To sustain the rapid growth of the gross domestic product and overcome the current global challenge, Bangladesh needs to reform the existing tariff regime and the financial sector, said the World Bank in a report titled “Change of Fabric” published under the Bangladesh Country Economic Memorandum.
The global lender said as part of the country’s export-led growth vision, it needs to address multiple policy issues to unleash private sector growth and investment, including tariff modernisation, increased trade facilitation, services and investment reforms, as well regional integration and regulatory cooperation.
With trade competitiveness based on low wages and trade preferences eroding, the overreliance on readymade garments exports and a protective tariff regime challenge the sustainability of Bangladesh’s growth model.
It said the average tariff rate on intermediate goods in the country is 18.8%, which is more than double the rate in China (7.4%) and almost double the rate in Thailand and Vietnam (9.6%).
Average tariffs, or nominal protection rate, more than double if para-tariffs are included make Bangladesh an outlier among countries with a similar income level.
Additionally, with an almost 30% point difference in tariffs including other import taxes between consumer and intermediate goods, which was also the highest in comparison.
Competitiveness will erode further with the expected graduation from Least Developed Country (LDC) status in 2026.
The report said Bangladesh needs to reduce the level of protection by rationalising the tariff regime as a first crucial step to support export diversification.
Para-tariffs need to be eliminated gradually, making the tariff structure consistent with that of an upper-middle-income country. Tariff rationalisation has been included in the Eighth Five Year Plan, which states the need to reduce the nominal protection rate by 3-5% every year until 2025.
Border and documentary compliance requirements lead to major delays for exporting firms in Bangladesh and, at a total of more than 300 hours required to comply, such delays are among the highest in South Asia, the report also said.
It pointed out that implementation of Bangladesh’s commitments under the WTO Trade Facilitation Agreement was lagging behind at 36%.
To achieve the target by the Eighth Five Year Plan, implementation of the National Tariff Policy was needed alongside more digitalisation.
Financial sector still behind
Despite major progress over the past four decades, Bangladesh’s financial sector still lags behind its peers.
The process of financial sector deepening has stalled in recent years, according to the World Bank report.
According to the IMF’s global Financial Development Index, Bangladesh ranks 95 out of 184 countries in terms of financial development.
While others like China, Vietnam, Cambodia, and Thailand have bank credit-to-GDP ratios that are substantially above 100%, in Bangladesh this ratio has stabilised at around 45% since 2016.
Similarly, stock market capitalisation to GDP has been declining since 2015 signaling limited ability of Bangladeshi companies to raise long term capital.
Long-standing banking sector vulnerabilities, magnified by the Covid-19, impede efficient channeling of savings to productive investments. Chronic asset quality problems, low levels of capital, and weak governance constrain bank lending and present substantial stability risks.
The report pointed out that most banks are controlled by owners of large business groups and politicians, and are heavily engaged in related-party lending, diverting scarce financial resources from the most productive use.
Strong presence of the state in the financial sector, both through the ownership of underperforming state-owned banks and the interventions such as interest rate caps, further contributes to crowding out of scarce resources from the private sector.
The existing regulatory and supervisory framework for the banking sector still needs to be aligned with international good practice in order to address the existing vulnerabilities and promote bank financing of underserved market segments such as MSMEs, the report suggested.
The domestic capital market remains small and underdeveloped, hindering longer term financing for infrastructure, housing, and climate adaptation, it said, also highlighting the limited growth and equity due to lack of investor confidence.
Small size of domestic institutional investors such as insurance and pension companies, and undue competition from the National Saving Certificate (NSC) program pose further challenges for capital market development.
The World Bank recommended that administrative measures such as interest rate caps are not efficient ways to reduce borrowing costs, nor will the issuance of licences help improve competition in an already overcrowded banking sector.
Rather, improving banks’ operational efficiency and reducing financial market distortions will help decrease costs of financial intermediation and support channeling of credit to more productive sectors and firms.