Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7368-BD STAFF APPRAISAL REPORT BANGLADESH EXPORT DEVELOPMENT PROJECT MARCH 22, 1989 Industryand Energy Division CountryDepartmentI Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 7368-BD
STAFF APPRAISAL REPORT
BANGLADESH
EXPORT DEVELOPMENT PROJECT
MARCH 22, 1989
Industry and Energy DivisionCountry Department IAsia Region
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.
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CURR3NCY EQUEVALENT
The external value of the Bangladesh Taka (Tk) is fixed inrelation to a basket of reference currencies, with the US Dollar serving asinterve:ation currency. The official exchange rate on February 1. 1989 wasTk 32.90 buying and Tk 32.95 selling per US Dollar.
US$1.0 = Tk 32.95Tk 1 US$0.03Tk 1 million = US$30,349
ABBREVIATIONS
BB - Bangladesh BankDEDO - Duty Exemption Drawback OfficeECGW - Export Credit Guarantee WingEDF - Export Development FundEMU - Export Monitoring UnitEPB - Export Promotion BureauEPZ - Export Processing ZoneFSC - Financial Sector CreditGDP - Gross Domestic ProductGOB - Government of BangladeshIDA - International Development AssociationIFC - International Finance CorporationIMF - International Monetary FundISC - Industrial Sector CreditLIC - Letter of CreditLIBOR - London Inter Bank Offer RateMIS - Management Information SystemNBR - National Board of RevenueNIP - New Industrial PolicySBC - Sadharan Bima CorporationTA - Technical AssistanceUNDP - United Nations Development ProgrammeUSAID - United States Agency for International Development
FISCAL YEAR
July 1 - June 30
rUKq_..%ALI. *UIL
BANGLADESH
EXPORT DEVELOPMENT PROJECT
STAFF APPRAISAL REPORT
TABLE OF CONTENTS
Page No.
Credit and Project Summart ................................... iii-v
I. INTRODUCTION .1
II. THE TRADE AND INDUSTRY SECTORS . ........................... 1
A. The Economic Setting .1B. The Manufacturing Sector. 2C. GOB's Industrial Strategy. 2D. Trade and Industrial Policies . . 3
- Tariffs and the Import Regime. 3- Exchange Rate Policy. 4
Investment Approval. 4
III. EXPORT PERFORMANCE, POLICIES, AND CONSTRAINTS. 5
A. Export Perf-wrmance. 5B. Factors Constraining Export Development . . 6
- Access to Duty-Free Imports. 6- Availability of Export Financing. 8- Adequacy of Export Credit Guarantee Scheme 9- Market Information Constraints .10
IV. THER BANK GROUP'S ASSISTANCE IN THE TRADE, INDUSTRIAL,AND FINANCIAL SECTORS .................................... 11
A. Past IDA Lending .11B. Impact of Past Trade, Industrial, and Financial
Sector Operations .11C. IDA's Future Involvement .13D. IFC's Role and Experience .13
V. THE PROJECT .............................................. 14
A. Projec. Objectives and Description .14B. Projec: Components .14
- Exrort Development Fund .14- Technical Assistance .16
C. Costs and Financing Plan .18
This report was prepared by Messrs. Benjamin Cu Kok (Task Manager),Surinder K. Malik, Thomas Maxwell, Paul Murgatroyd (AS1IE), and Bruce Nichols(Consultant) based on an appraisal mission in February/March 1988 and afollow-up mission in May 1988.
This document has a mtricted distribution and may be used by recipients only in the psrfonnanceof their offcial duties. Its contents may not otherwise be disclosed without World Bank authorkation.
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Page No.
VI. THE CREDIT ............................................ 19A. ................... ons............................. 1
A. ,DA TersasndConditions..19B. EDF Operations .................. ; , 19C Administrative Arrangements . .20D. Benefits and Risks .. 22
VII. AGREEMENTS AND RECOMMENDATION .23
TABLES
3.1 BANGLADESH: Growth and Structure of Exports,PY81-FYss. 5
5.1 Technical Assistance Program .......................... 165.2 Project Costs and Financing Plan ....................... 18
ANNEXES
1. Export Development Fund--Statement of Lending Policyand Operating Procedures ...... ...................... 25
2. Technical Assistance Component .303 Estimated Disbursement Schedule .384. Documents Available in the Project File .39
HAP
IBRD 20726
BANGLADESH
EXPORT DEVELOPMENT PROJECT
CREDIT AND PROJECT SUMMARY
Borrowert People's Republic of Bangladesh.
Beneficiariess Scheduled commercial banks, Bangladesh Bank (BB),National Board of Revenue (NBR), Sadharan BimaCorporation (SBC), Export Promotion Bureau (EPB), andnontraditional exporters.
Total Proiect Cost: SDR 24.2 million (US$31.2 million equivalent).
Credit Amount: SDR 19.4 million (US$25 million equivalent).
Terms: Standard, with a 40-year maturity.
Onlending Terms: The Borrower, through BB, will make the proceeds of theCredit available to scheduled commercial banks, whichwould provide advances in foreign exchange to eligibleexporters. BB would rediscount export financingprovided by the banks. The exporter would pay aninterest rate pegged to the six-month LIBOR plus 12 andbear the foreign exchange risks. BB would provide aspread of 3.5Z to banks providing financing to eligiblenew nontraditional exporters and of 2.52 to banksproviding financing to other eligible exporters.
Cofinancina: The U.S. Agency for International Development (USAID)has agreed in principle to provide US$1.2 million as agrant to finance the Project's technical assistancecomponent.
Proiect Description: The proposed Project would complement previous andongoing industrial sector operations by supporting theexport development program of the Government of thePeople's Republic of Bangladesh (GOB' through the:(i) establishment and funding of an Export DevelopmentFund (EDF) in BB to provide preshipment financing inforeign exchange to exporters for their importedinputs; and (ii) provision of technical assistance toBB, NBR, SBC and EPB to strengthen these agencies'capabilities to implement export promotion policies.US$25 million would augment GOB's US$5 millioncontribution to EDF resources, and US$1.2 million wouldbe utilized for technical assistance.
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Benefits and Risks: The proposed Project would promote incremental exportsby providing a stable source of foreign exchangefinancing, especially for never nont:aditionalexporters, and by strengthening the institutionsresponsible for implementing GOB's export policies.Demand for the EDP will depend on the availability ofalternative sources of financing at internationallycompetitive cost. The risk that the EDP would primarilysubstitute for more costly financing of manufacturerswho would export anyway, rather than contribute toexport growth, would be minimized by limiting EDFaccess to nontraditional exporters and, in garments, toexporters with domestic content of 302 or more, and byearmarking 20Z of the proposed EDF for newnontraditional exporters. Improving duty drawbackschemes and access to finance would also be a strongincentive for entry of new exporters. Possiblecommercial banks' reluctance to participate in thescheme would be reduced by allowing them an attractivespread, requiring all users of the EDF to take outexport credit guarantees, and strengthening the ExportCredit Guarantee Wing of the SBC. Careful design ofthe terms of reference with the agencies' fullparticipation, appropriate blending of foreign andlocal consultants, and appointment of an expatriateconsultant to coordinate and monitor activities wouldensure effective absorption of the project's technicalassistance.
1.1 In its New Industrial Policy (NIP) issued in June 1982, the Governmentof Bangladesh (GOB) recognized the essential role the nascent manufacturingsector must play in increasing overall economic output and providing adequateemployment opportunities for its large and rapidly growing population. Thereforms introduced under t'ne NIP have focussed on expanding the privatesector's role, improving public sector enterprises' performance, liberalizingthe import regime, and adopting a flexible erchange rate and appropriateincentives to promote exports. Subsequently with assistance under the FourthTechnical Assistance Credit (Cr. 1124-BD), GOB carried out further detailedTrade and Industrial Policy studies and has been refining the NIP policyframework.
1.2 International Development Association (IDA) has assisted GOB toliberalize the trade regime and improve the institutional framework forpromoting exports through an Industrial Sector Credit (ISC)(FY87). In parallelwith the program of trade and industrial policy reforms, ID& has worked closelywith GOB and the International Monetary Fund (IMF) in developing an appropriateexchange rate policy which supports the emphasis on export development.Accordingly, since the early 1980s, GOB has maintained a flexible exchange ratepolicy, expanded the scope of the secondary foreign exchange market and reducedthe premium of the secondary exchange rate over the official exchange rate witha view to unifying the exchange rates (para. 2.8). The proposed ExportDevelopment Project (the Project) responds to GOB's request for additional IDAsupport to help it further rationalize its trade, industrial and financialsector policies and institutions. With an estimated cost of US$31.2 million,it would focus on: (a) strengthening the capabilities of institutions involvedin export administration; and (b) providing a line of credit through the GOB'sExport Development Fund (EDF) to facilitate exporters' access to preshipmentfinancing of .h&ir imported inputs. Funding for the proposed Project would beprovided by IDA (US$25 million equivalent) and GOB (US$5 million) for the EDF,and the United States Agency for International Development (USAID) (US$1.2million equivalent in grant) for technical assistance.
II. THE TRADE AND INDUSTRY SECTORS
A. The Economic Setting 1/
2.1 Bangladesh's macroeconomic performance during the 1980s has beenreasonably good considering the frequent occurrences of natural disasters. Itreduced its external and fiscal deficits from a range of 9-122 of GrossDomestic Product (GDP) in the early 19806 to around 6-82 of GDP in FY88, mainly
1/ For a comprehensive review of the current economic situation inBangladesh, see Rtport No. 7596-BD, "Bangladesh - Recent Economic..avelopments and Short-Term Prospects," dated February 3, 1989.
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through demand management policies &.Ad selective import substitution (forexample, in fertilizers and energy). Continued restraints on publicexpenditure (whJch fell from 202 of GDP in FY83 to 162 in FY88), a decline inprivate investment, continued weak demand (especially for manufactured goods),and the fall in international energy prices helped reduce the external deficitand stabilize the domestic inflation rate at around 112 p.a. Improvements werealso made in sectoral policies which strengthened the incentive system anddiversified the structure of exports (para. 3.3). Economic growth performancewas modest at an average annual rate of about 42 ir. real terms.
P. The Man iacturing Sector
2.2 Bangladesh's manufacturing sector is small and at an early stage ofdevelopment. Based on official statistics, which do not reflect the rapidgrowth in nontraditional industriee and seriously understate its value addadcontribution, manufacturing accounted for about 10? of GDP in FY88 and about 8Sof total employment. Public sector and large-scale private units generate 58Zof value added but employ only 18? of the manufacturing labor force. Small andcottage industries account for most of the employment (822) in the sector andthe remaining 422 of value added. The public sector's share of manufacturinginvestment has declined continuously since the mid-1970s, falling from about9O0 in i972 to about 402 in 1988. Since the early 19809 significant changeshave taken place in the sector's structure. Nontraditional export industries(such as readymade garments) &-- natural gas-based fertilizers have grownrapidly, while the traditional manufacturing sector dominated by juteindustries, textiles, and light consumer goods have stagnated. Despite itsrelatively small size, manufacturing plays a prominent role in the country'sexternal trade. About one-third of value added in manufactuiring originates inexport activities and the sector accounts for over three-fourths of totalmerchandise exports.
2.3 The manufacturing sector grew at an average annual rate of about 42during FY81-PY88. The sector has grown unevenly in recent years, and thegrowth rate has b'en less than half of that in FY73-FY8O. Papid growth ofabout 10? in FY85 was followed by virtual stagnation in FY86. The sectorrebounded in FY87 with a growth rate of almost 152. Estimates for FY88 againindicate a levelling off in the growtb rate. Favorable macroeconomicdevelopments, i.e., higher agricultural incomes, monetary expansion, andgreater availability of raw material iUports, stimulated the demand forindustrial products and contributed to higher growth rates in FY85 and FY87.Slower growth in agricultural incomes due to drastic declines in jute pricea inFY86 and floods in FY88 affected the sector's growth rates in the respectiveyears. Political disturbances and general strikes in FY88 also adverselyaffected the manufacturing sector.
