Assignment (Part 2)

Course: Fin444

Instructor: Sayba Kamal Athoi (SBK)

Prepared by:

Andalib Azfar Chowdhury 1120381530

Md. Shohagh Hossain 1130437030

Md. Noor Hossain Sarkar 1220477030

Abdullah Al Jabed

Currency fluctuations are a natural outcome of the floating exchange rate system that is the

norm for most major economies. The exchange rate of one currency versus the other

is influenced by numerous fundamental and technical factors. These include relative supply

and demand of the two currencies, economic performance, outlook for inflation, interest rate

differentials, capital flows, technical support and resistance levels, and so on. As these factors

are generally in a state of perpetual flux, currency values fluctuate from one moment to the

next. But although a currency’s level is largely supposed to be determined by the underlying

economy, the tables are often turned, as huge movements in a currency can dictate the

economy’s fortunes. In this situation, a currency becomes the tail that wags the dog, in a

manner of speaking.

Date Exchange rate

Jan 1, 201069.25 BDT

Jan 1, 201170.79 BDT

Jan 1, 201281.99 BDT

Jan 1, 201379.75 BDT

Jan 1, 201477.75 BDT

According to last 5 years exchange rate research of BDT against USD we see that there is a

fluctuation through the

past 5 year. But the

fluctuation was

significant in 2011 to

2012. After 2012 the

fluctuation was not

much significant. In

2010, the exchange

rate of BDT against

USD was 69.25TK.

After one year in

2011, the rate was 70.79TK and in 2012 it was 81.99TK. In 2010 to 2012 the exchange rate

was significantly goes up year by year. From the year 2013 the exchange rate was decrease to

79.75TK. Then again decrease the rate in 2014, at 77.75TK. Through the last 5 years the

highest rate was in 2012 and the lowest rate was 2010. At present year in 2014, the rate is

77.75tk. So, now the exchange rate is a little bit stable than the previous year.

Factors that are responsible for the fluctuations: The currency market is subject to

frequent fluctuations. The first question that comes to mind is “What causes these

fluctuations?” The primary cause of these fluctuations is, of course, a shift in demand and

supply. But, what causes this shift?

Movement of net exports: Net exports in Bangladesh are always negative since

its independence due to merchandise trade account imbalance. The size of the external

trade account deficit becomes smaller or larger at different time periods. The vulnerability of

the net export situation resulted mainly due to inelastic import demand of Bangladesh.

About eighty percent of Bangladesh exports are on account of woven garments and knitwear,

which in-elastically depend on the import of raw materials. The other important import

items namely consumer goods (basically food), machinery and petroleum products are

also inelastic in nature. An increase in net exports increases the demand for foreign

exchange and trends to put pressures on the BDT exchange rate against partners' currencies.

Interest Rates: Any change in the interest rates of a country directly impacts the value of its

currency. If a country raises its interest rates, the demand for and, consequently, the value of

Exchange rate60

65

70

75

80

85

69.2570.79

81.9979.75

77.75

Exchange rates of the BDT against the USD for the last 5 years

Jan 1, 2010 Jan 1, 2011 Jan 1, 2012 Jan 1, 2013 Jan 1, 2014

its currency will rise in relation to other currencies. When a country lowers its interest rates,

people will start earning lower interest on their deposits and investments, reducing the

incentive of holding this currency. They will then tend to buy other currencies of countries

that offer higher interest rates. This will reduce the demand for the particular currency.

Money Supply and inflation: At the time central bank of country will print more money, the

supply of money will increase in the market. Resulted purchasing power of customer also

will increase and resulted it will invite inflation situation. And as we know in inflation time

home country’s currency value will be weak and may be causes depreciate.

 

 

Economic Growth: High economy and fastest growing economy country push FII from

weak economy and developing countries. In this case they will sell their currency (weak

economy) and buy the other currency (strong economy). In this case if country’s currency

will face more supply and less demand value of currency will fall.

