In the Development of Bangladesh Economy Foreign Remittance Takes Part an Important Role

In the Development of Bangladesh Economy Foreign remittance Takes Part an Important Role

Chapter -1

Introduction:

The report entitled “Analysis of Economic Growth and External Sector Behavior” mainly focuses on the study of the structure of the external sector of Bangladesh and its impact on GDP. It involves economic models developed to determine the impact of each sector-Export, Import, Foreign Aid and Remittance, on GDP of Bangladesh. It also involves an analysis of the behavior of these factors in three SAARC countries and the application of the regression model developed.

The economic model was developed based on the past behavior of GDP and the external sector. It indicated that Remittance is the sector having the most significant impact on GDP and aid the second most significant. While imports negatively affect economic growth, exports have played a very important role over the period.

The remittance of Bangladesh has been increasing over the last few years. Hence, its impact on GDP has also been rising. In the span of 34 years export as percentage of GDP increased from 2.2% to 15.4%. Hence, performance was moderately good. The economy has been suffering from ever increasing trade deficits, despite several export promotional measures. Large import payments mainly account for this problem. Foreign aid shows large fluctuations over the period

Finally, an analysis was conducted on the behavior of the external sectors in the SAARC countries using the regression model. Export was found to be the dominant sector in India, while imports had the minimum impact on GDP. Pakistan was found to be more dependent on export and foreign aid than on remittance and import. Sri Lanka’s economy is highly correlated to remittance, aids and export.

Literature Review

Several studies in recent years have focused on the relationship between the external sector and GDP. Some have developed models to analyze the structure and behavior of each component of the external sector with respect to GDP while others have focused on the combined impact of the external sector on GDP and their trend over time.

One research by Debapriya Bhattacharya (2006), involved an analysis of the external sector and GDP trend of Bangladesh to make predictions about the behavior of each of these sector and their impact on growth in the FY2020.The study involved the development of economic models for each component based on past statistics. The researcher concluded that the country has been able to experience the first transition, transforming from an aid dependent country to a trade-oriented nation. For the second transition, the country needs to boost the performance of the external sector. Policy reforms and institution building measures must focus on promoting export, sustaining remittance and increasing FDI. The analysis suggested that the country would be able to attain sustained growth rates only by experiencing a breakthrough in the external sector.

A study conducted by the World Bank indicated that Bangladesh has been able to experience an impressive growth of 5.4% over the period 2001-2005.The growth has been fuelled by large garment exports and remittance inflows especially in construction and service sectors. Research shows that for future growth, the country needs to enhance the competitiveness of the domestic firms to function more effectively in the world market. Reduction in tariffs, which account for about 50% of tax collection effort, can also ensure future growth. World Bank (1996) stated that restrictions on imports of sugar, salt and some other commodities encourage large illegal imports from India. Removing these restrictions would expose the domestic industries to greater competition, generate tariff revenues and benefit consumers by reducing prices.

Rashed Al Hasan (2006) focused on the significance of remittance on the economic development of Bangladesh. The study was based on past remittance flow of the country. It involved the determination of various macroeconomic benefits of remittance to different sectors of the economy such as household, government etc. Remittances play a critical role in generating foreign exchange reserves for Bangladesh. To ensure high remittance inflows and productive usage of remittance, the study indicated that the country needs to establish more technical institutes, develop new foreign policies, utilize remittances in productive investment, and create enabling environment to invest Remittances in Capital Market.

Mohammad Yunus, Bangladesh Institute of development studies, conducted an extensive study on the performance of the external sector of Bangladesh and policy reforms. The study focused on the trend of the external sector components and policy reforms. The analysis of past statistics indicated that the overall export promotion strategy in the country and export oriented policy reforms have remained incomplete and hence ineffective. The tariff structure retains an anti-export bias, causing distortion in economic incentives. The distortion is further fuelled by restriction on imports, thus encouraging smuggling.

A research by the center of policy dialogue (CPD), (2003), stated that the political economy of foreign aid in Bangladesh has undergone important changes over the last decades. There has been an important shift in the focus of foreign aid to Bangladesh, particularly in the context of a gradual reduction in Bangladesh’s aid dependence. The fact of growing regional export concentration during the 1990s in the markets of the EU and the USA, with a single product, namely the readymade garments, is now playing a more important role in defining Bangladesh’s foreign policy than its need for aid. In contrast, during the 1980s Bangladesh’s foreign policy was targeted to ensure an uninterrupted flow of foreign aid. Today, Bangladesh’s aid dependence is focused on the international and regional financial institutions.