C. GOB's Industrial Strategy
2.4 Bangladesh has very limited natural resources, and its industry isimport-intensive. Industrial growth has been constrained by the domesticmarket's small size due to low purchasing power and frequent, wide variationsin the availability of foreign exchange caused by fluctuations in theinternational prices of its traditional exports and periodic large food imports
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necessitated by natural disasters. A key element of Bangladesh's developmentstrategy is to promote rapid export-led growth to generate foreign exchange andprovide employment for a large, rapidly growing labor force. While themanufacturing sector performanct has been uneven in the 19809, a bright spot inthe economy has been the strong performance of nontraditional exports,especially readymade garments and frozen shrimp, which increased at an averageannual rate of 292 in real terms over FY81-FY88 and accounted for more thanhalf of total merchandise exports in FY88 (para. 3.1 and Table 3.1).
2.5 There has been a major shift in GOB policy toward the industrialsector, from early nationalization measures and concentration on public sectorindustrial enterprises (1973-1975), through a gradual increase in the privatesector's role (1976-1981), to a major emphasis on the private sector since June1982, when GOB introduced its NIP (para. 1.1). This emphasis on the privatesector has been demonstrated by the rapid divestment of public sectorenterprises and promotion of the private sector through deregulation anddecontrol (e.g. liberalizing import policies and procedures, simplifyingcustoms procedures, and enlarging the secondary exchange market, liberalizinginvestment l.,censing procedures) and incentives (flexible exchange rate policy,duty-free input imports and other incentives for exporters). Banking has beenopened to the private sector; there are now 15 private banks, including 7foreign banks.
D. Trade and Industrial Policies
Tariffs and the Import Regime
2.6 Bangladesh's structure of protection is characterized by tariffanomalies as well as various types of quantitative restrictions. Many productsat the final stages of production are protected either by outright bans orrestrictions and/or by high tariffs. Special exemptions and the existence ofmany transactions that bypass official chann ls create additional anomalies inthe levels of effective protection for different industries.
2.7 In FY86-FY87, GOB simplified and liberalized the tariff and importcontrol regime. Some of the recent measures included: a phased reduction inthe tariffs on luxury goods and/or imposition of excise taxes on localsuppliers to lower t-e effective protection enjoyed by domestic manufacturersand to discourage smuggling; a phased program to rationalize tariffs inselected subsectors, including textiles, steel, engineering, and chemicals;change from a positive list of unrestricted imports to a negative list ofproducts banned from importation, supplemented by a restricted list containingitems importable under conditions specified in the Annual Import Policy Order,thus freeing all imports except those subject to the Negative or Restrictedlists; reductions in the number of items in the Negative and Restricted listswith the aim to gradually phase out restrictions so that industries are onlyprotected by tariffs; a shift in import financing from the official foreignexchang- market to the secondary exchange market where the rate better reflectsthe opportunity cost of foreign exchange, thus paving the way for eventualunification of these markets. In addition, based on the recommendations of aUnited Nations Development Programme (UNDP) study completed in FY87, GOBinitiated measures to simplify customs valuaticn and clearance procedures.
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Exchange Rate Policy
2.8 Since the early i980s, GOB has pursued a flexible exchange ratem.nagement policy to improve competitiveness and promote export diversification.At the same time, GOB has continued to increase the proportion of externaltransactions conducted in the secondary exchange market so that virtually allexports and almost all imports not financed by aid flow through it. Along withthe widening of the serondary exchange market, the spread between the officialand secondary exchange market has been narrowed from 152 in FY85 to about 2Z asof end 1988. The official exchange rate, pegged to a basket of currencies ofBangladesh's main trading partners, has been adjusted frequently in small stepsto increase competitiveness. The real exchange rate (excess of the inflationdifferential between Bangladesh and its major trading partners) depreciated byabout 18Z in FY86 and 7Z in FY87 and appreciated slightly (O.3Z) in FY88. Inaddition, the Export Performance Benefit system which allows exporters to obtainpart of their export receipts at the higher secondary exchange market rate,contributed to the pace of effective devaluation for exporters. In FY88, nearlyall export proceeds were sold through the secondary excharge market, compared to53Z in FY86. GOB intends to sustain flexible exchange rate management and theinlargement of the role of the secondary exchange market. GOB is ccamited underthe Structural Adjustment Facility agreements with the IMF to eventually unifythe foreign exchange markets.
Investment Approval
2.9 In the past GOB periodically issued an Investment Schedule whichspecified priority sectors, the quantity of investments to be undertaken in eachof these sectors and sanctioning rules. This policy did not serve its intendedpuroose as investment targets were unrealistic and not binding on privateinvestors, and financial institutions tended to follow the Investment Schedulemechanically in making lending decisions rather than conducting meaningfulproject appraisals. The Revised Industrial Policy issued in 3986 made theInvestment Schedule indicative of GOB's guidelines rather than regulating entryas the Schedule had done previously. In addition, most of the industries aretreated as free sectors not requiring approval. To import machinery, firms inthe free sectors can use their own resources to buy foreign exchange from thesecondary exchange market. GOB has reserved only power generation andtransmis4olon, arms and ammunition, atomic energy, telecommunications, airtransportation, mechanized forestry, and currency printing and minting for thepublic sector; another 12 industries are 'discouraged' due to environmentalconstraints (e.g. deep sea trawling) or serious over-capacity (e.g. jutecarpets). All other industries (125 out of a total of 144) are now treated asfree sectors which do not require approval if investments are funded by theinvestor's own resources, including short-term bank funding; furthermore,projects with imported raw material content of less than 50Z no longer requireInvestment Board approval. Along with liberalization of investment sanctioningprocedures, to facilitate speedy loan processing GOB also significantlyincreased the limits below which financial institutions do not requireGovernment approval to make loans. In January 1989, GOB issued the InvestmentBoard Ordinance 1988 which created the Board of Investment with jurisdictionover the registration and approval of both domestic and foreign investments.Import licensing procedures were also simplified by requiring only a passbookand specifying broad categories of eligible raw materials and spare parts.
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2.10 These improvements in the inveatment climate, together with exportpromotion measures discussed below, contributed to a sharp increase in privateinvestment in manufacturing from FY83 through FY8S, contrary to the generaltrend in sggregate private it4vestment during this period. This growth occurredsolely in the free sectors, particularly in textiles, readymade garments and'ood processing. The pattern of foreign exchange financing of capital goodsimports also changed dramatically; 852 of the foreign ex%.hange requirements forsuch imports was obtained through the secondary exchange market by the mid-1980s compared to heavy reliance (over 80X) on cash licenses at the officialexchange rate in the early 1980s. However, in FY86-FY8S, private investment inmanufacturing has stagnated due to denial of new credit to defaulters.rerurrent political uncertainties. ae well as continuing low demand levels.
III. EXPORT PERFORMANCE, POLICIES, AND COUSTRAINTS
A. Export Performance
3.1 Until recently, Bangladesh's export structure was dominated by juteand jute goods and, to a smaller extent, by tea and leather. However,international demand and prices for jute have declined _.onsistently since the197(0s due to competition from synthetic fibers. To reduce dependence on jute,GOB has tried to diversify its exports by encouraging other domestic resource-based industries (shrimp and leather) as well as new activities which processimported materials for exports. The first breakthrough in the latter type ofactivity was in garment exports, wlhich increased from negligible amount.' inFY81 to almost US$434 million in FY88, equivalent to about 352 of totalmerchandise exports.
Table 3.1: BANGLADESH: GROWTH AND STRUCTURE OF EXPORTS, FY81-FY88
Nominal AverageExport Value Share of Exports Growth(US$ million) (2) Rate
Traditional ExportsJut? and jute goods 485 382 68.3 31.0Tea 41 39 5.7 3.2Leather 57 147 8.0 11.9
583 568 82.0 46.1 0.8Nonts.aditional Exports
Re.%dymade garments 3 434 0.4 35.3Fr,zen Fish and Shrimp 40 145 5.6 11.8Ccher 85 84 11.9 6.8
128 663 18.0 53.9 28.9
Total Merchandise Exports 711 1,231 100.0 100.0 '.7
la In constant prices./b Staff estimates.
Source: Table 1.10 of Report No. 7596-BD, 'Bangladesh - Recent EconomicDevelopments and Short-Term Prospects,' February 3, 1989.
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3.2 The improvement in export earnings in the 1980s has been due primarilyto the rapid growth of nontraditional exports which increased ol. an averagerate of 292 p.a. in constant prices over the FY81-FY88 period (Table 3.1). Onthe other hand, traditional exports--jute, tea and leather--stagnated, with theexception of leather in FY87, when both export prices and volume of leatherpicked up substantially. There was no secular Improvement in jute prices andexport earnings; a short-lived improvement in prices in FY85 due to supplyshortage was followed by sharp declines in FY86, FY87, and FY88. Given thesedisparate trends, the share of nontraditional exports in total merchandiseexports in current prices rose from 182 in FY81 to about 542 in FY88, while theshare of raw jute and jute goods declined from 682 to 312 over the same period.
3.3 In addition to the policy improvements in trade and tariffs,investment approval procedures, and exchange rate policies (paras. 2.6-2.8), amajor policy factor responsible for Bangladesh's success with readymadegarments has been the establishment of the special bonded warehouse system(para. 3.6), which provided free trade status for imported inputs. Thissystem, which applies to garment manufacturers who export all of theirproduction, has permitted them to import required inputs without restrictionsand without duties and other taxes. Another important factor has been theavailability of export-related financ..ng for imported inputs. Access tosuppliers' credit, bascd on the Back-to-Back Letter of Credit (L/C) System, hasbeen critical in meeting readymade garment exporters' working capital needs inthe absence of foreign currency loans through the Bangladesh Bank (BB). Otherexport incentives included income tax rebates, concessional rate of duty onimported machinery, and subsidized interest rates on preshipment financing inlocal currency.
B. Factors Constraining Export Development
3.4 There are a range of policy and institutional instruments whichgovernments have used to promote exports, including maintenance of realisticexchange rates, ensuring free trade status to exporters who import inputs forexport production, facilitating access to credit needed for export productionat internationally competitive costs, and strengthening the capabilities ofinstitutions administering export policies, as well as making them moreefficient. Under the NIP and supported by ISC, GOB achieved substantialprogress toward implementing these policy and institutional approaches topromoting manufactured exports. However, there still remain problems in thedetailed implementation of policy and institutional changes in exportadministration and in the access to credit, particularly .y new and indirectexporters.
Access to Duty-Free Imports
3.5 There have been five administrative exemption/drawback schemes toexempt exporters' imported inputs from duties as well as direct and indirecttaxes. Under the Drawback at Actual Scheme, exporters pay duties and taxes ontheir imported inputs which are subsequently refunded on a case-by-case basis.Duty refunds have been granted only in a few cases since this scheme wasintroduced in August 1970. Under the Drawback at Flat Rate Scheme, refunds onduties and taxes are estimated according to a preset schedule. Since its
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introduction in February 1981, only 13 product groups have been included in thefixed drawback schedule. The Notional Payment Scheme, established in April1983, exempted exporters from paying duties and taxes on imports used in exportproduction on a case-by-case basis at the time of importation. Fearing misuse,GOB officials have imposed complicated procedures, and exporters have neverused this prior exemption system. The Special Bonded Warehouse Scheme has beenadministered through the use of import and axport passbooks, input-outputcoefficients and stock accounting books, which has resulted in free tradestatus for exporters and has been one of the most important contributingfactors to garment exports' success. Its main shortcoming is that it has beenapplicable only to garment producers who export all of their output. ThePrivate Bonded Warehouse Scheme was created for manufacturers in fields otherthan garments and specialized textile products who export all of their output.Unlike the Special Bonded Warehouse Scheme, a Customs official must be presentto inspect the inflow and outflow of inputs and products.
3.6 These schemes have applied to different products and have been largelyineffective because of administrative problems. The Special Bonded WarehouseScheme has been most successful because it permitted speedy administration ofthe import procedures and guaranteed free trade status. Under this schemeinput-output coefficients are pre-announced, and exporters apply for duty-freeimports. Nevertheless, there are areas for further improvement. For duty-freeentitlements and duty-owed imports, input-output coefficients are handled on anad hoc basis after the exporters have applied for their duty drawbacks. Theyare not processed speedily, and new products are added to the flat ratedrawback schedule very slowly. It would be better to have a system whichestimates and publishes input-output coefficient information which exportersand customs officials can use in submitting and processing applications forduty exemptions or drawbacks. Another deficiency is that indirect exporters(i.e. demestic producers of inputs supplied to export manufacturers) have notbeen eligible for duty-free imports; this has prevented the rapid developmentof backward linkages which could significantly increase value added in exportactivity.