 Foreign Debt: Many developing and under developing borrowed the fund from international

bank like IMF, world bank and ADB etc. but this is unplanned borrowing . At current time it

adds in balance of payment but if we talk about future its obligation to pay the fund with

interest rate. And therefore it has seen the country which has taken more borrowed fund their

value depreciates in future.

Inward Remittance: The flows of inward remittances in Bangladesh have contributed

significantly to the external current account surplus recorded in recent years. It is also a

very important source of foreign exchange from the supply side of the foreign exchange

market in Bangladesh and thus can potentially play an important role in exchange rate

determination. In this context it is noteworthy that the remittance growth, especially during

the second episode, was disappointing (Fig. 6). The average growth of inward remittance

during the second episode was 8.29 percent where the historical average of inward

remittance was 18.86 percent (during January 2003-June 2012). The slower growth of

inward remittances certainly exacerbated the recent exchange rate pressure in Bangladesh

during the second episode.

FDI inflow: The FDI inflow in Bangladesh has generally been very low compared to most

comparator countries in the region. It was even lower during the two episodes under review

compared to the inflow in between the two episodes

Floating Exchange intervention: Although the floating exchange rate regime has

been prevailing, Bangladesh Bank has to intervene sometimes indirectly through selling and

buying of foreign currency in the market to mitigate the undesirable fluctuations in the

exchange rate. In this context, the amounts of net sales during the first and second

episodes were US$1135.9 million and US$1680.5 million, respectively. Market

interventions works to smooth out fluctuations due to temporary or short-term liquidity

problems and it never works when the exchange market is fundamentally in

disequilibrium. Since the interventions were made when the exchange market was

subjected to some fundamental shifts on the supply and demand side both working

toward larger excess demand for foreign exchange Bangladesh Bank interventions were

not sufficient to stabilize the market.

Foreign exchange reserves: Due to both domestic and external factors discussed above the

level of foreign exchange reserves was decreasing during both episode, in part

because of market interventions. Bangladesh Bank’s inability to stabilize the exchange

rate despite sizable market interventions and the consequent loss of reserves led to a sharp

exchange rate depreciation pressure in during the two episodes in Bangladesh.

Trends in inflation for the last five years

Inflation has appeared to be a major strain on the economy of the country in the recent past.

Though Bangladesh was enjoying lower inflation rates of below 6 per cent during the early

years of the current decade inflation started to rise since the beginning of 2004. After a short

spell of benign trend in terms of lower inflation and prices during 2008 and 2009, the country

has again started to feel the pinch of high inflation which is sneaking into the day to day lives

of common people. Since the second quarter of FY2009-10, inflation started rising and the

uptrend continued throughout FY2009-10 and FY2010-11. During the first five months of

FY2011-12 there has not been any change in the direction of inflationary movement. The 12-

month point-to-point consumer price index (CPI) inflation has reached as high as 11.58 per

cent in November 2011 compared to 7.54 per cent in November 2010. As in most years, food

inflation was higher than general inflation reaching 12.47 per cent in November 2011 as

opposed to 9.8 per cent in November 2010. High food inflation had a knock-on effect on non-

food inflation as well, pushing it upward to settle at 10.19 per cent in November 2011 from as

low as 3.33 per cent in November 2010. This reflects the fact that prices of food and non-

food items tend to move along the same direction though at a different pace.

As is known, inflation rate has been on the rise over the past three years. In the backdrop of

high level of commodity prices, the annual average inflation target for FY2012 was set at 7.5

per cent. However, general inflation (annual average) rate reached 10.6 per cent in FY2012

which was 8.8 percent in FY2011. Since the mid-2000s price level of food items became the

dominant indicator of inflation in Bangladesh

The inflation rate on point-to-point basis increased in June, 2013, which, according to

analysts, was due mainly to the rise in food prices and excessive rainfall that had largely

disrupted supply chains. In June, the rate of inflation stood at 8.05 per cent, remaining much

higher than 5.54 per cent in June, 2012, according to official data released Sunday by

Bangladesh Bureau of Statistics (BBS).

