Document of The World Bank FOR omCaLn USE ONLY RePt No. 5314 PROJECT COMPLETION REPORT BANGLADESH THE EIGHTH IMPORTS PROGRAM CREDIT (CREDIT 980-BD) November 6, 1984 Industrial Development and Finance Division South Asia Projects Department Ihe document ha a resbictud distibsibo and -y be sed hy recipiets only in theperfonnmce of tbdr offielnd t s eutout may no othrwise be disdoed wiout Wodd HBnk su shorton. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR omCaLn USE ONLY
RePt No. 5314
PROJECT COMPLETION REPORT
BANGLADESH
THE EIGHTH IMPORTS PROGRAM CREDIT(CREDIT 980-BD)
November 6, 1984
Industrial Development and Finance DivisionSouth Asia Projects Department
Ihe document ha a resbictud distibsibo and -y be sed hy recipiets only in the perfonnmce oftbdr offielnd t s eutout may no othrwise be disdoed wiout Wodd HBnk su shorton.
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CURRENCY EQUIVALENIS
In August 1979 the Bangladesh Taka was officially valued at Tk 34.7to the Pound Sterling. Since then the-Taka exchange rate has been determinedthrough a basket of major currencies, with the Pound Sterling as interventioncurrency. Consequently, the Taka-US dollar rate has been subject to change.The rates below have been used throughout this report except when otherwisestated.
IV. IMPACT OF THE CREDIT................................ .. 6A. Manufacturing Sector Overview 6
- Problems and Constraints 6B. Review of the Action Programs 7
- Jute Industry 7- Textile Industry ......... ................... . 8- Pulp and Paper Industry ......... .................. 9
C. The Credit and Export Development .................. 9- Export Promotion Bureau (EPB) 9- Export Incentives 10- Export Strategy .................................. 12- Export Performance .............................. . 12
V. CONCLUSIONS .............................. 13
ANNEXES
1. Balance of Payments2. Credit 980-BD, Disbursements3. IPC I-ViII, Cumulative Disbursements4. Credit 980-BD, Credit Utilization5. Utilization by Sector of Previous IPCs6. Summary of External Economic Assistance, 1981/82-1983/847. Indices of Industrial Production, 1973/74-1982/838. Merchandise Imports, FY73-FY849. Value of Merchandise Exports, 1972/73-1984/85
10. Comments from the Government of Bangladesh, September 20, 1984
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
PROJECT COMPLETION REPORT
BANGLADESH - THE BIGHTH IMPORTS PROGRAM CREDIT(CRRDIT 980-BD)
PREFACE
This report presents an evaluation of IDA's Eighth Imports ProgramCredit 980-BD to Bangladesh for US$50 million. The Credit was approvedin April 1980 and closed in February 1982.
The Project Completion Report was prepared by the South AsiaRegional Office of the Bank, based on the findings of a mission *hichvisited the country in November 1983; the Staff Appraisal and President'sReports; the credit documents and study of the project files. The reportpresents a factual review of Government's use of the credit proceeds andfocusses on the progress made in strengthening the country's institutionalframework to promote exports. Comments received from the Borrower have beentaken into account in finalizing the report and are reproduced as Annex 10.
This program credit has not been audited by the Operations EvaluationDepartment; it is, however, included in the study entitled "Bangladesh -
Review of Import Program Credits I - X".
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PROJECT COMPLETION REPORT
BANGLADESH - THE EIGHTH DMPORTS PROGRAM CREDIT(CREDIT 980-BD)
BASIC DATA SHEET(Amounts in US$M)
LOAN STATUS
As of January 31. 1984Original misbursed Cancelled Repaid Outstandlng
Credit 980-BD 50.0 50.0 - - 50.0
CUMULATIVE CREDIT DISBURSEMENT
FY80 FY81 FY82
(i) Planned 5.0 40.0 50.0(ii) Actual 4.7 42.4 50.0
(iii) (ii) as Z of (M) 94.0 106.0 100.0
OTHER PROJECT DATA
A.ctual
Board Approval 02/12/80Credit Agreement 04/04/80Effectiveness 04/21/80Credit Closing 02/28/82Borrower Government of BangladeshExecuting Agency ERD, Ministry of Finance
MISSION DATA
Number of Number of Sta'fTiming Weeks Persons Weeks Report
BAIGLADESE - THE EIGRTE IPORTs PROGRAN CREIT(CREDIT 980-BD)
HIGHLIGHTS
Credit 980-BD of US$50.0 million was the eighth IDA isports programcredit made to Bangladesh since 1972. The credit had dual objectives:(i) to supply imported inputs essential to the major industries forenhancing capacity utilization; and (ii) to address the need for policymeasures to resolve the specific issues, concerning the overall viabilityof the jute and textile industries and the expansion of the ExportDevelopment Program initiated under the Seventh Imports Program Credit(Credit 866-BD).
While the Seventh Imports Program Credit focused directly on theimprovement of jute and textile mill efficiency through consolidation ofactions initiated under earlier imports program credits, the Eighth ImportsProgram Credit emphasized the completion of these progrms. The overallposition of the jute and textile industries was sufficiently improved.through capital restructuring and pricing policy adjustments, to justify amove to project-specific involvement (paras. 24-28). In the continuingpolicy dialogue between GOB and IDA on export development issues, theEighth Imports Program Credit concentrated on the medium-term exportdevelopment strategy, export incentives, and their administration. Thefollowing points are of particular interest:
- some progress in capital restructuring and cash infusions by theGovernment in the jute and textile industries (paras. 24, 26);
- the Export Promotion Bureau's progress in strengthening itsorganization and the export infrastructure, and in completingexport and market studies (paras. 31-32);
- changes in the Export Performance Licenses scheme by shifting thebasis for awarding the licences to a net foreign exchangeearnings criterion (para. 34); and
- modification of the duty drawback system to expedite therepayment process, reduce the production costs, and enhanceexport incentive effects (para. 36).