Background of the Report

Bangladesh is a developing economy heavily dependant on external factors. External factors such as remittances, exports, imports , foreign aid have had major influence on our economy. Although the impact of these factors has not been uniform and has changed a lot over time. In the 70s, newly independent country Bangladesh went through a structural change that was largely propelled by foreign aid. But in the later years Bangladesh economy has made transition from aid dependence to trade dependence. This study has looked in details of these factors and its impact on our economic growth. We have determined the economic growth on respect of Real GDP growth. Among these four factors export and import directly affect the GDP equation. Remittance allows the recipients to spend it on for consumption and investment. Foreign aid and grants help the economy to strengthen specially for underdeveloped countries. This study has also compared the trends and level of its impact on GDP with three other SAARC countries. The report adds that future growth of Bangladesh will depend on promoting export, sustaining remittances, and triggering export. Bangladesh will require a breakthrough in the performance of the external sector. According to the report, the key to the breakthrough lies in effective integration of Bangladesh’s economy with the global economy which will ultimately depend on the ability of political leadership to undertake necessary policy reforms and institution building measures.

Objectives of the report

1.      Study the trend of GDP growth from the year 1975-2005 and four external factors remittance, export, import and foreign aid.

2.      Develop a regression model to show the relationship among these factors and GDP growth and show the level of impact of these factors on GDP

3.      Detailed study of each of the factors and show how it is affecting the GDP growth.

4.      Compared the developed model with three other SAARC countries (India, Srilanka and Pakistan)

Scope :

In this study, we will mainly focus on the impact of the four external sectors on GDP. We will discuss recent trends in GDP as well as in the external sectors and explain how they are related to one another. We will also discuss how the different sectors contribute to GDP and identify the key GDP accelerators.

 

Chapter- 2

Methodologies

Research process:

1.      Data Collection

Ø  Types of Data: The data we have used for our research include Real GDP of Bangladesh, Sector wise Export, Import, Remittance and foreign Aid. All data have been collected for the period of 1975-2005. The nature of the present study does not necessarily require the use of primary sources for data series therefore all data used in this report are primary.

Ø  Sources of Data :

i.        National Accounts Statistics published by Bangladesh Bureau of Statistics

ii.     Bangladesh Economic Review published by the Financial Advisor Wing, Ministry of Finance

iii.   Economic Trends

iv.   www.Earthtrends.com (For the Data of India, Pakistan and Srilanka)

2.      Structuring the Model : We have developed a model to show the impact of External Factors on the economic growth of Bangladesh. Then we have compared the model with the model with that of three other SAARC countries (India, Pakistan, Srilanka)

3.      Nature of the Variables: In our model we have identified economic growth in respect of real GDP growth. We have used real GDP as the dependant variable. For the dependant variable we have used the external factors i.e. remittance inflow, exports, imports and foreign aid. For each variable a coefficient has been assigned. We have accepted that the higher the coefficient the higher the impact of the variable on GDP.

4.      Data Analysis: On the basis of the model we have analysed the impact each of factors to the GDP growth. In the process we have looked into the trends of each factors over the years and the composition of the factors. For each of the factor we have identified the existing policies that have had profound impact on our economy.

Chapter-3

Significance of Remittance Income for Bangladesh Economy:

Remittances have been continuously playing an increasingly large role to the economic growth and the livelihoods of people in Bangladesh. Remittance income is more valuable for any developing country like Bangladesh. Puri and Ritzema (2001) tell that remittance is the portion of international migrant workers’ earnings sent back from the country of employment to the country of origin, play a central role in the economies of many labor sending countries. Osmani (2004) tells that remittances have been identified as one of the three factors that have been responsible for reducing the overall incidence of poverty in Bangladesh.  The demand of migrant workers remittances has now increased tremendously in Bangladesh in a number of reasons. These are as follows:

        i.            Remittance contributes to our national economy is a large scale by increasing foreign exchange reserve, per capita income and employment opportunities

     ii.            It has been continuously lifting-up the GDP (Gross Domestic Product) of Bangladesh. In 2012, the remittance which has sent by the migrant workers is the 11 percent of the total GDP of Bangladesh.

   iii.            Remittance has been continuously keeping the contribution to alleviate the poverty of Bangladesh through micro-enterprise development, generating substantial employment and income.

   iv.            The government has been paid various government and non-government import bills and investments of different foreign debt & donation from the remittance income.

      v.            Remittance income helps the government of Bangladesh to reduce dependency on foreign aid.

   vi.            Remittance helps to improve the balance of payment position of Bangladesh.

 vii.            Remittance also contributes to the expansion of financial market activities and the development of payment systems through enhancing direct capital flows and distributing those funds to users end and for investment or finance consumption purposes.

viii.            The government of Bangladesh is using remittance income to build schools, colleges, universities hospitals, roads, & highways, bridges, culverts etc.

   ix.            Remittance income is positively the socio-economic condition of migrant families.

      x.            Remittance income makes more strong local currency (Bangladesh) against US dollar.