The annual inflation dropped for the third consecutive month to 6.6 percent in October this

year from 6.84 percent of September. In June, the closing month of the last fiscal year, the

rate was 6.97 percent and it inched up to 7.04 in July. The rate then declined to 6.91 percent

in August. The decline was attributed to decrease in fuel and food prices in international

market. However, food inflation increased in October despite a fall in overall inflation.

Inflation is maintaining downward trend in India too. It has influenced inflation here as

several of our food items are imported from India.

Trends in interest rate for the last five years

Interest rate is a rate which is charged or paid for the use of money. An interest rate is

often expressed as an annual percentage of the principal. The benchmark interest rate in

Bangladesh was last recorded at 7.25 percent. Interest Rate in Bangladesh is reported by the

Bangladesh Bank. Interest Rate in Bangladesh averaged 7.25 Percent from 2009 until 2014,

reaching an all time high of 8.75 Percent in September of 2009 and a record low of 4.50

Percent in October of 2010. In Bangladesh, interest rates decisions are taken by the

Bangladesh Bank. The Bangladesh Bank controls two policy interest rates: the repo rate

(repurchase rate), which it uses to inject money into the banking system, and the reverse repo

rate. From 2012 and 2013 was moderately constants rate.

Trends in income levels for the past five years:

Disposable Personal Income in Bangladesh increased to 31079.56 BDT THO in 2013 from

29606.81 BDT THO in 2012. Disposable Personal Income in Bangladesh averaged 18543.01

BDT THO from 1990 until 2013, reaching an all time high of 31079.56 BDT THO in 2013

and a record low of 6808 BDT THO in 1990.

Interest Rate Parity

Interest Rate parity means relationship between the  currency exchanges rates  of two nations

and their  local interest rates, and the essential role that it plays  in  foreign exchange 

markets. According to this concept, the difference between the market interest rates in any

two countries is about the same as the difference between the forward and the spot exchange

rate of their respective currencies. Therefore no arbitrage opportunity in the mutual trading of

their currencies can exist unless this parity breaks down. In practice however, due to the

government interference via currency controls, the full realization of this parity might not

occur. IRP can occur because of the international arbitrage. That is why to know about IRP at

first we should know what international arbitrage is and how does it happen. If covered

interest arbitrage is no longer feasible, and the equilibrium state achieved is referred to as

interest rate parity (IRP).

End-value of a $1 investment in covered interest arbitrage = (1/S) ´ (1+iF) ´ F

= (1/S) ´ (1+iF) ´ [S ´ (1+p)]

= (1+iF) ´ (1+p)

(Where p is the forward premium)

Equating the two and rearranging terms:

P = (1+ i H) -1

(1+iF)

Forward premium = (1 + home interest rate) -1

(1 + foreign interest rate)

This is the method that is used to calculate interest rate parity (IRP). Market forces cause the

forward rate to differ from the spot rate by an amount that is sufficient to offset the interest

rate differential between the two currencies. Then, covered interest arbitrage is no longer

feasible, and the equilibrium state achieved is referred to as interest rate parity (IRP). When

IRP exists, the rate of return achieved from covered interest arbitrage should equal the rate of

return available in the home country. Interest rate parity (IRP) basically influences the

interest rate and interest rate is related to inflation rate. Thus it makes a great effect on

exchange rate of two currencies.

Purchasing power parity (PPP)

The theory of purchasing power parity (PPP) attempts to quantify this inflation - exchange

rate relationship.

