World Bank Documentdocuments.worldbank.org/curated/en/223981467996771377/... · 2016-07-08 · vi. Achievement of obiectives: Although most objectives were at least partly achieved,

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15866

IMPLEMENTATION COMPLETION REPORT

BANGLADESH

SECOND INDUSTRIAL SECTOR ADJUSTMENT CREDIT(CREDIT 24270/1-BD)

JUNE 28, 1996

Private Sector Development and Finance Division

Country Department ISouth Asia Region

This document has a restnicted distribution and may be used by recipients only in the performance of

their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Currency equivalents

October 1992 (Credit approval): Taka 39 = US$ 1.00June 1996 (currently): Taka 41.75 = US$1 .00

Fiscal year: July 1 - June 30

Abbreviations and acronyms

ADB - Asian Development BankAIT - advance income taxASYCUDA - automated system for customs dataBBS - Bangladesh Bureau of StatisticsBEPZA - Bangladesh Export Processing Zone AuthorityBOI - Board of Investment (OPM)BSCIC - Bangladesh Small and Cottage Industries CorporationBTC - Bangladesh Tariff Commission (MOC)DEDO - Duty Exemption and Drawback Office (NBR)ERD - Economic Relations Division (MOF)EPB - Export Promotion Bureau (MOC)ESW - economic and sector workESAF - enhanced structural adjustment facility (IMF)FIAS - Foreign Investment Advisory Service (IFC/World Bank)FY - fiscal yearGOB - Government of BangladeshIDA - International Development AssociationIMF - International Monetary FundISC-1 - Industrial Sector Credit (IDA, approved June 9, 1987)JTI - Judicial Training InstituteMUPA - Ministry of Law, Justice & Par liamentary AffairsMOC - Ministry of CommerceMOF - Ministry of FinanceMOI - Ministry of IndustryMSTQ - metrology, standards, testing and quality managementNBR - National Board of Revenue (MOF)OPM - Office of the Prime MinisterPFP - policy framework paperPIAG - Policy Implementation Advisory Group (USAID/MOI)PRMAC - Public Resource Management Adjustment Credit (IDA)PSD - private sector developmentPSI - pre-shipment inspectionQR - quantitative restriction (non-tariff import barrier)SBW - special bonded warehouseSDR - special drawing rightsSED - supplementary excise dutySIPL - Second Industrial Program Loan (ADB)SOE - state-owned enterpriseTA - technical assistanceUNCTAD - United Nations Conference on 1'rade & DevelopmentUNDP - United Nations Development ProgrammeUSAID - United States Agency for Internati(onal Development

FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORT

BANGLADESH

SECOND INDUSTRIAL SECTOR ADJUSTMENT CREDIT(Credit 2A270/1-BD)

Table of contents

Preface ii

Evaluation summary

PART I: PROGRAM IMPLEMENTATION ASSESSMENT

A. Statoment and Evaluation of Objectives 1B. Achievement of Objectives 3C. MaJor Factors Affecting the Project 6D. Project Sustainability 6E. Bank Paeformance 7F. Borrower Performance 9G. Assessment of Outcome 10H. Future Operation 11f. Key Lessons Learned 12

PART II: STATISTICAL TABLES

1. Summary of Assessments 132. Related IDA Credits 143. Project Timetable 154. Credit Disbursements 155. Status of Legal Covonants 166. Bank Resources: Staff Inputs 167. Bank Resources: Missions 178 Trends In Nominal Protection 18

APPENDIXES

A. ICR Mision's Alde-memoire A-1Annex I Status qfpolkcy acWonm (marix) A- 4Anna 2 Sunmary of agencies' comments on draft AM A -12

B. Borrower's Contribution B-I

C. GOB Statement of Trade and Rogulatory Policy (June 18, 1992) C - 1

D. Map D-1

Thk documnt has brticted dtribudon an may be used by reiiet only In the perfomrmo of their offil dudi. Its contentsImay not othuwbe be dislosd without World lank authorizaon.

1IPLEMENTATION COMPLEllON REPORT

BANGLADESH

SECOND lNDUSTRIAL SECTOR ADJUSTMENT CREDIT(Credit 24270/1-BD)

Preface

This is the Implementation Completion Report (ICR) for the Second Industrial SectorAdjustment Credit in Bangladesh, for which credit 24270-BD in the amount of SDR 72.2 million(US$100 million equivalent) was approved on October 27, 1992 and made effective on November5, 1993 (original date January 1993). One supplementary IDA credit 24271-BD in the amount ofSDR 2.53 million was signed on January 22, 1993.

The credit was closed on December 31, 1994 (original date December 31, 1993). The firsttranche, released upon effectiveness, was fully disbursed by February 2, 1994. Final disbursementtook place on that date, and a balance of US$50 million was canceled on December 31, 1994.

The ICR was prepared by Charles Draper, Private Sector Development and FinanceDivision, and reviewed by Marilou Uy (Chief) and Abid Hasan, PSD & Finance Division, JohnWall (Lead Economist) and Fakhruddin Ahmed (Project Advisor), all of Country Department I ofthe South Asia Region. The Borrower provided comments that are included as Appendix B to theICR.

Preparation of this ICR was begun during a mission for this purpose in July, 1995. It isbased on material in the project file. The Borrower contributed to its preparation by contributingviews reflected on the mission's revised aide-memoire, commenting on the draft ICR, andpreparing its own evaluation of the project.

Although the Credit was closed on December 31, 1994 without release of its secondtranche, this report's deadline was extended to enable it to report rather than foreshadow the furtherprogress on implementing the program which the Borrower expected to make in its FY1995/96Budget and Import Policy. As noted in the report, good progress did occur in tariff reduction.

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IMPLEMENTATION COMPLEIION REPORT

BANGLADESH

SECOND INDUSTRIAL SECTOR ADJUSTMENM CREDfT(Credit 24270/1-BD)

Evaluation Summary

INTRODUCTION

i. IDA operabons in Bangladesh during the second half of the 1 980s supported industrial,energy and financial sector policy adjustment, and export development. The Industrial SectorCredit (Cr. 1816-BD, 1987), which followed an elaborate Trade and Industrial Policy technicalassistance project, inibiated adjustment in protection, finance, and public enterprise. Preparation ofthis follow-on operation was well advanced when first an interim and then a democratically electedGovernment replaced the former regime in 1990/91. It was resumed in parallel with preparation ofprojects for investment financing, public resource management, and technical assistance. The fouroperatons were approved during May-October 1992 (ICR Table 2).

PROJECT OBJECTIVES

ii. Obiectives: ISAC-I1 supported a wide range of reforms in three areas (pare 3):

(1) ImDort liberalization to reduce and rationalize effective protection and also to streamlineimport procedures through: (i) removal of controls and simplification of procedures, transferringprotection fully to tariff and exchange rates; (ii) reform of the tariff structure to yield nominalprotection in the range of 7.5 to 50 percent for most activities, as a step towards achieving a 0to 30 percent range by 1997 with the help of a reformed Tariff Commission; and (iii) coord-inating the tariff reform with expanded consumption taxation and reformed assessmentprocedures to make the latter more equitable and to safeguard revenue.

(2) Export Dromotion through: (i) improved coverage and operation of the duty drawback andbonding programs to provide direct and indirect exporters with world priced inputs; and (ii) amore strategic approach to other aspects of export promotion utilizing a strengthened ExportPromotion Bureau, matching grants, and deregulation.

(3) Private sector development through: (i) substantial deregulation and procedural reform toremove public control over private investment, relax exchange controls, and initiate the reformof business laws and legal process; and (ii) stronger promotional stance towards efficient

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private sector development (PSD) through reorganization of the Board of Investment,rationalization of fiscal incentives, and further mechanisms.

iii. GOB was also expected to maintain the macroeconomic framework agreed with IDAand the IMF in the policy framework paper (PFP) process, particularly with regard to the rolesof (i) the exchange rate in protecting production and (ii) trade neutral VAT and supplementaryduty in maintaining revenue during the tariff rationalization (para 4).

iv. Special covenants or agreements: None, other than the credit's own effectiveness andsecond tranche conditionality, but the achievement of its objectives was expected to befacilitated by several parallel operations already approved: (i) IDA's Export DevelopmentProject, which had initiated work on the export component, (ii) IDA's Sixth TechnicalAssistance Credit, to help institutional development in tariff codification, trade data and tariffanalysis, (iii) IDA's Public Sector Resource Management Adjustment Credit, to help maintainrevenue, (iv) ADB's Second Industrial Policy Loan, to promote privatization, (v) IMF's ExtendedStructu-al Adjustment Facility, and (vi) TA support from UNDP, FIAS, USAID and other donorsin the areas of deregulation and promotion (paras 9, 18, 19).

v. Evaluation: The objectives were mutually supporting, clearly understood, reflected aconsistent reform strategy, appeared realistic for an enthusiastic new Government committedto rapid reform, combined PSD and export promotion with less quickly beneficial trade reformto reduce potential opposition from the business community, and accorded with current Bankpractice. The design was elaborate, however, and the scope of the institutional changesrequired proved too ambitious for adequate achievement in the prescribed time frame (para 5).

IMPLEMENTATION EXPERIENCE AND RESULTS

vi. Achievement of obiectives: Although most objectives were at least partly achieved, notenough of the specified agenda could be implemented for the second tranche to be releasedby the closing date, which had been extended a year:

(1) The identified goals in import liberalization have been substantially achieved, with the keyDCA requirements met. Tariffs were reduced to the planned range without revenue loss dueto the expected trade expansion which it allowed. Delays, shortfalls in compression, andretention of QRs on a few items, however, have slowed progress towards low and uniformrates of effective protection (paras 7,13).

(2) In export promotion several policy impediments have been removed on paper and partly inpractice, particularly with respect to the schemes to assure exporters better access to worldpriced inputs where the formal DCA requirements were met fully. On the other hand, some ofthese improvements and other elements of the program have yet to be implementedsufficiently to give more positive support to export diversification (para 8).

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(3) A strong start on the Dnvate sector development component significantly improved theclimate for private investment in 1992-1994. Investment controls were removed and exchangecontrols significantly relaxed. Institutional initiatives were not pursued sufficiently within thecredit period to yield further improvements, but their scope and the public discussion theygenerated had a positive psychological impact on both investors and bureaucrats (para 9).

vii. Sustainability: The reforms that have been implemented so far are expected to be atleast sustained, since their success is already manifest, they have helped establish the privatesector, especially exporters, as the main players in industrialization, and they have shown thevalue of balancing consumers/users' interests against those of producers. With political will forreform expected to continue under the new Government, the increasing strength of the internalMexport lobby", and perhaps further external encouragement, the process of transformationinitiated under ISAC-II should prove sustainable as well. This has been indicated already byactions taken since the credit closed, such as further tariff reduction in 1995/96 and plannedinstitutional strengthening in tax administration and tariff analysis (paras 12-14).

viii. Financing and schedule: The $100 million equivalent credit was supplemented by$3.5 million equivalent in IDA reflow finance, allowing $53.6 million to be disbursed promptlyafter the credit became effective in November 1993. This was nine months later thanexpected and the closing date was extended by a year to December 1994 to allow for thesecond tranche to occur after GOB's June/July 1994 Budget and policy orders. In the event,insufficient progress was made in some areas and the credit closed without tranche releasewhen completion of the agenda by the following Budget could not be promised to justify afurther extension. (Tables 3, 4, 5).

ix. Key factors: The project's successes were mainly due to: the Govemment's originalcommitment to reform (with some policy decisions taken in advance of credit approval); thedetermination of the Finance Minister and several key officials to overcome bureaucratic andother obstacles to the promised implementation of policy changes; and the combination ofPSD with trade reform in the project design to hamess the support of the business community.The delayed effectiveness and failed second tranche were due partly to late starts and weakperformance in implementing the preparatory activities scheduled to occur at the beginning ofthe credit period. Unfortunately, just as momentum was belatedly picking up in the secondyear (allowing several tranche conditions to be met), the worsening political situation distractedGovernment attention from completing the agenda. A third factor was the inherent difficulty ofmanaging institution building across various agencies within the limited period of anadjustment credit, even though only initial actions were required in most cases (paras 10,11).

x. Performance: The ratings for the Bank range from satisfactory for preparation andappraisal to highly satisfactory for identification and supervision (paras 15-19, Table 1.c), whilethe Borrower is rated satisfactory on preparation and implementation but deficient on covenantcompliance (paras 20-22, Table 1.d).

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xi. Outcome: The project's outcome was satisfactory -- even without second trancherelease - in view of: (i) the ufront loading' of policy decisions; (ii) the achievement of most of itsmajor objectives -- considerable tariff reform, world priced inputs for export, and removal ofmost import, investment and exchange controls -- and the high probability that these will besustained; (iii) the lesser importance of its shortcomings, which largely reflect the need formore time and/or support to perfect difficult institutional change; (iv) the expectation that theprogress made, though less than hoped, is already sufficient to achieve satisfactorydevelopment results, some of which are already manifest (paras 23, 24); and (v) the auxiliaryfunctions which the project performed successfully as a vehicle for technical collaboration, amedium for at least initiating institutional reform, and a catalyst for GOB/IDA/IMF dialogue on abroader reform agenda (para 15).

FINDINGS, FUTURE OPERATIONS AND LESSONS

xii. Findings: Three features of the implementation stand out (paras 7-11,23, 24): (1) Itproved feasible for Bangladesh to take significant steps towards both trade liberalization andimproving the climate for private investment within a very short period. (2) It proved moredifficult to make the necessary institutional preparations for deeper further reforms involvingagencies that were not central to the credit's "core" conditionality on trade policy where the IDAand IMF programs coincided. (3) The operation was expensive, but it served useful ancillarypurposes as a catalyst for dialogue, technical work and broader reform beyond its specificcomponents.

xiii. Future operations: Further reform, delayed during the political hiatus of 1995/96, isexpected to be resumed by the new Government now installed. Key areas for considerationinclude (i) completing the trade reform agenda, including the enclave facilities as well as tariffsand QRs, (ii) tackling law and legal process reform directly, (iii) rationalizing the corporate taxsystem, (iv) deepening the supporting framework for export product and market development,including MSTQ facilities and matching grants, and (v) advancing reform and investment inother sectors, especially finance and infrastructure, which are equally essential for the broadgoal of rapid industrialization. Other than discussions on further TA for the NBR and TariffCommission, planning of follow-up IDA operations to support such reforms also has beendelayed but can now resume. (para 25).

xiv. Lessons: Three main lessons were leamed to reduce the risk of partial failure insupport for complex reform programs: (1) Adequate allowance should be made for the abilityof an unconvinced and/or technically weak bureaucracy to thwart essential institutional aspectsof policy reform. (2) Projects which involve reform in several areas at once need commitmentfrom all concemed Ministers, with collective responsibility and/or strong leadership. (3) Acomprehensive reform agenda should be supported by several separate operations and non-lending instruments, either in series or parallel; this requires "dividing the pie" and may involvemultiple donors in a coordinated program of support. (para 26).