PROJECT COMPLETION REPORT
BANGLADESH - THE EIGHTH IMPORTS PROGRAM CREDIT(CREDIT 980-BD)
I. INTRODUCTION
1. The Eighth Imports Program Credit to Bangladesh, Credit 980-BD forUS$50 million, was signed on April 4, 1980 and became effective onApril 21, 1980. The closing date was set at February 28, 1982, by which timethe Credit was fully disbursed. The Credit brought the total of IDA'simports program lending to Bangladesh to US$550 million.
2. Prior to this credit, IDA made seven imports program credits (IPCs)to Bangladesh starting in 1972. Project Performance Audit Reports have beenprepared for the first three (Credits 345-BD, 458-BD and 515-BD) and twoProject Completion Reports-for the Fourth and Fifth Credits (Credit 591-BDand Credit 676-BD), and for the Sixth and Seventh Credits (Credit 752-BD andCredit 866-BD)--were issued on February 4, 1980, and December 15, 1981,respectively. Accordingly, this completion report is concerned only withthe impact of the Eighth Imports Program Credit.
3. The primary rationale for the first three credits was the need forrapidly disbursable foreign exchange necessary for the country'srehabilitation after the War of Independence and natural calamities. Theprogram content of these credits focused upon the requirements of theindustrial sector and the need for better utilization of installed capacity.Against a background of considerable capacity under-utilization, the Fourth,Fifth and Sixth IPCs focused more specifically upon the long-term developmentof the country's key industries, particularly jute, cotton textiles and pulpand paper, while the Seventh IPC introduced a new policy focus, exportdevelopment. The Eighth Credit had two policy objectives: (i) to improvethe overall viability of the jute, textiles and pulp and paper industriesthrough completion of ongoing action program requirements, leading to thedevelopment of specific sectoral projects; and (ii) to consolidate progressin the Export Development Program (EDP) while expanding the program in keyareas necessary for the development of a comprehensive export policy andstrategy.
II. BACKGROUND
4. Economic improvements in the late 1970s, together with greaterpolitical stability, signified a shift in Bangladesh's circumstances and
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brightened somewhat its economic prospects. In fact, FY80 was regarded as aperiod of consolidation of the country's economic recovery from the shocks ofthe early 1970s. For the planners and policymakers, it was an opportunity tofocus anew on longer-term development needs. In recognition of the need fora fundamental reorientation of policies, the Government chose to delay a newFive-Year Plan by two years. Thus, the Two-Year Plan period (FY79-FY8O)offered the Government of Bangladesh (GOB) time to consider the developmentstrategy and policies to be incorporated in the Five-Year Plan of FY81-FY85.
5. Bangladesh's balance of payments had, however, continued to becharacterized by a massive trade deficit and heavy dependence on foreign aid.Export earnings of US$610 million in FY79 represented less than 7% of GDP andless than 40% of the import bill. Moreover, exports remained dominated byraw jute and jute goods, which together accounted for approximately 702 oftotal export earnings. Among the principal categories of imports planned forFY80 were foodgrains (28%), capital goods (20%), petroleum products and crudepetroleum (14%), and fertilizer (6%).
6. During FY79 and FY80, Bangladesh's balance of payments situationdeteriorated markedly. Total FY80 import payments rose to nearlyUS$2.4 billion, an increase by 52% from the FY79 level of US$1.5 billion.The trade balance, which had already shown a large deficit in FY79,deteriorated to a deficit of almost US$1.65 billion in FY80, a 74% increaseover the preceding period, due to rising foodgrain imports caused by the 1979food shortages, coupled with the OPEC price increases. The need to financecommercial purchases of food imports had led to GOB's rather cautiousimplementation of its import program: non-foodgrain imports in FY79 remainedconsiderably below target. As a result, foreign exchange reserves in FY79increased substantially. The reserve increase was, however, a temporaryphenomenon. In the following year (FY80), there was an overall balance ofpayments deficit (decline in reserves) of US$118 million as compared to asurplus (increase in reserves) of a roughly similar magnitude in FY79. Theend-FY8O level of international reserves was equivalent to about one month'simports.
7. The FY80 balance of payments outlook was also grim, although therewere mixed indications. Prospects looked favorable with respect to: risingprices of jute manufactures owing to the impact of disruptions in the Indianjute industry; growing non-traditional exports; continued rapid growth inworker's remittances; and a more rapid commodity and cash aid utilization.However, with no significant changes expected in the import bill forfoodgrains and petroleum products (POL) prices, there was little prospect ofany major changes in the balance of payments situation. For industry, thiswould mean that the foreign exchange available for imports could limit thevolume of imports of raw materials and intermediate goods imports requiredfor stimulating and increasing industrial production. It was against thisbackground that the Eighth Program Credit was approved on April 4, 1980.
The Need for Program Aid
8. Bangladesh's need for non-project aid (i.e., commodity or programaid) arose from the inadequacy of the country's domestic savings to financeits investments and the similar inadequacy of its foreign exchange earningsto cover import requirements. In spite of substantial progress in domestic
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financial resource mobilization and increasing worker's remittances, nationalsavings still constituted only about 3% of GNP. Although the investmentrate, at about 14% of GNP in FY80, was very low, external aid financed about80% of total investments; the savings/investment gap widened from about8%-lOX of GNP during FY75-FY79 to over 14% in FY80.
9. A corollary of this savings/investment disequilibrium was the severestructural imbalance in Bangladesh's external trade. Export earnings duringthe late 1970s averaged less than one third of import payments. Mainly dueto the deterioration in the terms of trade, this proportion further declinedto 28% in FY81. The external resource gap could not be narrowed dramaticallyin the short-term--even with growing import substitution in foodgrains,fertilizers and energy-because of uncertain export prospects for jute andthe small base from which other exports has only recently begun to grow.Project aid alone-averaging more than 5% of GNP, but covering almost all ofthe foreign exchange cost of public investment-was insufficient to close thesavings and external resource gaps. Without commodity and programassistance, the supply of essential imports would have been curtailed sharply-- with severe adverse effects for industrial production, for public financesin general, and for development financing in particular.