Limitations :
Our report is completely based on information obtained from secondary sources. Hence, we cannot guarantee the validity and reliability of the data used during the analysis. The methods of analysis used and the concepts applied will be limited to what we learnt in our macroeconomics and statistics course.

Economic Growth:

Bangladesh Gross domestic product is an accepted parameter to measure the performance of an economy. As mentioned earlier in this report we will define economic growth as real GDP growth. Since its independence in 1971, the economy of Bangladesh has experienced significant strides. However, the country’s development was hindered by years of political instability and devastating natural disasters. The graph below shows the trend of Real GDP for the country for the period 1971-2005.In the computation of Real GDP the year 2000 has been taken as the base year.

As can be seen, there were wide fluctuations in the growth rate of Real GDP over the period. This indicates that the country failed to sustain a suitable growth rate. Bangladesh have experienced negative GDP growth in the year 1975. This was mainly due to the historic 1974 famine. In 1976 it rose again. For the next decade, the value fluctuated. The country was able to maintain a growth rate of around 5% after this period. The fluctuations in the growth rate over the period are partially due to inadequate infrastructure of the economy, weak governance, and low exports. The highest growth rate attained at the end of the period benefited from strong garment exports, large remittance inflows and impressive macro stability.

The structure of the economy has also changed vastly over the last three decades. Long before and after the independence, agriculture accounted for a large proportion of the GDP. But over the years its contribution declined by more than 20%, while the manufacturing sector prospered, boosting the country’s export earnings.

The external sector, mainly export, import, foreign aid and remittance, have always played an important role in the economy. However, there were wide fluctuations on the contribution from each of these sectors through out the period. In the 1970s, the country experienced a high balance of trade deficit mainly due to domestic shocks of natural disasters and international shocks of oil and food price hikes. Hence, over the decade the country had to rely heavily on foreign aid. In the 1980s, although policy reforms took place to enhance export revenues, the country was still suffering from external dependence. 1990s was a decade of policy reforms to reduce trade dependence and achieve trade orientation. Participation of the workers in the global labor market increased remittances and lower tariffs enabled the country to increase export revenues.

Chapter- 4

Role of External Factors in Bangladesh Economy:

External factors such as export, import, foreign aid and remittance have always played crucial role in Bangladesh economy. However, impact of these factors has not been consistent. If we analyze the contribution of each factor as a % of GDP over tie we will get a vivid picture.

As we can see from the graph our economy was initially influenced more by imports and foreign aid compared to exports and remittance. During 1977-1985 exports comprised only of 2-5% of total GDP and remittance was 0.5-2% of the GDP. Aid as percentage of GDP was higher than both exports and remittance till 1990. Export and remittance sector have been growing significantly over the years.

In the 1980s Bangladesh economy experienced e shift from import trade policies towards export oriented policies. During this decade RMG and knit ware exports started to dominate the export sector and earned a lot of foreign currencies.
In the 1990s economic reforms gained momentum and successive governments opted for export led policies. A major boost in export was accommodated by the insurgence of RMG sector. In 1990 RMG and knit ware goods exports made up over 65% of the total exports which was 84.95% in the year 1999. During this decade Bangladesh enjoyed a reduced tariff rates by some developing country to export its commodities. Volume of FDI increased during this period and remittance became a prominent sector in the economy. Thus 1990 was a decade of transition from aid dependence to trade orientation.
As we can see from 2000 remittance overtook aid as percentage of the total GDP. Export and remittance continued to rise during this decade. In 2005 remittance was 7% of the total GDP which has been the highest in the economy. Import of goods was mainly influenced by import of petroleum products due to rise in manufacturing industry. Impact of foreign aid on the economy has been declining 2000 on wards.

 

Regression Model :

In order to determine the impact of the external factors on GDP of Bangladesh we have developed a model using multiple regression. In this model we have used the GDP as the dependent variable and remittances, foreign aid and trade balance as the independent variable. The model developed is presented below.