3.7 GOB has begun to generalize the principles of the Special BondedWarehouse Scheme and make it the cornerstone of the duty-free importadministration for all firms that generate exports directly or indirectly. Toenable it to manage a generalized bonded warehouse system more effectively andto develop other alternative duty drawback systems, GOB has established theDuty Exemption Drawback Office (DEDO) in the Finance Ministry's National Boardof Revenue (NEBR), whose objective will be to consolidate import policy-relatedand technical tasks on imports for export production which are currentlycarried out by various agencies. Two statutory and regulatory orders wereissued in May 1988 to revise and systematize the drawback schemes toincorporate duty drawback at flat rates and individual drawback, and to extendthese facilities to indirect exporters using the inland L/C system. SincePY87, GOB nas permitted exporters, on a special case basis, to import bannedand/or restricted items and, in FY88, GOB also extended this incentive toindirect exporters. The present case-by-case or product-by-product approachwill eventually be replaced by a general system under which no importrestrictions would be applied to inputs used for direct and indirect exports,other than through the general procedures laid down by DEDO. StrengtheningDEDO so that direct and indirect exporters will have easy access to duty-freeimported inputs is one of the objectives of the proposed Project.
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3.8 In addition to the duty exemption-drawback schemes, Bangladesh hasalso established an Export Processing Zone (EPZ) in Chittagong where bothforeign and local enterprises can set up factories exempt from custom dutiesand import restrictions. GOB has decided recently to further expand the EPZand undertake additional infrastructural investments. After a slow start dueto the limited powers vestad in the EPZ Authority and other constraints. GOB'sstreamlined procedures are now expected to facilitate new investments andimprove existing investors' operations. GOB has reviewed with theInternational Finance Corporation (IFC) the latter's study on Foreign DirectInvestment in Bangladesh, and additional changes in institutions, incentives,and procedures are expected in the near future (para. 4.7).
Availability of Export Financing
3.9 In addition to restriction-free and duty-free imported inputs, anotherimportant incentive to promote exports is to facilitate access to exportfinancing for all industries and firms that generate exports directly orindirectly. Preshipment working capital financing is normally used to purchaseimported and domestic inputs. In countries with underdeveloped financialmarkets and foreign exchange controls, the financing needed to purchaseimported inputs is usually met either from foreign currency loans earmarked forexporters or from foreign suppliers' credits.
3.10 In Bangladesh, new exporters have difficulty obtaining credit, andexport financing is relatively expensive to those with access to it.Commercial banks' demands for physical collateral appear to be one of the mostimportant impediments to small and new exporters' access to -xport financing.These exporters typically have no established record and, given the currentspreads allowed them, the commercial banks have neither the incentive nor theability to assess the risk of lending to new and small exporters. DespiteGOB's stated objective to promote backward linkages from nontraditionalexports, indirect exporters have only recently become eligible for GOB's exportfinancing schemes. However, the implementation of the administrativemechanisms for the inland LIC system still need to be strengthened tofacilitate indirect exporters' access to financing. To exploit Bangladesh'sexport potential more fully, commercial banks need to be given a larger spreadto lend to new, small and indirect exporters, the Export Credit GuaranteeScheme needs to be substantially strengthened, and financial instruments alsoneed to be revised to allow indirect exporters access to export finaaicing. Theproposed Financial Sector Credit (FSC) will require as one of its objectivesthat banks be able to adjust interest rates to reflect the varying risks andcosts associated with different types of lending. The proposed Project willprovide technical assistance to the Export Credit Guarantee Wing (ECGW) of theSadharan Bima Corporation (SBC) to strengthen the export guarantee scheme andto BB to modernize the export financing system as described below.
3.11 In FY87, based on the findings of a BB Task Force on Export Finance,BB issued a revised circular to generalize the inland back-to-back LIC system,linking direct exporters' financing with indirect exporters' financing tofacilitate access to working capital financing for both types of exporters.Loan disbursements for the direct exporter will be strictly tied to the inland
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back-to-back LIC and negotiation of the import L/C. In addition, all indirectexporters will have access to export financing through the inland back-to-backLiC. Loan liquidation for direct exporters and indirect exporters will be tiedto an export LIC (or order) and inland back-to-back LIC negotiations,respectively. Provision has also been made in the design of the inland back-to-back LIC system for exporters to have access to both sight and usance LICs.These changes should substantially strengthen the access of f?xporters toforeign suppliers' credits for those sectors (particularly readymade garments)that are highly dependent on this type of financing. However, it does notaddress the needs of exporters in newly emerging products that may not haveaccess to suppliers' credit.
3.12 The Task Force also recommended the establishment of a foreigncurrency EDF in BB to address the needs of direct and indirect exporters who donot have access to appropriate suppliers' credits. During the transitionperiod when fundamental reforms will address the issues of access to credit andforeign exchange, GOB feels that it would be useful to create such a fund toprovide competitively-priced foreign currency loans to exporters to providethem with an assured source of foreign exchange as well as to demonstrate GOB'scommitment to promoting and diversifying exports.
3.13 In view of Bangladesh's current favorable foreign reserve position andthe expansion of the secondary foreign exchange market, access to foreigncurrency financing does not appear to pose a serious problem at present forexporters who already have access to adequate credit, although the situationcould change significantly as GOB introduces agreed trade regime reforms whichwould allow increased imports and may erode present reserves. Banks providepre- sand post-shipment working capital export financing at a concessional 92p.a. interest rate for nontraditional products up to 902 of the export L/C ororder. The interest rate applicable to certain nontraditional exporters(handicrafts and handloom products, and light engineering and electric goods)is 72 p.a. However, such export financing is limited and available only todirect exporters in local currency for the purchase of domestic inputs. Toprocure their imported inputs, Bangladeshi exporters can obtain foreignexchange through the secondary foreign exchange markets by obtaining workingcapital loans in local currency at 142 p.a., or they are required to obtainsuppliers' credit. Readymade garment producers as well as other users ofSpecial Bonded Warehouses have had to rely exclusively on suppliers' creditsthrough the back-to-back LIC. These sources of financing are relativelyexpensive and, more importantly, are generally not available to new exportersjust entering the market. The EDF is intended to supplement the existingsources of financing by making: (a) working capital loans available in foreigncu-rency at competitive international interest rates; and (b) a special effortto exterd werking capital credit to new exporters of nontraditional goods whoare just zntering the market.
Adequacy of the Export Credit Guarantee Scheme
3.14 SBC is a Government-owned general insurance company. Its ECGW,created in 1978, is Bangladesh's only export credit guarantee institution andprovides pre- and post-shipment export credit guarantees to banks andcomprehensive guarantees to exporters. Through 1986, ECGW's export insurance
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covered 7? of total merchandise exports and 222 of nontraditional exports.Because of staff and financial limitations and lack of operational autonomy inprocessing claims, ECGW is regarded as relatively slow and ineffective. Smalland new exporters have typically been unable to gain access to export finanicingdue to the guarantee scheme's institutional weaknesses and the conservativeatt..tude of commercial banks, which demand physical collateral. ECGW is alsolosing substantial amounts of money, largely because claims exceed fee .ncome;SBC, a publicly-owned company with commercial objectives, bears these losses,which discourages it from expanding the export guarantee program, incurringadministrative or promotional expenses or processing claims quickly.
3.15 To improve the export credit guarantee scheme, GOB has alreadyinitiated a program to expand and strengthen the ECGW. In 1987, the ECGW wasconverted into a separate department with its own account and budget,increasing its autonomy. Its capital was increased from Tk 16.1 million toTk 29.2 million, reducirg its leverage ratio. High leverage ratio has been animportant reason for the system's generally perceived low credibility. Both toimprove current services and in anticipation of increased export activity. GOBalso increased ECGW's working capital from Tk 5.4 million in 1985 to Tk 133.3million in 1988, and its staff strength from 18 in 1985 to 36 in 1988. Thestaff strength is authorized to reach 87 by 1990. Further strengthening ofECGW is crucial to meet the expanded guarantee demands expected from the newexport financing system and duty-free import administration. To strengthenECGW, GOB has agreed to cause SBC to prepare a study by June 30, 1990 to reviewits export credit insurance policies, and by September 30, 1990 provide IDAwith an action program based on the study's recommendations/proposals toimplement a comprehensive training program for ECGW staff and to enhance itsfinancial viability and operational autonomy within SBC. The study wouldreview several aspects of SBC's export credit guarantee operations, including:(a) a recommendation whether export credit guarantee insurance should be mademandatory for borrowers seeking export financing; (b) revision of the feestructure to cover claims and administrative and promotional expensesadequately; (c) measures to increase ECGW's authority to incur expenditures solong as they fall within overall budgetary levels pre-agreed by SBC prior tothe end of each fiscal year; (d) policies and procedures for better monitoringof the sale of collateral goods associated with paid claims and collection ofsale proceeds; (e) other measures designed to reduce ECGW losses or increaseECGW financial autonomy from SBC; (f) design of a simple but effectivemonitoring system to track insurance applications, outstanding insurancepolicies and claims, and analysis of claims experience, to improve ECGW'soperational efficiency and effectiveness; and (g) a comprehensive program oftraining for ECGW staff.
Market Information Constraints
3.16 Until December 1977, export promotion related matters were dealt withby the Commerce Ministry's Export Promotion Unit. In January 1978, the ExportPromotion Bureau (EPB), a semi-autonomous body, was formed under the CommerceMinistry and entrustea with promotion of Bangladesh exports. In 1986,Bangladesh was hit with "quota shock' when its major market, the Unites States,suddenly imposed quoLas on Bangladesh garment exports, leading to hardship for
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many garment exporters. Since then, GOB has improved its capacity to respondquickly to the imposition of import quotas in selected products and markets.The quota allocation policy has been substantially improved in recent years,and quotas are now announced sufficiently in advance of the quota year. Inaddition, the EPB has established an Export Monitoring Unit (EHU) tosystematically monitor the progress of firms with quota allocations. Themonitoring system, consisting of a repr.ting scheme by which EPB would beinformed by the commercial banks responsible for processing export L/Cs and bycustoms when shipments are actually made, would permit GOB to ensure thatquotas are utilized to the maximum extent and to reallocate unfilled quotas ina timely manner. The proposed Project would provide technical assistance toEPB to help it develop and implement the monitoring system effectively.
IV. THE BANK GROUP'S ASSISTANCE IN THE TRADE,
INDUSTRIAL, AND FINANCIAL SECTORS
A. Past IDA Lending
4.1 Since 1972, when Bangladesh was established, IDA's assistance to itstrade, industrial and financial sectors has consisted of 28 operationsamounting to about US$1.7 billion equivalent, and has focussed on theliberalization of these sectors to contribute to a higher, sustained economicgrowth level, provide productive employment for its rapidly growing labor forceand improve the external trade and balance of payments position on a sustainedbasis. IDA has pursued these objectives through a series of 13 program credits(totalling US$1.2 billion equivalent), as well as an industrial technicalassistance credit (Cr. 622-BD) (totalling US$7.5 million equivalent), fourprojects to increase fertilizer production and distribution (totalling US$135million equivalent), three projects to balance, modernize and rehabilitate thecountry's jute and textile industries (totalling about US$95 millionequivalent) and three projects (totalling about US$45 million equivalent) topromote small-scale industries. For medium- and large-scale private sectorindustry, IDA has provided two development bank credits totalling US$75 millionequivalent through the Bangladesh Shilpa Bank. IDA has also supported GOB'sindustrial policy reforms through an ISC (Cr. 1816-BD) and its efforts topromote energy efficiency use among industrial enterprises through the FY88Industrial Energy Efficiency Project (Cr. 1942-BD). In foreign resource flowterms (net of cancellations) these operations represent a transfer of resourcesof US$1.6 billion at current prices.
4.2 In late FY88 IDA learned that GOB had not been implementing thesubsidiary loan agreements' onlending terms and conditions for commercialentities under ongoing IDA credits, Asian Development Bank loans and loans fromvarious bilateral donors. For IDA credits, GOB has required entities, with fewexceptions, to make interest payments and repayments of principal on the sameterms as GOB repayments to IDA, rather than in accordance with the subsidiaryloan agreements. With IDA's agreement, GOB has adopted the following actionplan to address this issue for IDA credits. Beginning with their FY89accounts, all entities were instructed to record in their financial statements
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payments of interest and principal in accordance with the terms and conditionsof the subsidiary loan agreements, and would be in compliance with thesubsidiary loart agreements. Further, GOB has decided that all of the arrearsof energy sector entities as of June 30, 1988 will be converted into equity,and it will fully implement this decision by June 30. 1989. For theoutstanding arrears under the subsidiary loan agreements for all otherentities, GOB has decided to either convert them into equity or to reschedulerepayments depending upon the financial circumstances of each entity. GOB willfinalize its decision for each entity by June 30, 1989 and implement itimmediately thereafter. Future compliance with the terms and conditions of thesubsidiary loan agreements -111 be monitored closely by supervision missions.