10. Since only part of the development program could be formed intoprojects suitable for project aid financing, it was impossible to transferto Bangladesh the amount of external assistance required to sustain economicgrowth by means of project aid disbursements alone. In Bangladesh, aggregateexpenditures on externally aided projects usually have not exceeded 60% ofthe total ADP, and since most donors have rarely financed more than 75% ofthe total cost of individual projects, direct project financing was limitedto about 45% of total ADP expenditures. Substantial program assistance arsneeded to meet the additional external financing requirements. Effectingthe adjustments required to overcome Bangladesh's deep-rooted and structuralresource problems would take considerable time and need to be supported bycontinued sizable inflows of concessional aid, including non-project aid.
III. THE CREDIT
The Credit Objectives
11. The Eighth IPC had dual objectives: (i) to provide quick disbursingfunds for the import of essential raw materials, components and equipment toenable the major export-oriented and import-substituting industries toenhance capacity utilization and augment production; and (ii) to address theneed for policy measures to resolve the specific issues concerning theoverall viability of the jute, textiles and paper industries throughcompletion of ongoing action program requirements. and concerning exportincentive revisions, procedural improvements and export strategy included inthe Export Development Program (EDP).
12. Industrial Action Programs. In 1975, in an effort to strengthen thedevelopmental impact of the program credits, GOB and IDA moved from a generalbalance of payment approach to program lending; and the Industrial ActionPrograms were developed. Thus under the Fourth IPC, attention was focused
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upon the jute manufacturing industry through the Bangladesh Jute MillsCn poracion (BJMC) and upon the cotton teatlle Industry through theBangladesh Textiles Corporation (BTMC). Under the Initial program andsubsequent expansions, specific measures were developed to: (t) improvecapacity utilization, through mill maintenance programs and spare partsprocurement; (ii) reduce the cost of raw material, particularly of raw jute;(iii) improve production efficiency; and (Iv) improve the financialperformance and viability of the major industrial firms through improved costcontrol and pricing policLes, capital restructuring and asset replacemencprograms.
13. After the first action programs Introduced under the Fourth Credit,subsequent action programs (through the Seventh Credlt) aimed to create thebasis for the long term development of Bangladesh's key industrial areaso.Although progress, as anticipated, had been slow and not all of the problemsof the jute, textile, pulp and paper, and fertilizer industries had beensolved, sufficient progress had been made in strengthening operations andfinancial profitability to justify a move to a project specific involvementfor future operations in these subsectors. In Chapter IV, the impact of theaction programs on each subsector development are reviewed.
14. Export Development Policy and Strategy. In FY78, COB's industrialpolicy shifted from an emphasis on the public sector to greater encouragementto the private sector. However, this shift was not supported by anindustrial strategy linking the policies, incentives and investment programsnecessary to achieve rapid development of the private sector; nor was there aclear program to develop export industries, despite the recognition of thisneed. Between FY77 and FY79, Bangladesh's exports grew by about 5% p.a. inconstant prices; and the export commodity composition changed with agradually increasing proportion of non-jute goods (31% of total export invalue terms by FY79). However, rising export earnaings were largely a resultof significant price increases for leather and jute goods. These price gainswere offset to a considerable degree by the low volume of exports,particularly of goods other than jute. This export performance clearlysuggested that the GOB's export development strategy ought to focus on policymeasures and invesrment programs conducive to diversification of manufacturedexports, along with the development of institutional measures Seared topromoting non-traditional exports. In support of COB's effort, an IDAmission reviewed the Ban&ladesh industrial sector in FY79, and identified keypolicy and institutional issues. In consequence, an EDP was formulated incollaboration with GOB and the Export Promotion Bureau (EPB), and became partof the focus of the Seventh IPC. The program aimed at the development of amedium-term export strategy, covering broadly three basic Issues in exportdevelopment: (a) policies, procedures, incentives and other factorsaffecting the policy framework; (b) institution-building aimed atstrengthening promotion, organization, information and other services toexporters; and (c) product selection, design, production and supply problemsaffecting the growth and diversification of exports. It was agreed by GOB,EPB and IDA that the crucial factors to bring about positive effects onexport development would be the establishment of a sequence of actions onpolicies, procedures, incentives, and a precise implementation timetable.
15. The Eighth IPC in 1979 focused on the development of a comprehensiveexport strategy, and measures to strengthen the EDP including: (i) removal
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of supply constraints ln non-traditLonal exports; (ii) Increasing theeffectiveness of existing export incentives; and (iiL) improvemwnt of datacollectlon and analysim necessary to monitor export performance. The Creditemphasized revisLon of the Export Performance License (XPL), improvement ofthe duty drawback system, and development of a more fficient system ofcollecting, monitorLng and presenting export statistics.
16. Modification of the XPL system was proposed to shift the goneralbasLs of awarding licenses from gross f.o.b. values to a net foreign exchangeearnings, thus encouraging the efficient use of domestic resources andpromoting diversification of exports. The duty drawback system requiredsimplification to reduce the delays in claim processing, and hence tominimize an additional cost of financing imported inputs for exportproduction. Wlth growing exports, the need for comprehensive, accuratestatistics on which to base future development decisions had become pr-sellig.To provide this information, the Eighth Credit stressed the Importance of arational system of data collection, analysis and dissemination.
