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Bangladesh: Poverty Reduction Strategy Paper

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2013
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Chapter 2: Diversifying Exports and Developing A Dynamic Manufacturing Sector

The SYFP target of reaching 8 percent annual GDP growth in the outer years is premised on a prolific manufacturing sector growing at double digits on a sustained basis. Consequently, the broad industrial sector will continue to account for a larger share of GDP compensating for the secular decline in the share of agricultural sector. This trend is consistent with the stylized facts of structural change in the process of development articulated by development economists. Thus the strategy for achieving the high growth target under the SYFP and beyond includes further industrial deepening supported by a highly-productive agriculture sector. This was the basic thrust of the high-performing East Asian economies in the 1970s and 1980s. For Bangladesh to reach middle income threshold by 2021, industrial expansion must accompany hand-in-hand with highly productive farm and non-farm agriculture. A strong and competitive manufacturing sector is especially important for creating productive high income jobs.

Overall Manufacturing Performance, Strategies and Policies

Review of Past Performance

In the 1970s and the 1980s the performance of the manufacturing sector was lackluster, growing below the average growth of the economy. Following the initial debacle, the manufacturing sector growth performance improved during the 1990s. The faster pace of expansion of manufacturing relative to total GDP since 1990 caused its share to increase gradually, rising from its low level of 12% in 1990 to 17.3% in 2009. The evolution of the manufacturing sector in Bangladesh is indicated in Table 2.1.

Table 2.1:The Structure of Bangladesh Manufacturing Sector, FY1975-FY2010
FY1981FY1991FY2001FY2010
Size of the Manufacturing sector
Total (% of GDP)11.812.915.618.5
Of which
− Large and Medium Scale8.09.1511.1313.1
− Small Scale3.183.74.465.3
Growth Rate (% annual average over the
Total2.05.06.97.6
− Large and Medium Scale2.94.97.07.3
− Small Scale1.05.15.87.9
Employment
Share of total employment8.710.19.912.0
Exports
Percent of GDP4.16.810.617.2
Manufacturing share (% of Total Exports)65.578.992.190.9
RMG (% of Total Exports)0.138.956.177.1
Source: Bangladesh Bureau of Statistics (BBS),
Source: Bangladesh Bureau of Statistics (BBS),

In the 1970s and 1980s, manufacturing sector performance was constrained by the dominance of poor performing nationalized enterprises, inward looking trade policies and inadequate private investment due to poor incentives. The policy regime for manufacturing improved significantly in the 1990s, based on investment deregulation, trade liberalization, better exchange rate management and improved financial sector performance. The emergence of the private sector driven, export-oriented readymade garments (RMG) sector as a dominant economic activity considerably altered the structure of the manufacturing sector. Along with a growing share of GDP, the manufacturing sector quickly dominated the export market and contributed to an expanding share of exports. Together with remittance, the RMG sector has emerged as an economic power house in Bangladesh.

In Bangladesh the pace of industrialization has been gradual but steady without any shock from internal or external factors. Over the years, there has been a moderate structural shift from a predominantly agrarian economy to a more organized manufacturing sector. The result is evident from the higher share of manufacturing in GDP as agriculture continues to decline as a share of GDP, while services remained fairly steady throughout (Annex Fig. A1).

However, when this record is compared with the performance of the some East Asian economies, it appears as a rather slow industrial deepening over the two decades. In comparison with Bangladesh’s increase in GDP share of manufacturing from 12% in 1990 to 17.8% in 2010, Vietnam increased its share of manufacturing from 12.3% in 1990 to 21% in 2008; Malaysia from 24% to 28% over the same period. On the other hand, China’s share of manufacturing has been steady at 32-33% over that period. Even Thailand’s manufacturing grew so rapidly since 1990 that its share rose from 27% to 35 percent.

The common thread in the policies of these economies is the emphasis on private sector driven growth, trade openness and the effective courting of foreign investment. Since 1990, Bangladesh has also changed economic policy stance in these general directions though in a more gradual way. Progress is most advanced in regards to emphasizing the role of the private sector, but trade liberalization and attracting direct foreign private investment are less advanced. One notable development in the economy is the predominance of manufacturing goods in exports (90-95%) as the latter progressively becomes the driver of high growth.

