The recently ousted Awami League government had requested $800 million equivalent to Tk9,400 crore in loans from the Asian Development Bank (ADB) as budget support to help mitigate the potential losses and risks associated with graduating from the Least Developed Countries (LDCs), through transition to a sustainable, competitive and diversified economy.
ADB agreed to provide the $800 million in two separate phases, aiming to improve domestic resource mobilization, create an enabling environment for private sector development, and strengthen trade policy and logistics sector development, according to officials from both the ADB and the Economic Relations Division (ERD) of the government.
To facilitate this, the ADB issued a concept note to process the project titled "Economic Transformation for the Least Developed Country Graduation" which revealed that the government will need to comply with at least three dozen terms and conditions to secure this first-ever foreign loan aimed at preparing for the LDC graduation.
The proposed policy-based loan will help the government implement some of the key priority actions of a smooth transition strategy and action plan focusing on the structural challenges, drafted by a high-level committee of the government.
The document identified some fundamental development challenges in Bangladesh including a lack of domestic resource mobilization for critical public investment to promote inclusive growth and productivity, a lack of an enabling environment to promote private sector-led inclusive growth and attract FDI, and a lack of export diversification.
Challenges will be deepened further after graduation from the LDCs and the country must increase its tax revenue since its tax–GDP ratio is one of the lowest in the world, it revealed.
A nontransparent, unpredictable, and noncompetitive regulatory environment has hindered competitiveness, private sector development, and FDI inflows in Bangladesh, it added.
The government will have to modernize the income tax system, automate tax administration, establish an e-tax unit, ensure a uniform VAT rate, digitize the National Board of Revenue, and increase awareness of environmental taxes, to disburse the loans.
It will enhance OSS services, automate the RJSC, focus on FDI policies, enact a new offshore banking act, amend the Company Act 1994, and strengthen the competition commission and PPP Authority.
Additionally, the government will reduce import duties, reduce cash subsidies for exporters, expedite customs clearance, remove non-tariff barriers, implement national tariff and logistics policies, enact new customs and digital commerce acts, update the ICD policy, and safeguard consumer rights and data privacy.
ADB document revealed that the graduation from the LDCs comes with the potential loss of preferential market access, various trade-related exemptions under the World Trade Organization (WTO), and concessional borrowing, while export volume from Bangladesh could fall by 14% because of the loss of preferential trading arrangements, following the graduation.
Chronic structural weaknesses—including the lack of domestic resource mobilization, export diversification, foreign direct investment (FDI), and an enabling investment climate—have led to recent downgrades in Bangladesh’s credit rating and will exacerbate vulnerability and competitiveness in the post-LDC era, it added.
The ERD officials said that the government has negotiated a 3-year extension of WTO trade preferences on graduation, set up a National Committee on LDC Graduation led by the Prime Minister’s Office, and prepared a comprehensive draft LDC Graduation Smooth Transition Strategy and Action Plan.
The government asked for a policy-based loan to help the government implement some of the key priority actions of this smooth transition strategy, focusing on the structural challenges, they added.
Infographic: BFirst/Jahidul Islam
The loan is to be disbursed through two subprogrammes $400 million by October this year and the remaining amount under subprogramme 2 by October next year.
Challenges ahead of the graduation
LDC graduation will bring several challenges for Bangladesh revealed the ADB document which said that approximately 75% of exports, especially in the RMG sector, benefit from duty-free and quota-free access, which could lead to a 14.3% reduction in export earnings post-graduation.
The RMG sector faces an increase in tariffs in its main market, the EU, from 0% to 9.5%. Additionally, Bangladesh will need to discontinue export cash incentives due to WTO commitments.
The pharmaceutical industry, currently benefiting from patent waivers under WTO rules, may see higher medicine prices and increased royalties due to stricter intellectual property enforcement.
The document identified several key constraints and recommended tackling these to remain competitive and address recent credit rating downgrades.
Weak revenue mobilisation
The tax system in Bangladesh suffers from extensive exemptions, weak compliance due to outdated procedures, and poor enforcement, revealed the document and added that the National Board of Revenue struggles with digitisation.
With only 47% of registered taxpayers filing returns and low-income tax participation, revenue collection is hampered by inefficient VAT and withholding tax systems.
Trade taxes account for 29% of total tax revenues, which is particularly concerning as WTO compliance will call for lower tariffs after LDC graduation.
To raise the overall tax–GDP ratio to double digits and be on par with its peers, Bangladesh will need to more than double VAT and income tax collections because its trade tax collection will decline.
Inconducive business environment
ADB found an inconducive environment in Bangladesh to expand private sector business and revealed that the country ranks 72 out of 81 countries in the Economist Intelligence Unit’s business environment ranking.
New businesses face significant hurdles, navigating 23 government agencies and securing up to 150 regulatory approvals, the document said quoting the 2023 Bangladesh Business Climate Index published by the Metropolitan Chamber of Commerce & Industry and the Policy Exchange Bangladesh.
The One Stop Service (OSS) aims to improve this but has not yet fully integrated all relevant services. Additionally, obtaining sector licenses often requires visiting multiple agencies, adding to bureaucratic inefficiencies.
Lack of equal treatment
Lack of equal treatment and favouritism towards certain sectors by the previous government stifles innovation and hampers new business growth in Bangladesh, said the ADB.
The country has one of the lowest new business density rankings globally at just 0.04 compared to Vietnam’s 1.82, it revealed further.
Established firms benefit from lower tax rates, exemptions, and tariff protections, creating competitive distortions, while established industries, especially RMGs, receive disproportionate incentives and support.
This protective approach limits innovation and productivity, evidenced by no new product or service introductions by Bangladeshi firms in 2022 and stagnant sales and employment growth compared to South Asian averages.
Expected outcome of the reform
The program aims to transition Bangladesh to a sustainable, competitive, and diversified economy through increased fiscal space, improved business climate and open trade environment.
The proggramme will increase fiscal spaces of the government through rationalizing tax expenditure, broadening the tax base, and enhancing compliance via increased automation and digitalisation of tax administration.
It would focus on reducing the gender gap in entrepreneurship and finance by simplifying regulations for businesses, including PPPs and FDI, and promoting equal treatment through a stronger competition framework.
Facilitated by reducing protectionist duties, enhancing e-commerce, improving customs efficiency, and lowering logistics costs to support export diversification, the loan will open the trade environment.
On 14 August, ADB announced in a statement its intention to engage with the new interim government of Bangladesh to support development.
ADB reaffirmed its commitment to its long-standing partnership with Bangladesh, emphasising support for the country’s sustainable development in alignment with the aspirations of its people.
The statement noted that the ADB's collaboration with the interim government aims to ensure the continuation of ongoing projects and to promote a more inclusive, resilient, and sustainable future for Bangladesh.