Credit Administration
17. Eligible Industries. Industry groups designated as high prioritywere the main beneficiaries of the IPCs which isslated these industries byfinancing imports of essential raw matecrlls and spare parts to sustainproduction. From the Fourth IPC, the list of eligible industries (Annex 4)totalled eight, lncluding the countryfa major export Lndustry, i.e., jute,and major import substitution industries such as textiles, pulp and paper,fertilizer and cement. These industry groups were selected since they hadacceptable domestic resource costs (ORCs) and met one or more of thefollowing conditions: (1) direct and Indirect Impact upon exports,e.g. non-tradItional exports, such as leather, tea, shrimp, etc.; and(l) hLgh direct and indirect multiplier effect on utilization of Installedcapacity and a substantial impact upon employment generation.
18. Procurement. As with the earlier program credits, the enterprises towhich funds were allocated handled the procurement under the Eighth IPC.ResponsibLILty for sector procurement remained with the variou sectorcorporations, while procurement for the private sector was made either
* through the Trading Corporstion of BanglAdesh (TCB) or by individual privatesector org4lnizatLons. The Chief Controller of Imports and Exports (CCIE) wasresponsible for issuing all licenses for Laports under the Credits and for
- handling the ailloc4tions of funds to the private sector. The procurementprocedures of GOB and its sector corporations were satisfactory and in linewLth Bank Group Guidelines. These procedures covered about 802 of the totalpurchases under the Credits. All imports of cement and steel were procuredthrough international competitive aidding (ICB). Except for proprietaryItems, other goods costing US$100,000 equivalent or more were procured eitherthrough ICB or limited international tendering (LIT), from Switzerland andmember countries of IDA. As was the case with the preceding IPCs, IDAreviewed GOB's procurement decisions after such contracts had been signed andprlor to the submission to IDA of the first withdrawal application in respectof each contract. Contracts for non-proprietary items below US$100,000 wereprocured through normal commercial channels with the Invitation of bids fromnot less than three suppliers. About 7S: by value of the items financed
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under the Credit were procured under ICB and were subject to IDA'spost-review.
19. Disbursement. Credit 980-BD was fully disbursed by February 1982.Annex 2 shows details of projected and actual disbursement of the Credit.Generally, yearly disbursement totals were close to those projected at thetime of appraisal, although quarterly disbursements varied from projectedlevels. Actual utilization by Industry showed a significant variation fromthe coiling set during negotiations. However, this was expected, as the useof the ceiling was to allow GOB flexibility to channel funds to high priorityareas while utilizing non-IDA funds for other purposes. Annex 3 sbows thecumulative disbursements by category for the first seven IPCs compared to theEighth IPC.
IV. IMPACT OF THE CREDIT
Manufacturiag Sector Overview
20. At the time of the Eighth IPC appraisal (FY80), the manufacturlngsector accounted for about 8% of GDP, 62% of total exports and 14% of thetotal work force. Thus, it ranked third after agriculture and the servicesector in economic importance and provided an outlet for agriculturalproducts and much needed employment. As a result of nationalization of manyindustries following Independence, most of the large and medium scaleenterprises were in the public sector which consisted of approximately 275units organized under the administrative control of seven corporations,namely: jute, textiles, chemicals, steel and engineering, food, cement andforestry. The public sector accounted for 65% of the value-added Inindustry, 85% of iianufactured exports and 25Z of the industrial labor force.
21. The public industrial sector Included the largest export-orientedindustry, jute and import substitutlon industries, e.g., textiles, chemicals,pulp and paper. The jute manufacturing and cotton textile industriesconstituted close to half of the industrial capacity in Bangladesh havingessential links to the agricultural, rural and cottage industry sectors ofthe economy. In FY79, the jute industry contributed about 30% of the valueadded in the organized manufacturing sector, 50% of manufactured exports, andemployed 170,000 workers. The cotton textile industry, the second largestindustry in Bangladesh, has shown a steady improvement In performance sinceindependence. The industry accounted for around 152 of value added in themanufacturing sector, employed 76,000 workers producing about 60% of thetotal yarn requirement.
22. Problems and Constraints. Overall, the industrial sector hadrecorded a slow increase in production since FY74, due to the improvedavallability of raw materials, intermediate goods and spare parts and to ahigher domestic demand for manufactured products. Despite higher production,many enterprises suffered from low capacity utilization. While averagecapacity utilization was about 65% in FY79, capacity utilization in someindustries was as low as 40%. The reasons varied, but a number of commonfactors identified included: (i) irregular and insufficient raw materialssupply; (ii) equipment breakdown and poor maintenance; (iii) insufficient
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labor training and migration to the Middle East; (iv) administrative delayslinked to excessive centralization; (v) frequent power cuts; (vi) inadequatetransportation; (vii) lack of spare parts and components linked to foreignexchange shortages; and (viii) lack of working capital which preventsprocurement of sufficient spares and components and even, in some cases, rawmaterials to operate at capacity. Thus, low capacity utilization was only asymptom of the many serious problems affecting production efficiency.
Review of the Action Programs
23. Overall, GOB and the Sector Corporations had made progress during thesecond half of 1970s, albeit very slow, in implementing the action programrequirements, particularly in the jute and textile mill rehabilitation.Under the Seventh IPC, IDA reviewed this progress and consolidated theactions outstanding, in order to focus directly on the improvement of millefficiency and profitability. The Eighth Credit, while embodying thetransition to a more general approach, emphasized the completion of ongoingaction programs, especially for the jute and textile industries, and to alesser extent the pulp and paper industry.