Home country’s price index (Ph) = Foreign country’s price index (Pf)

When inflation occurs, the exchange rate will adjust to maintain PPP:

Pf (1 + If ) (1 + ef ) = Ph (1 + Ih )

Where, Ih = inflation rate in the home country

If = inflation rate in the foreign country

ef = % change in the value of the foreign currency

Since Ph = Pf , solving for ef gives:

ef = (1 + I h ) – 1

(1 + If )

If Ih > If , ef > 0 (foreign currency appreciates)

If Ih < If , ef < 0 (foreign currency depreciates)

When one country’s inflation rate rises relative to that of another country, decreased exports

and increased imports depress the country’s currency. The theory of purchasing power parity

(PPP) attempts to quantify this inflation - exchange rate relationship. There are two forms of

purchasing power parity (PPP): (1) The absolute form of PPP, or the law of one price,

suggests that similar products in different countries should be equally priced when measured

in the same currency. (2) The relative form of PPP accounts for market imperfections like

transportation costs, tariffs Empirical studies indicate that the relationship between inflation

differentials and exchange rates is not perfect even in the long run. However, the use of

inflation differentials to forecast long-run movements in exchange rates is supported. It also

influences tariffs, and quotas. It states that the rate of price changes should be similar. So we

can see that PPP will influence the inflation rate of both home and foreign countries. It also

affects the critical issues like tax, tariffs, quota and also the transportation cost of a country as

well as the MNC’s.

International Fisher effect (IFE)

According to the Fisher effect, nominal risk-free interest rates contain a real rate of return and

an anticipated inflation.

According to the IFE, E(rf ), the expected effective return on a foreign money market

investment, should equal rh , the effective return on a domestic investment.

rf = (1 + if ) (1 + ef ) – 1

Where, if = interest rate in the foreign country

ef = % change in the foreign currency’s value

rh = ih = interest rate in the home country

Now,

rf = rh

(1 + if ) (1 + ef ) – 1 = ih

Solving for ef :

ef = (1 + i h ) _ 1

(1 + if )

If ih > if , ef > 0 (foreign currency appreciates)

If ih < if , ef < 0 (foreign currency depreciates)

The above process shows the method of using fisher effect. In the Fisher effect, nominal risk-

free interest rates contain a real rate of return and an anticipated inflation. If the same real

return is required, differentials in interest rates may be due to differentials in expected

inflation. The international Fisher effect (IFE) theory suggests that currencies with higher

interest rates will depreciate because the higher rates reflect higher expected inflation. Hence,

investors hoping to capitalize on a higher foreign interest rate should earn a return no better

than what they would have earned domestically. Thus the real interest rate and nominal

interest rate are influenced by the fisher effect in order to influence the currency as well as

the exchange rate.

Bangladesh, an emerging country of the South Asian Region, switched its currency

management from fixed rate system to free floating system in January 2003. Since then the

local currency Bangladesh Taka (BDT) is freely traded in currency markets. Therefore, an

academic interest is arisen to see how a free floating system is working for a developing

economy like Bangladesh. Although BDT has been made freely convertible to any currency,

the exchange rate with other currencies maintains links with the exchange between BDT and

USD. This is because Bangladesh maintains its total foreign reserves and settles all

international transactions in USD.

As a matter of fact that the effect of interest and inflation rates on the exchange rate

movements are opposite to the expectation of IFE and PPP theories. This may indicate that

liberalization of economy with unrestricted flow of funds may have its potential negative

impacts for the developing countries like Bangladesh where demand for foreign currencies is

always high due to more import payments relative to exports earning. This may be possible

because Bangladesh economy yet to be fully integrated with the global financial system, with

required structural changes to allow free flow of foreign and local currencies in response to

the changes in the interest rate and inflation differentials.

Although three major economic variables, e.g., interest rate, inflation rate, and balance of

payment play major role in determining the exchange rate between Bangladesh Taka and US

dollar, though the effects of interest and inflation is not consistent with the IFE and PPP

theories.