Why Manufacturing Growth was Stronger in Some Countries

Economies with dynamic manufacturing sectors show at least three characteristics: (a) manufacturing sector typically grows at double digits, (b) its share in GDP reaches 30% or more, and (c) export and manufacturing sector performance tend to go hand in hand. Many factors – economic and non-economic – determine performance of the manufacturing sector. Asian countries that successfully transformed themselves from predominantly agrarian economies to manufacturing powerhouses had one thing in common: they devised a package of trade, investment and domestic support policies that created an overwhelmingly favorable environment for private entrepreneurs to unleash their hidden talents for innovation, risk-taking, and harnessing of domestic and external resources to their best advantage. For Bangladesh, there is much to emulate from the success of East Asian economies like South Korea, Malaysia, Thailand, and now, China. While East Asian economies of S. Korea, Hong Kong, Singapore, and Taiwan, showed the path to rapid industrialization in the 1970s and 1980s through export-oriented development, emerging economies like Malaysia, China, and India are showing the path to rapid growth within the new framework of globalization. Private capital and entrepreneurship, deregulated industrial policy regime, trade openness, and liberal foreign investment policy, all came together in creating the new export and manufacturing powerhouses of India, China, and Malaysia. China and Malaysia have strongly adhered to the strategy of making trade a strong pillar of economic growth having long ago abandoned the import substitution regime, which lead to the inefficient operations of firms by compromising their cost effectiveness and long-term competitiveness. India came on board with similar policies starting in the early 1990s, but more vigorously since the start of the 21st century. The results can be seen in its export growth of 20% plus with annual GDP growth in the 8-10% range in the past decade.

In particular, low tariffs have been an integral part of their trade openness. With a cheaper price tag on imported inputs, a revamped complementary trading relation with partners in terms of production structure and regional supply chains, together with an enabling investment environment, these countries gave rise to their light and heavy manufacturing industries whose products became highly competitive globally, translating into a greater share of the world market. Vietnam appears to be the new kid on the block, following in the footsteps of India and China, and reaping the benefits of its own comparative advantage based on labor costs coupled with greater linkages with international markets which has made it into an export powerhouse to be reckoned with.

As highlighted before, Bangladesh, like other low income economies is yet to make the transition to a modern manufacturing and services oriented economy. The manufacturing share of China, Malaysia and East Asia on average is over 30 percent as compared with a low 17 percent in Bangladesh. Pakistan’s share is slightly higher at 19 percent, but like Bangladesh remains a low industrialized economy. The cases of India and Brazil, which also exhibit low share of manufacturing require a bit of explanation. Brazil, with a per capita income of $ 4710 in 2009 is in a different league and is already fairly well industrialized with organized services providing the high income jobs and linked to serving the manufacturing sector. India similarly is fairly well industrialized and its lower share is a reflection of the much faster expansion of export oriented modern services such as Information Technology (IT).

Manufacturing Exports and the Diversification Challenge

One important structural change in manufacturing that has happened in Bangladesh is the emergence of a dynamic export-oriented readymade garments (RMG) sector. The emergence and expansion of the RMG sector is the direct outcome of the global Multifibre Arrangement (MFA) regime, as well conducive policies undertaken by the government to ensure global competitiveness of the industry. It was extremely good policy foresight that allowed the RMG industry not to be subjected to high tariffs, in terms of intermediate inputs and raw materials that have to be imported on upfront payment of duties. The RMG sector operates within a “free trade” enclave in that all imported inputs come in under a bonded system duty free. Had this not been the case, RMG exports would not have reached the heights they have reached, given the economy’s import regime which is riddled with complex tariffs and other import restrictions. A few other selected exports, such as leather products, and, recently, shipbuilding, have also been given the facility of bonded imports. For the rest of exports and potential exports, getting world-priced imported inputs is a challenge. As a consequence, export diversification has not made much headway.

Other manufacturing industries such as jute goods, leather and frozen foods, engineering products and pharmaceuticals have strong export potentials for driving the industry towards higher growth. But, unlike RMG, these industries are yet to become major contributors to the economy as can be seen from their export performance (Table 2.2). Thus export concentration in a single product group – RMG – infuses an element of vulnerability to our export performance.

Table 2.2:Export Performance of Major Commodities (in millions of USD)
Jute

Goods
LeatherFrozen

Food
Engineering

Products
PharmaceuticalsRMG
FY20083182845342204310700
FY20092693984541894512348
FY20105402264453114112497
Source: Bangladesh Bank
Source: Bangladesh Bank

For many decades prior to the emergence of RMG exports, jute and jute goods dominated the export sector making up 70 percent of exports until 1981. By 1990, however, RMG exports had overtaken Bangladesh’s traditional exports and, by the close of the 1990s, export concentration emerged afresh, with RMG exports reaching a share of 77 percent. While Bangladesh’s export growth for the last decade and a half could be characterized as robust, a sudden decline in demand for Bangladeshi garments would send shock waves throughout the economy. Such a prospect can be avoided through the creation of a diversified export basket. That remains the major challenge of trade policy.