As we can see during the early stage of our economy economic growth has been mostly influenced by aid inflow and exports. During this period export of jute and tea was the main driving force of the economy. Gradually the weight age has has shifted to the remittance sector and now it plays a huge role in the economy. Year to year no. of migrants have increased a lot and thus remittance inflow has had significant impact on our economy.

But 1990 on wards shows a complete different picture. As we have calculated the coefficient of remittance for the years 1990 on wards. For the data from 1990 on wards the result are as followed.

As we can see that economy of Bangladesh has shifted to remittance and export from 1990 onwards. Previously we saw from the data of 1976-1990 that aid had a profound impact on the economy. It is very understandable that after independence of Bangladesh foreign aid was very crucial for the restructuring of economy. But we can see that 1990 on wards aid had negative regression relation with GDP. Import also had a negative coefficient wit respect of GDP.

 

Changing Features of the External Factor

1.      Remittance:
Contribution to the economy : Bangladesh is considered as one of the major labor exporting country of the world. Since independence over 4 million Bangladeshis went abroad. The cumulative receipts of remittances from Bangladeshi migrants during 1976-2003 stood at around US$22.0 billion5. In 2003, through the official channels Bangladesh received 3 billion US dollars and it is estimated that another 3 billion US dollars came in through the informal channels. Bangladesh accounted for 12% of all remittances coming into South Asia and 2% of the overall global remittances . According to Ministry of Expatriates Welfare and Overseas Employment, despite a sharp decline in manpower export, the country’s remittance earning increased by 27 percent in the year 2005 than the previous year with the total remittance crossing US $ 4 billion mark for the first time. In 2004, the earning was US $ 3.5 billion while 0.25 million Bangladeshis went abroad for job purposes this year against 0.27million last year. Careful analyses of the available household survey data indicate that remittances have been associated with declines in the poverty headcount ratio in several low income countries and in Bangladesh remittances play a significant role to decline poverty by 6 percent. In the year 2000, remittances contribute 4% in total GDP in Bangladesh. Among the top 20 remittance-recipient countries, the position of Bangladesh was fourteenth and amount was US$3.4 billion in 2004(Global Economic Prospect 2006). In Bangladesh, remittance hits a record US $653 million growth in March 2006, which is 23 percent higher in the first three-quarters of current financial year than the previous year (The Daily Star, April 06, 2006). It is very evident from the data of remittances as percentage of GDP that remittance sector has had profound impact on the economy of Bangladesh. As we can see from the graph above that remittance inflow has been growing as percentage of the total GDP over he years. Initially GDP growth mostly was influenced by the foreign aid. It is very understandable that after independence aid had the major impact in restructuring the economy. Gradually it shifted to remittance and exports. In 1977 remittance made up only 0.45% of the GDP. But it has been growing gradually and in the 2005 it was 7% of the total GDP. Therefore remittance has played significant role in Bangladesh economy and has the potential to become the most crucial factor in the economy. Another important factor to notice is the remittance as % of foreign aid. In 1977 remittance was only 15.47% of foreign aid. It has gradually increased and in the year 2004 remittance was almost 3.5 times the foreign aid.

2.      Country wise overseas employment:

Remittance earned through migrant workers:

Remittances now form an important part of household livelihood strategies. The remittances sent by the migrant workers have grown over time. It has increase from US$ 1217.06 million (1995-96) to US$ 1097.00 million (2009-2010). The cumulative receives from Bangladeshi migrants during 1976-2010 stood at around US$ 78.67 billion. Bangladesh maintained a healthy growth in remittances through the formal channel. The trend of remittance has accelerated in recent years from $2.07 billion in 2001 to $11.00 billion in 2010, an average growth of 43 percent per annum, even in the global financial meltdown. The oil-rich Middle Eastern countries with more than 80 percent of the total stock of Bangladesh migrants accounts for a lion’s share of remittances. Table 2 shows the year-wise remittance from 1999 to 2010

3.      Macroeconomic Benefits of Remittance:

Remittances in Bangladesh arise as a poverty alleviating policy tool. It

contributes directly in broadening the opportunities to increase incomes. It allows households to increase their consumption of local goods and services. At the community level, remittances generate multiplier effects in the local economy, creating jobs and spurring new economic and social infrastructure and services. At the national level, remittances provide foreign currency and contribute significantly to GDP.  Remittance has surpassed official aid transfers to developing countries, reduces international inequality and promotes poverty reduction. Measuring the impact of remittances is complex. But a growing body of evidence from poverty simulation model, cross-country regressions and analysis of household survey shows that remittances, in facts do reduce poverty-although the evidence of their effect on inequality is mixed (World Bank 2006).