Government Regulations on Foreign Currency

Bangladesh, an emerging country of the South Asian Region, switched its currency

management from fixed rate system to free floating system in January 2003. Since then the

local currency Bangladesh Taka (BDT) is freely traded in currency markets. Therefore, an

academic interest is arisen to see how a free floating system is working for a developing

economy like Bangladesh. Although BDT has been made freely convertible to any currency,

the exchange rate with other currencies maintains links with the exchange between BDT and

USD. This is because Bangladesh maintains its total foreign reserves and settles all

international transactions in USD.

As a matter of fact that the effect of interest and inflation rates on the exchange rate

movements are opposite to the expectation of IFE and PPP theories. This may indicate that

liberalization of economy with unrestricted flow of funds may have its potential negative

impacts for the developing countries like Bangladesh where demand for foreign currencies is

always high due to more import payments relative to exports earning. This may be possible

because Bangladesh economy yet to be fully integrated with the global financial system, with

required structural changes to allow free flow of foreign and local currencies in response to

the changes in the interest rate and inflation differentials.

Although three major economic variables, e.g., interest rate, inflation rate, and balance of

payment play major role in determining the exchange rate between Bangladesh Taka and US

dollar, though the effects of interest and inflation is not consistent with the IFE and PPP

theories.

Bangladesh Bank’s transactions with Ads

Branches of foreign firms/companies including foreign banks, insurance companies and

financial institutions are free to remit their post-tax profits to their head offices through banks

authorized to deal in foreign exchange (Authorized Dealers) without prior approval of

Bangladesh Bank.

Bangladesh Bank's purchases and sales from and to the ADs are in US Dollar only, on

spot basis. All such transactions with Bangladesh Bank are required to be in multiples of US$

10, 000, subject to a minimum of US$ 50,000. ADs are free to quote their own rates, ready

and forward, for transactions in the interbank market and with their customers.

(a) The Central Banks of Bangladesh, India, Iran, Nepal, Pakistan, Sri Lanka, Bhutan and

Myanmar have an Agreement to settle current transactions between these countries through

the Asian Clearing Union (ACU) mechanism. All such payments to the ACU member

countries excepting those covered by loan/ credit agreements are accordingly settled through

the Asian Clearing Union (ACU) mechanism in Asian Monetary Unit (AMU, also called

ACU dollar)which is defined as equivalent to the US dollar.

(b) The ACU Agreement referred to above provides for settlement of the following types

of payments:

(i) Payments from residents in the territory of one participating country to residents in the

territory of another participating country.

(ii) Payments for current international transactions as defined by the Articles of Agreement of

the International Monetary Fund.

(iii) Payments permitted by the country in which the payer resides.

(c) ADs shall maintain nostro accounts in ACU dollars with their correspondent banks in

ACU member countries for the purpose of settlements through ACU. Similarly ACU dollar

accounts may be opened by the ADs in their books in the names of their correspondents in

ACU member countries. Ads may pay interest on the balance of Nostro A/C (ACU Dollar) as

per mutual negotiation.

(d) An AD needing to fund its ACU dollar nostro account with a correspondent bank in an

ACU member country shall do so through Bangladesh Bank against surrender of the required

amounting US dollar, or of equivalent taka at Bangladesh Bank's selling rate. Bangladesh

Bank will advise the central bank of the concerned ACU member country to make the

amount available to the transferee bank in that country. After making the payment, the central

bank of the recipient ACU member country shall advise the GM of the ACU secretariat to

credit its account by debit to Bangladesh Bank's account.

(e) For repatriating funds from an ACU dollar nostro account with a correspondent bank in an

ACU member country an AD shall advise the correspondent bank to route the payment

through the central bank of that country, which will advise Bangladesh Bank to make the

amount available to the recipient AD. Bangladesh Bank on receipt of the advice, shall make

the fund available to the recipient AD (either in US dollar or in equivalent taka. at BB's

buying rate, at the AD's option) and shall advise the GM of the ACU secretariat to credit its

account by debit to the account of the central bank of the transferor ACU member country.