B. Impact of Past Trade, Industrial, and Financial. Sector Operations
4.3 IDA's experience with its past trade, industrial and financial sectoroperations has been mixed. The program credits have successfully provided GOBwith necessary balance of payments support, particularly during years when theeconomy had to confront stresses caused by natural disasters and/or terms oftrade deterioration of its major commodity exports of jute and tea. They havealso achieved substantial, albeit slow, liberalization in the trade regime andinvestment licensing systems. Hore recently, the ISC assisted GOB in itsaccelerated effort to rationalize its trade, industrial and financial sectorpolicies through reforms in industrial licensing, export policy andadministrationt, tariffs and import controls, public sector enterprisesefficiency and improving portfolio quality. Except for shortfalls in therecovery of industrial term loans, GOB's implementation of the ISC program wasgenerally satisfactory, ani the second tranche was released in June 1988.
4.4 IDA-assisted fertilizer projects have helped Bangladesh to achieveself-sufficiency and develop a potential for exporting natural gas-basedfertilizers. Through a judicious program of efficient import substitution, GOBhas generated foreign exchange savings of about VS$100 million per year sincethe early 1980s. Nevertheless, a recent IDA fertilizer sector reviewidentified marketing and financial issues which, if properly addressed, couldimprove the performance of existing plants.
4.5 The jute and textile balancing, modernization and rehabilitationprojects experienced substantial delays and cost overruns and have had a morelimited impact. Both industries, particularly the public sector mills,continue to face serious subsectoral issues of operational autonomy, high costsdue to overstaffing, excess capacity, production inefficiency, high debtoverhang, foreign competition in the case of textiles and periodic pricedeclines in the case of jute. The three small-scale industry projects haveprovided substantial resources for small and cottage industries in Bangladesh.However, due to a difficult investment climate, barriers to entry, administeredinterest rates and a general lack of credit discipline, these projects have notbeen as successful as originally envisioned during appraisal. The investmentprojects for medium- and large-scale enterprises similarly had a limited impacton industrial sector growth and, despite substantial technical assistance tothe development banks, these banks continue to suffer from institutionalweaknesses and poor lcan recovery rates. Pending the results of a UNDP-fundedtechnical assistance program executed by the Asian Development Bank and furtherfinancial sector reforms, IDA has not extended any new loans to the developmentbanks.
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C. IDA's Future Involvement
4.6 The main thrust of IDA's further involvement in the industrial sectoris to work closely with GOB to address remaining policy and procedureconstraints, particularly those affecting export development and industrialfinance. The proposed FSC, which is based on the FY88 Financial Sector Review,would inter alia modify the structure of interest rates to reflect risks andcosts more adequately, improve banks' management information systems to enablethem tc, become more efficient, and enable GOB to improve loan recovery throughlegal and accounting reforms and strengthening BB's capabilities to supervisebanks more effectively. IDA is also discussing with GOB continued reforms inthe trade regime, leading to a tariff-based system of industrial protection.Reforms in this and other areas could form part of a possible ISC II. Theproposed Project would complement IDA initiatives under the Seventh and EighthImport Program Credits (Cr. 752-BD and Cr. 866-BD) and the ISC and the actionsproposed under the FSC.
4.7 Following on the ISC, and the proposed Project and FSC, IDA's futureindustrial/financial sector lending in Bangladesh is expected to include anumber of credits to assist private investment (small, medium and large) andpublic enterprises. These would continue to complement GOB's initiatives forgeneral reforms in trade, industry and financial sectors to promote morerationality and financial discipline in industrial investments, both public andprivate. A sector work program, consisting of studies on trade and tariffs,public enterprises, and small and cottage industries, is planned to prepare forIDA's lending operations.
D. IFC'S Role and Experience
4.8 In addition to IDA's involvement in the industrial sector, the IFC hascarried out four operations amounting to about US$8.5 million. As with IDA'soperations, IFC's experience in Bangladesh has been mixed. It successfullyintroduced the concept of leasing in Bangladesh which has provided anothersource of financing for industrial enterprises. Its investment in shoemanufacturing has been instrumental in improving production technology andmanagement and contributed to increased output and employment. In thefinancial sector IFC was involved in the establishment of an industrialpromotion company which has had modest success. However, a fourth IFCoperation is under litigation. In addition to its investment operations IFChas carried out several studies for GOB to provide the basis for policy reform.In FY87, at GOB's request, it conducted a pilot study to advise GOB on thefinancing mechanisms and methodology of public enterprise divestiture in thechemical industry. Following this study, GOB partially privatized six publicenterprises in FY88, and another ten are identified for partial privatizationin FY89. In FY88, IFC completed a Foreign Direct Investment Study (pars. 3.8)which recommended policy and procedural reforms to improve the foreigninvestment climate substantially. Since then, GOB has established a Board ofInvestment and instituted major procedural changes. IFC remains ready toassist in the financing of viable projects despite its mixed experience todate. It is also available to provide fee-based advisory services to help GOBin institution-building (including the recently established Board ofInvestment), structuring project proposals and improving the investmentclimate.
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V. THE PROJECT
A. Proiect Objectives and Description
5.1 As noted earlier fparas. 3.5-3.16), exporters in Bangladesh do nothave automatic access to foreign exchange preshipment financing atinternational rates of interest, automatic access to duty-free imported inputs,nor do they have adequate. timely market knowledge about export commoditiessubject to quota limitations. The proposed Project would assist GOB's effortsto promote exports by eliminating these constraints and furthering its trade,industrial and financial policy reforms through a line of preshipment foreignexchange credit for exporters and a comprehensive technical assistance program.
5.2 Lack of access to credit and ready availability of foreign exchangepreshipment financing at international interest rates have been a majorbottleneck to the growth of exports. By providing a line of credit, theproposed Project would augment GOB funds in an EDF in BB to hep meetexporters' preshipment foreign exchange requirements. The proposed Project isintended as a transitional link in IDA projects to support GOB reforms intrade, industry and financial sector policies.
5.3 Technical assistance under the proposed Project would generalize andextend export financing to direct and indirect exporters by helping BB operatethe EDF and implement a generalized inland back-to-back LIC system; improve andmake more automatic exporters' access to the duty-free imported inputs byassisting the DEDO improve its administration of the duty drawback system;improve access to finance by newer as well as established exporters exploringnew markets or products by strengthening SBC's ECGW; and improve exporters'access to knowledge of market conditions, especially in markets subject toquota limitations, by helping the EPB operate its EMU.
B. Project Components
5.4 The proposed Project includes: a line of credit of US$25.0 millionequivalent to augment US$5 million equivalent of GOB funds in the EDF and aUS$1.2 million equivalent technical assistance program to BB, DEDO, SBC andEPB, the key institutions engaged in export finance and administration. USAIDhas indicated its agreement in principle to finance the technical assistancecomponent as a grant to: BB, to implement the inland LiC; DEDO, to improve itsability to calculate duu.y drawback rates and the efficiency of refundingdrawbacks; ECGW, to strengthen the export credit guarantee scheme; and EPB, toimprove its export monitoring information system for exports subject tointernational quotas.
Export Development Fund
5.5 GOB would establish the EDF in BB with a contribution of US$5 millionfrom its own foreign exchange resources. This would be supplemented by aUS$25.0 million credit from the proposed Project. GOB's establishment of theEDF with an initial contribution of at least US$3 million equivalent would be acondition of Credit effectiveness and the remaining GOB contribution of US$2mill' a would be deposited before July 1, 1990. GOB has agreed to earmark US$6
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million (202 of the initial EDP) 3 promote the activities of newnontraditional exporters (para. _1). The EDF would be a self-sustainingrevolviug fund, providing up to 180-day foreign currency preshipment financingto exporters, in line with the export production cycle, at an internationalinterest rate. Disbursements from the EDF subloans would be made bycommercial banks directly to the suppliers, and repayments to the EDF will bededucted by commercial banks from payments to exporters by their buyers. GOBhas agreed that it would use the principal and interest repaid to EDF onaccount of subloans and any interest accrued on the investment of the EDF fundsfor further lending to eligible exporters. The draft Lending Policies andOperating Procedures for the EDF were agreed with GOB, which issued them onDecember 7, 1988 in the form of BB Circular No. 29 (Annex 1). The mainfeatures of the Lending Policies and Operating Procedures cover the EDF'smanagement, eligibility criteria for use of EDF funds, procedures to access theEDP, terms and conditions of subloans, procurement procedures under the EDF. aswell as periodic reviews of eligibility criteria, rediscounting spreads,interest rates, demand and, eventually, provisions to review if the EDF shouldbe terminated.
5.6 In the Bank Group's experience, demand for export funds in somecountries have not been as strong as originally envisaged for a number ofreasons, including the availability of alternative sources of relativelyinexpensive financing, new institutions and unwieldy procedures to administerthe funds, the inability of centrai banks to convert soft currencies into hardcurrencies to replenish the fund and perpetuation of such funds beyond theirusefulness. In contrast, they have been successful in countries such asMexico, Jamaica and Yugoslavia during periods when exporters experiencedlimited access for competitively-priced fo-eign currency financing, thecommercial banks understood the mechanics of export financing, and the spreadswere adequate for the commercial banks. To avoid some of the shortcomings inthe Bank's Group previous experience with export development funds, such astheir continued existence beyond their usefulness or use of funds for purposesnot related to export promotion, GOB has agreed that: (a) GOB and IDA wouldreview the demand for the EDP annually beginning January 31, 1990, includingthe amount set aside for new nontraditional exporters, and if demand for thelatter is found to be low during these annual reviews, efforts will be made byGOB to remedy the situation; (b) should there be insufficient demand forearmarked funds for new exporters, GOB, in consultation with IDA, wouldreallocate these earmarked funds to the general EDF for use by all eligibleexporters; (c) if the demand for EDF funds substantially exceeds the fundsavailable, GOB would contribute additional foreign exchange to the EDF,equivalent to 20? of the annual excess demand (defined as the differencebetween the amounts of valid financing requested by eligible subborrowers andthe actual amounts lent from the EDP over the previous 12 months), or suchother adequate amounts as GOB would determine in consultation with IDA up to amaximum of US$10 million equivalent, to increase the fund's size; and (d) ajoint GOB/IDA review of the EDP would be conducted on or about December 31,1992 to determine if the EDP should continue. Should the EDF be phased out,GOB has agreed that the EDF's assets and liabilities would be transferred toits general exchange resources.
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5.7 All EDP subborrowers would be required to iake ou.. export creditinsurance. This should encourage commercial banks to make loans to newnontraditional exporters who might otherwise be denied credit because ofperceived risks and the commercial banks' limited ability to assess risksadequately, thus providing new exporters more opportunities to avail of the EDFand increasing incremental nontraditional exports. The ECGW does not deal inforeign exchange; if foreign currency liabilities arise due to non-performanceby an exporter, GOB has agreed that the latter would be responsible forrepaying the commercial bank with foreign exchange purchased on the .%condaryforeign exchange market, as is currently the case with garment exporters. Tostrengthen the ECGW's operational capabilities and financial viability, GOB hasagreed that it would cause SBC to annually, commencing not later than June 30,1990, establish adequate levels of administrative and promotional expendituresfor ECGW in consultation with IDA.
Technical Assistance
5.8 The technical assistance (TA) component of the proposed Project ofabout US$1.2 million equivalent consists of consultancy services, equipment andmaterials and overseas training, including interrships of three to four monthduration, which would strengthen the institutional capabilities in Bangladeshrelated to export financing and administration, as indicated in schematic formin Table 5.1 below and described briefly in paras. 5.9-5.12 and in detail inAnnex 2. The proposed Praject would support the introduction of severalactions that would be innovative for Bangladesh. The key officials responsiblefor implementing the export financing, export guarantee and duty drawbackschemes could therefore benefit substantially from exposure to successfulpractices in other countries. To ensure that the benefits from such trainingare maximized, GOB has agreed that each of the participants in overseastraining would be required to: (a) submit a study plan for IDA's and USAID'scomments and approval; (b) agree, after completion of the training, to serve ina relevant institution carrying out the functions for which training was givenin accordance with GOB's regulations on over3eas training; and (c) prepare areport on the lessons learned from the training for the supervisor, IDA anc.USAID.