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IMPLFMENTATION COlMPLEION REPORT

BANGLADESH

SECOND INDUSTRIAL SECTOR ADJUSTMENT CREDIT(Credit 24270/1-BD)

Part I: Program Implementation Assessment

A. STATEMENT AND EVALUATION OF OBJECTIVES

1. The Credit was approved in October 1992 when a fairly new democratic Government,committed to a vigorous structural adjustment program, had continued to pursue soundmacroeconomic policies into the second year of an ESAF program and had initiated importantreforms in public finance to raise savings and public investment (supported by IDA's PublicResource Management Adjustment Credit, May 1992). Economic growth had already slowedto 3.2 percent by FY1991/92, however, and industrial performance had remained sluggishwith the exception of rapid growth in ready made garment exports under a multilateral quotaregime that favored Bangladesh. The balance of payments was stabilized after a return toflexible exchange rate management, but the apparently strong reserves position, then 5.4months of imports, was due to imports' depressed level as much as to the emergence of asuccessful garment export business. To achieve and sustain an overall growth rate consistentwith poverty alleviation, it was essential to promote industrial development by (a) resumingthe privatization process which had been stalled for almost a decade, and (b) stimulatingprivate investment.

2. Privatization was initially supported by the Asian Development Bank, while IDAworked with the new Government to design support for a broader agenda of trade andregulatory reform to encourage industrial growth based on private investment. Specifically,the Credit was designed to: "support the replacement of.. ad hoc regulatory and fiscal policymeasures by a more liberal and neutral trading environment in which industry, led by theprivate sector including foreign investment, could become a principal engine of development inBangladesh. This process would be facilitated by the removal of unnecessary regulation andGovernment's adoption of a promotional stance towards private industry and trade."1

3. Monitorable actions to these ends were specified in three areas -- import liberalization,export promotion, and private sector development -- in each of which some steps had beenimplemented or initiated by mid-1992.2 The following broad targets were to be achieved over

I Report and Recommendation of the President, para. 40 (Report No. P-5816-BD, October 2, 1992).

2 See column 2 of the policy matrix annexed to Appendix A.

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the 15 months following Credit approval (later extended by the 12 months ending December1994) through a detailed program of further actions:3

(a) Import liberalization to reduce and rationalize effective protection and also tostreamline import procedures through:* removal of controls and simplification of procedures not required for public health orother non-trade reasons, transferring protection fully to tariff and exchange rates;* reform of the tariff structure to yield nominal protection in the range of 7.5 to 50percent for most activities, as a step towards achieving a 0 to 30 percent range by 1997with the help of a reformed Tariff Commission;* coordinating the tariff reform with expanded consumption taxation and reformedassessment procedures to make the latter more equitable and to safeguard revenue.

(b) Export promotion through:* improved coverage and operation of the duty drawback and bonding programs toprovide direct and indirect exporters with world priced inputs;* a more strategic approach to other aspects of export promotion utilizing astrengthened Export Promotion Bureau, matching grants, and deregulation.

(c) Private sector development through:- substantial deregulation and procedural reform to remove public control over privateinvestment, relax exchange control, and initiate the overhaul of business laws and legalprocess;- stronger promotional stance towards efficient PSD through reorganization of theBoard of Investment, rationalization of fiscal incentives, and further mechanisms.

4. GOB was also expected to maintain the macroeconomic framework agreed with IDAand the IMF in the PFP process, particularly with regard to the roles of (i) the exchange ratein protecting production and (ii) trade neutral VAT and supplementary duty in maintainingrevenue during the tariff rationalization.

5. Though numerous, these objectives were mutually supporting, reflected a consistentreform strategy of the Government, and accorded with current Bank practice. They wereclearly understood when the Credit was approved, and remain so today when good progresshas been made on achieving many of them. They appeared realistic for an enthusiastic newGovernment which was (i) committed in its manifesto and in its Industry Policy 1991 tofostering an open and competitive economic environment for efficient and mainly privateindustrial development, and (ii) apparently determined to move swiftly on a comprehensiveprogram to these ends. The combination of PSD and export promotion with less quicklybeneficial trade reform reduced potential opposition from the business community. Inretrospect, however, as the shortcomings discussed below indicate, the scope of the objectivesproved to be too ambitious for their adequate achievement in the prescribed time frame.

3 See column 3 of the same policy matrix.

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6. Resistance from existing inefficient industry was initially harder to overcome thanexpected, but the most important area in which the objectives proved to be over-ambitious wasinstitutional: i.e. the need for radical change on various fronts at once exceeded the capacityof some implementing agencies without fully committed Cabinet oversight. While several ofthe agencies could handle their responsibilities well, the program design expected too muchfrom those which had to be strengthened or redirected tirst (even when only initial actionswere required). The design also underestimated the technical difficulty of getting initiatinglegislation through the legal drafting process, and the tenacity of opposition from adverselyaffected civil servants (notably in Customs houses and the BOI). All agencies are nowperforming better than at the outset, but the institutional reform explicit in the program wouldhave had to be undertaken considerably faster or started much earlier to ensure the expectedquality of implementation for the prescribed policy changes which did indeed occur on paper.

B. ACHIEVEMENT OF OBJECTIVES

7. The objective of impoit liberalization has been substantially achieved without revenueloss due to the expected trade expansion which it allowed. Steps were taken somewhat laterthan planned, however, and other shortfalls have slowed progress towards low and uniformrates of effective protection:

* Reduction of the maximum customs duty rate to 45 percent with a few exceptionsat 50 percent was delayed until FY1995/96. However, it occurred then without theexceptions at much higher rates that were anticipated when the target date was set forFY1993/94 (see Box 1 and Table 8 in Part II).

* Most import controls were removed under the program, leaving protection only foryarn and fabrics and a few other politically "sensitive" products still provided byquantitative restrictions rather than tariff rates at or above the new maximum.

Box 1: Big reduction in protection

1991 1996

Maximum customs duty (CD) rate 400 percent 50 percent

Average rate of nominal protection due toCD + 23. % license fee (LF) + part of 2; %advance income tax (AIT): Unweighted 89 percent 25 percent

Import-weighted 52 percent 22 percent

Estimated average rate of effective protectionfor manufacturing value-added: All industries 82 percent 67 percent

Excluding steel/engineering & food/dairy 93 percent 45 percent

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* Relatively minor aspects of the tariff rationalization program that were not fullyimplemented include: abolishing the 2.5 percent license fee; making VAT on textilesand supplementary duty trade neutral; minimizing the use of zero rated customs duty oninputs, at least until tariffs on outputs are much lower than 47.5 - 52.5 percent; andremoving a few remaining rate distinctions by type of importer.

* These shortfalls are attributable in part to the serious delay which occurred initiallyin strengthening capacity for tariff analysis, i.e. reconstituting and staffing the TariffCommission; the new organization is now functioning quite well, but has not yet hadtime to complete either a thorough cost/benefit analysis of the QRs or a general reviewof relative protection. Excellent progress has been made, however, on facilitating suchanalysis by simplifying the tariff code and improving import statistics.

* Some further improvements have to be made to streamline import administration:first, passbooks were abolished for most imports and some other redundant or intrusivepermit and flnancing provisions were removed by 1994, although the Government did

4not publish a new Import Policy Order to enshrine these revisions.

* Second, Customs clearance has been at least partially reformed through thevoluntary preshipment inspection scheme. Better performance may have occurred ifthis had been upgraded to the prescribed scheme -- comprehensive, compulsory,contractual, and including assessment offshore -- when it became apparent that thevoluntary approach would not ensure hassle-free clearance, equitable assessment, andimproved collections.

8. Performance on export promotion has been mixed. On one hand, several policyimpediments have been removed, particularly with respect to assuring many exporters betteraccess to world priced inputs. On the other hand, the Government was unable to implementsome elements of the program intended to give more positive support to export diversification:

* Great improvement has occurred in the operation of the duty drawback systemwith several hundred "flat rates" established by DEDO and remaining problems inhandling applications could be removed in the course of implementing the June 1995decision to delegate processing to banks.

* At least formally, the special bonded warehouse system which had facilitated thespectacular growth of garments has now been made available to any export industry;this will not be fully effective, however, until NBR develops an adequate monitoringsystem to quell fears of leakage.

* Good progress has occurred also on the removal of the already modest range ofcontrols and regulations, facilitated by the promulgation of an export developmentstrategy and the establishment of both a consultative mechanism (the reformed Export

4 The 1995-1997 IPO, effective April 1996, is now printed; its English language edition is due July 1996.

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Council) and improved policy making machinery (the Commerce Minister's task forceand the Cabinet-level National Committee on Export).

* Although the Export Promotion Bureau now has some private oversight, it retainsbureaucratic regulatory functions rather than focusing on being a professional serviceorganization (the program proposed to reconstitute it as a relatively small, autonomous,market oriented business with technical capacity for commercial advice to exporters).

* Similarly, the proposed assistance fund has not yet been fully implemented as amatching grant facility for product and market development with objective,transparent criteria (although funding was provided in the FY1994/95 budget).

* As for the unsatisfactory export credit guarantee scheme, discussions on itsreorganization were initiated in 1992 but have not been followed up.

9. After a very strong start on the private sector development component of the program,which significantly improved the business climate in 1992-1994, progress petered out andinitiatives were not pursued sufficiently within the Credit period to yield significant furtherchange in the climate for private investment. However, their scope - and public discussiongenerated by the process -- clearly had a positive psychological impact on both investors andbureaucrats. The shortfalls occurred especially in those elements that required complexinstitutional reform rather than simpler policy decisions:

* Early successes included the removal of investment and relaxation of exchangecontrols. Further progress has yet to occur on exchange controls after Bangladeshformally liberalized the current account and qualified for IMF Article VIII status;exporters must stiU surrender most of their proceeds and most imports require L/Cs.

* The formal removal of power and telecommunications from the list of industriesreserved to the State also occurred promptly, but a long delay occurred before seriouswork commenced on regulations to give effect to private investment in those activities.

* The transfer of the Board of Investment to the Prime Minister's Office andmobilization of TA (UNDP/FIAS) to assist its reorganization occurred on schedule.The reform process then stalled through inability to overcome employee resistance tothe restructuring of the staff, but progress has been resumed on redirecting theorganization since the Credit closed.

* A task force was established to launch legal and judicial reform, but it lackedpolitical, bureaucratic (Law Ministry) or technical support and momentum was lostthrough diversion of Government attention to the more formal (and yet unresolved) re-establishment of the Law Reform Commission. The Judicial Training Center wasestablished by legislation, but bureaucratic problems have delayed its becomingoperational.

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* The mobilization of TA in the Ministry of Industry (USAID's PIAG) to review theregulatory framework played a valuable role in identifying further obstacles, butparallel reviews of incentives in corporate taxation and broad aspects of investmentpromotion were commenced less promptly and lacked the analytical depth to supportpolicy action.

B. MAJOR FACTORS AFFECTING THE PROJECT

10. The unsatisfactory implementation of several of the project's second-year actions wasdue to inadequate groundwork for them in the first year. The program prescribed variousstudies that would identify and/or win support for specific approaches which it would havebeen premature to define precisely in advance if the Borrower were to retain intellectualcontrol of the program. Consultants were involved in some of these preparations, but theirweaknesses were due more to delayed recruitment, inappropriate selection, or limited scope ofwork than to poor professional performance. In other cases official task forces wereresponsible for planning the subsequent actions, but lacked adequate technical support.Officials of both the Borrower and the Bank bear some responsibility for these failures, butimportant contributing factors included the large number of parallel processes which moved atdifferent speeds and the multiple sourcing of TA activities on which some of the projectelements depended.

11. Such factors caused important parts of the reform program to run a year or morebehind their original schedule, delaying Credit effectiveness until November 1993 andextending the closing date to December 1994 (i.e. the middle of FY1994/95 which thusbecame the second year of the program). An unfortunate consequence was that, just asmomentum was picking up during that year, Government attention was distracted by domesticpolitical strife with the Opposition parties boycotting Parliament. Although progress continuedto occur, the Credit was closed since GOB could not justify a further extension of time -- evenwith restructuring -- by pledging to complete sufficient core program elements by theFY1995/96 Budget. IDA supervision missions had recognized the inherent difficulty ofcompleting the institution building elements within an adjustment credit period, and wouldhave proposed waivers on these if serious progress on them and completion of the core policyagenda could be assured. This course was precluded largely by worsening political conditions.

D. PROJECT SUSTAINABILITY

12. Those specific program items that have been implemented successfully are expected tobe sustained -- notably progress to date on tariff reform, confinement of import controls to afew "sensitive" products, reconstruction of the Tariff Commission, streamlined schemes forworld priced inputs to export, and removal of all investment and most exchange controls.Only a drastic -- and unlikely -- change of economic philosophy could reverse these reforms,or even preclude further, at least gradual, progress. The changes made so far have already

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been sufficient to put the private sector in the driving seat of industrialization, to establishexport as the core of growth and thus job-based poverty alleviation, and to introduce theconcept of the sovereignty of consumers over protected producers.

13. While it would be difficult to reverse the particular gains made to date, the project'ssustainability should be measured also in terms of its role in initiating a continual process ofreform to make and keep the policy environment supportive of private industry in a rapidlychanging world. The reform process has already been interrupted by 18 months of politicalupheaval, which precluded (i) satisfactory completion of the ISAC-II program's second stage(although some important actions such as further tariff reduction occurred after the creditclosed), and (ii) preparation of an expected follow-on operation in 1995-97. The politicalsituation now appears to be settled with a new Government taking office in June 1996.Although much of its announced policy is generally consistent with the reform processcommenced under the project, there may be a danger of delay in regaining the momentum --especially in those areas where (i) implementation is still well below expectations such as legalreform and investment facilitation or (ii) ISAC-II covered only some stages of multi-yearprocesses such as tariff compression and reduction to very low, pro-export levels.