 

(a) Bangladesh Bank operates a foreign currency clearing system enabling the AD banks to

settle their mutual claims in US dollar, Pound Sterling, Euro and Japanese Yen arising from

inter bank transactions; to economize the time and cost involved in settlements through

correspondents abroad. Under this arrangement, AD banks maintain clearing accounts

with the BB in US dollar, pound sterling, Euro and Japanese yen. Apart from the purpose of

settlement with other ADs, these accounts may also be used for transfers to and from

correspondents abroad.

(b) Settlement of the balances lying in each of the clearing accounts take place at the end of

each month. The Bangladesh Bank charges interest on the debit balance in an account on

daily product basis and debit the bank's account at the end of each month and pays interest on

the amount of credit balance at the rates prescribed from time to time.

(c) Operation of the clearing system is centralized in the International Department of

Bangladesh Bank, Head Office, Dhaka; but the ADs in other centers may transfer funds to

other banks through their head/main office in Dhaka.

After the Independence, Bangladesh adopted a policy of nationalisation of all large and

medium industries. So, there was no new inflow of FDI in the country until 1977. Subsequent

governments experimented with various industrial policies, but because of very uncertain

political situation in the country, the FDI flows remained negligible until 1993. Only 220 FDI

units were registered in Bangladesh between 1977 and 1993, but subsequently, FDI has

experienced a fairly high annual growth. The number of FDI units registered in the country

during the period from July 1996 to May 1999 was 425. The expected volume of total

investments in these enterprises accounted for Tk 288.8 billion. These would create

employment for more than 94,000 persons. Sectors that now attract FDI are readymade

garments, textiles and fabrics, chemicals, paper and paper products, equipment and

spares, printing, packaging, plastic products, metal industries, food processing, electrical

goods, pharmaceuticals etc. Of late, oil and naturalgas,

electricity, telecommunication, cement, hotels and restaurants, and hospitals and clinics have

become sectors favoured by many foreign investors. The choice of FDI in initial years was

limited in low investment, quick yield projects, while recent years show some diversification

in lines of high-tech, capital intensive projects as well as of preferential distribution within

the traditional sectors and sub-sectors. The share of agriculture, construction, storage and

communication, however, remains historically low and account for less than 3% of the total

FDI. Despite a continuous increase in the number of FDI projects registered with the BOI

over the last few years, the net FDI flows into the country remained low and in 2005, the

figure accounted for around 1.3% of the county’s GDP. In 2007-08, the BOI recorded 143

proposals of FDI projects with a total FDI of Tk 54.33 billion, while the corresponding

figures for 1995-96 were 127 and Tk 62.61 billion.

The industrial policy of the government provides extensive incentives and facilities to attract

FDI in Bangladesh. These include tax holidays, concession in import duty on machinery,

repatriation of profits dividends, invested capital and capital gain, and salaries of foreign

personnel and exemption of tax on these incomes, exemption of export oriented industries

from paying local taxes, up to 90% financing of the L/C value of export products. The

government has liberalised the trade regime and significantly reduced non-tariff restrictions.

Foreign investors in Bangladesh have access to domestic capital markets for working capital

in the form of loans from commercial banks and development financial institutions. They also

have access to the services of the country’s stock exchanges. Export-oriented industries of the

thrust sector (toys, luggage and fashion articles, leather goods, diamond cutting and

polishing, stationery goods, silk cloth, gift items, cut and artificial flowers and orchid,

vegetable processing, and engineering consultancy services) are provided cash incentives,

venture capital, and other facilities. The establishment of export processing zones (EPZ)

proved to be an effective step in attracting FDI in Bangladesh and government permission to

allow creation of private EPZs in the country has been a welcome decision.

Problems that have restricted FDI potentials in the country include excessive bureaucratic

interference, alleged irregularities in processing papers, lack of commitment on the part of

local investors, inordinate delays in selecting projects for feasibility studies, and frequent

changes in policies on import duties for raw materials, machinery and equipment.