The remittance has significant microeconomic impact at household level. The macroeconomic impact of remittances at household level partially depends on the

Crore is a local counting slab equal to 10m. characteristics of the migrants and hence the recipients i.e. whether they constitute the rural poor, or the more educated sectors of the population generally residing inurban areas. The majority of Bangladeshi migrants abroad is unskilled, and originates from rural areas. The poorer the household, the more impact or benefits remittance income can have on alleviating poverty. In the short-term remittances help loosen the budget constraints of their recipients, allowing them to increase expenditures on both durables and non-durables products, and provides them with protection against negative income shocks (Bruyn 2005).

Investment in health and education is valuable for long-term economic growth and poverty reduction. Studies conclusively found that migrant families invested more in these areas (Murshid 2002). The most comprehensive review of the literature on remittances in Bangladesh (Bruyn2005) lays out a number of benefits that are listed in the table below:

Socioeconomic Impact of Remittance at Community & Household Levels in Bangladesh

4.      Government and Private Sectors Initiatives for Transferring Remittance:
Bangladesh Bank continues its efforts to encourage Non-Resident Bangladeshis (NRBs) to send their money through official channels. Remittance has become a good source of income for some of the banks with strong network abroad. Earlier the Nationalized Commercial Banks (NCBs) were the main official channels to transfer remittance. The NCBs have some overseas branches in United States, Europe and Middle East. Moreover, NCBs have agreement with the foreign banks in many countries for smooth transferring of remittance. But the process of transferring remittance through NCBs is lengthy and takes some days. So, now a day the private commercial banks (PCBs) have become more aggressive in remittance business providing quick and reliable services and attracting the Bangladeshi wage earners to send money home through banking channel. Although the flow of transferring remittance in Bangladesh through official channels is increasing, but according to World Bank staff estimates based on household survey, the informal sources of remittance channel is still higher. The ‘formal’ system means the transferring through banking system and the ‘informal’ system can be through hundi system, friends and relatives, hand carried etc. Hundi is an ancient and informal method of funds transfer and part of Bangladeshi culture. Other countries have different names for the same system – Hawala in parts of India and the Middle East, Fei’chen in China, Padala in the Philippines. This informal system is based on trust and is underpinned by a loose network of traders (shop owners, money changers etc.) who settle transfers amongst themselves, using their existing trading relationships. For the remitter, the hundi system has the advantage of being inexpensive, fast and accessible. Its two significant drawbacks are that it is illegal, and is based purely on trust and is therefore theoretically a high-risk proposition. The following table shows that roughly half of remittances to Bangladesh are estimated to be generated through the formal banking system based on 2002 data.

To attract Bangladeshi wage earners by providing quick and reliable services three PCBs i.e. National Bank Ltd., Arab Bangladesh Bank Ltd. and BRAC Bank Ltd. have made an agreement with Western Union, an US-based organization for financial services which has been covering more than 200 countries with its network . The number of branches of each bank which is transferring remittance through Western Union as following table:

5.      Savings Facilities for Non-Resident Bangladeshis: The Government is offering different savings instruments for the non-resident Bangladeshi to attract remittance that will boost the local economy. The Government is offering following savings instruments.

Non-Resident Foreign Currency Deposit (NFCD): This Deposit account can be opened any bank operating in Bangladesh. The account can be opened for one month, three months, six months or one year term in foreign currency i.e. US Dollar, Pound Starling, Euro etc. The minimum deposit requirement is US $1000 or 500 pound starling or equivalent to other currency.

US Dollar Premium Bond: 
This is issued for three years in the name of a holder of a non-resident account against remittances from abroad to the account. The Bondholder will be entitled to draw interest on half yearly basis at 7.5% fixed rate per annum in Bangladesh currency at the USD/BDT rate. However, the Bondholder may surrender the Bond before maturity and en cash the same at the paying office in which case lower interest will be paid. The Bond will be issued in the denominations of US$500, $1000, $5000, $10,000 and $50,000 and in such other denominations as the Government may decide. The purchaser can purchase 

Bond of any amount in multiples of US $500 without a maximum limit. For investment of US $10,000 and above, subject to an initial investment of US$10,000 in one instance, the concerned purchaser will be provided with death-risk benefit. The death-risk-benefit will be determined according to the different slabs of investment and the age of the purchaser shall not be over 55 years at the time of his death.