24. The Jute Industry. In the case of the jute industry, there were twomain issues: (i) the capital restructuring of BJMC; and (ii) the developmentof an optimal export and pricing strategy for raw jute and jute goods. Dueto the continuous operating losses over the preceding years, the BJNC had anegative equity base and its operations were funded by budget appropriationsand term loans from GOB and the banking system. To rectify this situationand to place BJMC's operation on a sound commercial basis, GOB agreed toimplement an annual phased capital restructing program for BJMC and itsunits, to be completed by December 31, 1983. Uader the program, GOB agreed:Xi) to provide a yearly minimum cash infusion equal to the amount required byBJMC and its units to service the debts due to the Bangladesh Shilpa Bank(BSB), Bangladesh Shilpa Rin Sangstba (BSRS) and the Commercial Bankingsystem which has funded BJMC's capital expansion, in accordance with therepayment schedule agreed with the lending institutions; and (ii) to convertthe ADP allocation into equity (about Tk 370 million, equivalent toUS$24.0 million). GOB agreed to provide BJHC with about Tk 2,700 million(US$175 million) of equity in the form of four annual infusions of cash; theactual cash infusions were to be adjusted to reflect any after tax profits orlosses incurred by BJKC and its units during the period to December 31, 1983.GOB's cash infusions and conversions of ADP allocations into equity wereexpected to reduce BJMC's debt/equity ratio to 60:40, and to decrease overallinterest charges by about Tk 350 per ton, thereby making all product linesprofitable. On June 30, 1980, BJMC received the first tranche of the cashinfusioa and made the payments due to BSB and BSRS. These adjustments led toan improvement in BJMC's FY80 operating profit of about Rs 850 million. Forannual cash infusions in the subsequent years, GOB has provided detailedinformation to IDA on September 20, 1984 (Annex 10).
25. The second major issue was GOB's position on the development of anoptimal export and pricing strategy for raw jute and jute goods (the majorcomponent of the country's export earnings). Under the Sixth IPC,-aconsultaat reviewed GOB's pricing policies for raw jute purchases, determinedthe optimal mix between raw jute and jute goods exports, and proposedappropriate policies for jute distribution and allocation. Under the Eighth
Credit GOB acted upon these recommendations and established mechanisms/procedures for development of an optimal pricing structure/export strategy.GOB established a Jute Strategy Cell within the Ministry of Jute, with thefunction of monitoring movement In raw Jute pricing as part of thedevelopment of an export strategy and optimal pricing structure. Inaddition, major weaknesses in marketing and production plaaning wereeliminated, and a market information system was implemented. With theassistance of UNIDO, BJKC improved quality coatrol, tilis, coupled with theintroduction of export inspection service, resulted in a significantreduction of claims for substandard materials, and helped Bangladesh improveits share of the jute goods market. By 1980, the overall position of theJute industry had progressed sufficiently to justify a move toproject-specific involvement. 1/
26. The Textile Industry. The action programs under the IPCs addressedshort and medium term issues, including the need for greater managerialautonomy and improved maintenance requirements. Although the progress wasslow initially, by FY77, progress on the operational and institutionalmatters was adequate to justify broadening the focus to cover policy issues(e.g. pricing, autonomy). In textiles as in jute, the Eighth IPC emphasizedthe completion of ongoing action programs and focused on resolving two majorissues (i.e., capital restructuring and pricing policy) affecting productionefficiency and profitability. In the critical area of industryprofitability, GOB agreed to the implementation, by December 31, 1984, of anannually phased program of loan conversion and cash infusions necessary togive BTMC and its units a debt-equity ratio of 60:40. Under the program, GOBconverted Tk 334 million (US$21 million) of ADP loans into equity, and agreedto make five annual cash payments to provide additional equity of aboutTk 860 million (US$55 million) by December 31, 1984 (see Annex 10, para 2).The total cash infusion was subject to adjustment to reflect any after taxprofits or losses earned by BTMC units during the period to December 3-,1984. GOB aizo agreed to provide a yearly minimum infusion equal to theamount required to service BTMC units debt to BSB, BSRS and the commercialbanks on term loans in accordance with agreed repayment schedules.
27. As indicated in GOB's statement of policy on the textile industry(submitted to IDA in 1979), its pricing policy had the objectives of:(i) providing yarn and cloth to low income groups at a fair and equitableprice; and (ii) providing BTMC with a rate of return on equity (defined as1OX after tax) necessary to remove the need for any form of subsidy paymentfrom GOB. Although these objectives were acceptable to IDA, the policyimplementation and its implication appeared uncertain. 2/ Therefore, theEighth IPC focused on the implementation of the required pricing adjustmentthat -was a condition to negotiating the Credit. In the preceding period,
1/ Credit 1023-BD Jute Industry Rehabilitation Project.
2/ On the basis of an adjusted equity (i.e., assuming a 60:40 debt/equityratio for current asset investment) BTMC required a FY79 after tax profitof about Tk 65 million (actually a loss of Tk 35 million) which reflectedthe need for an average price increase of about 8Z and a reversal of GOBenforced price reductions in the previous year.
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GOB increased the price of yarn by 17.7Z and cloth by 15Z in order to giveBTMC an after tax return of 10% on shareholders' funds. Even theseincreases, due to rising raw cotton prices, were not sufficient to achievethe rate of return by September 1980, as required under the Eighth IPC, andon March 1, 1981, GOB increased the price further to achieve the requiredrate of return.
28. GOB/BTMC implemented the agreed action program although progress inareas, such as training, introduction of a management information system andimproved pricing, was considerably behind schedule. Stability was restored,making it possible to tackle the problems of raising productivity (throughBMR), increasing capacity (through the construction of new mills), anddeveloping the long term strategy necessary to improve the overall efficiencyand cost effectiveness of the industry. While progress in general wassatisfactory, there was still a need to monitor closely problem areas ofautonomy and pricing.
29. Pulp and Paper Industry. The Fourth IPC addressed issues affectingthe four mills comprising the pulp and paper industry, including short termproblems of production and the lack of a long term development strategy.Since FY75, the physical condition of the older mills (Khulna and Karnapuli)had deteriorated to such an extent that major rehabilitation expenditureswere needed immediately. Bilateral and international agencies providedeither technical or financial assistance for BIR to all four mills: Khulua,Karnapuli, Sylhet Pulp and Paper, and North Bengal. Studies to identify BMRrequirements for the mills were completed and specific proposals forfinancing were presented to IDA and other agencies. However, on one of thekey elements of the program-the preparation of a long term developmentprogram for the industry-a consultant had been engaged for the -work requiredbut no substantial progress was made. Given the uncertainty of resourceavailability for the industry's long term development, IDA stressed the needfor such a study under the Eighth Imports Program Credit; the study wascompleted by GOB in December 1980. All actions agreed with IDA in connectionwith preceding program credits were initiated and most of the objectivesachieved, although in some instances much later than originally planned.