Overlapping administrative procedures and absence of a transparent system of formalities

often confuse not only investors proposing projects, but also staff and personnel assigned for

discharging procedural responsibilities. Frequent transfers of top and mid level officials in

various ministries, directorates and departments affect continuity and prevent timely

implementation of strategic, procedural, and even routine duties. Many foreign companies

feel disturbed and ultimately are discouraged by disruptions in the production processes in

the country because of frequent power failures, poor infrastructure support, and labour and

political unrest. An additional problem is the lack of professional personnel, i.e., the

technical, managerial and innovative skills in the country needed to efficiently handle

entrepreneurial function including risk taking, planning and coordination and control.

Bangladesh has an advantage in labour costs, which can be converted into an exportable

product, but the advantage has many difficulties. The factories in the country have to deal

with constraints beyond their control, such as, power failures, poor communications or

increased transaction costs and cumbersome procedures in customs in many government

offices. The political instability, including frequent hartals is a real hazard. The World Bank

and IFC document named “Doing Business 2009” ranked Bangladesh 110th in the list of a

total of 181 assessed in terms of ease of doing business. The document however, ranked the

country 18th according to the index ‘protecting investors’ and 59th in availability of loan

funds, which make the country relatively attractive for FDI. The situation is expected to

improve if the political commitment of the government to promote and protect FDI in the

country can be increased and the policy environment can be changed from one that is

regulatory to one that is supportive/complementary in nature.

Barriers of FDI in Bangladesh:

Barriers restrict the flourishment of something. There are quite a few barriers in case of FDI

growth in Bangladesh.

Policy legislation and implementation

 In this context, the extent of the administrative barriers is quite longwinded and inter-related.

Poor policy design and implementation, competitive weakness, structural impediments, low

quality of infrastructure and skills, weak institutions, poor governance and administrative

hassles represent the administrative barriers that discourage potential FDI. But the main

drawbacks in the bureaucratic system are inefficiency and corruption, turning the whole

administrative functionaries into a harassing experience. Administrative barriers are also

translated in different forms and vary from sector to sector. In Bangladesh, we are used to

face barriers in different regulatory bodies in the form of their policy,

 

legislation and functions. National Board of Revenue (NBR) and Board of Investment (the

Investment Promotion Agency) are two important agencies directly related with FDI

operations.

Cost of inefficiency is high indeed

 The governance and management of the government entities has been largely inefficient,

ineffective and unresponsive. The cost of economy of inefficient services of state-owned

entities in energy, telecommunication, ports, railways and other public utilities and banking,

in terms of increased cost of doing business has been high indeed. Power outages and voltage

fluctuations, shortage of gas supply particularly due to limited network, limited telephone

services, inadequate urban water supply, and the high incidental and transaction costs

associated with these services have imposed considerable costs on entrepreneurs. In fact, the

activities of the public sector utility service providers have been inward looking and have not

worked well, while the rationale for public provision has been weak or missing in many

areas. And much of the short fall in their performance can be linked to ineffective and

inefficient management and unresponsive governance.

Corruption is a disguised form of taxation

 Reasons for the extensiveness of official corruption can be numerous. Many of these are

cultural or sociological, but the more important ones are organization-related and economic

policy-related in nature. Corruption thrives in an environment of pervasive bureaucratic and

regulatory controls. Extensive discretionary powers in the hands of the officials and weakness

in the legal framework also induce corruption. Though corruption afflicts different sections of

the society in diverse ways its costs fall heavily on the investors and entrepreneurs as well

as the business community. For them, corruption is a disguised form of taxation. When

regulations and controls are pervasive, and effective means of obtaining redress through legal

or administrative procedures are absent, businessmen end up bribing officials to overcome

them. Many companies regard bribery as just one of the costs of doing business and show

these payments as legitimate business expenses.