14. With continued political will and increasing strength of the internal "export lobby"even the process of transformation initiated under ISAC-II should prove sustainable, althoughexperience elsewhere suggests that further external encouragement may be a useful adjunct tothese forces. Particular needs to help consolidate the progressive improvement of the businessenvironment include further institution building in the areas of protection analysis, legalsystem reform, export product and market development, Customs clearance, and bondedwarehousing. Other key needs that were not initiated under ISAC-II but are just as essential toits broad industrial development objectives include improved access to utilities and portfacilities, and acceleration of the financial sector reform and privatization processes.

E. BANK PERFORMANCE

15. One strength of the Bank's performance lay in considerable staff continuity, at bothheadquarters and the resident mission, from preparation through supervision. In addition, IDAallocated unusually large staff resources to the operation, in recognition both of the project'scomplex scope and of the auxiliary functions it came to assume as (i) a vehicle for intensivetechnical collaboration on trade policy and statistics,5 (ii) a medium for institutional reformwith complementary assistance from IDA and other donors, and (iii) a catalyst for dialogue onan even broader reform agenda. The quality of performance did vary at different projectstages, however:

S Technical work in these areas was gradually taken over by officials and consultants funded by TA-VI, butconsiderable technical input was provided by Bank staff and consultants, especially during identification and preparation in1989-1992.

-7-

16. Identification is rated highly satisfactory. It occurred in 1989-1990 when Bank staffresponded to the previous (Ershad) Govemment's apparent intent to make the garment exportsuccess of the 1980s sustainable through diversification, to readdress through importliberalization the SOE reform that had failed to occur under ISC-l, and to attack Customscorruption through a full-scale scheme for offshore assessment. The validity of the resource-intensive identification process was underscored by the maintenance of all the key programelements when the project was reactivated with an expanded agenda under a new Government.

17. Preparation began as soon as the new democratic Government assumed office in 1991,and also was resource intensive. It can be rated as satisfactory, yielding a program ofmutually supportive policy and institutional reforms which were essential for achieving thebroad liberalization, export and PSD objectives. It might have been better, however, if Bankstaff had been less persuaded by the positive manifesto of the new Government intounderestimating the ability of the bureaucracy to resist some of the specific reforms. Anotherweakness of this and the previous stages was that they incorporated intensive technical tasksthat might have been done better under separate TA or ESW tasks; staff were absorbed by thetechnical challenge of establishing the starting point for the program, and perhaps too ready forthe Bank to lead rather than assist the Government in preparation. It was recognized also thatan earlier TA operation with a longer horizon may have been more appropriate for theplanning and institution building elements that were being built into the design of anadjustment operation, but that option was no longer available.

18. Appraisal also was satisfactory in most respects: a two-tranche operation was decidedon, and key steps were spelled out for each agenda item, leaving flexibility where necessaryfor phase I studies to define phase II actions. It might have been better, however, if theappraisal could have been separated more clearly from the negotiations process. By now theproject's political momentum may have inhibited IDA's dispassionate appraisal of (i) theGovernment's effective political commitment and leadership potential across various Ministriesand (ii) some of the implementing agencies' propensity and technical capability to perform inthe absence of such leadership. More attention might have been given also to checking theactual priorities of the prospective private investors who should have been the primarybeneficiaries, although staff were conscious that the agenda was already broad. Other risks ofthe program stalling -- mainly through GOB's difficulty in sustaining its concern for generalwelfare goals over narrower short term interests -- were well anticipated, and to reduce themmuch store was set on the strengthening of the Tariff Commission and other internal elementsof the program as well as its close association with the IMF's PFP/ESAF process and theadequate size of the Credit.7 At the time, an adjustment operation was considered theappropriate instrument for the program, although the already modest balance of payments andfiscal rationales were undermined when (i) external reserves became even stronger as exportsuccess initially outran import liberalization, and (ii) the Government's fear of revenue lossthrough tariff reform proved groundless.

6 The Credit amount was doubled to $100 million mainly on the strength of this welcome determination on PSI.

7 In the event, the project was held together longer than might have been the case by these factors, particularly itssynergy with the IMF program as well as the respect of bilateral donors.

- 8 -

19. Supervision must be judged as highly satisfactory, the formal failure to complete theprogram notwithstanding. Throughout more than two years from approval to closure afrequent and well staffed HQ mission schedule was complemented by close field officesupport, implementation progress was reported in detail, problems carefully assessed, adviceplentifully given, and great flexibility shown in finding ways to give effect to the spirit andpurpose of each component wherever the narrowly predefined steps or timing proved difficult.Close cooperation was maintained with several others of Bangladesh's development partners,providing support in related areas. These included USAID (industrial regulation), UNDP/ITC(export promotion), UNCTAD (ASYCUDA), and the ADB whose Second Industrial ProgramLoan complemented ISAC-Il by promoting SOE divestiture.8

F. BORROWER PERFORMANCE

20. The Government commenced the project with very strong commitment to its objectives,and continued to regard it as an important symbol of its overall reform program and of donorsupport for its PSD and liberalization stance. At times the maintenance of this stance rested onthe shoulders of the Finance Minister against considerable political reluctance to realize itsoperational consequences. Several of the Borrower's implementing agencies worked very hardfor the success of their own components, in some cases throughout the whole preparation andimplementation period. In spite of frequent staff changes, the leadership of the National Boardof Revenue and its Customs wing stands out for sustained commitment to the direction, if notpace, of change while considerable vigor was exhibited at various times by the CommerceMinistry, Finance Division, Bangladesh Bank and Tariff Commission. A notable strength inGOB's performance comprised the valuable leadership role played by the Finance Ministry'sEconomic Relations Division in coordinating a variety of implementing agencies over a four-year period which saw several changes in their (and its own) key personnel.

21. Such changes in the Borrower's team were especially distracting when they involvednew Secretaries or Ministers (other than Finance) unfamiliar with the project. A second orderweakness, fortunately only affecting some minor components, was that some concernedMinistries (e.g. Law & Justice, Industry) were never sufficiently involved in the project designto establish ownership, even at the outset.9 In a few other cases, progress in otherwisesuccessful components was severely stalled by either uncommitted or unsupported seniorpersonnel; this problem was occasionally significant in subsidiary agencies of the CommerceMinistry (e.g. Tariff Commission, Export Promotion Bureau), the PM's Office (Board ofInvestment) and even NBR (Income Tax), while at other times some of these agencies made

a The Asian Development Bank's SIPL was canceled without release of its second tranche in April 1994 due toweak progress on the privatization program.

9 Ironically, the Industries Ministry which had initiated the project in 1989 under the previous Government wassidelined during project appraisal when (i) the BOI was slated for transfer to the PM's Office, (ii) Indust7y Policy 1991was guided by the Commerce Minister, and (iii) technical work under ISAC-Il's regulatory component, thoughoccurring in the MOI, was largely undertaken through the PIAG project that was separately sponsored by USAID.

- 9 -

fine progress. These dichotomies tended to occur when senior and middle level personnel ofan agency had different degrees of obligation to the program objectives, or when TA fellbehind schedule. Under these circumstances and in a political world, sporadic failures tomaintain all agencies' momentum was understandable; even with the Prime Minister's supportat critical junctures, it was difficult for the Finance Minister to keep such an inter-Ministerialprogram on consistent track.

22. On balance, allowing for the breadth of the reform program which was supported by asingle operation, and notwithstanding the failure of the second tranche, the Borrower'sperformance may be judged as satisfactory. Some key elements of the program were managedin a highly satisfactory manner over much of the period, while deficient performance wasconfined largely to subsidiary elements of the covenant for second tranche which requiredstronger TA support than was available. The main deficiencies related to the inability of theFinance Minister to ensure consistent cooperation from his Cabinet colleagues when the BNPGovernment was preoccupied with political rather than economic issues.

G. ASSESSMENT OF OUTCOME

23. The Credit's second tranche could not be released due to GOB's inability to implementthe textiles-related VAT and QR provisions, institutional reforms in BOI and EPB, and someother contractual elements of an ambitious, comprehensive reform program. Nevertheless, theproject' s outcome must be judged satisfactory in view of:

- the achievement of most of its major objectives -- considerable tariff reform, worldpriced inputs for export, and removal of most import, investment and exchangecontrols -- and the high probability that these will be sustained (Section D),

o the lesser importance of its weaknesses, which largely reflect the need for more timeand/or complementary IDA/other support to perfect difficult institutional reform, and

* the expectation that the progress made, though less than hoped, is already sufficientto achieve satisfactory development results.

24. Some of these results are already manifest. Even in areas such as investment andexport promotion, where specific program implementation was below expectations, importantcontributions were made to the creation of a more liberal and neutral trading environment inwhich industry, led by foreign and other private investment, could become a principal engineof development in Bangladesh. The strong upsurge in private investment in industry in 1994was helped in no small measure by investors' perception of the fundamental policy changeswhich the project supported. For this growth to be sustained, however, both completion of theinstitutional reforms to provide positive support and further progress on promoting competitionare essential. The project thus played key ancillary roles in advertising the Government'sachievements and identifying the need and scope for more technically demanding reform.

- 10 -

H. FUTURE OPERATION

25. None of the program elements has been abandoned and further progress is likely tooccur in each area as the political situation becomes more settled. The new Government -- andany likely successors -- are expected to maintain fiscal and monetary stability, flexibleexchange rate management, and continuing efforts to liberalize trade and remove unnecessaryregulations and procedures to promote the free market economy. In particular, the followingkey further steps are expected to occur in the areas initiated under ISAC-II, especially ifappropriate technical support is available for planning specific reform measures, evaluatingtheir implications, and steering their implementation:

* the NBR has firm plans (and expects TA) to continue the processes of streamliningprocedures for (i) Customs clearance procedures including more responsiblepreshipment inspection, (ii) the duty drawback and SBW schemes, and (iii) tradestatistics to support policy analysis by itself (revenue), BTC (protection) and otherparties;

* the next two Budgets could continue progress on tariff reform with more focus onrate compression,'0 to achieve by 1997 or 1998 the stated medium term goal of"effective protection at low levels prevailing in internationally competitive developingcountries" ;1

- meanwhile, more thorough analysis of the key textile subsector, already begun byBTC, could help the removal of (i) most remaining QRs without high tariffreplacement, and (ii) the main exception to trade neutrality in the VAT;

- QR removal should be helped also by more rapid progress on privatization -- or atleast and meanwhile full commercialization -- of SOEs in textiles and also in sugarproduction and petroleum import;

* a new, more thorough examination is required (and being planned) to underpin thedevelopment of a system of corporate taxation more appropriate to facilitate anexpected period of rapid industrialization;

* the institutional strengthening of the BTC is expected to continue with further TAexpected to begin soon, while it should be easy for the new Government to solveproblems stalling parallel reorganizations of the promotion bodies, BOI and EPB;

* the purely bureaucratic barrier to the execution of the professionally managedmatching grant scheme for export product/market development also could beovercome easily, while new initiatives are needed on other MSTQ support; and

10 The goal itmples a zero tc 20 percent noininal tariff structure, comprising only customs duty (i.e. no otherimport taxes such as license fee, urieimbursed advance income tax, non-neutral VAT or SED).

11 Development Credit Agreement S.5.01 (j)(iv) and Cabinet-approved Operational Guidelines for the BTC.

- 11 -

* progress should be accelerated on several aspects of the legal system, notablyplanning and implementation of further modernization in business law and especiallylegal process, supported by capacity building in legal drafting, judicial training(facilitated by the newly established JTC), and perhaps a proposed IDA operation.

I. KEY LESSONS LEARNED

26. These are three:

* First, even strong political commitment, a few highly competent senior officials, andvigorous Bank support may be unable to prevail in the face of an unsupportive bureaucracywhich is at the same time threatened by rapid change and technically weak in some key areasand thus empowered to thwart implementation of policy reforms. Effectively exploiting thepolitical commitment may require sidelining the through a mix of deregulation and powerful,autonomous, new support institutions. The alternative of adopting a more patient approach tosupporting institutional change -- i.e. outside adjustment operations -- may mean acceptingthe consequences of slower reform and, possibly, lost political windows; it is also doubtfulwhether institutional reform can be pursued successfully if not linked to a high-powered policyreform program.

* Second, adjustment operations cannot be fully successful without broad operationalcommitment and sharp focus on the agreed reform agenda within the political level. Ideally --and this also was lacking in ISAC-Il -- the Borrower should have a strong ministerial reformteam within the Government (as well as at the officials' level), taking collective responsibilityfor implementing the whole agenda. It is difficult for one or a few Ministers to engineercomprehensive economic reorganization if their colleagues have different priorities or ifsuccessful implementation of the economic reform program is not seen as an essential elementof the more partisan political agenda.

* Third, even if bureaucratic and reform leadership conditions were robust, there is highrisk in using a single Bank operation to support a comprehensive reform agenda with manyinterdependent features. The partial failure of ISAC-Il appears to illustrate the attraction ofthe alternative approach of dividing the reform pie into more manageable slices, within each ofwhich the essential interdependencies can be addressed sharply and separately from the broadercomplementarities among various areas of reform. Even if the ISAC-II program were themost appropriate design under the circumstances prevailing in 1991-1994 when manydevelopments needed to be initiated at once to jump start the transformation of the economy,subsequent phases of reform in Bangladesh should be supported by more sharply focusedlending and non-lending IDA instruments. These should be placed within a well coordinatedprogram involving a variety of donors, however.

- 12 -

L~~~~~~~i - ~ ~ ~ ~ ~ ~ - -1L-

C6 ' .

0-4~~0

Cu . 4 4 . .... .. 4~~~~. ... 44

c.4-4~ ~ ~ ~ ~ ~ ~ b

-"~~~~~~~~~~~~~~~~~~~~~~~ g

-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C U2,&--i

.'..4+.. -x ~~~~~~~~~~... .*... .

.0 : :~~~~~~~~~~~... . ... .. ... .. ..... .

Table 2: Related IDA Credits'

F ~ ~ ~ ~ ~ . . . . . . ... . .:X E : 7 RE7 fgC . .7f .. . . . . . .. . . . . . . . .

