Bangladesh diversifying its economy into
higher-value-added activities.
9  Moreover, strikes are frequent;  in 1999, for example, 30 days were
lost as a consequence of "hartals", which are thought to cost the economy roughly US$200 million per
day in lost production.  In an attempt to mitigate disruption of exports, trade unions and strikes are
banned in EPZs.
26. Bangladesh is a major exporter of labour, with an estimated 3 million skilled and unskilled
persons working abroad.  Remittances from overseas workers reached the equivalent of
US$1.7 billion in 1998/99 compared to approximat ely US$1.5 billion in each of the two previous
years.  More than 70% of remittances come from  Gulf Co-operation Council (GCC) states, with the
United States (10%), Malaysia (6%) and the United Kingdom (4%) accounting for most of theremainder.  Insofar as Bangladeshi wage-earners in some crisis-hit Asian countries are forced to
return home and demand for new workers declines, such remittances are likely to fall.  The problem
might be compounded in the event that GCC countries also shed substantial amounts of expatriate
labour in response to lower world oil prices.
10  Faced with this prospect, the Government is actively
looking for alternative opportunities in East and South East Asia, Africa and Europe.  It is also takingsteps to ensure the smooth export of manpower, notably to Malaysia.
11
(4) TRADE AND FOREIGN DIRECT INVESTMENT (FDI)
(i) Composition and pattern of trade
27. In 1998/99, exports and imports of goods and services, respectively, amounted to 16.6% and
23.4% of GDP.  Most of Bangladesh's trade involves merchandise, which in 1998/99 accounted for88% of total exports of goods and services and 94% of total imports.  Workers remittances fromabroad were more than double the receipts for exports of services.
                                                     
9 The lack of skilled labour can be partly explained by the fact that 62% of the population over 15 years
of age is illiterate, one of the highest rates in Asia, an d low enrolment ratios in primary and especially secondary
school education.  A recent World Bank study found that the private financial rate of return on education in
Bangladesh is, on average, 10% per additional year of schooling.  This high rate of return is in contrast to the
negative return earned on SOE assets.
10 However, World oil prices have been rising again recently.
11 The Independent , 10 November 1999,  "Bangladesh to resume manpower export to Malaysia next
month" .Bangladesh WT/TPR/S/68
Page 9
28. Perhaps the most striking feature of Bangladesh's trade is the export domination of textiles
and particularly clothing, their combined share having grown from 70.4% in 1992 to 83.5% in 1998
(Chart I.2).  Such heavy dependence on a limited number of products make the Bangladesh economy
very vulnerable to increased competition from other Asian countries that produce labour-intensive
garments, as these countries recover from the recent economic crisis with substantially depreciated
currencies.  In the case of imports, the share of primary products has declined substantially since 1992relative to that of manufactured goods.  Bangladesh remains heavily dependent on imports of food
and fuel, although that dependency has declined, particularly in the case of fuel.  Textiles, machinery,
and transportation equipment account for by far the largest, and growing, shares of imports, followed
by chemicals and other semi-manufactured goods.
29. India is currently Bangladesh's main source of official imports, accounting for 14.8% of total
imports — more than double its share in 1992 — followed by the European Union (12.3%) and
China (10.4%) (Chart I.3).  Other countries that are relatively important sources of imports are Japan;
Singapore;  Korea;  Chinese Taipei;  and Hong Kong, China, whose shares are each around 5-7%.
The growth in India's share of total imports since 1992 has been largely at the expense of theUnited States and Latin American countries, Europe, and the Middle East, while the overall share ofEast Asian countries has hardly changed.
30. The United States and the European Union, with which Bangladesh enjoys privileged GSP
access, are by far its largest export markets;  together they received 82.4% of exports in 1998,compared with 69.5% in 1992.  India accounts for less than 1% of exports.
31. However, the above import and export figures do not reflect the considerable unofficial trade
that is thought to take place, particularly with Bangladesh's large neighbour, India, with which it
shares a long border.  Unofficial trade is estimated at 13% of total trade (Chapter III(2)(iii)).