TABLE 6.1 THE TECHNICAL ASSISTANCE PROGRAM
----- Promotion-------Reference
Computers Publications and--Consultants--- and other --Training-- Semi ars/ and Media ResesrchExpatriate Local Eauipient Overseas Local Workshops Advertisement Material
88 X X XNSR (EDO) X X X X X X xSBC (ECGW) X X X X X X XEPS (EMU) X X
5.9 Bangladesh Bank. TA funding of about US$34,000 equivalent would beprovided to BB for: (a) preparation of a manual on export procedures andfinancing, concentrating on how the inland LIC system and the proposed EDPwould be implemented to promote exports; (b) expenditures for coursematerials, seminar facilities, honoraria and related costs that will be neededto conduct, over a two-year period, eignt seminars aimed primarily to
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disseminate information about the innovations in export financing; and(c) travel costs for two senior BB of. icials, two senior commercial bankofficials, and one Ministry of Finance official to visit Korea, Singapore,Hong Kong or other relevant countries to be agreed with IDA and JSAID toobserve the implementation of export financing schemes. These officials wouldreview tbese countries' successful experiences, identify potential pitfalls inoperating export financing schemes and make appropriate recommendations toadopt successful practices in Bangladesh.
5.10 Duty Exemption Drawback Office. TA funding of about US$708,500equivalent would be provided to DEDO for: (a) 36 staff months of expatriateconsultancy to assist DEDO calculate input coefficients for products inspecialized subsectors for which no local expertise is available, and toestimate the cost implications of taxes other than custom duties and salestaxes and fees on Bangladeshi exports; (b) 36 staff months of localconsultancy to assist DEDO staff to calculate input coefficients and trainthem in the use of computer technology; (c) computers and software andeducational equipment to support DEDO's operations; td) expenditures forconducting eight seminart cver a two-year period, designed primarily todisseminate iixformation on the revised legal frarework and mechanics of theduty drawback systems; and (e) travel costs for six DEDO technical staff towork in one or two countries (from among Korea, Indonesia, Malaysia, Sri Lankaor other countries to be agreed with IDA and USAID) for three to four monthseach on a secondment basis to learn by actually calculating input coefficientsand administering duty drawback systems, so that upon their return they willmake appropriate adaptations to Bangladesh and train their compatriots. Ofthe 36 staff months of expatriate consultancy, 12 staff months will beutilized for a Project Coordinator for the Project's entire technicalassistance component.
5.11 Export Credit Guarantee Wing. TA funding of about US$412,000equivalent would be provided to ECGW for: (a) six staff months of expatriateconsultancy to design a management information system and to conduct a studyon how ECGW can revise its fee structure and how it can be provided greateroperational autonomy within SBC in respect of promotion of its activities,personnel practices and claims procedures; (b) 12 staff months of localconsultancy to implement a Management Information System and train ECGW staffin use of comluters; (c) computers, software, and office equipment to assistECCW staff establish an effective and efficient Management Information System;(d) reference materials on export credit guarantee schemes and internationaltrade finance; (e) ECGW's promotional activities and media advertisements,including publication of manuals and brochures on its export credit guaranteeschemes; (f) expenditures for conducting six training courses and seven 1-dayseminars, designed primarily to promote the ECGW's export credit guaranteeschemes; and (g) travel costs for eight technical ECGW staff to work in theexport credit guarantee organizations on secondment on tour to five-weekinternships in countries like India and Singapore, or other countries to beagreed with IDA and USAID, so that they could adapt successful practices toBangladesh.
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5.12 ElDort Promotion Bureau. Finally, TA funding of about US$60.000equivalent would be provided to EPB for: (a) three staff months of localconsultancy to help its EKU implement an information system to monitor quotautilization for Bangladeshi exports subject to quota limitations; and(b) office equipment to enable EMU to carry out its monitoring operations moreeffectively and efficiently.
5.13 GOB has secured USAID's agreement in principle to provide grantfunding for US$1.2 million equivalent for the proposed Project',. technicalassistance componeat. Final agreement with USAID on the technical assistancewould be a condition for Credit effectiveness.
C. Costs and Financing Plan
5.14 Project Costs. Total financing required for the proposed Project isestimated at US$31.2 million equivalent, of which US$30.7 million equivalentor 98Z would be in foreign exchange, as shown below:
TABLE 5.2 PROJECT COSTS AND FINANCING PLAN
Foreignas Z ofCompon-
Local Foreign Total Local Foreign Total ent-----Tk Million------ -----USS Million-----
Total Financing Reauired 15.4 1,011.9 1,027.3 0.5 30.7 31.2 98.5
la Includes US$0.02 million in duties and taxes on the machinery and equipment.
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5.15 Estimates of the import financing are based on BB projections ofannual preshipment fore3.gn input financing for key export industries, such ashigh domestic content readymade garments, leather and leather goods, andchemical and engineering products, estimated at about US$90 million. Assumingan average turnover period of about four months, an initial EDF amount ofUS$30 million would be appropriate. Estimates of technical assistance werebased on the agencies' requirements for consultancy services, based on 42staff months of foreign and 57 staff months of local consultancy expertise.and their requirements for materials and equipment, seminars, and local andoverseas training, as detailed in Annex 2.
5.16 Proiect Financing Plan. The proposed IDA Credit of US$25 millionwould meet 802 of the Project's total financing requirements. IDA wouldprovide 83Z of the initial import financing under the EDF, and GOB the rest.USAID would finance the technical assistance component by a grant.
VI. THE CREDIT
A. IDA Terms and Conditions
6.1 The proposed IDA Credit of SDR 19.4 million (US$25 millionequivalent) would be made to GOB on standard IDA terms with 40 years maturity.
B. EDF Operations
6.2 Lending Arrangements. GOB would use the proceeds of the Credit tosupplement its own EDF resources and will make these funds available to allscheduled commercial banks through BB. The banks would lend foreign exchangefrom their own foreign exchange positions to eligible direct and indirectexporters and rediscount these loans with BB. BB has agreed to administer theEDF gratis initially as part of its effort to help GOB promote exports.Further, BB has agreed that it would collect information relatec to the costsof administering the EDF and review such costs annually to determine if andhow much it should charge for its services. GOB would earmark US$6 million ofthe initial funding of US$30 million (para. 5.5) to rediscount loans to newnontraditional exporters on more favorable terms than the commercial banks,loans to established exporters (para. 6.4).
6.3 Lending Terms. The commercial banks would charge an interest ratepegged to the six-month London Inter Bank Offer Rate (LIBOR) on EDF subloans.At the time the EDP is established, the interest rate would be LIBOR plus 1Z.Thereafter, the rate would be adjusted at the end of every quarter to be 12above the LIBOR at the time, or whenever LIBOR increases or decreases by morethan 25 basis points (0.25Z) compared to the LIBOR at the time when the EDFinterest rate was last set. The interest rate would be set at the time asubloan is disbursed to an exporter, which would normally occur wt.en the LICdocuments for the imported inruts are negotiated.
6.4 Setting the ultimate lending rate at LIBOR plus IZ is consideredappropriate since the effective interest rate would be about three to fivepercentage points higher than the nominal rate due to the subborrowers havingto bear the foreign exchange risks. Further, the demand for EDF resources
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would be sufficient to justify the proposed EDF size since the proposedlending rate should be attractive to subborrowers. The currert interest ratefor working capital loans in local currency at 142 p.a. is positive andrelatively high. Adjusting the subborrower interest rate periodically inresponse to changes in LIBOR would facilitate the administration of the EDP byeliminating daily fluctuations while ensuring that subborrowers are not undulyrewarded or penalized by movements in the LIBOR.
6.5 BB would rediscount commercial bank export financing to subborrowerson a first come, first served basis. BB's rediscounting rates would allowcommercial banks a spread of 3.5Z for their loans to new nontraditionalexporters and a spread of 2.52 for other eligible subborrowers. BB wouldreview these spreads every six months to ensure that they are adequate andappropriate and, if necessary, modify them in consultation with IDA.
6.6 Subloan Eligibility and Size Limits. All direct exporters ofnontraditional goods, defined as firms, z.,ndividuals or partnerships exportinggoods other than jute or jute goods (except jute carpets) and tea (exceptconsumer packaged tea and teabags), and garment exporters with domesticcontent of at least 30Z and all indirect exporters who supply inputs withimported content to direct exporters of nontraditional goods would be eligibleto utilize EDF funds. New nontraditional exporters are defined as first-timeexporters or those who have not exported more than three times prior to theirapplication for an 2;DF subloan. To promote financial discipline, defaulterswith the banking system, already barred from receiving new credits underexisting BB rules and regulations, as well as EDF defaulters, would not beeligible to use the ED?.
6.7 Except as otherwise agreed by GOB and IDA, the maximum subloan sizewould be US$200,000, and the maximum outstanding credit to any one exporterwould be US$500,000. Such limits are intended to ensure that the proceeds ofthe EDP would be made available to a large number of eligible exporters andthat new exporters would not be crowded out by large established ones. Ifthese limits should constrain an exporter's ability to import the inputsrequired for a firm order, the exporter's commercial bank could recommend toBB to make individual exceptions, which BB could approve in consultation withIDA.
C. Administrative ArranRements
6.8 Procurement. Exporters would follow normal commercial practice forprocurement of raw materials and other imported inputs from countries andterritories referred to in the Bank's Procurement Guidelines. Sinceprocurement for imports financed by subloans would depend on the decisions bymany enterprises for a large number of items, and given that timing is ofcrucial importance in executing export orders, international competitivebidding is not practical. Excapt for proprietary items, subborrowers from theEDF would be required to procure goods through competitive shopping, whichwould include invitation of quotations from no fewer than three suppliers. Inorder to meet the needs of small and/or indirect exporters as well as theneeds for smaller contracts of the other exporters, goods estimated to costless than the equivalent of US$25,000 per contract up to an aggregate amount
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not to exceed the equivalent of US$5 million, could be procured undercontracts awarded on the basis of the normal procurement procedures of thepurchaser of such goods. Contracts for proprietary items could be let on anegotiated basis, but award of such contracts would be subject to priorapproval by IDA. Commercial banks would disburse EDF subloans directly toforeign suppliers or domestic suppliers upon the negotiation of import L/Cs orinland L/Cs, respectively. EDF Lending Policies and Operating Procedureswould provide that the commercial banks require subborrowers to followcompetitive shopping procedures, and BB would ensure that commercial banksfollow such practice as part of its bank supervision activities.
6.9 In a letter dated February 7, 1989 USAID reiterated to GOB itsagreement in principle to fund the proposed Project's technical assistancecomponent with a grant. TA funded by USAID would be made in accordance withits procedures; the consultants' experience, qualifications and terms ofreference would be satisfactory to IDA and GOB.
6.10 Disbursements. GOB would set up the EDF with an initial contributionof US$3 million (para. 5.5). IDA would open a Special Account with an initialdeposit of US$3 millicn. Replenishments of the Special Account would berequested by GOB by submitting monthly BB statements on Credit usage supportedby statements of expenditures. BB would then apportion the replenishmen(suntil the US$6 million earmarked for new exporters is reached. The detaileddocumentation evidencing final expenditures on items financed would be /retained by BB and reviewed by IDA during supervision missions.Reimbursements from IDA from the Credit would cover up to 100Z of the c.i.f.costs of imported raw materials, spare parts and other imported inputs forexporters for which disbursements have been made by BB from the revolvingfund. The disbursement experience of previous Bank Group-supported exportdevelopment funds has not been uniform. No standard disbursement profile isavailable but in previous Bank Group-financed export fund projects,disbursements have usually been slow in the initial periods while banks andexporters familiarized themselves with new systems and procedures. Based onappraisal estimates, it is expected that disbursements would be completedwithin three years and a half of Credit effectiveness (Annex 3).
6.11 Auditing and Reporting Requirements. BB would submit to IDAquarterly reports on the utilization of the EDF by scheduled commercial banks,which would show inter alia the size of subloans, products, exporters, marketsexported to and export earnings generated. The EDF and statements ofexpenditures would be audited annually by the Comptroller and Auditor Generalof GOB, or other independent auditors of BE acceptable to IDA, followingaccounting principles satisfactory to IDA, and these reports would befurnished to IDA no later than nine months following the end of the fiscalyear.