[0-;-;tit000tCredit flUe Pu E :0 rpose Month of Sta t by

; :i: i: :: : ~~~~~~~Approval:;:: Jul 31iy0996 -; -

.1. Industial sectorPolicy and institutionalchanges to boost XJune87 S s£0ed t;(ad; justment)ceit export, improve SOEsan bei Ma ;; 0f ;;¢; y 89;

2; Exportdevelopment:0: tProvide trade reit ad strnghenf;: : Aprilt890 t;; ;f-Closed 3t:;::;3it;:: :tproject export su:7;::30 n:pport instittions: Jun 94 0:: ::tfg- 0;:y;:- :

%. Energy setr; 0 :0 Resource develop:ment and investment; ;: 0 0April 89: C00l00-;iosed\0 ; adjustment credcit 000 ratioaization of pricing;Institutiona 0 ;:i0:; 0: -:Dec. 91

;4. Fincialw seto Seto plic eform; fnancial . ; ;June9Dj00 Closed

05.Frivae sector 00 Financing investment lending and ;;000May 92 ;0i;Disbursin

:6. t:Public -resurce ; 0::: Imprvin rtax uadministration and fpublic May tj 92Q-:-;f- :E 3rd.: -anch

-7. Sixth D000 technical 0X0 Strenghenin caact invariu area July92 OnAg-oihg4 -?$ ;

Following operation; ; ::00: ;0;t0000330 0:; 0t00;;0 ;0

1:.0 :Jute isector iadjustment g;Subsector policy; andenterprise E : : ;A;iJa. 9f4 0 tf 2nd $-tran-ebe

|?: credit restructuri5 rnng pendin0;f : :; :; g ---

1 Includes projects in the same sector/subsector as this project and adjustment operations with relatedobjectives. A limit of 10 years is observed when listing preceding operations.

- 14 -

Table 3: Project Timetable

Steps in project cycle Date planned2 Date actual/latest estimate

Identification (Executive Project Summary) November, 1988

Preparaion 'wth prevlous Gvernnent March 89 - Oct. 90with interitm Government Nov. 90 - Jan. 91'with eected:Government . MarchfApril 1991

Appraisal A Aug. 91 - March 92

Negotiations June 6-8 1992

Letter of development policy - June 18, 1992

Board presentation ._-_'_._ October 27, 1992~~~~~~~. .. . ... ........

'Signing .__-_._'_-_._-_. _. November 6, 1992

Effectiveness January 15, 1993 November 5, 1993

Second tranche release August 1993 canceled

Project completion December 31, 1993 December 31, 1994

Loan closing December 31, 1993 -December 31, 1994

Table 4: Credit DisbursementsCumulative, Estimated and Actual

US$ thousands

FY93 -Y94 Total

Appraisal estimate 50,000 50,000 100,000

Revised to includesupplement (reflow) 53,510 50,000 103,510

Actual 0 53,600 53,600

Actual as -of estImate -0% 107.2% 51.8%

Date of final disbursefent February 2,, 1994

2 As provided in the Report and Recommendation of the President.

- 15 -

Table 5: Status of Legal Covenants3

| greement Section Descr1ition or vent C e Vom e-

| : DCA0;i *V30.01 Periodic exhge ofviews Freq u0- eent consultations. -t.o pl ac.. .V TP) :on progresseon tne Project::: throgut Project mpe ntto

DCA .. Proceduel fox pocurement Complance wasatisf y. -

DCA ~ 3.03 Maintnne of accounts ; O veralsatisfaetoybut audit reports 0

| 00 ; t 000 0 iand audi£ t? ;;0 wer submtte latet (ill iJs;leprtsae

;: DCA: 0 : i5.°010 Efctveness cnditio ns0;0 A:- i;waiver oe ondition -reaiong i^toOcA OCI 7 ; 7: 5 iE; e .;:z or-Tro igidi;: :: th preparation of an action plan for

: : i;: ; u ;7:: : i: 00;:;000 :indutrial development -- wa giveng with0

31.02. Pr ~ ~ ~ EfecienssinNoebe 193afeDCA :eDt i 0:f ccouw:;:-;f:0:-tt: _Sles t t.Re-o4: -rrepa

;:: ::i :9i:;: S ;i: ; a ndWEAud; wa.U W .J (M. I. .. .; .; ..- ... ..0 ..9 :..~~~~~~~~~~~~~~~~~~~~~~~~~~~~. .. ......... . .. . ...... . .. . .

. ;DCAt:;t 0 Schdle 3 Tranche relesecondi&tions Severlsecndtranch relaecniin

th, (extended) ,losing. . .d..t; s c. uld

an the orrwer

Table 6: Bank Resources: Staff and Consultants I

staff-weeks

: :: ::iPrepartioVn t0 :: i 7 0 ;179. 6000iii0i 15.6E -:+: ->-: Ahe0ep 9 ti5 2:9 4

Negotiation 37.4 70 51,5t:0 ::37 l-: : lt l t:iE:f | ?000 |00: ii-;:f::i00:::. 57T

.. ~~~~~~~~~~~~~~~~.. . , ;,j,;... ....... .. b . M b, h i

Coi :: impletion -: t i -; -- 8.0 8.0.30;

3This table is based on Annex D5 of OD 13.05, Project Supervision.

4 Including extensive technical work that might otherwise have comprised TA or ESW tasks.

- 16 -

Table 7: Bank Resources: Missions

Stag orproject yeof: Monhth/year - -Number of Days In Performance

p r1'd d e -0 t ly a --- -- 6-- W---*- 'li - ---- --- -_____________________ ~~ ~~persons5 il rating'

1Identification through. Nov 88 4 22 daysappraisal Apr 89 3 17 days

Jun 89 2 10 daysJan/Feb 90 2 15 daysMay 90 3 .16 daysJul 90 3 8 days

.Recon, stde&rv.flon. wh Nov/Dec 90 3 I I days

: bunh9i Cow. - - Jan 91 3 7 days,- ep'' reswn ed , MaFwApr91d 4b - days

MAug91 1 6daysnew man(fe.to Ag9.6dy

Feb/Mar 92 2. 17 days

,Post-appraisal through May 92 2 .1ldaysBoard approval Jun 92 4 3 days' - -. .-. .

Supervision through Nov/Dec 92 .3 14 days-.effectiveness, .. '- ' -. .Jan.93 4 6. days 3

Apr/May 93,' 3 14 days 3

Aug93 3 7days 3-________________ _ -Oct 93 1 12 days 2

Supervion after Mr 94 3 :16 -days S.effectiveness May 94 2 10 days S

. - . ............... Oct/Nov:94 3 . 9. days S

Completion .. :.J'uly 95 . , ,: :-',,:',,,.,, .,- .... , 2' - '.' . '.' ''' .6 days _

5 In addition, most missions were joined by one or two resident staff.

6 Key to status as shown in Supervision Form 590.

7 Negotiations were conducted in Dhaka, June 9-11, 1992.

- 17 -

0) 0 C) -~~~~~~~~~~Z ;S, ". 0L

-~~~~~~~~~~~~~~~~~~~~~~ l

O Cs~~~~~~~~~~~~~~~~~~~~C

(' 04L 090

0' "~~~~~~

0 ~

I .~~~~~~~~ ......i i, G i . i40 W ti , i i 0- 4'-4o i i'0 t a i p - 0 i Ab:

Q 00CC :: : :t : I : :: : :::

0".ff 0 C Ca#C0 % 000t-CC UtCC N IACCO 0'4CCLA0% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Qv Oi.ILOCW N~ tII ; -: ~ t :: : 4t 0 :j: :::: : : :7 :::7 ;: : ::: ;; ;7~ ; :6 A '-P..CC rOOK a N CV:

0 . | : : -:: 7 :: :: 7~~~~~~~~i : :%no >... .. .. . .... . : :4p : : 0 i

Cs ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ -CD

0 - : -:0i :' fw .p.... p. i... ... : : .... .... oti%OV ,-4 A WV CD 0 o :

g o E o: f: :::: ::::::: i::f :ff............... 7:ff :E:::E::f. . : . .. .- . . . . . . . . . .::::. : . . . : : . . . . .: . . . : . . . .: . .. .:: . . . . : . .:7

. ¢ . ., 'L o TEi i i i i i i w i: 1 2 : 2; 8 w f W 000 - 0 0 X 0> S S42 00w 0¢0 390 t$% f9 D;¢00 ffr kn > :: 0 ; w t00 ~l ... O~~~~~~~~~~~~~~~~~~~. . ..::..;. . ; f7. .. ... .;:f: ......t : S;:::. ..X: : i: . . ..... -o e, ^ 7 ~~~~~~~~~~~~~~~.. .- I:-::7 ,:-: 7S,i . ...:: .: . .... ... .... ... .. ..

A.- W~~~~~

Nb.) N IA 0 4 4 Vt~~~~~~~~~~~~~~~. ... W 4N~~~~~~~. ~~~~~~~~~.~V N 4tAo o AO ~s o 4 W W A k tA 4 0 A O .O N 4' aC 1

O~~O ° b WiS :: : 7 A :S:'.00:0%4 ':::r.4 010*-f IsA .-' Ct 0 f.0-: ANtef O:::. J- ::;AS::.sS:::fi.Q..: V

.. . .. ......... 1.. ............ a 4 .

4 ...... .... .... ... A 0%::: Ia;::: C. .i: O W A : V; .:

CC R 0 > :: fiV90:0:;: i:iti:D:f:00: :iT?000:; :;X::000:; ;VV44141O:iV::;-f:::'St; ;;::fii'-00:.f:tA0 %LA'di-.:fCf::fC:: O 4 :1.....4. .... A. ..:.I.....

X P g . - :: V 'ME 200 ~~~~~~~~~Ar: : OV w. :i: .::: .:: ... WW! LA.t LA000;: LACE W:::f: b4:X i!t;::iT>:

0 : :S :E it?\°S::;iitiw:E ::;sty' A:f9- :ff..::'U.0. . .. .-0 ...E .i;E ; .t ... ...:;:f: ..;f:f ;.000fS? '-;;- :-

Appendix A : ICR Mission Aide Memoire

BanLladesh: Second Industrial Sector Adiustment Credit (ISAC-Ill

Implementation Completion Report Mission, July 1995:Aide Memoire, Revised

1. Discussions were held between concerned GOB officials' and an IDA ImplementationCompletion Report mission comprising Charles Draper, Sona Varma and Khurshed Alam during July8-13, 1995 to discuss the implementation and operation of the Second Industrial Sector AdjustmentCredit (ISAC-II) which had closed on December 31, 1994.2 The officials represented the EconomicRelations Division, Ministry of Commerce, Ministry of Industries, Ministry of Law & Justice, NationalBoard of Revenue and its Duty Exemption & Drawback Office, Bangladesh Bank, Bangladesh TariffCommission, Board of Investment, and Export Promotion Bureau. A draft of this note and attachedmatrix (Annex 1) was provided to all participating agencies on July 13, 1995 in order to solicitcomments which could be reflected to form the aide memoire of the mission. Agencies' writtencomments have been received and reflected in the text and/or matrix; they are also summarized inAnnex 2.

2. The mission enjoyed detailed discussions with each of these agencies on the progressmade in implementing their respective parts of the ISAC-II program, and on the need for theirsubsequent participation in preparing the Borrower's Evaluation of Project Implementation as anappendix to the ICR. The mission wishes to record its appreciation of the each agency's very helpfulcooperation. Since the more detailed views of the Bank and the Borrower will be contained in theirrespective sections of the Report, it was agreed that this aide memoire could best facilitate thatprocess by comprising largely the attached matrix, to record the current status of the policy actionslisted in Schedule C of the President's Report.

3. In addition, however, the mission emphasized the need to use the preparation of thecompletion report as an opportunity for GOB, not only to take stock of progress on the specifiedreform measures, but also to outline the current consensus on the goals and further specific stepsinvolved in continuing the reform process over the next few years. It noted that such consensus wasstill strongly evident with respect to all three of the ISAC-II program's broad development policyobjectives, viz:

(i) liberalization and rationalization of the import regime to remove controls and distortedincentives and facilitate trade and efficient development;(ii) replacement of policy and institutional constraints on export growth by active publicpromotion activities; and(iii) replacement of policy and procedural constraints on private sector development by itsactive promotion within a conducive legal, regulatory and incentives framework.

H.E. Mr. Morshed Khan, Special Envoy of the Prime Minister; Dr. Y. Farooq, Acting Chairman, and seniorcolleagues, Board of Investment; Mr. Abdul Hamid Chowdhury, Chairman, and senior colleagues, Bangladesh TariffCommission; Mr. Khwaja Ghulam Sarwar, Member (Customs), Mr. Mubarak Ali Mollah, Director General (DutyExemption and Drawback Office), Dr. Zahid Hossain and Dr. Fouzal Kabir Khan, National Board of Revenue; Mr.Shoeib Ahmed, Joint Secretary (Export), Ministry of Commerce; Mr. Shah Abdul Hannan, Deputy Govemor, and Mrs.Joslin Landell-Mills, Advisor, Bangladesh Bank; and Mr. Shah Jahan, Economic Relations Division, Ministry of Finance.

2 It had been decided to defer the ICR mission until July 1995 to enable the Report to reflect policy and institutionalchanges, consistent with the Program, which the Government might make by the end of FY1994/95.

A - 1

An outline of further actions planned to achieve these or other relevant objectives could constitutethe 'operational plan" for sustaining and deepening the reforms.3 This would meet IDA's formalexpectation of such a plan to be available at the close of adjustment operations.

4. In this connection, the mission was very pleased to note that good progress hadcontinued in implementing several aspects of the ISAC-II reform program since the Credit itself hadclosed. In particular:

* both the Import and Export Policy Orders are in advanced stages of preparation andwere expected to consolidate policy decisions consistent with the program, particularly in therelaxation of regulations affecting exporters;

* the tariff changes announced in recent Budget included a further reduction of themaximum nominal protection rate (to CD 50%, plus LF, AIT and textiles VAT), and, whileother changes may have increased effective protection for some activities by lowering rates oninputs, this would be reversed easily by subsequent steps in lowering the maximum rate;

* officials expect progress to continue on the phased elimination of the 'license fee" andthe few remaining user distinctions;

* as the BTC's study on the textiles subsector is proceeding apace, there was a goodchance that the basis would be laid shortly for removing the excess protection given by bothimport controls and unequal VAT treatment accorded to imports and domestic production offabric;

* after a delay, momentum is now being resumed by the PM's Task Force on Investmentpromotion, expected to lead to a comprehensive program to support private sectordevelopment;

* the performance of DEDO continues to improve with (a) most applications beingcleared within 3-14 days of receipt of export bills, (b) efforts under way to reduce the frequentdelay in such receipt, and (c) plans under active consideration to involve cornmercial banks inthe payment process; and

* institutional strengthening of BTC, already well advanced, is expected to continue withthe help of a further technical assistance project now being developed, as well as with thereturn of the staff undergoing training abroad.