Income Tax Facilities for Non-Resident Bangladeshis: The National Board of Revenue (NBR) of Bangladesh Government has undertaken various initiatives in the income tax rules for Non-Resident Bangladeshis to increase the flow of remittances. The Government has taken following steps to provide income tax rebate to nonresident Bangladeshis:

• The amount of remittance transferred by non-resident Bangladeshis through banking channel enjoys full exemption from income tax (Finance Law, 2002). 
• No Tax Identification Number (TIN) Certificate is required upon purchase of fixed assets by non-resident Bangladeshis (Finance Law, 2002). 
• The interest income of non-resident Bangladeshis from ‘non-resident foreign currency deposit account’ is fully exempted from tax. 
• The ‘Wage Earners Development Bond’ purchased by non-resident Bangladeshis is exempted from income tax. 
• The non-resident Bangladeshis and foreign passport holders Bangladeshis and their family members don’t require income tax clearance before leaving country after visiting Bangladesh.

Export Sector : Export sector has been the major driving force of our economy. Initially this sector ws not as significant as it is now. Due to insurgence in RMG and other manufacturing industries it is the main driving force of our economy. In this section we will look into the details of export scenario and how it has been affecting our economy.

• The total exports can be devided into two broad categories –Primary Commodities
• Manufactured goods

The total export composition of primary commodities and manufactured goods is shown in the following graph:

The percentage of manufactured good exports was always greater than that of the primary commodities export. The primary commodities export has declined over the time span and the manufactured goods export has increased in percentage.
The following regression analysis shows which export goods have the maximum impact on total exports.

Dependent Variable Total Export

Independent Variable Frozen Food, Raw Jute, Tea, Jute Goods, RMG and Knit wares
Coefficient Frozen Food Raw Jute Tea Jute Goods RMG and Knit wares
1.109 1.961 0.554 1.361 1.039 Adjusted R² 1.00

From this model we can see that apart from tea the value of all other independent variables is more than 1. The high value of the variables indicates highest impact on total export. Here we can see that the impact of raw jute is highest. The high amount of exports of raw jute in the 1970s caused greater value of of the coefficient, but the export of raw jute has significantly fallen in the recent years. The same thing goes for jute goods. The frozen food exports had higher values in the 1980s which gave a higher value to its coefficient. Though the value of RMG and knit wears is comparatively lower than the other variables it has a higher impact on total export because there was no export in this sector before the 1980s. the exports after 1980s only gave such high value to its coefficient. Keeping all the factors in mind we can say that the RMG and knitwear have the highest impact in total export.

Overall Changes in Composition of Exports and Imports :

The highly disparate growth patterns of individual export product groups have inevitably led to large changes in the export composition over time. Exports of jute, jute goods, tea and leather, constituted most of Bangladesh’s total exports in the early years. These exports precipitously fell drastically in the recent years. At present the dominance of raw jute and jute goods in the export trade of Bangladesh has weakened considerably, and the RMG product group has boomed substantially in the recent years. The share of raw jute in export earnings has fallen from 38% in the year 1972 to to 1.5 in the year 2005. Over the same period, the share of jute goods declined from 52 percent to less than 4 percent. Another main exports item, tea, declined from 6.3% to 0.12%t during the period. Tea’s relative export share did increase in some of the years in the 1980s but it declined sharply in later years. The share of leather in total exports showed a significant increase from about 1% in 1972 to more than 16 percent in the late 1980s. But it declined to 2.7 percent in the year 2005.

On the other hand, exports in readymade garments and knit wears dramatically grew over the years. The composition of readymade garments increased from 0.1 percent in 1980 to 43.2 percent in the year 2005. Knit wears export increased from 1% in the year 1989 to 40% in the year 2005. The very fast growth of the readymade garments and knit wears in the export arena are the main reason behind the exports and economic growth in Bangladesh. Though Bangladesh faced setbacks in exporting jute and jute goods, the exports of the RMG product group has more than made up for the loss. The share of frozen food increased from less than 1 percent to 5 percent during the years. Frozen food’s share in total exports was higher in the 1980s but its later decline reflected a deceleration in its growth performance in recent years.

The export performance of Bangladesh over the years was moderately good. Though it has experienced steady growth over last 35 years but the growth rate has not been highly remarkable. The above trends indicate that Bangladesh’s export performance over the last three decades was good. The government has repeatedly emphasized on the export-led growth and the introduction of several export promotion measures, but this measures was not very fruitful. Exports of traditional items are demand determined, while some of the non-traditional exports are supply constrained.