6.12 In addition, in order to review the Credit's overall impact and thebenefits derived from the initial years of revolving fund operations, GOBwould prepire the standard completion report within six months following thefinal disbursements of the Credit proceeds.
-22-
D. Benefits and Risks
6.13 Benefits. Access to foreign exchange financing at internationalinterest rates and duty-free access to imported inputs would enableBangladeshi exporters to compete with exporters of manufactured goods fromother countries. The proposed Project would provide Bangladeshi exporterswith a steadily available source of foreign exchange financing pegged to thesix-month LIBOR. Through the TA program, the proposed Project would alsostrengthen BB's capabilities to implement a generalized inland L/C system, andstrengthen the administrative capabilities of ECGW and the credibility of itsexport insurance. TA would also assist DEDO to calculate input coefficientsand streamline its procedures for the timely processing of Bangladeshiezporters' duty drawback claims, thus facilitating their access to importedinputs. Together with an attractive spread on the EDF to give banks addedincentive to lend to new exporters, the proposed Project would facilitate thegrowth of incremental exports, diversify the export base and increase thevalue added in export activities through backward integration.
6.14 Initially, it is expected that the users of the proposed EDF would belarger, better established borrowers who are current or potential exporters.Eventually, as the system's operational aspects and benefits system becomebetter known, newer, less well-established exporters would also begin to usethe EDF. As the inland LIC is implemented effectively, more and more indirectexporters would also contribute to exports. All these would lead toincremental exports. Due to eligibility criteria, only high domestic contentgarment exporters and nontraditional exporters would be eligible to use theED?. With maximum size limits on subloan and limitations of outstandingexport credits to any one exporter, the EDF should be utilized by a largenumber of potential exporters. Improvements in DEDO and ECGW would facilitatemore automatic access by exporters to duty-free imports and credit,encouraging newer exporters. In addition, changes in customs procedurescarried out as a result of the ISC have improved the ease of exporters' accessto their imported inputs.
6.15 Risks. The main risks concern: (a) GOB's ability to implement thetechnical assistance program to strengthen institutions engaged in exportadministration: (b) demand for the EDF; and (c) the extent of participation ofthe commercial banks.
6.16 If the proposed Project's TA component is not implementedeffectively, many of its institution-building objectives are unlikely to beachieved. Concrete, monitorable steps, such as schedules for seminars,vetting of consultants, and requiring IDA and USAID concurrence on the nature,duration, and venue of such training (paras. 5.8-5.13), have been built intothe component and, together with intensive and frequent review by IDA andUSAID, reduce such a risk. Careful design of the terms of reference with theagencies' full participation, appropriate blending of foreign and localconsultants, and appointment of an expatriate consultant to monitor anicoordinate TA activities would ensure effective absorption of the proposedProject's technical assistance.
-23-
6.17 Factors constraining the demand for other Bank Group-supported exportfunds (which were elaborated in para. 5.6) are not found in Bangladesh. Otherthan the proposed EDF, there are no compatitive sources of preshipment exportfinancing in foreign exchange in Bangladesh; the alternatives of purchasingforeign exchange in the secondary market and of using suppliers' credits arerelatively more expensive and usually limited to exporters already havingaccess to credit. The EDF would be managed by existing departments in BBfamiliar with IDA procedures. No separate, costly, cumbersome bureaucracywould be needed to administer the EDF. Existing practices would be used. BBwould conduct seminars to promote the use of the revolving fund to thecommercial banks and exporters. Subloans would be denominated and repaid inforeign currency; no problems of conversion should arise. The interest rate,while internationally competitive, would be attractive (para. 6.3). Demandfor EDF would be reviewed annually, and to guard against the experience ofother countries, where such funds have sometimes continued to exist despitethe loss of their raison d'etre, the EDF's performance would be formallyreviewed with IDA by June 30, 1992, to determine whether it continues to beneeded (para. 5.6).
6.18 The commercial banks may not be interested in participating in theEDF to lend to the target group--newer nontraditional exporters. This riskwould be reduced by requiring all users of the EDF loan facility to take outexport insurance and by providing commercial banks attractive spreads for EDFlending. Commercial banks would be given an attractive spread to encouragethe EDF's use, including an even more favorable spread for loans to newnontraditional exporters (para. 6.4). The banks' perceived risks of lendingto the target group would also be reduced through a strengthened, moreeffective ECGW.
VII. AGREEMENTS AND RECOMMENDATION
Agreements
7.1 During negotiations GOB agreed that:
(a) it would establish the EDF with an initial contribution of US$3million equivalent and to deposit an amount equivalent to US$2 millionby July 1, 1990;
(b) it would cause the SBC to: (i) prepare a study by June 30, 1990 toreview its export credit insurance policies; (ii) by September 30.1990, provide IDA with an action program based on therecommendations/proposals of the study to implement a comprehensivetraining program for ECGW staff and enhance ECGW's financial viabilityand operational autonomy within SBC (para. 3.15); and (iii) agreeprior to the end of each year beginning FY90, to adequate levels ofECGW administrative expenditures (including promotional expenditures),in consultation with IDA (para. 5.7);
(c) repayments to the EDF and profits generated from EDF operations wouldbe retained in the EDF for further lending to eligible exporters(para. 5.5);
-24-
(d) US$6 million (202 of the initial EDF) would be earmarked fornew nontraditional exporters (para. 5.5):
te) the EDF would operate in accordance with the Lending Policies andOperating Procedures for the EDF satisfactory to IDA (para. 5.5);
(f) GOB and IDt would review the demand for the EDF annually beginningJanuary 31, 1990, including the earmarked amount for newnontraditional exporters, and if demand for the latter is found to below during these reviews, efforts would be made by GOB to remedy thesituation (para. 5.6);
(g) should there be insufficient demand for earmarked funds for newexporters, GOB would reallocate them to the general EDF for use by alleligible exporters in consultation with IDA (para. 5.6);
(h) should the demand for EDF funds substantially exceed the fundsavailable, GOB would contribute additional foreign exchange to theEDP, equivalent to 202 of the annual excess demand (defined as thedifference between the amounts of valid financing requested byeligible subborrowers and the actual amounts lent from the EDF overthe previous 12 months), or such adequate amounts as GOB woulddetermine in consultation with IDA up to a maximum of US$10 millionequivalent (para. 5.6);
Ci) a joint GOB/IDA review would be conducted on or about December 31,1992 to determine !f the EDF should continue (para. 5.6); and
Cj) each of the participants in the overseas training would be requiredto: (i) submit a study plan for IDA's and USAID's approval;(ii) remain in a relevant institution in accordance with GOB'sregulations on overseas training carrying out the functions for whichhe/she was trained after his/her return from training; and(iii) prepare a report on the lessons of training for the supervisor,IDA and USAID (para. 5.8).
7.2 Prior to Credit effectiveness, GOB would:
(a) establish the EDF and initiate its operations by contributingat least US$3 million equivalent from its own foreign exchangeresources (para. 5.5); and
(b) secure USAID agreement of required funding for technical assistance(para. 5.13).
Recommendation
7.3 With the above agreements and assurances, the Project constitutes asuitable basis for a Credit of SDR 19.4 million (US$25 million equivalent)on standard IDA terms with a maturity of 40 years to the People's Republicof Bangladesh.
ANNEX 1Page 1 of 5
-25-
BANGLADESH
EXPORT DEVELOPMENT PROJECT
Export Development Fund--Statement of Lending Policy and Operating Procedures(Bangladesh Bank Circular No. 29 dated December 7, 1988)
I. Obiectives
1. The Export Development Fund (EDF) is expected to contribute to asustained export drive and long-term development of Bangladesh's non-traditional exports by:
(a) assuring a continued availability of foreign exchange to meet theimport requirements of nontraditional exporters, particularlynewer exporters, exporters diversifying into higher value exports,and expo._ers diversifying into new markets;
(b) encouraging foreign suppliers, overseas coL'irming houses, andforeign commercial banks to provide short-term credit lines toBangladeshi exporters; and
(c) complementing other export development policies, such as improvedaccess to duty-free imported inputs and generalization of an inlandLetter of Credit (L/C) system, being implemented by the Government ofthe People's Republic of Bangladesh (GOB) to promote nontraditionalexports. diversify exports, and encourage higher value added exports.
2. Existence of the EDF will provide assurance to nontraditionalexporters of the continued availability of foreign exchange to finance theirimported input requirements. This would provide additional confidence andevidence of GOB's commitment to the development of nontraditional exports.The result should provide a stimulus to private sector export production andmarketing effort, and encourage investments in market development and plantand equipment necessary to expand export capacity.
3. It is GOB's intention to gradually eliminate structural andregulatory constraints to financing of imported inputs required for exportmanufacturing, so that the need for a separate EDF will be eliminated in duecourse. Imported input financing for exports will continue to be a toppriority of GOB, even if the EDF is eventually eliminated. A joint IDAIGOBreview of the EDF will be conducted about December 31, 1992 to determine ifthe EDF should continue in its present form.
II. Organizational Aspects
A. Statutory Form
4. The EDF will be a separate source of funding for financing foreignexchange import requirements of exporters for their imported inputs. It willbe owned by GOB, and managed gratis by BB, which will use the EDF to refinance
ANNEX 1
-26- Page 2 of 5
foreign exchange credits advanced by scheduled banks to eligible exporters.while BB will initially provide the administrative services on the EDF 8ratis,it will account for the costs and this information will be reviewed annuallyto determine if, and how much, BB should charge to provide theseadministrative services.
B. Duration
5. GOB will maintain the EDF until December 31, 1992. or such other dateas GOB and IDA may jointly determine after periodic reviews.
C. Domicile
6. EDF will be established in BB, and will be managed by BB's staff inthe Banking Control and Accounts Department.
D. Capitalization
7. GOB will establish the EDF with an initial contribution of at leastUS$3 million and such contribution would be increased to US$5 million byJuly 1, 1990. This will be supplemented by the proposed IDA credit of US$25million. GOB will cause BB to review demand for EDF funds annually. Duringthis review, demand for the earmarked funds to new, nontraditional exporterswill be examined. If the demand is sluggish, measures will be taken tostimulate demand as a first step; but if it is determined that there is nodemand for the earmarked funds, these will be absorbed into general EDF fundsin consultation with IDA.
E. Segregation and Independence of Accounts
8. EDF will maintain separate accounts of its operations. The accountsof the EDP shall be kept separate from other accounts and activities of BB,and GOB will ensure that profits generated from EDF operations and fromdeposit of EDF funds in interest-bearing accounts will be added to EDFresources for use by eligible exporters.
F. Conduct of Operations
9. All lending and investing programs carried out by scheduled banksusing the EDF for rediscounting shall be conducted in accordance with soundbusiness principles. The operations of the EDF will be conducted inaccordance with these Operating Policies and Summary Procedures, which havebeen approved by GOB in agreement with IDA.
G. The EDF Advisory Committee
10. The BB Board of Directors will appoint a Committee, which wouldinclude BB officers and may include representatives from: External ResourcesDivision of the Ministry of Planning, Finance Division of the Ministry ofFinance, NBR. Export Credit Guarantee Wing (ECGW) of the Sadharan BimaCorporation, Export Promotion Bureau, commercial banks, exporters, and
ANNEX 1-27- Page 3 of 5
representatives from Federation of Bangladesh Chamber of Commerce andIndustry, who will meet at least once a quarter to:
(a) review the refinancing activities of the EDP;
(b) recommend changes in the policy;
(c) approve the annual report of EDF activities;
(d) approve those credit limits and transactions which involve adeparture from the established policies and procedures;
(e) provide general guidance, to the managers and staff of the EDF;
(f) review export pertormance under the EDF, discussing its broaderimplications and examining other desirable government policies tostimulate exports, focussing especially on those obstacles in gainingaccess to imported inputs and export credit; and
(g) make recommendations to other concerned agencies of goveranentregarding administrative actions which would improve EDF'seffectiveness and be helpful in the overall development effort.
H. Audit of EDF Accounts
11. EDF accounts and the statement of expenditures by which BB will seekreimbursement under the IDA credit will be audited annually by the Comptrollerand Auditor General of GOB, or other independent auditors of BB acceptable toIDA, and the auditor's report will be furnished to IDA.