4. The mission also emphasized the need for GOB to continue to press forward on otheraspects of the program initiated under ISAC-II, where progress has been less impressive so far. Itdrew particular attention in this regard to:

* protection - continuing the tariff reform and removing the import controls on somefabrics, salt, eggs, sugar, petroleum products, used machinery and vehicles, and a few otheritems;

* import procedures - accelerating progress on streamlining import procedures throughASYCUDA and voluntary PSI (although the mission welcomed the NBR's continuing efforts inthat direction through further computerization that could include a proposed valuationdatabase to replace tariff values);

3 To assist the Government's preparation of such a plan, the mission agreed to provide a draft of an IDA report inpreparation on 'Industrializing Bangladesh", which includes suggestions for continuing progress on most items in thereform agenda supported by ISAC-II.

A - 2

* promotion - overcoming the obstacles that have hampered the necessary developmentof three important institutional mechanisms for promoting export oriented investment: theBOI, the EPB, and the proposed matching grant facility; and

* legl reform - regaining the loss of momentum (apparently caused by delays inoperationalizing the Law Reform Commission) that has beset the initial steps in reformingboth business laws and judicial processes which had been expected to be taken within theISAC-II program period.

Since each of these remains important for achieving policy objectives that were agreed under ISAC-IIand remain valid, the mission suggested that the Government might use the opportunity of the ICRprocess to recommit itself to implementing programs of action to complete the reform agenda in theseareas too.

6. It was agreed that both sides would take these considerations into account when preparingtheir respective section of the Report.

Retised to reflect theagencies' commentsMarch 14, 1996

A - 3

Annex IBANCLADESH: SECOND INDUSTRIAL SECTOR ADJUSTMENT CREDIT (ISAC-f

Status of DCA Schedule 'C' Policy Actions by July 1995 (updated March 1996)

POIYORECIVE MESRSTM2 BEOR CRDI APPROVA ACIN TO BE TARE DNFA CREDIT0 STAU DV JUL 19S 19

::'S00:tS''.'--'#:fi,00, :':-::; L''f .f.f',-........... ,;r i - .. .. '.. m - - , .. ..+ .. ..iS .; ;

Liberallizatioa and rational-3 mnouMnIizetdfs a-AMiat1 1?okyiztion- ciftREicmport regme: (ff1).t: ;; E:;A: T:: : :;; ::: ::. :: : :::;to rmv cotl and Ef:fe:tiven00. Public00--000000;:;0E00 nmeuuotnstofus: tditn:: :distorted incentivesand * oos po to aow iq.. bias in trade regime over tam gol of tde .fo. : effeive. protefacilitatetrad*e and efficient live -Sied inFY93 Budgesped gemh;t tht this reduced totow leves reai'ling nuratiovmfly Coal uneiucdIa TC pa ddetes anprucion nlt %fawrtdionr&xe to loivl prviln hi coipeitv dvlopingm cwtrie(l g hiuso FY95 Budgeflsonal pRgm toad It

t .t. .... d.ve...ng o..ies . in BTCp.licyguidelin pnde .ver.p three Budes

A. linn 0ControlsU *IteplaoNspcitive ititnegative& ueistin Effive:n tess.pen ioPO S: Test motlycdifieh

. ~~ ~ ~ ... .. . . ........ : -

1i985,cneinginay ofih QR*ES i te fF0by 4dgit co:de publiito ad public aootmt of the

Removal of prohibitions and theselist cnindas te o nr Lit in1989. No oetion removl of: : Progressive CLdeleton trugh F93-FY9s5adnmstaiversntiosand ctdifulnvditdu rB:eovl1991. a) al but agreed CLte; a t but control rman MaiE) nfbric sal,

requiirements,other than reasonable b): ; :t0:07 :; ;::i ::: all :b311ut agred, codifiedIPO textitenu, eggsuga, peftrolumproducts,usdt

controls fiar nont-trade reasons. * Phaed rebioueaving 193 HS5-4 coes :on CL plus abou 4cpmssboos,: nmtchhncery/velddes, and a few oile iters

130 poups of oher IP rstritilonsi I)textin Junle1992. 4) impowtfinctions of CCIE n t neddfor Some wrere remtoved hutt rebuposed.Contols n plinscual_ ius/pacaging rviewed, rentained QEs:, and? :::

0 i: 7: ::::: V : ~~~~~~e) eprmitactivitiesof sctor Ministreswith Passtboosaboished,C IE cntraced, and

* OB agentto abolish most CL code items & IPO text conseqent retucturnrg oCIE#BOJher pennlt atvlties reduced, hu IPo for 1995-povuisin including passbooks & odher procedr:es not needed agea:ies' funtnions. 2000 delayed (Mar. 96) and nmay tot reflectfor the retand cotoa t.e: rmnoval of .1 redundan procedurs

a) 39 of present codes icuit pharmacuticaliptl & Second trandtc: Remtoval of remainingontrostxile itEu & controls fo raide resnstansferred fromt IPO apst frown agreed non-trade reqireents.

text, reandfor FYf93 only,

b) 54:ef preen odes lit non-trde reasons, andt;) otlber rsmnfrPSi iiiSp(tC t

qJSSilC reqmnes codified

own C:L (1*41 frontiPO text). :::

A - 4

POLICY-OBJE :-VES MEASURESTAKEN BEFORE CREDIT APPROVAL. ACTIONS TO BE TAKEN UNDER CREDIT STATUS BYJULY I MARCH 199

R Tadftstrltu're * ISC-suopprtedfationalization during 1925-90 btdmaximumn Effectiveness: ImplementatiosqbyOTS tsaeeed biFY94.

a:ustou duty (CD)rate r 150 witIh 200-350 hfor 12 publication) of agee LF and A1T chnges p

Comwessiol and rductin f luxury podup; followig CD ate changes: Furtherh S owing

rates ald sim fcation of a) apart Gun 4 ageed product-groups, all now estimated ector EPR average to ril to 46%

insnmients ine the: proteetive .D-8elnt urhae (VI.) & regulaty duty replaed by above 10O% to =<75% (modt) or 100O (some), for hsdsaty and 29%/e for agrktmine.

elmemnts oimpottaxation to I10%inrease in most CD rates below 100%. and a few b) about half(by CY91 impot value) ofnow at Dispersa of nomInald ratesXll high: coesint

remove bias among users/ exenmtio/ cemninm rmoved, in 1991. 100%to 75% or less, of variance 74, std deviation I9

iunpter idtrc stages and C) abou ou-quarter (by CY9J impot value) of

sles of productin and direction * GOB appov ofFY93 ps towards and FY94 roles for now above 50% to below 5004, including Maximum rate of CD4fLF+AI r-educed to 55%

Of sales. - ralionfiing CAtINAlTsdshIs: sipuicant inputs to a) & b), In FY96 (Lie. much beter tha expecd for

a ) C) as the eyprotive inlment in impott taxation d)all now blow '7.5% to 7.5 or l5% exept second tranche), reducig hport-Weighted

(with.VATISED r u. m agred itm atz, NfR average to about 20%. Effectve

b).no usa-defidCD rat; a) consolidation to eiTninite distinctions beween proect rates stl fairly high and diperad,

c) eight CDOlewls: :0, 7.5 15;:30, 45,40, 75 k perhaps tsm (all) & bwen siilar produa within HS-4 hoever, becaust

100% withb rdgs ( ) ae of bkput itth zero and low rates ha

* zeri for-spee nc4rd raaa been expanded, an

'7.5 firspeciled priary inpt, Second tranche: Implementation (by OTS user distdctions remain for electrical,

* 15J30145 for mon, w/scmuinal goods, publication) of phannaceutlcal and lwec"ldde.

* 60MM5/fl un nm r wrC ageeOK,O a) dual Cl) maxina -

(sm FY93 excepio:- see Effecovessa)7 *75%5o for BTC--pprovcd time-bound inhustry LF retained except on zer-CD Items and raw

d) LCAiumk fee (lF) applied as temporry revenue adjustment programs (perhaps 100%a in a few materals for some Industries

measu in FY93; agred ses),e) Advance income tax aippliedto ali tayer impotams 50/o for other inpons (acceptable revenue

coideratio pemnting),

b) other CD adjumenss needed to noke

eflive protecion moderate Rif most activite

any exeptions beingetiicitly ontthe basis of(BTC

rewmendatios

c) elmintion of LF.

A -5

POLICY OBJECTIVES MEASUREStAKIEN BEFOR CREDITAPPROVAL ACONS TOSBE TAKEN UNDER CREDIT STATUS BY JULY 199/MlC 1996

C.; Tradeneutral Taxes-: a0::o VAT lealted &extcted 1991 to tepleimportsa Effectene:nplenteniTioo(byOS Tanona:l arrAngemet fr FY94w bieen:...... ..... ...... .........-; :700ttax(SI).&domestecied ED) bu:iosd only t publicaion)eofstades itfor leves oter 2moreye peVAT

D e ;eqnn of COl ::DbO innis ot textils& cane other 4meic prothEiaexenqn; 7 CDIfISAIT with: saicor ceues to VAT, exemptio rtied on textilehiupsia

taxation .. .eplace.... ra - qpnt x.. (BED e ..n.a.few p . £. .(foYATxet domsitexiles) and BED.juxstfiedi.... ... .n ..t ... S A d :s 0s(M0 U 0 *Wy: pf ncnu yo vc ed amsorexted toinputsrfote poultrVtax intrumentsX, d emoval of: aGOB approl o: S&eond Irnche: plee..tiion.(OTS.of& dary.inFY96. : ::prutecint eltqem ts in the- a) rules fir SEDl at aevaul utsn sigtiflcantsxnge of final a) r Imoith oaf trade neutral taxatiowi of

consumptii tax rinshmrntu -dtohem lpoY cO posbleErevenuelo(sffromACDTdecdoase textlesti SD covegeareducedbdtEtereb) pi. for .... .. text.e (aial i FY9 b) Read ED sedue t a m CD natosnipta CDs f.l from 60% 4 or

reductio. fromm75/tonoOl to osd45e5o n in fom u rO

D. nmoert Administration * Frngnu do*ped attest =y _:jatoric ~Fijy..: I..mpot datandecuhfllaimpleenttintiafl

data cqtiledfor FY1 (BBS and C9I N daily 1.w Satoisatior NBRsd anuneetsa opeationa fo civdb F9n otnu ohpoe

Rasttly addsrto gtlyptsaa in main Cutm beanby 1992; reocln_scnetrcit a. eovn lhuhpolsocre iatmttin cuistoms clearance, idt: FY93 reaie dtans jsedobakaC:Y9I: :imps diaeacia an ning NIlEstff thri.replace O wIth ASYCUDA. More elaorate

auitableimfaoeincg of trnsadmomMabae, IDA-finaned advin nkid,zees*3 NB compstrtatio reunede butuaterexpitz b het.~~ > t _asS S __. . . . . . . .

bxstie txs nnuotst po ti data c n ateivities. in 2. :at::istcty procedur aWd pratmaonp of plannig eay. :: :

btipsctkwWasaums(PSIA) voreuttifomy 5 PSI 0$tdWWt0 Volu W entaw S effecive in. fY9om hn mroe

D.: Import Aadminmicesatrat990itonpoatngpeidwt gen? vluaionpreailngivera'san

......... ~~~~~~~~~~~~~~~~~~~~~~fImporte dand lacks dtyio asubst*ndeato

a OperalivFTedf SduI sad.I~)ntitd Y2 muh dtwfa. NR n b sh-e yF9a cnm ohpo

Rt ~ ~ ~ ~ ~ ~ rebaod(ht ot#ifre&tIFby IPrP~ .TVsat mayin Alhuherobeplacd by ipropoed vlution(a .........ui ... oa se . .... ...... ...... .... ..S taatt .....i .JA ~ n wih......ne ad r ev ipm

*00 ~ ~ ~ ~ ~ cvtt*t ietd,asyftaaeantt separat CS&d wi ed A rUA. ASYCUDlAboase

; l- - -0 - t00 0 -0 0 lrslOOWIDArev-ewJ;ohsImy

- >' A 1 6 0;zit 0:0 0 ;00 lihin 0 0JNK ... . .. mu . 0 W ;^ 0:i0 tpolkire" w"r oadeafonbu.......... ...... ..... ..... ~~~ ~~~~~~~~~~~~. . . . .. .: :: ... . . .... 7 7

tN 0b&+iiatYlOhs0I. ifass <i

A - 6

POLICY ORJECTIVES MEASURES TAKEN BEFORE CREDIT APPROVAL ACTIONS TO BE TAKEN UNDER CREDIT STATUS BY JULY 1995 / MARCH 1996

I. Protection Analysis * Effective protection studies unit supported by 1984-86 IDA- Effectiveness: Legislation approved after delay.firnaned Trade & Industry Policy Studies project; retained in I. Announcement of intended BTC reform (in

Development of public capacity to Bangladesh TariffConmission through FY92 but without advance of legislation). Restalfing, training abroad and nae ofhearingsmeasure, to assess, and to provide adequate expertise. commenced In FY94. Management (members)appropriate and intended levels 2. Conunencement of BTC operations with: strengthened in FY95.and pattern of industry assistance. . Decision in principle taken in 1991 to establish more a) satisfactory policy guidelines within or

autononous, better staffed Tariff Commission (BTC); IDA approved pursuant to its legislation, Modest 18-month TA contracted Nov. 93;TA-V funded advisory service & study tour to help formulate b) approved & satisfactory operating consultants mobtized quickly but computerspolicy guidelines & organization structure; Cabinet approval procedures, organization, staffing, budget & TA not operating until May 94.with amendment- of draf legislation in May 1992. requirements and work program

c) assignment of staff & mobilization of TA Severd subsector studies completed by TA

consultants; good progres made on CGESecond tranche: Satisfactory operation of BTC and modeling and In-house trainig In basiccompletion of FY93 studies_haringseports on: computIg. ERP methodology under develop-

a) industries most affected by the tariff ment (could enable genera protection review Inrationalization, FY97).

b) 'sensitive' impworts now subject to QP,

c) others agreed in selting the FY93 work Tertile study now ongoing after long delayprograrm, and (could aid reconsideration of QRs & VAT)

d) first annual report with general protedionreview. TAPP prepared for further TA in FY97.

