Liberalised policy for a vibrant manufacturing sector

Bangladesh has been making significant progress in reforming foreign trade regime and reducing protection since 1980s. These have been reflected in the simplification of import policy, tariff policy and industrial policies by reducing quantitative restriction and implementation of a flexible exchange rate policy. Benefits of policy liberalisation are mixed. The country is gradually proceeding towards a manufacturing-based economy, but not all the manufacturing sectors are capable enough to compete with the other similarly-placed countries and thus unable to achieve the required growth.
DEPENDENCE ON IMPORTED RAW MATERIALS: Our manufacturing sector is almost fully dependent on imported raw materials. On an average, about 70-80 per cent raw materials for manufacturing products are imported. Tax anomalies and marginal differences between finished and intermediate products and raw materials, non-transparent information about the total supply chain of a product and a sector, weak administrative and regulatory process have made some of the promising sectors vulnerable.
Poor coordination among the concerned government organisations and lack of credibility of the financial system have also contributed to make the situation difficult to gauge the real impact of liberalised policies on the manufacturing industrial sector specially.
Contribution of industry to Bangladesh's gross domestic product (GDP) increased from 21.7 per cent in 1991, to 25.9 per cent in 2001 and further to 29.61 per cent in 2013-14 fiscal year (FY). But in order to achieve Vision 2021 and Industrial Policy target, contribution of the industry to the GDP will have to be increased up to 40 per cent.
In the year 2005-6, industrial growth was 10.81 per cent, which declined to 8.68 per cent in 2014-15 as per the Economic Review 2014. Growth of small and medium enterprises (SMEs) was 9.14 per cent in 2005-6 and it declined to 6.60 per cent in 2013-14. In the Sixth Five-Year Plan (p-58) sectoral growth for industry is targeted as 10.5 per cent for the fiscal 2014 and 2015. The figure clearly says we are much behind the target.
Import policy has been gradually liberalised for easing doing business for foreign manufacturers and suppliers. Imports are allowed to be done through Indenting and Proforma Invoice (PI). Gradual evolution of import policies allowed abolition of the limit of opening letters of credit (LCs) under PI which was introduced in 1889-91. It was written that "L/C may be opened against a foreign supplier's pro-forma invoice(s) up to C&F value of Tk 10.00 Lac even if the concerned foreign supplier has appointed a local agent in Bangladesh. But in such cases, the foreign supplier shall certify on the PI that the price quoted there in does not include any commission------". The present Import Policy simply mentions that LC may be opened against an indent issued by a local registered Indenter or against a pro-forma invoice issued by a foreign manufacturer/seller/supplier.  
NEED FOR REGULATORY SUPERVISION: PIs were accepted internationally for allowing heavy industries to procure their products for supporting their manufacturing units or for the suppliers who are supplying goods for the government through different projects under different government-to-government arrangement. But the regulatory supervision should be in place so that it can also protect the interests of the entrepreneurs of all levels.
The direct PI providers run large-scale businesses. Import under PI and through Indent was 30:70 in the past; now it has been increased to about 80:20. The main channel for selling goods in Bangladesh is through a local agent, i.e., an agent, wholesaler or distributor. If authorised, companies may use their local agents to service industrial consumers and bid on government contracts. Indenting agents look after the interests of overseas manufacturers, investors, exporters as well as for importers of Bangladesh. Acting as the agents of the foreign companies, they market their products in Bangladesh. PI providers may have their branch office, or both branch and local office. On the other hand, they may not have any branch or local office.
PI providers without any branch or local office are not registered with the government and thus do not have to pay individual and corporate tax.  Industry insiders say about 80 per cent of the country's trade has been operated through agents. As per import policy, foreign companies are allowed to export products through local agents by providing PI. For providing PI, there is no requirement of enlistment or to have a registration number and thus to be enlisted in the tax net.
More than half of Bangladesh's imports are made through tender or direct purchase by public sector corporations, government-controlled corporations, and autonomous bodies. These organisations prefer to deal with local firms acting as exclusive agents or distributors of foreign manufacturers and suppliers.