III. Summary Operating Procedures
12. Direct and indirect nontraditional exporters (defined as firms,individuals, or partnerships exporting goods other than jute and jute goods[excluding jute carpets] and tea, [excluding consumer packaged tea andteabags]) and high domestic content (defined as those with 302 value added ormore) readymade garment exporters) will be eligible to approach scheduledbanks to use the proceeds of the EDF. New nontraditional exporters aredefined as first-time exporters or those who have exported not more than threetimes prior to applying for an EDF subloan. The eligibility criteria will bereviewed annually by the EDF Advisory Committee to ensure that EDF proceedsare being utilized to promote exports by new exporters. If necessary, theseeligibility criteria will be changed in consultation with IDA. Defaulterswith the banking system will not have access to loans from commercial banksusing the EDF. Defawlters on EDF subloans will also not be eligible.
A. Earmarked Funds for New Exporters
13. US$6 million of the initial EDF amount of US$30 million will be setaside for the exclusive use by new nontraditional exporters in order topromote their export activities.
ANNEX 1-28- Page 4 of 5
B. Participating Financial Institutions
14. All scheduled commercial banks will be abie to lend to eligiblenontraditional exporters and avail themselves of the facilities of the EDF.These banks will be expected to utilize their foreign exchange positions andrefinance with BB on a first-come, first-served basis. They will disbursedirectly to foreign or domestic suppliers of inputs to enable an eligibleexporter to use EDF funds. Upon using the EDF, the commercial banks willassign the export proceeds to EDF and upon receipt of export payments from theoverseas buyer, forward to the EDF the outstanding principal and interest ofthe exporter's credit, and then crediting to the exporters account. 'n theevent that the exporter fails to export, or his/her failure to receive paymentfor his/her exports, the scheduled bank will debit the exporter's loanaccount, pr&-ure the necessary foreign exchange from the secondary foreignexchange market and repay the EDF.
15. For the indirect exporters using the inland L/C system, thecommercial bank will pay the i direct exporter when the latter's inland L/Cdocuments are negotiated, and the commercial bank will transfer the foreignexchange liability of the indirect exporter's imported inputs to the directexporter. For the direct exporter, when export payments are received from theoverseas buyer, the commercial bank will forward to EDF the direct exporter'soutstanding principal and interest, which would include the portion owed bythe indirect exporter. Similar provisions as those for the direct exportersapply to indirect exporters who fail to deliver intermediate inputs.
16. Defaulters with the banking system or with the EDF, as determined bycommercial banks and BB, will be excluded from further support from the EDF.
C. Terms and Conditions
17. The interest rate on EDF subloans will be pegged to the six-monthLIBOR. Initially, the interest rate w 1 be the LIBOR at the time the EDF isestablished plus 1Z. Thereafter, the rate would be adjusted at the end ofevery quarter to be 1Z above the LIBOR at the time; however, it willautomatically be adjusted to reflect the current whenever the latter increasesor decreases by more than 0.251 compared to the LIBOR at the time when the EDFinterest rate was last set. Direct exporters would be able to borrow fortheir imported inputs based on confirmed, irrevocable L/C opened by anoverseas buyer, and indirect exporters would be able to borrow for importedinputs based on confirmed, irrevocable inland back-to-back L/Cs opened bydirect exporters. The term of the preshipment loan from the EDP will be theexport production cycle or 180 days, whichever is shorter, and will not exceed180 days.
D. Export Credit Guarantee
18. Export credit insurance will be required for all users of the EDP. Asthe ECGW does not deal in foreign exchange, in the case of foreign liabilitiesthat arise due to non-performance by a direct or indirectexporter/subborrower, the guarantees will be paid out in local currency, andforeign exchange procured from the secondary market to replenish the EDF.
ANNEX 1-29- Page 5 of 5
E. Masiumum Subloan Sizes
19. To ensure that EDF funds will be utilized as widely as possible, themaximum subloan size for subborrowers would normally be US$200,000 equivalent,and the aggregate outstanding amount of subloans to any sub-borrower will notexceed US$500.000. Upon application by commercial banks, BB will considergranting individual exceptions to these normal size limits in consultationwith IDA.
F. Credit Risk
20. The credit risk for the advances using the EDF will be borne by thescheduled commercial banks, except for the proportion covered by the ECGW.
G. Foreign Exchange Risks
21. The subborrower will bear the foreign exchange risks of the advancesusing EDF.
H. Interest
22. The interest rate to the exporter/subborrower will be charged on theoutstanding subloan from the date of disbursement.
I. Spreads on Rediscounting with EDF
23. The BB will provide a spread of 3.5Z on advances to newnontraditional exporters and a spread of 2.52 on all other advancesrediscounted with the EDF. This is in order to encourage commercial banks toprovide financing of imported inputs for new exporters. BB will review therediscount spreads every six months to ensure their adequacy andappropriateness, and modify them when necessary in consultation with IDA.
J. Procurement Using EDF Funds
24. The subborrowers from scheduled commercial banks using the EDF willbe expected to follow normal commercial practice for procurement of rawmat6rials, accessories, and other imported inputs. BB will ensure throughperiodic bank supervision that commercial banks enforce the requirement ofnormal commercial practice of competitive shopping, including invitingquotations from no fewer than three suppliers for the procurement of rawmaterials and other imported inputs. Goods estimated to cost less than theequivalent of US$25,000 per contract, may be procured under contracts awardedon the basis of the normal procurement procedures of the purchaser of suchgoods, provided that procurement of such goods does not in the aggregateexceed US$5,000,000. Contracts for proprietory items would be let on anegotiated basis, but award of such contracts would be subject to priorapproval by IDA.
ANNEX 2-30- Page 1 of 8
B/NGLADESH
EXPORT DEVELOPMENT PROJECT
Technical Assistance Component
1. To more effectively implement its export policies and administration,the Government of Bangladesh (GOB) has established a Duty Examption-DrawbackOffice (DEDO) in the National Board of Revenue (NBR); issued a Bangladesh Bank(BB) circular and detailed operational guidelines to implement a generalizedinland letter of credit (L/C) system; improved access to export financing bynew and small exporters by increasing the working capital and the staffstrength of the Export Credit Guarantee Wing (ECGW) of the Sadharan BimaCorporation (SBC); strengthened the Export Monitoring Unit (EMU) of the ExportPromotion Bureau (EPB) to ensure quota fulfillment of Bangladeshi exportssubject to external quota limitations. The legal and administ.ative changeswhich GOB has made during FY88 should facilitate exporters' access to theirimported inputs on a free trade status, improve their acceib to exportfinancing, and help develop backward linkages for nontraditional manufacturedexports. Nevertheless, to ensure that the legal and administrative changesare effectively implemented, substantial technical assistance is required tothe key institutions involved in export administration, which is envisioned asan integral part of the proposed Project.
2. The proposed Export Development Project (the Project) will beintroducing several actions which are innovative for Bangladesh. The keyofficials responsible for implementing the export financing. export guarantee,and duty drawback schemes could therefore, benefit substantially from exposureto successful practices in other countries. In addition to consultancyservices, equipment and materials, the proposed Project therefore includesoverseas training for staff from BB, the commercial banks, ECGW, and DEDO. Tomaximize the benefits of this training, each of the participants in overseastraining would be required to: (a) submit a study plan for IDA's approval;(b) agree to serve in a relevant institution upon the trainee's return inaccordance with GOB's regulations on overseas training and carry out thefunctions for which training was conducted; and (c) prepare a report of thetrainee's findings and recommendations to be furnished to the trainee'ssupervisors, IDA and USAID.
3. A package of technical assistance for each of the aforementionedagencies which were discussed with the concerned agencies during appraisal,and agreed during negotiations, are summarized in some detail below. Each ofthe concerned agencies framed its technical assistance requirements in theform of a Technical Assistance Project Proforma (TAPP) which was approved bythe Special Project Evaluation Committee.
4. In addition to the agreements reached regarding training (para. 2),as a condition of Credit effectiveness, IDA would require formal donoragreement to fund technical assistance.
-31- ANNEX 2Page 2 of 8
5. The technical assistance component will be provided to the fouragencies most involved in export administration, namely, BB, DEDO, ECGW, andEPB. Technical assistance would comprise consultancy services (both short-and long-term, domestic and foreign, and including management studies as wellas technical tasks), provision of equipment and facilities, seminars andworkshops, and overseas training. Total cost of the technical assistance hasbeen estimated at about US$1.2 million, which the United States Agency forInternational Development (USAID) has indicated its agreement in principle toco-finance as a grant.
6. Bangladesh Bank. BB has been responsible for administering a numberof refinancing schemes for GOB, including the refinancing schemes fornontraditional exports in local currency. Its Task Force on Export Financinghad found that the lack of preshipment financing in foreign exchange hae beenone of the major constraints in the development of nontraditional exports fromBangladesh. BB had also identified the need to generalize the inland letterof credit (LIC) system in Bangladesh, in order to extend the export incentives(such as export financing and duty-free imports of inputs in exportproduction), which have been available to direct exporters, to indirectexporters. BB issued a circular on the revised inland L/C system and detailedoperational guidelines for its implemen!ation in 1987 and 1988. It is alsoseeking IDA assistance In establishing an Export Development Fund (EDF), whichwould partly remedy the exporters' lack of foreign currency preshipmentfinancing, as a demonstration of GOB's commitment to promote and diversifyexports. Although BB staff and management are capable of implementing boththe proposed EDF and the inland LIC system, key BB staff and commercial bankofficials involved with the EDF and the inland LIC system would benefitsubstantially from some overseas training to observe successful implementationin other countries of both the EDF concept and the inland L/C system. It isalso essential that handbooks be prepared on the modernized export financingsystem and seminars conducted on how both the EDF and the inland LIC systemcan be used.
7. Technical assistance would be provided to BB for: (a) preparation ofa manual on export procedures and financing, concentrating on how the inlandLIC system and the proposed EDF would be implemented to promote exports;(b) expenditures for course materials, seminar facilities, honoraria, andrelated costs that will be needed to conduct, over a two-year period, eightseminars in Bangladesh's major urban centers. targeted to about 400 commercialbankers, exporters, representatives from chambers of commerce and industry, todisseminate information about the innovations in export financing; and(c) travel costs for two senior BB officials and three senior commercial bankofficials to visit Korea, Singapore, Hong Kong, Jamaica, or other relevantcountries to be agreed with IDA and USAID to observe the implementation ofexport financing schemes. These senior commercial and central oank officialswould review these countries' successful experiences, identify potentialpitfalls in operating 'Jxport financing schemes and make appropriaterecommendations to adopt successful practices in Bangladesh.
8. Technical assistance to BB is estimated to cost about US$34,000summarized as follows:
-32- ANNEX 2Page 3 of 8
Cost EstimateItem Tk'000 US$OO0
1. Compilation and printing of handbookon 'Export Procedurea and Export Financing' 174.0 -
2. Conducting eight seminars with about400 participants 120.0 -
3. Study trips for two senior BB officials,two senior commercial bank officials.and one Ministry of Finance officialto observe export financing schemes - 24.7
294.0 24.7
9. Duty Exemption-Drawback Office. GOB has had in effect several dutyexemption drawback schemes: the notional payment (exemption) scheme; the flatrate system, the individual rate system; the bonded warehouse scheme forgarment exporters; and the bonded warehouse scheme for 1002 exporters otherthan garments. Except for the bonded warehouse scheme for garments, thesedrawback schemes have not worked very well. Realizing that access to duty-free imported inputs is a key incentive to exporters of manufactured goods,GOB established DEDO in NBR to consolidate all the export incentives otherthan financing. A large proportion of DEDO's initial task would be toimplement the two new statutory and regulatory orders which GOB has issued tostreamline the drawback schemes at individual and flat rates and to moreeffectively and efficiently process the rebates. It will need to calculateand issue input coetficieats for a large number of products that Bangladesh iscurrently exporting or has the possibility of exporting in the near future.Faced with such challenges, and with the fact that DEDO is starting out as anew department, albeit with a core staff from the Duty Exemption Drawback Unitwithin NBR. DEDO would require substantial consultancy services, computerfacilities, and staff training to become fully effective and efficient.