A -7

POLICY OBJECTIVES MEASURFS TAKFN BEFORE CREDIT APPROVAL ACTIONS TO BE TAKEN UNDER CREDIT STATUS BY JULY 1995/ MARCH 1996

COMPONENT 11:

EXPORT DEVELOPMENT

Replacementdof policy. andinstitutionil constraints on National Cttee on Export, Minister's Tak

export growth by active Effectiveness lIplementation of agreed BE-DS Forete and better Export Council have

public promotionwactivitiet action plan and TA requirements for FY93-94 incl: facilitated Many reductions IR rCg. cousthaalt

a) establishment ofCabinet Ctee, Export In FY94 & 95. EPO codIying these hang

Council, Assistance Fund; delayed to Manrch 96

F. Export Promotion Stratecy b).EPB st rgfeing;

Stafftrcgtening and ITC & USAID assistance for EPB. c) satisfadory concrete steps to relax regulatory Plans to strengthen EPB not satisfctory (and

Provision of an integrated and other export service agenciem environment possibly incl. bans on reexport & not approved)

strategic framework for improving consignment sales (subj. to review).

and assessing policy interventions * EPB/MOC preparation of strategy with IDA assistance; Assistance fund (matching grant facility)

and public serces affecting GoB adoption and public announcnemt of comprehensive Second tranche: Satisfactory impleminention of fumded and policy gudenes reported to be

export developmenL Bangladesh Export Development Strategy 1992-2000. firtherneasures under BEDS. approved, but not operationaL

G. World-priced Inputs * Strengthening of DEDO office & stafffor improvemnent of Effectiveness: Satisfactory operation of improved/ Specified SBW inprovements completed tn

DD schemes USAID expert & equipment mobilized to help expanded SBW scwheme FY94. CD .& VAT on machinery (but not

Removal of the effects on export computerization and procedures; coordination of DD and VAT spares) exempt for all export. SBW license

production costs offiscal rebate procedures. Second tranche: period reduced to one year In FY96 unles

instrunments intended to protect I. Continued expansion & satisfactory operation of 100% export (concern about leakge) New

domestic market producfion or tax . Public announcemnent & satisfactory operation ofdrawback DD schemes including.extension oflsat rate superlsed scheme for leather.

domestic consumption. schemes with: coverage by 50 a month or other satisfactory

a) "flat"DDratessetfior.335 products, number. 700DD flat rates now set and further

b) nax pressing tinie reducedto,5 daysforflat & 4: disaggregasonunderway. Fast erprocessing

weeks foractual rate applicants: 2. Continued expani satisfactory operation of the neorm bat often delayed by port-to-DEDO

the SBW scheme, including proatingachinery/ trnsferof exportdoes. Use of banku for

* Special bonded warehouse facilities extended to 2 non- paresduty suspension fornon-100%exportm. payment: heduled to begin Oct. 96,

gsntirms asw Atrial. Apeoval4public on cenoie of SBW

imFprove nsenqmansion to iny by allowing:

*f a)nnbak-bc Cerdiazrngmnnl.. .. .. . -:

b advancet isnet of; of theelteroif last or next

c)I :Jd uty nspasinon maisny & spre (lO0%e rera

FYt93) w/ot nvlvnt ospno ring agenes, adi :00

A - 8

POLICY OBJECTIVES MEASURES TAK¢EN BEFORE CREDIT APPROVAL ACTIONS TO BE TAKEN UNDER CREDIT STATUS BY JULY 1995 MARCH 19%

COM{PONENT HI:

PRIVATE SECTORDEVELOPMENT

Replacement of policy and * Intrationa/local experts mobilized for Ministry of

procedural constraints on Industries studies to:

PSI) by its active promotion a) identify legaL regulatory and procedural obstacles to

within a conducive legal, industry (other than investren, import & export controls

regulatory and incentives covered below & in inport & expost components);

frameworkL b) review of efficiency of fiscal, fiancial incentives for

expert, location, small industries, etc.; FY94 action plas rather cursory, but PM's

c) review plans for BOI reorganization. Effectiveness: Fornulation of action prograrn for Task Force on Investment Promotion given

further reforns in FY93 (in addition to those noted broader PSD focus In FY95. Outlne produced

GOB approval and public announcement of some aspects of below) and in early FY94, based on inter-agency and discussed. Detailed action plan expected

program. review of MOI studies' findings. in FY96.

HP Investment Controls * In 1990, self- & private bank-funded projects deregulated, Effectiveness: Fully implemnented In IP revision, but no

and sanction ceiling for DFls & NCBs raised to Tk 100 & 60 1. Revision of IP-9 1, including: regulatory regime established for private

Withdrawal of public monopoly mnillion including up to 49W foreign equity projects. a) elirninatn ofBOIIBSCIC/BEPZA oversight of investment in power & telecoms.

and intervention in private DFI/NCB-funded projects & of all approvals,

investment decisions other than * Industrial Policy 1991: allocations, etc. other than for delivering Deregulation studies undertaken by PIAG In

reasonable regulation for social/ a) raised DFIINCB ceiling up to Tk 300 nm, incentives/services through BOLIBSCICIBEPZA; MOI. Environment & satety not Included, but

environmental protection. b) promised equal treatmnent for foreign investment, b) elimnination of requirement for approval of pollution control management studyc) set time liniits for DFI/ NCBfBOllBSCIC/BEPZA production capacity changes, and conunenced with ADB TA to Ministry of

approvals, and machinery imporls; Environment.d) replaced the indicative/priority/discouraged investment c) curtailment ofteserved list to allow private

schedules by 7 groups of industries reserved for public investment in power & telecom. (other industries to No further actions taken In FY95 except

investment plus provision for regulated industries. be considered), with public announcement thereof importlexport noted above.

* Elimination of requirements for public listing of funs with 2. Commencement of study on scope and

over Tk 10 mn paid-up capital and for approval of public implenentation of industrial regulation relating to

limited companies chief executive salary rates. environment & safety.

* GOB approval of further changes to be made in Industriat Second tranche: Satisfactory implementation of

Policy to remove project 4 other approval requirements. further reforms including those based on study of

industrial regulation & review of reserved

industries.

A - 9

POLICY OBJECTIES MEASURES TAKEN BEFORE CREDIT APPROVAL ACTIONS TO BE TAKEN UNDER CREDIT STATUS BY JULY 1995/ MARCH 1996

L Excbanee Controls * Return to flexible management in 19,91 aimed at maintaining Effectiveness: Flediblt management h1a been maintabinedLreal effective rate (REER) at its November 1988 level. 1. Flexible managemnent of the exchange rate to

Liberalization of the exchange allow the exchange rate to help, in part, protect Specifled controls were streamlInet In FY94policy regime to promote . Removal of requirement for approval of transactions failing production during tariffrationalization. with BB guidelines Ised and BI moI 4th4ongdomestic production and facilitate within transparent BB3/ BOC guidelines for commenced to fIhilitate approvast above theintemnational business a) remnittance of dividends and capital gains; 2. Satisfactory implementation of guidelne Since then, Taka made convertibletransactions. b) local borrowing of worldng capita by foreign-invested a) the recently announced relaxation and on current account but gudelnes and BO1

firns; streamlining of exchange controls; and monitoring remain in place. Retentionc) remittances of salary (50%lo) and pension contributions. b) automatic access to foreign exchange for allowance increased hurther.

domestic farms' foreign training and consultancy* Announcement of similar liberalization for: expenses under satisfactory guidelines.

d) contracting, servicing & repnt of supplier credit & other

foreign borrowing; Second tranche:e) agreements & fee remnittance for technology transfer, 1. Continued satisfactory operation of flexiblef) local borrowing of term flinace by foreign-invested exchange nmanagement

firms;

g) remittance of savings on expatriate employees' departure; 2. Satisfactory implementation of further relaxationh) back4--back VCs against export LfCs. of exchange controls.

* Announcement of withholding tax for dividend and capital

gain remittance.

* Anrouncement of 10% export proceeds retention allowance

(5% for garments).

J. Legal Reform . Study on regulatory environmentt comrnmissioned by MOI Effectiveness: JTI Act passed and TAPP prepared but not yetrevealed need for urgent attention to laws & legal procedures I. Satisfactory arrangements for establ. Judicial operational. No progress on drafting staff(stil

Provision of an appropriate legal affecting business. Training Institute;and strengthening legal drafting only two professional draftsmen in MLJPA).framework for modern private staff in Ministry of Law, Justice & Par]. Affairs.enterpise 2. Completioni of a review, and fomnulation & Planning task fome in abeyance pending

announcement of a satisfactory program of reform proposed Law Reforn Conunission which wasof business law, legal institutions, and legal and approved FY94 but not yet appotnted.administrative procedures.

Companies Act gazetted but without EnglishSecond tranche: Satisfactory implementation of version yet; Bankruptcy BiB stUi in draft; littleinitial refonns. progress on othersm

A - 10

POLICY OBJECrlVES MEASURES TAKEN BEFORE CREDIT APPROVAL ACTIONS TO BE TAKEN UNDER CREDIT STATUS BY JULY1995 I MARCH 199C

K Investment Incentives * Contant (under PRMAC) to review dired tax stmcture, Effectivenest oenceanent of study to prepare Plan mde for study In FY93, ater delayed,

but witAot ugent ation to inives for busine and danges in the fsal regime affeting comnme and but resamed w Wlocl coutants who reported

Rationalization of the corpotate indary, study on incentives conmimed by MOL industry with resetto coprte tax ratts, in FY95

tax regime to promote private holidays, allowances and deductions, as well as

investment in productive adnminiatration, liability and appeal. Mhior redudtion in corporate tax rates FY95

activities. and FY9; tax hiday system extended S yea

Second trancbe: Satisfactory implementation of rather tia abolshed.

initial fiscal refurms.

L Investment Pf-omotIon * FIAS prposals on BOX structure. operatio and UNDP/ Effectiveness: BOI reorganization plan drafted FY94.

FLAS TA aenosed by BOI in 1990; revised propoals sought I . Fonnulation of action plan following review of Mobilized TA helped further plannig, but

Identification and rapid rtmoval in 1991 by Industry Seetary, new FLA repot preparedq Task Force report resitane to staff rtducton prevented approv

of cwnstaints on and & execution.

disincentives for domestic and * Bio transferred to PM's Office with upgpded Executive 2. Implementation of approved BOI reorganization

foreign investment. Chairman (but old premises and staffretained under new mandate, appointment of qualified Board Meawhile BO1 top namgesnnt Airther

menber substantial restaffing of secretariat, and hnproved and service procedues streamlned:

* Project document sigwed by GOBO JNDP/FLAS. mobilization of TA regitration delaya reduced. Numerous

external campaigns nounted hn 1994-95.

* Establishmnent of publicaprivate taskfosce wih broad swope to Second tranche: Satisfactory progress in BOI

form proposals on investmern pronotion. operstions and other agreed mechanisms to pomote Acts (BOI and Foreign Pvt lnvcstnent) still

and facilitate foreign and domestic investment in all under revison.

sectors of the economy.

PM's Task Force produced preUlminary report

on broder promotlon program focusng on

foreign hlvestment, but rm proposab awaited

A - 11

Annex 2

Summaru of Agencies' Comments on Draft AM

1. The Board of Investment agreed with the status shown for PSD in the July 13 matrix, andprovided a resume of the implementation of ISAC-Ifconditionality on investment promotion. Itrecalled that the BOI's effectiveness had been raised by its transfer to the PM's Office, theappointment of a senior Secretary as chief executive, and reorientation of its role reoriented fromregulation towards promotion and facilitation. Internal organization is still in process, however,awaiting approval of recruitment rules as well as MOF approval to enable restaffinrg. Amendmentof the 1989 BOI Act and the 1980 Foreign Private Investment Act are also in progress.Meanwhile, the sanctioning of private investments by any of six agencies has been replaced byautomatic registration with the BOI (for firms without BEPZA or BSCIC sponsorship); the need forBOI approval of DFI/NCB financing has also been eliminated, along with the ceilings on suchfinancing; and prior permission is no longer required for expatriates' remittances, technologytransfer fees, and foreign borrowing terms that fall within prescribed guidelines. Privateinuestment is now permitted in power, telecommunications and domestic air service. Someelements of an investment promotion action plan have been implemented, and a more far-reaching action plan to remove constraints to foreign investment is in preparation by a high-leveltask force. A moderate but targeted promotion campaign during 1994 and 1995 has featuredmedia materials, overseas missions and conferences, with events in Japan, Korea, Singapore,Malaysia and Italy, as well as a Euromoney conference in Dhaka and a UK investment delegationto Bangladesh.

2. The Ministru of Industnv also referred to some of the above deregulatory measures, andadded that the high-level task force's draft report had been presented to two meetings. It alsoreported that legal, regulatory and procedural obstacles to investment had been studied by MOIunder the PIAG project, and that a study on the management of industrial pollution control wasunder implementation, with part-I complete and part-II to be undertaken shortly.

3. The Ministru of Law. Justice and Parliamentaru Affairs commented that as of July 1995,appointments to the Law Reform Commission were expected shortly. The law to set up theJudicial Training Institute had been enacted.