In the Foreign Exchange Guideline, for the authorised dealers (ADs), there is a clear directive that they should see the documentary evidence that a firm's order for the goods to be imported has been placed and accepted. They also need to ensure that while opening an LC, full description of the goods to be imported is given in each credit along with the unit price of the merchandise. In case of business through agents, the Foreign Exchange Act has clear directives.
It has appeared from the calculation of the concerned Import and Indenting Association that about 1,00,000 PI users, through agents or other ways have been avoiding trade license fees of minimum Tk 1,300/year, in the form of income tax at least Tk 5,000/per person and registration at CCI&E at Tk 40,000/year along with renewal of Tk 20,000/year, which is about Tk 5 billion. Through this process, if there are two million LCs are opened in a year, conservative statistics of about US$ 2,000/LC equivalent to US$ 40 million or about Tk 3.20 billion could be collected from this source.  Together with these two figures, it stands near about Tk 10 billion revenue loss.
A review of import policies and regimes in Bangladesh done by a study 'Bangladesh Country Report: Trade & Employment prepared for EU & ILO" by the South Asian Network on Economic Modelling (SANEM) shows evolution of import policies and quantitative restrictions. It mentioned that in 1987-88, about 40 per cent of all import lines at the HS-4 digit level was subject to trade related quantitative restriction (QR), but these restriction has drastically been reduced to less than 1.0 per cent in recent years. Reform in the tariff structures also helped rapid increase of import to Bangladesh.
LOSS OF 20 PER CENT OF GDP: Some studies show that because of liberalisation and too much simplification of import policies every year, Bangladesh is losing about 20 per cent of the GDP (gross domestic product). A report of UNDP mentions that, among others, weakness in collecting trade statistics is one of the reasons for huge money laundering.  
At this age of globalisation, there is no scope to remain aloof from other countries but too much liberalisation is not suitable for a country.  Liberalisation of policy is required but it should not be at the expense of the country.
BUILD STUDY: BUILD has conducted a small study and presented to the PSDPCC (private sector development policy coordination committee meeting) for addressing policy anomalies so that the manufacturing sector get a level playing field.  A significant number of assembling industries has to close their businesses. It is true that some industries like readymade garments and information communication technology (ICT) is doing well but a significant number of electronic and electrical goods, leather goods, plastic, ceramics and light engineering units have been facing closure and some have already become non-existent.
There are about 500 branch offices registered under the Board of Investment (BOI) that are allowed to do business on behalf of their parent companies. The branch offices, after being established for a certain period of time, need permission letters from the Bangladesh Bank (under 18(B)), Income Tax Clearance Certificate and other documents for extending the time. The import and other businesses of the branch offices, if reflected in the import statistics, could be a good vehicle to know the practical import statistics. Updated list of the branch offices could be visible in the BOI website with information on their specific time of establishment and renewal.
PI should be clearly defined in the new Import Policy. In case of import under PI, its name, logo and registration reference (authorisation) giver should be included in the LC. The PI provider could have membership of any chamber/association as per the Trade Organisation Ordinance. Article 397 of the Companies Act 1994 states that foreign companies, which establish businesses within Bangladesh, shall, within one month of the establishment of the place of business, contact Registrar of Registration.  Foreign company/agencies and branches working in Bangladesh must be registered with RJSC (Registrar of Joint Stock Companies) before going to the Bangladesh Bank for remitting their money. They may be given permission under 18(b) (Foreign Exchange Transaction Act 1947, restriction on foreign companies) provided they are registered with the RJSC.  Initial permission for setting up offices by the BOI should have a specific  time frame in the announced format before the company applies for extension.
Future imports will be simpler with little need for LCs. Only documents will be used and one such mode is INCOTERMS. In view of the above, INCOTERMS should be integrated with the Import Policy and ADs should strictly follow these principles. Open Account Policy and Factoring are some new policies for trade. Maintenance of the INCOTERMS by the Importers and ADs must be mandated through policy as it is important for complying with trade facilitation issues.

The writer is CEO, Business Initiative Leading Development (BUILD), a partnership organisation of DCCI, MCCI and CCCI.
ceo@buildbd.org