The Credit and Export Development
30. The Export Development Program (EDP) was initiated by the EPB incooperation with the IDA's Industrial Sector Mission (1978) and with theassistance of a team of advisors from the International Trade Center (ITC).The EPB prepared the Action Program in 1978 and has been influential inestablishing the program as a central framework for developing Bangladeshexports. The Seventh IPC included the Program as part of the focus. The EDPformed the basis for important covenants in the Eighth Credit, covering suchareas as institution building, policy and procedures, and product studies.
31. Export Promotion Bureau (EPB). The EPB made considerable progress instrengthening its organization, completing export and market studies andstrengthening the export infrastructure. From late 1978, a three-tier systemhas operated in Bangladesh export development. This was created by adding to
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the Export Coordination Unit a Central Task Force (CTF) and nine SectoralTask Forces for product groups, for which the EPB served as secretariat underthe close guidance of the National Export Council. In this system, bettercooperation between various agencies 1I/ has improved the ability to tacklespecific problems of exporters at a micro level. Also improvements have beenmade in the reporting system, particularly regarding information onnon-traditiona; exports, e.g., leather, handicrafts, marine products andagricultural and forestry products.
32. In the process of institution-building during the late 1970s, andearly 1980s, the EPB took an active role in influencing changes in exportpolicies and procedures and continued to improve export information as aninput in adjusting policies and procedures and as an aid in monitoring andcoordinating export performance. With its training program in fields ofexport production, market research, trade information and statistics, andother marketing services, fairs, and publications, the EPB coatributedsubstantially to the country's export development effort. As a result,significant awareness of the importance of export promotion and a relativelyhigh degree of cooperation among government agencies on matters relating toexports were achieved; and an institutional structure capable of providingpromotional services for export activity was established. What remained tobe further strengthened was the effective implementation of policy measures.
33. While the EPB as an export institution was approaching a state of"institutional maturity", manpower constraints in implementation remained,which limited its efficiency in export services. The difficulties ofrecruitment and retention of senior staff at existing salary levels werecompounded by the continuLe' use of Civil Service personnel to fill manylower-level posts. These assignments did not usually last long enough togenerate any personal involvement in the functions of the institution or inthe possibility of a career in export development. Also, the staffingproblems of the EPB were closely related to its high degree of dependence onforeign advisers. Resolving the problems required a development program forthe local staff and revision of salary scales and conditions in order toattract and retain a capable, permanent staff. However, to date such aprogram has not been implemented.
34. Export Incentives. Prior to the Eighth IPC in FY80, the XPL schemeprovided additional import licenses (i.e., Import Entitlement Certificate,IEC) to exporters on the basis of the f.o.b. value of exports. While thescheme served as an incentive to exporters in general, it tended to rewardexporters irrespective of export products and import contents. In fact, thescheme neither encouraged the efficient and intensive use of domesticresources, nor provided adequate incentives for diversification of the exportrange. Added to this weakness, the scheme did not allow adequately fordifferential market penetration costs. As part of the EDP, therefore, GOBagreed to resolve these weaknesses in the XPL scheme. EPB proposed to use
1/ The CTF consists of the Joint Secretaries of Industry and Commerce,Agriculture, Fisheries, Shipping and Jute, the Director General ofIndustries, one representative from the Bangladesh Shipping Corporation,Bangladesh Biman, National Board of Revenue, and the Bangladesh Bank.
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the outcome of the Bank-financed DRC (domestic resource costs) study byBoston University to rationalize the scheme and revamp the rates so that theentitlement would be a uniform rate applicable to value added from domesticresources (i.e., net foreign exchange earned) but giving weight to suchfactors as labor intensity, new products, and domestic resource-basedproducts. Under the Eighth Credit, changes in the XPL scheme were made byshifting the basis for awarding XPLs from gross f.o.b. value of exports to anet foreign exchange earnings criterion. The revised scheme alsoincorporated an expansion of entitlement to provide facilities aadregulations pertaining to the use of foreign exchange for business travel,market development and product promotion. To promote labor intensive exportindustries, export manufactures largely based on indigenous resources, andexport product diversification, the XPL scheme has evolved over the last fewyears into a system in which exportable commodities eligible for XPL facilityare grouped into three categories; namely 40%, 60% and 80% XPL. Under thenew system, all non-traditional exports automatically qualify for a rate of40% and can move into 60% or 80% categories depending upon domestic valueadded content. Accordingly, Import Entitlement Certificates are issued,which permit exporters to import some of their production inputs directlyand/or to sell part of their foreign exchange earnings in the free(secondary) foreign exchange market at a premium which usually issubstantially higher than the official exchange rate.
35. Among the available export incentives, the XPL is the most effectiveinstrument which provides access to imported inputs necessary for exportproduction and also additional earnings to exporters. This incentive hashad a positive impact on the growth of non-traditional exports. These(excluding naptha, furnace oil and bitumnan) increased by nearly 17% duringthe two year period, FY80-FY82 -- in value terms from US$138.3 million toUS$161.4 million; and by volume index, a 33.7% increase; during the sameperiod total exports at current prices decreased from US$722.2 million toUS$630 million, by about 13% in the same period. The decline was largelydue to the depressed export prices for raw jute and jute goods. The share ofnon-traditional exports also expanded from 19% of the total exports in FY8Oto about 26% in FY82. As an incentive to promote non-traditional exports,GOB through commercial banks provided export credit at a concessicnal rateof 12% as against commercial rates of 14-16% in 1981-82. It was fuartherreduced to 11.5% in 1982-83. In addition to continuous adjustment of theincentives, the promotion of non-traditional exports requires that clearsignals are given to investors to channel resources into such activities.