4. The Bangladesh Tariff Commission provided a note discussing several analytical issuesraised by the mission. First, it recorded its agreement with the mission's observation thatlowering input tariffs may have raised some products' EPRs, which could be revised by loweringthe maximum NPR in subsequent steps. In more aggregate terms, however, it pointed out thatthe Revenue Board's estimates based on the FY87 I/O Table showed significant declines in thesectoral EPR averages for industry and agriculture. Weighted by value-added at world prices,these aggregate averages fell from 33.5 to 29.3 percent for agriculture and from 64 to 45.7percent for industry between FY93 and FY95. The BTC felt these rates were not 'high" for aleast developed country. Second, on the level of nominal tariff rates, it noted that the Bank hadreported Bangladesh's average of 26 percent to be below the average for other South Asia exceptSri Lanka in 1994, and that the import weighted average had fallen frrm 24.5 percent in FY94 toonly 18.8 percent in FY96 (NBR estimates). Third, the BTC discussed the mission's concernabout increasing dispersion of protection. It agreed that the NBR-estimated coefficient of variationin nominal rates had risen from 68.4 in FY94 to 73.8 in FY95, but argued that (a) standarddeviation is also a widely accepted measure of dispersion, and the SD in nominal rates had fallenfrom 24.5 to 19.2 in that year, and (b) in the estimated EPRs themselves, the standard deviation

A - 12

among 40 trade sectorsfellfrom 72.2 to 26.3 in the same year.' Fourth, on non-tariffprotectionfor textiles, the BTC questioned the mission's expectation that the textile study could lay the basisfor removing excess protection provided by QRs and non-neutral VAT. The local experts it hademployed to study factory data would recommend policy changes to encourage productiveefficiency in textiles and external competitiveness in garments, but the nature of these changescould not be anticipated. Fifth, the BTC doubted whether the QRs on otherproducts could beremoved without detailed studies. 2

5. The National Board of Revenue also questioned the mission's observation that effectiveprotection rates (from CD/LF) remain high and dispersed, and requested the supporting study.3On trade neutral taxation, it clarified that SD coverage expanded in FY96 when CDs fell from 60percent to 45 or 50 percent. On import administration, it noted that work on developing avaluation database was in progress and The World Bank had been asked to identify price datafor automobiles, chemicals, consumer durables and other consumer goods. Finally, it reportedthat two-year SBW licenses were still being issued to 100 percent exporters; other industries'licenses were now annual.4

6. The Dutu Exemption and Drawback Office agreed with the July 13 draft.

7. The Export Promotion Bureau reported that the Government had approved policy guidelinesfor the matching grant facility, and that 'disbursement offund is under process."'. It alsoreminded the mission that recommendations on its own organizational strengthening, which hadbeen made by a committee headed by the Additional Secretary, Commerce, were undergovernmental consideration.

8. The MinistrE of Commerce provided comments on both importpolicy and export development.It endorsed the BTC's reservations on tariff rate dispersal and also on textile protection fromQRs. However, it stated that theforthcoming IPOfor 1995-2000 would reflect a review of suchcontrols on a number of products, including textiles. The new IPO would also reflect recent stepsto remove redundant procedures. In the area of export development, the Ministry underscoredthe important roles played by the National Committee, the Promotion Council, and the Minister'sTaskforce in resolving impediments, and promised that more constraints would be removed soon.It also echoed the EPB's comments that recommendations for strengthening EPB were still underconsideration by the Government, and that the matching grant facility was "in the process' ofbeing made operationaL

9. Banaladesh Bank had no written comments. In the interview, its management defended theretention of guidelines (mostly annual or ratio ceilings) for various forms of outward remittance asa defense against capitalflight.

1 This situation could occur because the SD did not fall as much as the Mean did when a number of inputrates were changed to zero; although the SD may be "widely accepted" as a measure of dispersion, it is notnormalized over the distribution of rates and thus is a weaker measure than the CV, especially if used as a rough2predictor of EPRs.

The BTC management also gave the mission a detailed matrix describing progress to June 30, 1995 onthe technical assistance activity "Institutional Development of the Tariff Commission, Phase II" a subproject ofIDA's TA-VI Credit.3 The mission had used the NBR Advisor's estimates for FY95 and its own assessment that the picturewould not have improved in FY96 when more low or zero rates were set for input goods.4 It remains to be clarified which industries have one-year licenses.5 It remains to be clarified (a) whether the facility is actually operating, and (b) whether the policyguidelines and management process are satisfactory.

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Appendix B : Borrower's Contribution,

A. INTRODUCTION

1. Background & Objectives:

Government of Bangladesh requested the Association for a Second Industrialsector Adjustment credit to provide balance of payment support, expressing itscommitment to review and reform the policies and procedures that hampered thecontribution of private sector to the industrialization process. The credit proposed tradepolicy and regulatory reforms so as to stimulate and facilitate the restructuring andexpansion of potentially efficient existing industrial capacity and the development of newactivities that would effectively utilize country's human and other resources.

The credit supported the policy reforms in three critical areas i.e., (i) importregulation and taxation, (ii) export development; and (iii) private sector development.The proposed reforms were to be implemented in phases over a two-year period as peran agreed action plan.

B. CREDIT EFFECTIVENESS AND CLOSING

The credit was approved by IDA Board in October 1992 and made effective inNovember 1993 and was originally scheduled to close in December 1993. After one yearextension, the credit closed in December 1994 without release of the 2nd tranche.

C. IMPLEMENTATION EXPERIENCE

(1) The programme sought to implement, massive reform packages which involvedmultiple agencies in different areas. In view of very ambitious reform objectives in asingle adjustment operation, many of the agencies were not fully convinced about theout-come of the proposed reform activities because of inadequate study in therespective areas. Some of the agencies (such as the Ministries of Industries, Textilesand Law, Justice and Parliamentary Affairs) were not adequately consulted during thepreparation stage.

(2) IDA's estimates for implementation of so many reforms in diverse areas within soshort a period and through one single adjustment operation seem to be highlyunrealistic. Although credit closing date was extended by one year from December 1993to December 1994, the conditions for release of the Second tranche could not be metand almost half of the credit (US$50.00 million) lapsed undisbursed. This is a lessonWorld Bank may try to benefit from in the future.

D. ACHIEVEMENT OF OBJECTIVES

1. The objective of import liberalization has been achieved almost fully. Reduction oftariff rates have also been achieved satisfactorily. There were maximum tariff rates of100% and nearly 15% of all harmonized system (HS) items had rates above 100%.Moreover, the tariff structure was characterized by numerous anomalies with import taxincidence in the range of 75-100%. Tariff reduction and removal of anomalies began in1992-93 and gathered momentum in all the subsequent budgets. Presently the average

Not edited by Bank staff.

B-1

tariffs is only 26% with the highest rate of applicable duty set at 60%. The importweighted average customs duty rate in FY 95-96 has been estimated 18.87%. This ratewas 24.5% in FY 93-94 and 21.3% in FY 94-95.

2. Substantial change and improvements have been made in the Import Policies.Import controls and almost all non-tariff barriers have been removed gradually and at thesame time simplification and improvement of import procedures have also taken place.Presently there are quantitative restrictions on only 8 sensitive items and a few items offabric. Because of delay in the textile sector study, decision on the restricted fabric itemscould not been made as yet.

3. Tariff commission has been reconstituted and strengthened. The commissionconducted a Textile Sector study by the local consultants financed under TA-6 credit.Decision relating to removal of restrictions on fabrics and introduction of trade neutraland uniform taxation of textiles is expected to be taken by the government ofBangladesh after due consideration of the finding and recommendation of the study.

4. Import policy for 1996-97 has been published. Redundant provisions of theprevious policy have been omitted. Substantial changes and improvements have beenmade in the current Import Policy.

5. Several policy impediments have been removed and major policy improvementshave taken place in the export sector. Duty drawback system has been improved,special bonded warehouse system has been expanded for the export oriented units inalmost all sectors, controls on exports have been removed, long-term exportdevelopment strategy (1992 -2000) has been adopted and consultative mechanismestablished. Policy guidelines for Matching grants has been approved by thegovernment for export diversification.

6. Regarding Private Sector Development relaxation of exchange and investmentcontrols have been made. Procedures for private investment has been simplified. Now,Government is playing promotional rather than regulatory role. Private investment inpower, telecom and domestic aviation are allowed and encouraged.

E. SUSTAINABILITY

The reform programme implemented under ISAC-II particularly those related totrade liberalization, tariff rationalization, investment de-regulation, exchange liberalizationhas gained its own momentum and appears to be on course. There seems to be notdoubt that the reforms would be sustained.

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Appendix C : GOB Statementof Trade and Regulatory Policy

Ministry of Finance

Ga.rnmerwe of the Peope

Dkbb

No.MF/ERD/IDA-1135/88 June Ia. 1992.

Dear Mr.Preston.

Subject:- Second Industrial Sector Adtustment CreditStatement of Trade and Regulatorv Policy

The Government of Bangladesh assumed office with a clear mandate

to accelerate the country's economic and social development through

renewed reliance on a system of free enterprise that should release the

energies of both small and large entrepreneurs in the Nation's interest. It

is anticipated that private foreign investment and the official cooperation

of the international community, including tne World Bank Group. shouLd

play important roles in this endeavor. This appiles in many fields, not least

the industrial development which must be a critical source of employment

and growth. The purpose of this letter is to request the Associatioan's

provision of a second Industrial Sector Adjustment Credit that would

provide balance of payments support while facilitating our efforts to

reform policies and procedures that have hampered the contribution of

private enterprise to the industrlalization process.

2. In requesting a Credit associated with trade policy and regulatory

reforms, we are seeking the Association's continued involvement in these

critical policy areas. Our program in this regard is among several sets of

aproaches forming what we believe to be an effective stabilization-cum-

growth strategy. Together they should stimulate and facilitate the

restructuring and expansion of potentially efficient existing industrial

capacity and the development of new indrtital activities that will

effectively uttiize the country's human and other resources. The reforms

that are outitned in this letter will complement similarly ambitious

programmes for maintainig approptiate fiscal and monetary policies, for

strengthening and lIberalizing the financial sector, and for rationalizing and

reducing direct Government involvement in production and commerce.

3. In the proposd reform of trade policy, the Government is

cosolidating and extending the proceu of liberalization which has already

yielded a less restrictive trading environment In Bangladesh than in some

ConLtd..P/2.

other countries at a similar stage of deveiooment. Further. liberalization ofimports and exports to rationalize production incentives will beaccompanied by radical reductions in other types of constraint on privateinvestment and production. This reflects the Government's promotionalrather than regulatory stance towards private sector development. including

the provision of an attractive climate for foreign involvement in oureconomy. Many of the specific measures that we plan to implement inthese respects are heralded in the new Industrial Policy announced lastyear, while others are being formulated in accordance with principles andgoals discussed below.

4. The proposed policy reform programme for which IDA's support isbeing sought comprises actions in three areas...import regulation andtaxation, export development. and private sector development---organizedinto a two-year action plan. The import liberalization measures include thecommencement of phased tariff reforms scheduled to continue over anadditional three years for which further IDA support may be requested.These will leave active exchange rate management. already an importanttool for maintaining macroeconomic stability, as the most significant tradepolicy tool for ensuring the external competitiveness of industries and othereconomic activities by 1997. The other elements of the liberalizatiion willbe completed more promptly. with actions scheduled for the beginaing ofFY93 and FY94. This applies also to the export promotion measures toreinforce the import and exchange liberalization. as well. as to the actionswhich more generally cover investment promotion. investment and exchangecontrol, fiscal incentives, and legal system reform to facilitate privateindustrial development.

1. IMPORT REGULATION AND TAXATION

lmport controls

5. The import liberalization will occur, first, by completing the processof phasing out quantitative restrictions on imports and otherwisestreamlining import procedures, initiated under the first Industrial SectorCredit. All but 93 of the items/entries now on the Control List will befreed for FY93, along with the removal of most restrictions described inthe text of the Import Policy Order pertaining to non-CL items. Among thelatter are the present provisions pertaining to the use of local agents.import permits(except for CL Items) and opening L/Cs and foreign-invested

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firms' production capacity. As regards importation of second-hand and job

lot goods. a decision on withdrawal of restrictions on such goods will be

taken on the basis of recommendations of the Tariff Commission. Since

direct controls will no longer be used to defend the balance of payments

or protect domestic industry (with the exception of just 39 products for

which decontrol will be delayed by one year). we will dispense with import

passbooks and entitlements (except for CL items), and all similar

procedures and levies that have been associated with them, other than

offshore inspection and assessment. From the beginning of FY94, the only

controls remaining will be those applicable to a short list of highly

sensitive items and those that are required for the non-trade reasons of

public safety, security, health. religion. environment and social

considerations.

Tariff reform

6. Efficient industrializtion will be facilitated through rationralizing the

tariff structure to ensure the more neutral treatment for export production

and import substitution that is consistent with the country's comparative

advantage. Industries serving the domestic market will continue to receive

some assistance from tariffs, but their levels will become moderate and

otherwise designed to avoid large differences in effective protection across

existing and potential domestic production. Exceptions to this will be few

and temporary, in order to minimize their adverse impact on consumers and

on other production activities which do not receive such protection. Among

the latter are export industries that must become a major contributor to

industrial development and employment generation while competing at world

prices, and other industrial activities that could operate efficiently and

significantly enhance industrial added value if they have access to

reasonably priced domestic inputs. Our rxedium term objective is to remove

anti-export bias in the structure of effective protection through a series of

annual adjustments to compress and reduce the tariff schedule. To keep

the process moving and give a clear signal to investors on its outcome. the

medium term program includes the target of having effective protection

reduced progressively to reach low levels.

7. Initial steps towards tariff rationalization have been taken already in

th abolition of development surcharge and regulatory duty, the replacement

of separate import sales tax and domestic excise by trade neutral value

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added tax (VAT) and supplementary duty (SED). For FY93. the Government

will complete the process of reducing the maximum customs duty rate to100 percent with the exception of four product groups. in addition. abouthalf of the imports now rated at 100 percent will attract rates of 75percent or lower. and the rates on items of considerable import value willbe reduced from 75 or 60 percent to 45 percent. These reductions togetherwill mean that about one-quarter of the imports now rated above 50percent will come below that level. At the -same time, most concessionsand exemptions will be replaced by moderate rates applicable to allimporters mainly 7.5 or 15 percent. and other adjustments will be made torationalize the distribution of most imports among the 15. 30. 45 and 80percent rates. The process will continue in FY94, when the remaininginconsistencies among the treatment of industries and comparableproduction stages will be removed, including any concessions andexemptions not removed already. At the upper end of the schedule, use ofthe 75 percent rates (and if applicable 100's) will be limited to theprovision of temporary protection under time-bound enterprise or subsectoradjustment programs. Over the subsequent three years the maximum ratewill be further reduced and the structure further rationalized so as toachieve the above-mentioned 1997 target.

Industrv assistance

8. Enterprise or subsector adjustment programs under which higher thanthe normal maximum protection may be allowed on a temporary basis.would be designed to induce and enable the activities to operate with lowlevels of effective protection within three or four years consistent withremoval of anti-export bias. They will have to be sanctioned by the newNational Tariff Commission(NTC). which will commence operations at thebeginning of FY93 under a forthcoming Ordinance. This institutionalmechanism will help accelerate the tariff reform while avoidiag suddenwithdrawal of assistance for those industries which. have been shielded fromforeign competition by high tariffs or non-tariff controls On competingimports but which could adjust to the new environment if provided withtemporary tariff protection above 50 percent as they begin to adjust. Toensure that the Government is provided with impartial and technicallyshouldadvice in this regard. we have given the NTC a broad compass of factorsto consider in formulating its opinions. and we are accepting the

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Association's assistance in strengthening its technical capability. As well ashelping define the FY94 tariff changes under ISAC-2, the NTC willfacilitate further cuts during FY95-97 to rationalize effective protectionand remove the burden 'sick" enterprises now impose on the Budget,consumers. exporters and/or other producers.

