Bangladesh must revamp tariff rates and financial sector to meet global challenges: World Bank

To sustain the rapid growth of gross domestic product and overcome the current global challenge, Bangladesh needs to reform the existing tariff regime and the financial sector, the World Bank said in a report entitled “Change of Fabric” published as part of the Bangladesh Country Economic Memorandum. .

The global lender said that as part of the country’s export-led growth vision, it needs to address several policy issues to unleash private sector growth and investment, including tariff modernization, increased facilitation of trade, services and investment reforms, as well as regional integration and regulatory cooperation. .

With eroding trade competitiveness based on low wages and trade preferences, over-reliance on ready-made garment exports and a protective tariff regime are challenging the sustainability of Bangladesh’s growth model.

He said the average tariff rate on intermediate goods in the country is 18.8%, more than double the rate in China (7.4%) and almost double the rate in Thailand and Vietnam (9 .6%).

Average tariffs, or nominal rates of protection, more than double if para-tariffs are included, makes Bangladesh an exception among countries with a similar income level.

Moreover, with an almost 30% difference in tariffs, including other import taxes, between consumer goods and intermediate goods, which was also the highest in comparison.

Competitiveness will continue to erode with the expected graduation from least developed country (LDC) status in 2026.

The report says Bangladesh needs to reduce the level of protection by streamlining the tariff regime as a crucial first step to support export diversification.

Para-tariffs should be phased out, making the tariff structure consistent with that of an upper-middle-income country. Tariff rationalization was included in the eighth five-year plan, which stipulates the need to reduce the nominal protection rate by 3-5% every year until 2025.

Border and document compliance requirements cause significant delays for exporting companies in Bangladesh and, with a total of more than 300 hours needed to comply, these delays are among the highest in South Asia, the report also says. report.

She pointed out that the implementation of Bangladesh’s commitments under the WTO Trade Facilitation Agreement was 36% behind schedule.

To achieve the goal of the Eighth Five-Year Plan, the implementation of the national tariff policy was necessary along with increased digitalization.

Financial sector still lagging behind

Despite major progress over the past four decades, Bangladesh’s financial sector still lags behind its peers.

The process of deepening the financial sector has stalled in recent years, according to the World Bank report.

According to the IMF’s Global Financial Development Index, Bangladesh ranks 95th out of 184 countries in terms of financial development.

While others, such as China, Vietnam, Cambodia and Thailand, have bank credit to GDP ratios well above 100%, in Bangladesh the ratio has stabilized at around 45% since 2016.

Similarly, market capitalization to GDP has been declining since 2015, signaling the limited ability of Bangladeshi companies to raise long-term capital.

Long-standing vulnerabilities in the banking sector, amplified by Covid-19, hamper the efficient channeling of savings into productive investments. Chronic asset quality issues, low capital levels and weak governance constrain bank lending and pose substantial risks to stability.

The report pointed out that most banks are controlled by the owners of large business groups and politicians, and are heavily engaged in lending to related parties, diverting scarce financial resources from their most productive use.

The strong presence of the state in the financial sector, both through ownership of underperforming public banks and through interventions such as capping interest rates, further contributes to the crowding out of scarce resources from the private sector .

The existing regulatory and supervisory framework for the banking sector still needs to be aligned with international best practices to address existing vulnerabilities and promote bank financing to underserved market segments such as MSMEs, the report suggests.

The domestic capital market remains small and underdeveloped, hampering longer-term financing for infrastructure, housing and climate adaptation, he said, also pointing to limited growth and equity due to lack of investor confidence.

The small size of domestic institutional investors such as insurance and pension companies, and undue competition from the National Savings Certificates (NSC) scheme pose further challenges for capital market development.

The World Bank has found that administrative measures such as interest rate caps are not effective ways to reduce borrowing costs, nor will licensing help improve competition in an industry. bank already overloaded.

On the contrary, improving the operational efficiency of banks and reducing distortions in financial markets will help reduce the costs of financial intermediation and help channel credit to more productive sectors and firms.

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