Export Incentives opt by the government :

The government has provided various incentives to expand the narrow export base and to make the products more competitive. The governments have introduced several export promotion measures and replaced or modified previous measures. The following measures were taken to ensure a competitive edge for export products: (a) special or supervised bonded warehouse facilities; (b) duty drawback facilities; (c) a cash compensation benefit in lieu of duty drawback on raw materials; (d) duty exemption on capital goods applied to recognized (100%) export-oriented industries and income tax concession; (f) credit support from an export development fund; (g) export credit guarantee scheme; (h) foreign exchange retention benefit for exporters; and (i) development of export processing zone (EPZ) facilities.

(a) Special or Supervised Bonded Warehouse Facilities: There are two kinds of bonded warehouses – Special and supervised. Supervised bonded warehouse system is preferred by the custom authorities. The supervised bonded warehouse system is availed by the garments sector, it has boomed in the recent years. The exporters of other products are not comfortable with supervised bonded warehouse system due to various problems; very few industries such as leather goods, computer industry etc. use this system. As such they face high resistance from the custom authorities. As such the bonded warehouse system is unable to play a major role in the expansion of the export base.

(b) Duty Drawback System: There are two variants of duty drawback system – a) drawback at actual rate b) drawback at flat rate. The drawback at actual rates have various difficulties and is not preferred by the exporters generally. The flat rate variant is more preferred by the producers as it is easier and quicker to avail. The government has expanded the coverage of exported products under this system.
Even though the flat drawback system was better than the other system, it does not always benefit the exporters. These system involves higher delays than the officially set limit of a week or unofficial side payment. The government introduced a repayment system of drawbacks from banks on 13 items to quicken the process of duty demands .

(c) A Cash Compensation Benefit in Lieu of Duty Drawback on Raw Materials : The cash compensation in lieu of duty drawback system was first applied for the RMG sector in 1987 with a rate of 15% of final exports. Later it was revised with a rate of 25% in the year 1993. During 1989 this facility was provided to the frozen food, crust and finished leather industries. From the 1990s most of the exporters preferred to switched from duty drawback and bonded warehouse facilities to cash assistance system since it they receive more benefits from this system.

(d) Duty Exemption and Tax Concession: The government provided duty exemption on capital goods. For example handicrafts are fully exempted of tax and the tax on garments has been reduced from 0.5% to 0.25%. Before 1995 exporters were eligible for income tax rebates at varying rates up to 50 percent of the tax attributable to income from exports. After that they are entitled to a 50 percent deduction of the income from exports from the taxable income.

(e) Credit Support from an Export Development Fund: An export development fund of US $ 30 million was established in the early 1990s as a support to boost exports. IDA made a comtribution of US $ 25 million to this fund. This fund is used to lend financial support to the exporters. It provides credit support to an extent of 90% of the confirmed value and irrevocable letter-of-credit at a rate of 7 percent for selected non-traditional export items and at 12 percent for a few traditional export items.

Import Sector :

Ever since its independence in 1971, the economy of Bangladesh has been experiencing large trade deficits. Despite several export promotional efforts by the government, the export earnings of the country have fallen behind import payments.

A large portion of Bangladesh’s imports consists of consumer goods and materials for consumption that are not used for development purposes. In the 1970s and 1980s,these goods accounted for more than two third of the country’s imports. The share rose significantly mainly due to external trade liberation in the 1980s.The rest one third of the country’s import consist of capital goods and materials for capital goods, which are used for development purposes.

The graph below shows the trend of import payments compared to Real GDP for the period 1979-2005.

The graph shows an overall rising trend with slight fluctuations. The value reaches a maximum in the FY2005 (around 14000 million US Dollars). The overall increase in imports over the period has been about 380%. Payments for the FY2005 rose by about 20.5% compared to the previous year. Increased imports of rice, sugar, fertilizer and capital machinery contributed to this rise. Increased consumer and industrial needs increased the import of petroleum and petroleum products. High oil prices in the international market also boosted the growth.

Import Policy:

In 1987-1988, imports of as many as 2306 items were controlled. The figure however fell to 117 at the beginning of 1990s. Bangladesh has been pursuing a liberal trade policy since the 1990s. Extensive reform programs have been implemented in trade regime during decade. Reforms have been initiated to dismantle both tariff and non-tariff barriers. With regard to steps towards trade liberalization government has been pursuing a moderate protective policy only in consideration of certain sensitive issues like public health, security and religious bindings. Simultaneously, more liberal import and export policies and programs have been adopted including reduction in tariff slabs. Bangladesh pursued one-year export and import policies in the eighties and two-year policies in the first half of nineties. But five-year export and import policies were formulated and implemented for 1997-2002. In this policy, quality control mechanism of imported goods was strengthened. Requirement for declaring country of origin for import of raw materials were also withdrawn for export-oriented industries. Consequently, raw material imports became easier for 100 percent export oriented industries that accelerate expansion of export industries. Import of gold and silver was made consistent with the Exchange Control Regulations of Bangladesh Bank. Under the policy, expatriate Bangladeshis could import capital machinery and raw materials in any quantity while the foreign investors, as part of their equity share, could import the same on cost insurance and freight (c.i.f.) basis.