Other imoort taxes

9. As noted above, customs duty is becoming the only instrument tosupplement protection provided by the exchange rate. Other import taxationis already trade neutral to a large extent. The Government proposes tocomplete the process for FY94. The fee for license permits or LICauthorizatioas. which we are retaining in FY93 as a temporary revenuemeasure, will be eliminated in FY94, provided a satisfactory mechanism forachieving revenue neutrality can be worked out.Another temporary measurein FY93 will be the reimpositlon of excise duty on textile and yarndomestic products to complement the VAT which now applies only onimports. We are currently reviewing a study on the restructuring of thetextile subsector, and will reform the tax structure affecting the subsectorin FY94 in a trade neutral manner. Including the imposition of VAT equallyon imports and domestic products if possible. For all other goods subjectto VAT, the flat rate of 15 percent is charged already on the duty-inclusive value of imports and the ex-factory value of domestic productsalike, fully creditable at subsequent production stages and for export sales.To help maintain revenue in the face of tariff reform, however, the VAT Issupplemented by the other trade-neutral instrument, SED. imposed at afew rates on an increasing range of non-essential final goods.

Import procedures

10. The tariff reform is being supported jointly by the removal of mostof the import control administration noted above and the strengthening ofimport tax assessment and collection mechanisms to ensure both promptclearance of goods and the use of published operative tariff rates for allImports other than under international agreements or to implement dutyrelief for export production. Three key elements of the proceduralinnovations to make the lIberalization effective are: tha publication fromFY93 of consolidated schedules of current Import duties and taxes: theforthcoming evolution of the customs Information system(CIS, establishedwith the Association's assistance In FY92) Into a fully automated system

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of customs datalASYCUDA. now being developed with UNDP assistance):

and. if necessary, the full implementation within FY93 of offshoreInspection aad assessment by professional agents to replace the "tariff

values" now used to prevent under-or over-invoicing. In FY92. we have

Introduced a voluntary scheme for pre-shipment iaspection and "greenchannel" clearance on a trial basis: we propose to conduct a review of thisjointly with (DA within CY92 to examine its effectiveness with a view to

agreeing on improvements. perhaps Inciuding its replacement by a

cornpulsory scheeme operated by agents under contract to the government.

M. EXPORT PROMOTON

Exooct strategy

11. The Government recognizes that the import liberalization measures

outlined above will Improve but not fully equate the incentives for export

with those for domestic market production. Therefore our reform program

features the development and implementation of a comprehensive National

Export Development Strategy. 1992-2000 with emphasis on removing

constraints. expanding markets and diversifying the export base.

The first component of the strategy relates to the increasedemphasis being accorded to exporting by creating a new Cabinet

Committee on Exports. the purpose of which is to facilitate

positive support for exporters throughout the government and to

engage in a regular dialogue with the private sector.

The second component comprises a series of concrete steps to

effect a relaxatioQ in the regulatory enviroament. Many

regulatory and administrative measures curreatly affect privatesector developmentJas a whole. while some are specific only to

export activities; to this end. we propose. inter alia. to review

the restrictions on re-exports and on "sale-or-return" export

shipments, and to permit retention of foreign exchange by

exporters. Initially five percent of proceeds.

The third component focuses on the critical importance of the

trade and exchange regimes. and in particular. the enhanced role

of the exchange rate vis-a-vis import controls and tariffs to

influence imports. ln addition. existing mechanisms for relleving

Import duty and taxation are to be further streamlined in order

to ensure world prices for inputs to direct and indirect export

producers(see below).

c - 6

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Fourth. more effective institutional arrangements for promoting

exports and foceign investment are being prepared through

restructuring programmes for the Board of Investment and the

Export Promotion Bureau. as well as the encouragement of

enhanced private sector represeatational arrangements.

Fifth, exporters and potential exporters will be encouraged to

increase the volume of overseas trade through a series of positive

steps to improve product and market development, particularly

through improved export marketing techniques, inward investment

promotion, and backward linkages in strategic industries.

Sixth, positive support will be accorded to the export community

in the provision of utilities, transport and other government

services.

The seventh component recognizes that both the public sector and

the private sector are hindered by a lack of expertise that

reduces their effectiveness in overseas marketing. An extensive

range of short and long-term training programs are in the course

of preparation to enable both exporters and service suppliers

within the bureaucracy to more effectively avail of the increased

opportunities offered througb the export strategy.

World priced inouts

12. Bangladesh has been trying for some years to implement an effective

regime to relieve export production of duties and taxes on inputs. and the

range of schemes now in effect comprises the Chittagong Export Processing

Zone and prospective Dhaka EPZ. special bonded warehouse (SBW) facilities,

duty and tax rebates. and Bangladesh Bank's administration of a 15 percent

cash compensation scheme in lieu of drawback for garment exports.

Important advances over the past year Include the introduction of creditable

VAT, strengthening of the Duty Exemption and Drawback Offlce(DEDO) with

an expanded range of "flat rates" to cover 335 products under the drawback

scheme (including for 112 textile fabric items), and extension of the SBW

facility on a trial basis to some non-garment industries without requiring

back-to-back LIC financing.

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13. For FY93. we will streamline DEDO's procedures for handling drawback

applications to enable payment within five days for flat rates and one month

for actual rebates. and to implement an efficient link between VAT and duty

rebate. In parallel. further improvements in the SBW facilities are being

implemented to make any indusry eligible under any financing arrangements.

to allow advance import of four months' input requirements to established

exporters. to relax the requirement for 30 percent value added in the case of

high value garments under certain quota categories, to remove the

Involvementof"sponsoring" agencies in machinery import. and to exempt duty

on machinery and spares. The last will be available for 1009s exporters until

a means of pro-rating the exemption for other export-oriented firms is

introduced in FY94. By then also. appropriate treatment of capital goods and

spares is to be incorporatd in the flat rate drawback scheme. Other

refinements already under serious consideration for implementation by FY94

include further expansion of the range of flat rates at the rate of about 50

a month. and mechanisms to promote enhanced value added through backward

linkages to indirect exporters (such as temporary admission arrangements for

fabric weavers and finishers supplying the garment industry).

M. PRIVATE SECrOR DEVELOPMRlNT

Investment control

14. 1 have alluded already to the imoortance of reducing regulatory

constraints on private enterprise, and to the specific efforts we are making

with respect to the import and export regimes. In parallel. we are

dismantling government intervention in investment decisions in several ways.

First. the Industrial Policy last year replaced all the investment schedules

with a short list of activities reserved to public enterprise. allowing free

entry in all other industries subject only to provision for the regulation of

some actlvitles. Among revisions to be announced shortly, we are further

curtailing the reserve list to allow private investment in the power and

telecommunications sectors. This would leave only airways and railways. arms.

ammunition and defense equipment and machineries, production of nuclear

energy, security printing and minting, and forestation and extraction of

reserved forest areas reserved for public Investment: we are initiating inter-

ministerial discussions to consider further contraction of the reserve list. We

are also commenciag a study to review the scope and implementation of

industrial regulations. with a view to limiting them to essential public policy

purposes relating to enforcement: this will be completed in time for

recommendations to be adopted by the beginning of FY94. Second. the

Industrial Policy is being revised to elimiaate requirements for Board of

Investment approval of private -- contd...P/9

C-8

projects with loans from public financial institutions. and for all approvals.

allocations, entitlements and registration by sponsoring" or "patronizing",

agencies other than for the purpose of incentives or services provided through

the BOI. BEPZA and BSCIC. Third. we have rescinded the requirement for

companies with capital above Taka 10 million to list their shares on the

Stock Exchange and the requirement for approval of chief executive salaries

for public limited companies in the private sector. We are continuing to

identify regulatory and procedural constraints and will remove them wherever

possible. including a second batch. to be agreed with IDA. by the beginning

of FY94.

Exchange control

15. As indicated, our need to promote export production drives our desire to

phase relatively high protection for domestic market production down as

quickly as possible, in favour of the more neutral protection provided by the

exchange rate. Yangladesh has a good record of exchange rate management

as a tool for stabilization. and we propose to use it more vigorously to help

develop our industrieslexternal competitiveness. In addition, we intend to

liberalize the excnange control regime in several respects at the beginning of

FY93 as part of our overall program of deregulating private enterprise. Thus

exporters will be able to retain a proportion of gross proceeds in foreign

exchange to facilitate their business activities; we are committed to

increasing tbe proportion as rapidly as circumstances permit. Transparent

guidelines will be issued for advance approval of suppliers credit and other

foreign borrowing, for technology transfer agreements. and for expatriate

employment: applications conforming with the guidelines will be approved

automatically and procedures will be established for the BOI to deal with

others within one week. Within Bangladesh Bank guidelines, approval is no

longer required for local borrowing of working capital by foreign invested

firms. nor for outward remittances to pay expatriate employees' salaries or

annual pension contributions. This applies also to remittance of dividends and

capital gains. for which tax withholding will replace the need to submit

income tax returns. In addition.we intend to allow domestic firms automatic

access to foreign exchange for foreign training and consultancy.

Legal environment

16. Another important way in which we propose to improve the

environment for private enterprise to operate efficiently relates to the legal

system affecting commerce and industry. The removal of bureaucratic

interventions as outlined above has enhanced both the need for and the

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Government's ability to provide an effective legal framework. We haveinitiated action to modernize our company law, further strengthen thefinancial loan courts law. and laws governing the securities market and non-bank financial institutions. tWith the assistance of FIAS, we are undertaking astudy to identify opportunities for streamlining and modernizing laws, courtprocedures and judicial performance pertaining to such topics asincorporation, contract, patents and insolvency. Based on the study'srecommendations. we expect to have a first batch of reforms designed andimplemented within FY93 to facilitate the establishment and exit of firms.enforcement of contracts, protection of private property etc. We are alsogiving consideration to the establishment of a business laws reformcommission to help ensure that the legal system will always keep pace withthe demands placed on it to support the country's economic development.

Fiscal incentives

17. Another field in which most reforms are proposed for the second yearof the ISAC-2 progran is the structure of fiscal incentives. A start has beenmade with the curtailment of tax holidays to phase them out by 1995 (fiveyears sooner than their previous end date). and with other changes outlined inthe statement of development policy which I gave you on March 30 inconnection with the Public Resource Management Adjustment Credit. Sincethen. we have decided to move more swiftly in rationalizing those parts ofthe tax system which affect the structure and performance of commerce andindustry. In addition to the removal of concessionary rates as part of thetariff reform program mentioned above, and the removal of interest ratesubsidies, we are undertaking a study on fiscal incentives covering thefollowirnareas during FY93 to make the direct tax regime more conducive toefficient private enterprise: standardization and lowering of the corporateincome tax rate: tax holidays: the requirement for exempted income to beinvested in government paper:tax on dividends: tax on income from exportproduction: use of accelerated depreciation and/or investment allowances; thedeductibility of interest charged but not paid; tightening of taxadministration through improved NBR procedures: liability for directors,managers and/or auditors responsible for financial statements: use of thesame accounts for tax and lending purposes: and establishment of appeal andarbitration procedures independent of NBR. Based on recommendations of thestudy, we will initiate necessary actions in the above areas to enable a firstbatch of reforms to be agreed between GOB and IDA and implemented bythe beginning of FY94.

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Investment oromotion

18. We intend the Board of Investment to become an important instrument

for the promotional stance the Government now has towards the private

sector. To this end. the BOI has been relocated in the Prime Minister's

Office. the status of its executive chairman has been enhanced. and further

organizational changes are now being made to reflect its new mandate. The

registration of new enterprises will be fully automatic by the beginning of

FY93. with the 301's sanctioning role completeLy eliminated. Instead, we are

,making it responsible for promoting investment opportunities, for assisting

investors. for helping us identify and remove other impediments to efficient

procurement, production and marketing activities, and for recommending

appropriate changes in non-tariff incentives for industrial development through

foreign and domestic investment. The assistance which the Association and

the International Finance Corporation's Foreign Investment Advisory

Service(FIAS) are providing on the B01 reorganzation should facilitate these

developments. particularly through FIAS's execution of the technical

assistance project financed by the United Nations Development Program which

was approved recently. Operational changes will be introduced from the

beginning of FY93. with any necessary legal changes to be made later in the

year. The process is being assisted also by the appointment of a

public/private task force to advise the Prime Minister on broad aspects of

private investment promotion. including but not restricted to the role of the

301.

CONCLUSION

Revenue and reserves effects

19. Since the tariff reform will be gradual and will involve some revenue

increases as well as decreases (i.e. the removal of concessionary rates and

replacement of quantitative restrictions will partly offset reductions in high

customs duty rates, removal of other import levies, and improved relief for

exporters), we do not expect the tariff rationalization to have a significant

adverse effect on public revenue even when taken alone. Moreover, some of

the lost revenue revenue will be replaced by trade-neutral SED to supplement

the basic VAT, and we anticipate a substantial improvement in duty

collection performance as a result of both short and medium term reforms in

border and domestic tax administration. As indicated. a key decision that we

may take in this regard is to expand the present voluntary pre-shipment

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inspection scheme by employing professional agents for the offshore

inspection and assessment of duty. This is complemented by computerization

of the Customs Service with the assistance of the Association. United Nationsagencies and other donors.By carefulLy coordinating these various policy andinstitutional retorms we expect them to have a positive net impact onGovernment revenue. thus contributing to fiscal stability even as the tradeliberalization is implemented.

20. Similarly, on the external account, we intend to accompany effective

exchange rate management with continued monetary and flscal discipline.This should enable the liberalization to occur even during a period when

increased import demand could precede the expected improvement in exportperformance.

Assistance reouested

21. In view of the strong commitment of the Government to the reforms

outlined above. and given the close involvement of IDA in the prepaL'ation of

each of the program's components. I request the approval of the Seco.idIndustrial Sector Adjustment Credit in the amount of S 100 million to assistin the continued implementation of the reforms.

Yours sincerely.

(M. Saif ur Rahman )

Mr. Lewis Preston,President

. International Development Association,1818 H Street, N.W.Washington, D.C.

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IMAGING

Report No: 15866Type: ICR