10. Technical assistance would be provided tc DEDO for: (a) 36 staffmonths of expatriate consultancy to assist DEDO calculate input coefficientsfor products in specialized subsectors for which no local expertise isavailable, to estimate the cost implications of taxes other than custom dutiesand sales taxes and fees on Bangladeshi exports, and to coordinate and monitorthe Project's technical assistance component; (b) 36 staff months of localconsultancy to assist DEDO staff calculate input coefficients and train themin the use of computers; (c) two micro.omputers, and computer software, tohelp DEDO in its work and for to help it conduct seminars; (d) expendituresfor course materials, seminar facilities, honoraria, and related costs thatwill be needed to conduct eight seminars over a two-year period to disseminateinformation on the revised legal framework and mechanics of the duty drawbacksystems among an estimated 400 commercial bankers, exporters, and relevantofficials from Customs, EPB and ECGW; and (e) travel costs for six DEDOtechnical staff to work in one or two countries (from among Korea, Indonesia.Malaysia, Sri Lanka or other countries to be agreed with IDA and USAID) forthree to four months each on a secondment basis to learn by actuallycalculating input coefficients and administering of duty drawback systems, so
-33- ANNEX 2Page 4 of 8
that upon their return they will make appropriate adaptations to Bangladeshand train their compatriots. Of the 36 staff months of expatriateconsultancy, 12 staff months will be utilized for a Project Coordinator forthe project's entire technical assistancae component.
11. The technical assistance to DEDO is estimated to cost aboutUS$708,500, as follows:
2. Computers, Software and transportation 2,243.0 -
3. Seminars and Workshops for 400participants over a two-year period 650.0
4. Training - 76.4
5. Other, including contingency 1,610.2 10.05.583.2 518.4
12. Export Credit Guarantee Wing. ECGW of the Sadharan Bima Corporation(SBC) was established in 1978 to provide pre- and post-shipment export creditguarantee to exporters. Until recently, ECGW has been limited in itseffectiveness due to small working capital base and staff. Through 1986, ECGWinsurance coverage represented 7? of total merchandise exports and 222 ofnontraditional exports. Recently, GOB has strengthened ECGW considerably bymaking it into a separate department, and substantially increasing both itsworkirg capital (from Tk 5.4 million in 1986 to Tk 133.3 million in 1987) andits staff strength (from 18 in 1986 to 36 in 1987 and is authorized to grow to87 in 1990). However, such strengthening has yet to overcome a reputation forbeing ineffectual and for ECGW's guarantee simply being required by commercialbanks as additional collateral. This has hampered the access to exportfinancing by those without track records, typically new and small exporters.ECGW is also beset with a number of other institutional issues.
13. ECGW is losing substantial amounts of money because claimssubstantially exceed fee income. These losses are borne by SBC, a publicly-owned company with commercial objectives, and result in poorer overall SBCfinancial performance. Consequently, SBC has disincentives to expand theexport credit insurance program, incur administrative and promotional expensesto improve the program, and to service claims quickly.
14. Despite relatively high fees, claims substantially exceed fees. Amajor reason is that insurance is not mandatory; therefore, ECGW only gets thehigh risk business without the "blue chip" business necessary for it to spread
-34. ANNEX 2Page 5 of 8
this risk over a reasonably high volume of business. Moreover, as commercialbanks are required to pay the insurance fees, it provides one additionalreason for banks to prefer financing "blue chip" customers. They avoid boththe cost and the administrative burden of arranging the insurance. AlthoughECGW has paid claims for a number of years for which they, together with thebanks, obtained collateral, in return they have reportedly never received anyincome from sale of such merchandise. In most, but not all, of these casesresponsibility for sale of the goods lies with the commercial banks. ECGW andthe commercial banks should be sharing sale proceeds on a 75:25 basis. Itwould appear that: (i) no one is selling these goods and they are incurringhuge storage charges and/or goods are perishing or being lost; (ii) commercialbanks are pocketing the entire proceeds without sharing with ECGW (in whichcase they may be receiving well over 1002 payment for claims that generatetransactions); or (iii) individuals are selling the goods for their ownbenefit.
15. In addition, ECGW spends virtually nothing on promotion, has nopromotional objectives, few btochures, poorly established policies andprocedures for enhancing the effectiveness of its promotional programs andinadequate personnel for implementing a broader promotional program. Theyhave held some seminars with commercial banks for promotional purposes whichthey view as effective. Also, ECGW has inadequate staff. These needconsiderable training. ECGW's administrative procedures are also notefficient. Problems with inefficiency are likely to escalate rapidly if thelevel of transactions increases significantly over time.
16. In order to promote the access of new and small exporters to exportfinancing, GOB would need to strengthen ECGW further, with a comp.ehensivepackage of financial and technical assistance. To deal with ECGW's financialproblems, it is recommsended that IDA finance a study under the proposed EDPrequiring an expatriate for a period of two to three months to examine variousproposals for enhancing the viability of ECGW including: (i) whether exportcredit guarantee insurance should be made mandatory; (ii) revising the feestructure, either through raising fees or through a system of graduated feeswhich involve higher fees for riskier and newer exporters, with lower fees formore experienced exporters and/or those that export on multiple occasionswithout submitting claims; (iii) increasinS ECGW authority to incurexpenditures (i.e., increasing the amount they can authorize) so long as theyfall within overall budgetary levels; (iv) proposing policies and proceduresfor better monitoring of sale of collateral goods associated with paid claimsand collection of sale proceeds; and (v) other measures designed to reduceECGW losses or increase ECGW financial autonomy from SBC. The consultantmight also be asked to study other selected autonomy issues.
17. ECGW should be encouraged to spend certain amounts on promotion overthe next three years to launch a *start-up' promotional campaign. SBC shouldbe required to pre-agree expenditure levels prior to the end of each fiscalyear beginning June 30, 1989. In addition, it is recommended that technicalassistance be arranged to hire a Bangladeshi firm or individuals to assistECGW in designing promotional materials and campaigns and, if requested, toassist in the implementation of some of these programs. In addition, it is
-35- ANNEX 2Page 6 of 8
important that more efficient procedures and a simple but effective monitoringsystem be implemented at an early date with two or three powerfulmicrocomputers. Technical assistance should be provided, in the form of anexpatriate consultant for about one month and a Bangladeshi consultant forabout one year, to design and implement processing of insurarce and claimprocedures utilizing the computers, and to train staff in the use of bothcomputers and the processing systems. The processing system, which couldutilize templates for a commonly used spreadsheet (e.g., LOTUS) shouldincludes (a) a system for logging in all new insurance applications togetherwith key data such as inter alia exporter, name of bank branch, amountinsured, product insured, name of importer, date insurance issued, dateinsurance will expire; (b) a system for monitoring outstanding insuranceincluding date fee paid and date of expiration, and date claim filed, if any.Policies should be implemented for issuing warning letters if claims have notbeen paid within seven days of insurance application and for formallycancelling the insurance within, say, 15 days, if the fee has not been paid.The system should be capable of listing outstanding insurance still in effectsorted by, for example, branch, exporter, importer, product; (c) a system formonitoring all outstanding claims including, inter alia, date claim received,outstanding documentation not yet submitted, date claim paid, claims rejected,and reasons for claim rejection. It should allow for producing letters ofcancellation upon expiration of one year deadline upon submission of fulldocumentation. Where claims are paid, data on goods seized as collateralshould be logged; (d) a system for analyzing claims experience whichclassifies it by name of exporter, name of importer, reason for claim, andbank branch involved. It should allow comparative claims experience by branchto enhance ability to find fraudulent patterns. Claims experience by exportercan be tabulated so that appropriate action can be taken (e.g., increasedfuture fees, refusal to provide insurance in future, investigation of fraud,etc.) where exporters have had multiple claims. Claims experience by importershould be tabulated and insurance refused for future shipments to an importerfor which a claim has been made due to importer non-payment; and (e) a systemwhich can be used (perhaps at a later stage) for ccmparing insurance businesswritten to total export business of each major bank/branch to assist in bettertargeting for future export promotion activity and in measuring results fromsuch efforts. It would also help to monitor compliance if export creditguarantee insurance is made mandatory.
18. Technical assistance would be provided to ECGW for: (a) six staffmonths of expatriate consultancy to design a Management Information System(MIS) and a study on how ECGW can be provided greater operational autonomywithin SBC, in respect of promotion of its activities, personnel practices,and claims procedures; (b) 12 staff months of local consultancy to implementthe MIS system and train ECGW staff in use of computers; (c) computers,software, and office and communication equipment to assist ECGW staff inestablishing data files on their clients and management information systemsregarding claims; (d) reference materials with books, reports and magazines oninternational trade laws, international finance, and research on politicalrisks and business failures; (e) ECGW's promotional activities, includingpublication of manuals and brochures on its export credit guarantee schemesand media advertisements regarding ECGW; (f) expenditures for coursematerials, seminar facilities, honoraria, and other related costs to conductsix training courses in Chittagong, Dhaka and Khulna to familiarize about 440
-36- ANNEX 2Page 7 of 8
participants over a two-year period. including, exporters, commercial bankersand customs officials, about its export credit guarantee scheme, and sevenone-day seminars in the same cities for about 700 participants; (g) travelcosts for eight technical ECGW staff to work for four to five weeks in theexport credit guarantee organizations in countries like India, Singapore, orother countries to be agreed with IDA and USAID, to review how successfulexport credit guarantee organizations are operated so that they could adaptsuccessful practices in Bangladesh.
19. The technical assistance to ECGW is estimated to cost aboutUS$412,000 as follows:
2. Computer, Software and other OfficeEquipment 1,823.0 -
3. Library and Research Reports - 30.0
4. Seminars and Workshops and PromotionalActivities 3,091.0 -
5. Overseas Training - 32.3
6. Other, including Contingency 2,383.0 25.07,837.0 159.3
20. Export Promotion Bureau. Until December 1977, matters related toexport promotion were dealt with in an Export Promotion Unit (EPU) within theMinistry of Commerce (MOC). In January 1978, the EPB, a semi-autonomous body,was formed under MOC and entrusted with promotion of Bangladesh exports. In1986, Bangladesh was hit with "quota shock' when its major market, the UnitedStates, imposed quotas on Bangladesh's garment exports, catching many garmentexporters unawares. For the purpose of ensuring that adequate marketinformation is provided on a timely basis to exporters whose outputs aresubject to external quota limitations, GOB established an Export MonitoringUnit (EHU) in the EPB. This unit would collate information from banks andcustoms offices so that a close watch can be maintained over the exports ofmanufactured goods on which there are external quotas. This way, GOB would beable to quickly reallocate unfulfilled quotas to other manufacturers who areable to manufacture and satisfy Bangladesh's export quotas.
21. Although the EMU has been established within the EPB, and althoughthe computer necessary for tracking exports have already been procured usingEPB's own funds, there is a need for EPB to upgrade its communications andoffice technology, a consultant to help it set up a monitoring system
-37- AN1EX 2Page 8 of 8
(including the design of the necessary forms to be used by commercial banksand customs offices tracking export orders), and training for its staff to usecomputers.
22. Technical assistance would be provided to the EPB for: (a) threestaff months of local consultancy to help its Export Monitoring Unit implementan information system that can monitor quota utilization for Bangladeshiexports subject to quota limitations; and (b) office and communicationequipment to enable EMU to carry out its monitoring operations moreeffectively and efficiently.
23. The technical assistance to EPB is estimated to cost about US$60,000,as follows:
Estimated CostLocal Foreign
(Tk '000) (US$ '000)
Consultants 90.0 -Equipment 1,562.0 7.0
Total 1,662.0 7.0
Swmmary
24. In summary, technical assistance to BB, DEDO, ECGW, and EPB have beenestimated at US$1.2 million, as follows:
Items and Agencies Estimated Cost TotalLocal Foreian (USS '000) /a
(Tk'000) (US$0000) Equivalent
1. Consultancy Services 1,710.0 504.0 559.22. Promotional Material and Seminars 4,035.0 17.0 146.93. Machinery and Equipment 5,628.0 30.0 211.54. Training - 133.4 133.45. Other 3,993.2 25.0 153.8
1. Export Development Fund -- Operating Policies and Summary Procedures
2. Bangladesh -- Export Policy and AdministrationPrepared by Mr. Yung Whee Rhee (IENIN), February 1986
3. Bangladesh -- Report on Export Finance SystemPrepared by First Washington Associates, April 1987
4. President's Report on the Industrial Sector Credit(Report No. P-4558-BD), May 18, 1987
5. Notice to the Board of Second Tranche Release of Industrial SectorCredit (No. 1816-BD), IDA/SecM88-209, June 28, 1988
6. Technical Assistance Project Proforma for Bangladesh Bank
7. Technical Assistance Project Proforma for the Duty Exemption andDuty Exemption and Drawback Office of the National Board Revenue
8. Technical Assistance Project Proforma for the Export Credit GuaranteeWing of the Sadharan Bima
9. Technical Assistance Project Proforma for the Export Monitoring Unitof the Export Promotion Bureau
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