36. The duty drawbacks system allows a repayment of duties paid onimported inputs for export products. In terms of benefits to exporters, thesystem had long been criticized due to the cumbersome and time-consumingadministrative procedures. To expedite and simplify the process, the EPBin FY80 proposed the introduction of a flat rate of duty rebate based on aperiodic calculation of the average percentage value of customs and exciseduties and sales tax for a product or product category. In addition, forcertain fast moving items such as ready-made garments, the EPB proposed a"notional" system of duty payment. This system required the recording ofthe raw and packaging materials imported by an exporter and establishing asuspense account for the duties and taxes payable thereon. Liability to paythe amounts in suspense would be removed on proof of exports. The system wasfurther improved by the introduction of a bank guarantee system to underwrite
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the exporters' liability. The implementation of the modified duty drawbacksystem has expedited the repayment process, reduced the costs involved indelays (i.e., tied up working capital), and hence become much more effectiveas an export incentive.
37. Export Strategy. On the basis of studies carried out under theSeventh IPC, GOB/EPB prepared a draft strategy statement for FY81-FY86. Thedraft, which was reviewed during negotiations for the Eighth Credit, sets outguidelines for implementing a national program of actions accelerating exportgrowth during the Second Five Year Plan FY81-FY85 (SFYP). The CreditAgreement (Section 3.10) required that the Export Strategy be incorporated inthe SFYP document. The main objectives of the Export Strategy were: (a) toprovide a basis for a significant acceleration in the growth of existingexports, both major and minor; and (b) to create and develop new exports ofagricultural and industrial products. Furthermore, the strategy focuses onproduct and supply development, particularly for non-traditional exports. Inthe strategy, export growth targets were set somewhat ambitiously for theSFYP period, FY81 to FY86: total export was projected to reach the level ofTk 15.3 billion with an average growth rate of 6.2% p.a. (at current prices).To meet the target, potential export products and related developmentcoastraints were identified, supply requirements were estimated, andmarketing and promotional plans were prepared. As discussed above,supporting policy and institutional adjustments have progressed since thelate 1970s. In the following section, the export growth targets set by theExport Strategy Statement are examined in the context of the exportperformance since FY78.
38. Export Peformance. Analyzing the performance of individual exportproducts prior to the Eighth IPC period (FY78-FY80) reveals that the exportgrowth in this period was mainly the result of some favorable price changeswhich hid a mixed and relatively weak performance. Export volume declined injute goods and tea in FY78-FY80, and in raw jute in FY80. In other exports,value increased in leather, frozen food and newsprint and was mixed in paper,naptha and furnace oil. The total value of exports grew 24.4% between FY74and FY79 and 18.5% between FY79 and FY80. However, almost all the netincrease was attributable to the sharp price increases for jute goods and alarge increase in the proceeds from naptha and furnace oil. Without thesetwo factors, neither of which promised long-run benefits, exports would havestagnated. In the following years (FY81 and F82) a sharp decline in exportprices of raw jute, jute goods, leather and fish caused export earnings tostagnate, despite a substantial growth in export volume. Export prices felland led to a 2% reduction in export earnings in FY81 and further 12% declinein FY82. The terms of trade deteriorated by over 30% during this two-yearperiod.
39. Over the past several years, GOB has pursued the export developmentobjective and taken a number of measures to encourage exports, especially ofmanufactures. Export growth, however, has not responded strongly to theseinitiatives. Between FY76 and FY83 exports, in constant FY73 dollars,increased by only 15%, largely due to the problems faced by jute.Non-traditional exports, although growing rapidly from a small base, have notgrown sufficiently in volume to offset the decline in earnings from jute andjute goods. There have clearly been a number of minor successes (such as
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ready-made garments, fruits and vegetables), but their cumulative impact hasbeen limited.
40. Recent export performance suggests that achieving the projectedexport growth requires further support through policy changes, i.e.,incentive and procedural adjustment to encourage exports, especiallynon-traditional exports, since export production is more risky and moredemanding in terms of product specifications, quality control and deliveryand procedural requirements than production for the local market. Among themeasures aad instruments which GOB's short-term export promotion strategyshould take into consideration are the exchange rate and the impact of taxesand subsidies. Since, with very few exceptions, Bangladesh exports facestrong competition from other countries, it is essential to enhance thecompetitive capability of the economy by frequent review of the exchange rateand price developments in Bangladesh relative to competing countries.
V. CONCLUSION
41. The Eighth IPC, as with all the previous Credits, was approved tohelp Bangladesh ease a serious (and continuing) balance of paymentsconstraint. Thus, one important objective of the Credit was to provide thecountry with quick disbursing funds for the import of industrial components,chemicals, raw materials and spare parts to enable selected high priorityindustries to reach their full production potential. The other objective wasto monitor progress in implementing the measures agreed under previous IPCsto improve the efficiency and financial viability of the jute, cotton textileand paper industries, and expand the Export Development Program, initiatedunder the Seventh Imports Program Credit.
42. Under the Credit, specific measures were implemented for keyindustries co improve capacity utilization through mill maintenance and spareparts availability; to improve financial performance through capitalrestructuring and pricing policy adjustments. Initial steps were also takentowards formulating long-term development programs for the jute, cottontextile and pulp and paper industries. Although progress had been slow andnot all of the problems of the jute and textile industries had been solved,sufficient progress had been made in strengthening operations and financialprofitability to justify a move to a project specific involvement for futureoperations in these subsectors. In the continuing policy dialogue betweenGOB and IDA on export development issues, the Eighth Credit concentrated on amedium-term export development strategy, export incentives, and theiradministration. Since the Seventh and Eighth IPCs, the EPB as an exportinstitution has progressed considerably in strengthening its organization, inimproving export information and statistics to monitor and coordinate exportperformance, and in catalyzing policy adjustments. On the policy side, theIPCs have had a positive impact on specific issues addressed in exportpromotion, namely, the modification of the XPL scheme and the simplificationof the duty drawback procedures. However, the impact has been limited onoverall exports of manufactures, for which industrial development is moreimportant. The present structure of industrial policies, controls,procedures, duties and taxes is only weakly conducive to industrialinvestment or efficiency. Such encouragement as the system offers tends to
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be biased towards production for domestic rather than export markets.Although the quick-disbursing nature of the IPC enables IDA's policy dialogueto tackle specific policy and institutional issues for immediate results, itsvery nature suggests that the IPC is perhaps not the best vehicle throughwhich IDA would effectively assist GOB's longer term development of exportsof manufactures.