Policy discrepancy

Bangladesh offers generous opportunities for investment under its liberalized Industrial

Policy and export-oriented, private sector-led growth strategy and the relevant policies are

attractive in paper. But, there are several policy discrepancies that are quite enough to

discourage FDI.

Differential treatment

 Although existing regulations provide for equal treatment of domestic and foreign investors,

certain discriminatory rules continue with regard to foreign investment. Sanctioning

requirements for particular categories of foreign investment, restrictions against capacity

expansion, special regulations for supplier’s credit an

d pay-as-you-earn-schemes are some of the areas of differential treatment.

One stop service of BOI

 In Bangladesh, the Board of Investment (BOI) has created a cell to provide all types of

services and assistance to private investments including FDI. But, offering one stop service to

the existing and prospective investors in real terms is yet to materialize. The officials of

several state-owned utility service providers, working for BOI one stop service, are less

capable and less powered to provide necessary service.

Lawsuits

 There are many lawsuits by taxpayers against the government and majority of which the

government loses. But, due to cumbersome legal procedure such lawsuits become

inconvenient for the businessmen.

Hassles in implementation

 The major quandary of administrative barriers lies in the gap between investment and trade

related policies, and lack of co-ordination between various government agencies in the

implementation process. As a result, investors face hassles and the cost of doing business

goesup.

Registration complexity

 The procedure for registration with the sponsoring agency has been an annoyance to

entrepreneurs and does not serve any useful purpose. With regard to registration with the

Inspectorate of Factories and Establishments‟ the rules governing the role of the inspector

seem to provide ample discretionary power and put industries in a disadvantaged situation.

Lack of coordination among state entities

 There is a serious lack of co-ordination between the policy implementing agencies of the

government and because of this investor’s suffering goes up. This induces lot of hassles in the

implementation process and creates barriers for the investors in getting due incentives offered

by the government and ultimately discourages foreign investors to proceed on.

Fiscal policy changes

 Any change in the fiscal change after passage of Finance Act seriously disturbs any

business plan and discourages FDI in particular. In Bangladesh, quite often policies are

changed through issuance of Statutory Regulatory Orders (SROs).

Lengthy customs processing

It takes something like 25 signatures to release a consignment from customs. And it takes

more than the stipulated time to release a consignment supervised by an authorized PSI firm

even when the consignment is not selected for physical inspection.

Infrastructure

 Also linked with administrative barriers the level of infrastructure development is another

factor that affects the level of foreign investment and it can be hardly claimed that South

Asian countries have reached a level of infrastructure development that will satisfy foreign

investors. Again this administrative and bureaucratic inefficiency failed to increase proper

infrastructure support.

Power supply

 Bangladesh has one of the lowest per capita consumption of power and coverage of

electrification among developing countries. System losses in the power sector have often

exceeded 40 per cent of gross generation. Involvement of the government in the power sector

has created an overlapping and confusing situation regarding responsibilities. In fact,

inadequate and inefficient power supply continues to impose a high cost on the economy. The

extensive load-shedding from time to time, particularly during peak hours, has disrupted

industrial production thus affecting the country’s external competitiveness.

 

Expensive port

 The cost of inefficient cargo handling at the Port has been particularly high, thus affecting

the external competitiveness of the economy. There are numerous workers‟ unions at the

port, all of which are crucial for handling cargo. In case that one of these associations decides

to call a strike, the whole system comes to a standstill. There are, of course, the hidden

unofficial costs for clearing cargo, be it for import, be it for exports. In fact the port happens

to be one of the most expensive ports (container wise) in the world, singularly due to these

“unofficial” payments, to which the authorities concerned are comfortably oblivious,

evidently to their benefits. Another factor is the inefficiency and bureaucratic logjam, which

increases the lead-time for shipments. Hence, even if a foreign client is interested in ordering

from Bangladesh, the company is compelled to procure the products from elsewhere if it is

quite urgent. Not only do the entrepreneurs lose, the government also loses its due tariffs and

levies from the port.