A new import policy was introduced by the government for the period 2003-2006. Phenomenal changes and amendments were incorporated in the new Policy to cater to the needs for promotion and protection of local industries, ensure availability of quality goods to the consumers at reasonable prices, develop human resources and create employment opportunities. Two major changes include:

• Making industrial raw materials like aluminum scraps, iron and brake acrylic etc importable so that finished products are available at affordable prices; 
• Banning commercial import of methanol and harmful acid

The new import policy seeks to accelerate the industrialization process and help boost up export trade and facilitate agricultural development and public health care as well as ensure public security and protection of environment.

Quantitative restrictions on imports of sugar, salt and some other commodities encourage large illegal imports from India. Similarly, restrictions on imports of sugar, salt and some other commodities encourage large illegal imports from India (World Bank, 1996). Removing these restrictions would expose these industries to greater competition, generate tariff revenues and benefit consumers by reducing prices.

Foreign Aid sector:

Foreign aid is one of the most important parts of external sector. Bangladesh receives foreign aid in two forms – grants and loans. The grants are given without expecting anything in return and the loans are given at a certain payable interest rate.
From the following graph we can see the trend of the received foreign aid over the years

From the graph we can see that the value of foreign aid is not following any particular trend, it has fluctuated highly over the years. Foreign aid had a rapid growth from 1971 to 1975. It had a very high value in the year 1975 but had a sharp decline in the following year. The complicated political situation and unrest at that period was the main reason behind this. After that the foreign aid amount was increasing at a good rate up to the year 1980. The receipt of foreign aid highly fluctuated up to the year 1985. After that the foreign aid receipt increased considerably up to 1990, but we can see a declining trends as we move on afterwards up to the year 2002. After the sharp decline in the year 2002 the receipt of foreign aid has slightly recovered, but it faced a decline in the year 2005.

 

Chapter- 5

Recommendations and Conclusion

Based on the study that e have conducted we believe that following recommendations will be effective. As we have seen that the export and remittance sector have been the most emerging we are recommending export and remittance policies.
Export Policies

1.      Tax benefits for RMG industries: As we have seen from our analysis that RMG has the most emerging sector of our economy. Over the years RMG has been the major contributor to our economy. So, policy makers should make the RMG sector as the “USP” of Bangladesh economy. Therefore to attract more investors to invest in this sector proving these investors with tax benefits can be useful.

2.      Quality improvement: If our RMG products want to capture new target market it is compulsory to maintain quality standard. In order to make trendy products fashion institute can be established.

3.      Revival of jute goods: revival of jute industry and producing attractive jute products can certainly create a new vibe in the international market.

4.      Strengthen backward linkage industries: if proper channel of backward linkage is ensured our economy can certainly ensure proper utilization of resources. In the process it can create more employments.

5.      Participating in global trade fairs: In this way we can create more exposure of our goods to foreign market.

6.      Ensuring conducive environment for the exporters: Government needs to ensure that exporters can operate hassle free way.

 

Remittance policies :

1.      Establish more technical institutes: The government as well as private sector can establish more high quality technical, polytechnics and vocational institutes that can supply skilled and professional personnel.

2.      Encourage the remittance recipients for productive investment: Government as well as NGOs can play important roles in this respect. The government should eliminate regulatory constraints of transferring remittance for NGOs.

3.      Creating Enabling environment to invest Remittances in Capital Market: Moreover,
the government can make easy access to the capital market for the remittance recipient families. Although at present there is a provision for quota of foreign investors or nonresident Bangladeshis during Initial Public Offering(IPO) of issuing shares, but this process is so critical that most of the time this quota doesn’t fulfilled. The government should make this quota system of issuing IPO also applicable for the families of the non-resident Bangladeshis, so that they can invest in the capital market.

 

References

1. Bangladesh Bank Annual Report 2005.

2. Bangladesh Bank, website: www.bangladesh-bank.org

3. Bangladesh Bureau of Statistics, website: www.bbsgov.org

4. Board of Investment, July 2004, website: www.boibd.org

5. Bureau of Manpower, Employment and Training (BMET), 

website: http://www.bmet.org.bd