43. In 1982, policy dialogue led to GOB's introduction of the TIP Project(Trade and Industry Policy Reform Program). This was an important step inrecognizing and attempting to rectify the biases and perversities in thepresent policies. The results of the TIP Project should help identifypolicies and projects which will more effectively promote manufacturedexports. In view of Bangladesh's resource endowments, current world tradeconditions and growing protectionism in many countries, it is unlikely thatprogress in export development will be rapid. However, in the longer term,there are areas where substantial potential for the country's export growthexists -- manufactured exports, such as leather products, ready-madegarments and textile products; processed goods, such as tobacco, fruit andvegetables; and domestic gas-based industries, such as fertilizer. Futureexport growth, therefore, will have to be generated by diversifying andexpanding non-traditional manufactured exports with strong policy support.Toward such development, additional incentives (i.e., financial andtariff/tax concessions), effective administrative arrangements for theseincentives, and measures to alleviate market constraints will have to beconsidered in the future imports program credits and the GOB/IDA policydialogue.
lo Uelts sboen ia preotbese- apply to the overall lint f iadetcnlal production.7i; atirey ins ne pullc euctor.
Mate: ihe inex of -afxfctuinig production covers pproultely 93Z of volue added In large and edtwecale aenufecteriog.Eacluded ore. oueg other rs. tbe nfecturig of footuear, leather, furniture and nen-ferrune etal producte printingen publisblng. as well a. *1 eIml and cotm4We tolucries (whtch include epineilrg. dyei and hendloom weavig).
Soree: hng desk Ureeu of Statistice.
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-qc alo Jo11 -m I .q1 tit - (amls. 5u3u15) -%Is .tdog' A. opq a :u tacse - -gsa -u a. .tac I s
_ Iu am.i lbg1 -M _19uq.- -131 -- at- 1.5 . - pu_rn 3 .s.mus s-uus -s e1sS.,..' a S '.a- a. susuds - I_K- 3si.5iu5 ..*su.5M l.t31 I -j Z Am p.us_u *s-urnu.a 1d ,-x ri
UU - GaOA t_ a*a 315 _ -1* _3-I .efift; us puu.. v- _ _ 1 a.l u-_u *e*as -1 1 a. amucaud * u- 1 -., ,, _t_ ^|~~~~~~.-W"<.- J. eas Cs- 36P11i
E. -' ec,a usp31u-.1 ±
*1s4s11 -Mail -q1u p- f 11j -* _ _ - sees :al aesc s O S 1 t1 u U-Au-. *t-ud lu5331 -E 15111l l33 * u-isa _ -4 * -elu - S .1- ITO _L
4 er-X tftta Z~~~~~~~~~~~RISE *C-Ell ft-C3 uIC-3- (11-1- (19-11 (110.) G-VO C..,) 1s. *5 *_b leeoDod'scz lt 9w'1% f '%t wo' * vE l * 'SLI SIM& ll W"t o'l '1eal CM - cuvo afe -1g*- _I.e. s aft&
undertaken by then to identify problems of jute & Jute
goods for preparation of optimal jute policy and export
strategy with the funds provided under IDA A credlit.
Reference Aa rega-ds capital re-stracturing programme of B1,is madein PCR, Vinistry of Jute & Textile kase further informd that ADIPara. 26.
Loan of !k. 33.40 crores was oonverted Into eqity w.e.f.
1.7-1979. The BIE got cash infusion of Ik. 18.68 orae e
in 1980-81, 1k. 25 orores In 1981-82, 1k. 15 oreres In
1982-83 and 1k. 20 crores in 1983-84. Besideo, an ADP Loan
of mk. 51.27 crores va alm oonverted into equity in
PT 1983-84.
Aa regards impleeantatlon of prioCng pelicy, the
BRI had already made upward revision on prices of Tern
during 1982-83 end1983-84 to keep its uills in operation.
On Export Development Programme as has been highlighted
in the TOR, SPB has added that a very important incentive
e.g. concessional Dank finance for export wan emitted in
Reflected the POR. They have also stated that exporter used to 6 etin PCR,Para. 35. export credit from commercial Maku during 1981-62 at 12%
as against commercial rate of 14-16% Ia 1982-83, the rate
of interest on export credit was further reduced to 11.5%
for export of non-traditional item. 1PB has, however,
expressed the view that the main constraint in the export
sector is still identified an the lack of product and
suDply development. Por exmort development, it is, therefore,
necesesary that long-term development assistance be provided
Contd ... *P/3.
ANNEX 10
Ministrt of Finance & PanningExtemal Roum Dsion
- 26 - Shw.angle Nagr
me D~~~~~~~~~~~~~~~~~~haka.-7
a D-0. No Dat
PCR, Para.42 to the country through a sequence of Imports Progrsmmestates itas one of Credits to be chanellsed to opecflo expert promeftialternativeapproaches. projects.
We shall be glad if you kindly tranamit our above
views to. the Operation & Rvluation Department of your
Headquarters in Washington.
With regards,
Yours sincerely,
(Abdul Jalil 1iSX)Kx. Roger Rowe,Chief of Xission,W.B. Bisdeft Xt selon in alae,222, Jew Bakaton,Dhake.