(ii) Foreign direct investment
32. Bangladesh has one of the most liberal FDI regimes in South Asia, with no limits on foreign
equity participation (Chapter II(6)).  According to estimates by the World Bank, annual FDI in
Bangladesh has quadrupled during the past four  years, increasing from US$83 million in 1994/95 to
US$386 million in 1997/98 (Table I.3), thereby fostering economic development.
12  The main reason
for this increase is the opening up of infrastructure and services to private investors, domestic andforeign.  Power and gas account for the bulk of FDI.
33. Judging from proposed projects registered with the Board of Investment (BOI) in 1998/99
13,
the United States has been the main source of FDI, accounting for 30.7% of the cumulative total,
followed by Malaysia (13.2%), the United Ki ngdom (12.6%), Japan (9.1%), Hong Kong, China
(8.6%), and Singapore (5.6%) (Chart I.4).
                                                     
12 According to a recent World Bank study, every one percentage point of GDP increase in FDI in
developing economies is associated with a 0.3-0.4 percentage point faster growth in GDP per capita.(Wacziarg, 1998).
13 Proposed projects registered with the BOI greatly exceed actual investments.  Projects registered
with the BOI are believed to cover around four fi fths of total inward FDI:  they exclude EPZs.WT/TPR/S/68 Trade Policy Review
Page 10
Chart I.2
Product composition of merchandise trade, 1992 and 1998
1992 1998
(a)    Exports
Agriculture
15.8
Other manuf.
1.8Other semi-
manufactures
7.2
Textiles
16.7Machinery & 
transport equip.
3.9
Clothing
53.7Manufactures
83.3
Total:   US$1.9 billion Total:   US$5.1 billion
(b)    Im ports
Chemicals
10.8
Textiles
18.2Other 
mining
     2.5
Agriculture
22.1
Machinery & 
transport equip.
18.7Iron & steel
   4.1Fuels
12.2
Manufactures
63.1Agriculture
20.7
Other 
manufactures
4.1Other semi-
manufactures
8.4
Machinery 
 &
 transport 
equip.
19.6
Textiles
21.7Fuels
7.5Other 
mining
2.2
Manufactures
69.5Chemicals
9.1
Total:   US$3.5 billion Total:   US$7.0 billion
Source :  UNSD, Comtrade database (SITC Rev.3).Per cent
Other semi-
manufactures
7.3Agriculture
8.9Other semi-manuf.
2.8
Other 
manufactures
4.4Textiles
8.6Clothing
74.9Manufactures
90.7
Other 
0.4
Iron & 
steel
6.6Other  1.0
Other manuf.
4.0Bangladesh WT/TPR/S/68
Page 11
Chart I.3
Direction of merchandise trade, 1992 and 1998
1992
(a)    Ex ports
Germany
8.3
Middle East
5.7 EU15
35.5
United States
34.0Other EU15
15.6Other 
America
2.7Germany
8.9Other 
3.0
Middle East  
2.1
EU15
43.0
Other  EU15
18.0
United States
39.4East Asia
 7.0
France
8.8
United 
Kingdom
7.3
Total:   US$1.9 billion1998
Total:   US$5.1 billion
(b)    Imports
Other  Europe
3.7
United States
6.3
Middle East
7.2East Asia
49.0Africa 1.5
Korea, Rep.
8.9
Singapore
7.4
Other America
5.8EU15
14.1Other East Asia
6.0
Oceania 2.3India
6.6
Other South Asia  3.5    
China
7.3Japan
7.2EU15
12.3Africa 1.2
Other America
4.2
Middle East
3.9Japan
6.8 China
10.4Singapore
6.5Other Europe
2.6
United States
4.3East Asia
49.6
Total:   US$3.5 billion Total:   US$7.0 billion
Source :  UNSD, Comtrade database (SITC Rev.3).Oceania
  1.1
East Asia
12.2Per cent
France
5.7
United 
Kingdom
5.9
Other Europe
3.4
Other East Asia
8.4Africa  3.1
Korea, Rep.
