Political stability, good governance to facilitate business, investment: IMF
Friday, 17 October 2008
FE Report
Giving importance to a 'return to political stability' and continued improvements in the quality of governance, the International Monetary Fund (IMF) cast its hope that a clearer political environment would arise in Bangladesh after the December 2008 elections, facilitating the country's business and investment.
"A return to political stability and continued improvements in the quality of governance will also be important. A clearer political environment, which should hopefully be in place following the December 2008 elections, should assist the business environment," an IMF country report said Wednesday.
Prepared by an IMF staff team, the report also said continued progress on improving the quality of governance, particularly with regard to controlling corruption, will also be an important element in attracting high-quality investment in Bangladesh.
Also mentioning that a continued progress in structural reforms that reduce the overall cost of doing business will be critical in maintaining competitiveness, it also suggested that Bangladesh should give special attention to a few key areas to achieve the goals.
Among them, the report said access to reliable and affordable power regularly appears at the top of the list of constraints to doing business in Bangladesh.
"Making improvements in this area is critical to promoting industrial growth and needs to be supported by improvements in other infrastructures, notably roads and port facilities," it said.
Also focusing on the country's trade policy, it said despite substantial progress in liberalisation of the trade policy environment in the 1990s, Bangladesh still has one of the most restrictive trade regimes in the world. The report also mentioned that the country ranked at 113 out of 125 countries on the World Bank's trade restrictiveness index.
The IMF, however, suggested that Bangladesh need further efforts to liberalise the tariff system, particularly by reducing or eliminating supplementary duties that significantly increase protection on a large range of products.
About the trade facilitation, the IMF staff team also observed that building on recent progress in port performance, particularly by improving the efficiency of customs, would be important to encourage the country's trade further.
On the financial sector, the report also said improving banking sector efficiency and providing the environment for broader use of the stock and bond markets for corporate financing would encourage inward investment and development of the domestic private sector.
Bangladesh should improve the skill levels of its labour force in order to enhance productivity, it said, adding a continued attention to education and training is an essential part of maintaining long-run competitiveness in this sector.
Also identifying Bangladesh as one of the lowest tax-to-GDP ratios among Asian countries, the IMF country report said despite recent improvements, tax collection in Bangladesh still stands at around 9.0 per cent of GDP, well below the regional average of more than 12 per cent.
Referring to studies, it said the low tax intake is the result of excessive use of tax holidays, basic design flaws in the tax laws and weak tax administration.
"Cross-country analyses and estimates of revenue foregone from tax incentives in Bangladesh find that there is potential to raise revenues by 2 to 4 percentage points of GDP, in broadly equal measure from direct and indirect taxes," said the report.
It also went on: "This would allow Bangladesh to catch up to the regional average, although generating such revenue would require fundamental tax reforms."
The multilateral donor, however, recommended a series of reform initiatives for improvement of the revenue intake in Bangladesh
Among them, it underscored the urgent need for broadening the tax base to generate more revenue, while lowering marginal tax rates to reduce distortions
In addition to that, it also laid emphasis on redrafting the value-added tax (VAT) and income tax laws to achieve a much simpler tax system that would broaden the base and reduce reliance on inefficient tax incentives.
"At around 4.0 per cent of GDP, Bangladesh has a relatively small annual development budget (ADP), compared with other countries at similar levels of development," it said.
Although capacity constraints and governance issues appear to be the primary factors affecting ADP spending, revenue shortfalls prior to FY'08 reduced the fiscal space available for higher spending, the report added.
Tax reforms that generate additional and reliable sources of revenue would increase the ability to finance higher and better quality public investment, with potential positive growth effects, it mentioned.
Also mentioning that maintaining macroeconomic stability will be critical to promoting investment in all sectors, it said all investment, and particularly foreign direct investment (FDI) that is likely to play a crucial role in building new export industries, relied primarily on expectations of a stable macroeconomic environment.
"Bangladesh's sound recent record works in its favour, although many of its main competitors have similarly strong records," it said.
On the other hand, the report said maintaining stability, particularly with regard to keeping control of inflation, will be important in prolonging the steady increase in investment seen in recent years and opening the doors for much larger volumes of FDI.
While the initial transition to the regime of floating exchange rate, according to the report, was generally seen as a success, there is more that needs to be done to improve the functioning of the floating rate system.
"In general, the system that was put in place in May 2003 needs to be developed further to improve the efficiency of the foreign exchange market and allow for the better integration of exchange rate and monetary policy," it said.
The report also suggested that Bangladesh should diversify its export basket in order to boost its earnings from the merchandise trade.
There are a number of factors that suggest that Bangladesh is well placed to expand its manufacturing exports, it said, adding a key factor is its abundant and relatively low-cost labour force, which makes it an attractive destination for investors looking to locate assembly operations.
Giving importance to a 'return to political stability' and continued improvements in the quality of governance, the International Monetary Fund (IMF) cast its hope that a clearer political environment would arise in Bangladesh after the December 2008 elections, facilitating the country's business and investment.
"A return to political stability and continued improvements in the quality of governance will also be important. A clearer political environment, which should hopefully be in place following the December 2008 elections, should assist the business environment," an IMF country report said Wednesday.
Prepared by an IMF staff team, the report also said continued progress on improving the quality of governance, particularly with regard to controlling corruption, will also be an important element in attracting high-quality investment in Bangladesh.
Also mentioning that a continued progress in structural reforms that reduce the overall cost of doing business will be critical in maintaining competitiveness, it also suggested that Bangladesh should give special attention to a few key areas to achieve the goals.
Among them, the report said access to reliable and affordable power regularly appears at the top of the list of constraints to doing business in Bangladesh.
"Making improvements in this area is critical to promoting industrial growth and needs to be supported by improvements in other infrastructures, notably roads and port facilities," it said.
Also focusing on the country's trade policy, it said despite substantial progress in liberalisation of the trade policy environment in the 1990s, Bangladesh still has one of the most restrictive trade regimes in the world. The report also mentioned that the country ranked at 113 out of 125 countries on the World Bank's trade restrictiveness index.
The IMF, however, suggested that Bangladesh need further efforts to liberalise the tariff system, particularly by reducing or eliminating supplementary duties that significantly increase protection on a large range of products.
About the trade facilitation, the IMF staff team also observed that building on recent progress in port performance, particularly by improving the efficiency of customs, would be important to encourage the country's trade further.
On the financial sector, the report also said improving banking sector efficiency and providing the environment for broader use of the stock and bond markets for corporate financing would encourage inward investment and development of the domestic private sector.
Bangladesh should improve the skill levels of its labour force in order to enhance productivity, it said, adding a continued attention to education and training is an essential part of maintaining long-run competitiveness in this sector.
Also identifying Bangladesh as one of the lowest tax-to-GDP ratios among Asian countries, the IMF country report said despite recent improvements, tax collection in Bangladesh still stands at around 9.0 per cent of GDP, well below the regional average of more than 12 per cent.
Referring to studies, it said the low tax intake is the result of excessive use of tax holidays, basic design flaws in the tax laws and weak tax administration.
"Cross-country analyses and estimates of revenue foregone from tax incentives in Bangladesh find that there is potential to raise revenues by 2 to 4 percentage points of GDP, in broadly equal measure from direct and indirect taxes," said the report.
It also went on: "This would allow Bangladesh to catch up to the regional average, although generating such revenue would require fundamental tax reforms."
The multilateral donor, however, recommended a series of reform initiatives for improvement of the revenue intake in Bangladesh
Among them, it underscored the urgent need for broadening the tax base to generate more revenue, while lowering marginal tax rates to reduce distortions
In addition to that, it also laid emphasis on redrafting the value-added tax (VAT) and income tax laws to achieve a much simpler tax system that would broaden the base and reduce reliance on inefficient tax incentives.
"At around 4.0 per cent of GDP, Bangladesh has a relatively small annual development budget (ADP), compared with other countries at similar levels of development," it said.
Although capacity constraints and governance issues appear to be the primary factors affecting ADP spending, revenue shortfalls prior to FY'08 reduced the fiscal space available for higher spending, the report added.
Tax reforms that generate additional and reliable sources of revenue would increase the ability to finance higher and better quality public investment, with potential positive growth effects, it mentioned.
Also mentioning that maintaining macroeconomic stability will be critical to promoting investment in all sectors, it said all investment, and particularly foreign direct investment (FDI) that is likely to play a crucial role in building new export industries, relied primarily on expectations of a stable macroeconomic environment.
"Bangladesh's sound recent record works in its favour, although many of its main competitors have similarly strong records," it said.
On the other hand, the report said maintaining stability, particularly with regard to keeping control of inflation, will be important in prolonging the steady increase in investment seen in recent years and opening the doors for much larger volumes of FDI.
While the initial transition to the regime of floating exchange rate, according to the report, was generally seen as a success, there is more that needs to be done to improve the functioning of the floating rate system.
"In general, the system that was put in place in May 2003 needs to be developed further to improve the efficiency of the foreign exchange market and allow for the better integration of exchange rate and monetary policy," it said.
The report also suggested that Bangladesh should diversify its export basket in order to boost its earnings from the merchandise trade.
There are a number of factors that suggest that Bangladesh is well placed to expand its manufacturing exports, it said, adding a key factor is its abundant and relatively low-cost labour force, which makes it an attractive destination for investors looking to locate assembly operations.