6.1Oceania  5.6India
14.8
Other South Asia  1.5Other Europe
2.0Other America
3.6
Chinese Taipei
5.7Hong Kong, China
    7.4
Chinese Taipei
4.8Hong Kong, 
China
5.7South Asia  2.3WT/TPR/S/68 Trade Policy Review
Page 12
Table I.3
Inflows of foreign direct investment by sector, 1994-99
(US$ million)
Sectors 1994/95 1995/96 1996/97 1997/98 1998/99
Gas 14 40 170 217 194
Power 0 0 0 60 321
Telecom 0 4 31 26 13
Export processing zones 31 26 46 59 73
Other 38 171 50 26 206
T o t a l 8 32 4 12 9 73 8 8 8 0 7
Source: World Bank (1999a),  Bangladesh:  Key Challenges for the Next Millennium, Washington, D.C., April, p. 32.
Other EU15
     3.4
EU15
16.0
Middle East
4.8East Asia
41.0
Singapore
5.6Malaysia
13.2Other East Asia
1.9United Kingdom
12.6
Japan
9.1India  3.6United States
30.7Other Europe
2.0
Other South Asia   1.5
South Korea
3.0Hong Kong, China
8.2Other 0.3Per centChart I.4
Inward FDI Flows by country of origin, 1991/92 to 1998/99
Source :  Based on information on proposed projects provided by the Board of Investment (BOI).
(5) OUTLOOK
34. While barriers to access in export markets are undoubtedly among the many impediments to
Bangladesh's economic development, the main obstacles are home-grown.  Notwithstanding the
immense opportunities offered by Bangladesh, including its relative cheap and abundant labour, and
potentially large market, and despite having one of the most liberal FDI regimes in South Asia, FDI
continues to be discouraged by a number of problems.  These include frequent strikes;  inadequate
basic infrastructure (notably power, telecommunications, and transportation facilities) and resulting
bottlenecks;  the slow pace of privatization;  an inefficient financial system;  an institutionalenvironment that is bureaucratic and corrupt;  political uncertainty;  and a worsening law and order
situation.  These problems tend to increase the cost of doing business, thereby impairing the
competitiveness, not just of foreign-owned enterp rises, but also of domestically owned companies.
Clearly, there is a pressing need to create the broad political consensus necessary to address these
problems through structural reforms.  Such reforms might usefully include further trade liberalization,Bangladesh WT/TPR/S/68
Page 13
although Bangladesh appears reluctant to undertake further trade and trade-related reforms because of
what it views as the slower pace of liberalization by some of its main trading partners.
35. While Bangladesh has hitherto escaped the worst effects of the Asian crisis, the erosion of
exchange rates in the crisis-hit countries, it may create intensified competition from these and other
countries, particularly in respect of labour-intensive ready-made garments (RMGs), which currently
account for a lion's share of Bangladesh's exports.  With textiles and clothing dominating its exports,and the bulk of those exports going to the United States and European Union, there is a need for
Bangladesh to diversify both its export base and export markets.  At the same time, the phasing out of
preferential access to these markets and the full integration of textile and clothing products into the
GATT 1994, scheduled for 1 January 2005, will require Bangladeshi exporters of RMGs to increase
efficiency, improve product quality and ensure that their products are competitively priced.
36. In the longer term, one sector that perhaps offers some potential for export diversification
involves gas.  With considerable reserves, and the likelihood of more discoveries in the future, gas
might eventually be exported in various forms, provided the necessary resources, particularly
investment, can be mobilized to develop the sector (Chapter IV(4)).  As already noted, much of the
recent inflow of FDI has been in the gas and power sectors.  Since inflows of FDI to these and other
sectors have been largely from countries outside the region, they have not been affected by the recent
Asian financial crisis.
14  However, manufacturing, other than textiles and clothing, as well as
telecommunications and other services, would appear to offer for greater potential.
                                                     
14 It remains to be seen whether FDI in the proposed EPZ in Chittagong financed by Korea falls
because of the latter's recent severe economic recession.