To promote export diversification, the Government in its export policy has adopted a strategy of according the highest priority to several emerging exports that demonstrate high potential:

  • 1) Agro-products and agro-processing products;
  • 2) Light engineering products (including auto-parts and bicycles);
  • 3) Footwear and leather products;
  • 4) Pharmaceutical products;
  • 5) Software and ICT products;
  • 6) Home textile;
  • 7) Ocean-going Ship Building Industries; and
  • 8) Toiletry Products.

In addition, the Government is selectively according bonded import facilities to more emerging exports (e.g. agro-processing, ship building). In future, this facility may not be limited to 100% export-oriented industries only but extended to industries producing for both domestic and export markets. Further, the Duty Drawback Scheme will be revamped to ensure world-priced inputs to exporting firms without long lags and high transaction costs for reimbursements.

Manufacturing and the Employment Challenge

Bangladesh has made progress in specializing in labor-intensive manufacturing (e.g. RMG and footwear) where its comparative advantage lies. Yet the employment impacts so far fall short of expectations. The ability of the manufacturing sector to create jobs has been sharply weaker than its growth and export performance. The share of manufacturing in total employment remained virtually stagnant at around 8 percent well until the 1990s. This share began to rise slowly once the job creation effects of the RMG sector began. As a result, the employment share has now grown to 12 percent (Table 2.3). Nevertheless, this is still well short of the role that the manufacturing sector has to play to help create productive jobs in Bangladesh. This is a major challenge for the Sixth Plan.

Table 2.3:Shift in the Structure of Employment, 2005/6-09
2005-062009
Broad Sectors(In Millions)
Agriculture22.922.3
Manufacturing5.36.0
Services19.321.7
Total47.450.0
(In Percent)
Agriculture48.144.6
Manufacturing11.212.0
Services40.743.4
Source: Bangladesh Bureau of Statistics
Source: Bangladesh Bureau of Statistics

Policies Underlying Manufacturing Performance

Successive governments have realized the importance of the manufacturing sector in helping Bangladesh achieve better economic outcomes and hence tried to design policies to create a dynamic and globally competitive manufacturing sector. Seven industrial policies have been designed and implemented in quick succession in between 1972-2005. The impact of such policies has been varied due to both exogenous and endogenous shocks that the sector was exposed to over the course of time.

One of the most notable shifts in policy stance has been the drive towards a liberal market economy since the early 1990s with private sector being the main driving force of growth. This is a notable paradigm shift from the early state-led growth model where the state-owned enterprises were the main force behind growth. Unfortunately and despite best efforts of the Government of Bangladesh a number of policies and incentive packages remained stalled on their tracks due to lack of proper implementation modalities and lack of coordination among various agencies/institutions assigned with implementing the policy. Hence due to the existing challenges and rigidities, the manufacturing sector was unable to unleash its true growth potential.

The trade regime in Bangladesh also went through a series of reforms especially since the early 1990s, resulting in a shift of regime from an inward-looking import-substituting bias to an outward-looking export-orientation bias with higher integration of the economy in the global economy. Moreover, foreign direct investment has increased several times though the growth rate is much lower than some of our comparators like India, Pakistan, or Vietnam.

Over time the Government has employed different measures to provide incentives to manufactured exports. As indicated earlier the reforms of the trade regime initiated in the early eighties continued to be undertaken by successive governments for greater outward-orientation. However, although the export sector has flourished, the momentum in export has been dominated by Ready Made Garments (RMG). Other export items failed to replicate the impressive success of this sector, primarily because the tariff and import regime precluded the absorption of world priced inputs. Exclusive facilities enjoyed by the RMG sector essentially allowed it to exploit Bangladesh’s labor cost advantage to the fullest. Footwear and shipbuilding have been given the RMG treatment and they are booming. Other non-RMG exports still face an adverse policy environment which will have to be addressed early on during the SYFP in order to achieve the export and growth targets of the plan.

Trade liberalization improves manufacturing efficiency and competitiveness. Since much of the impetus to trade liberalization came in the early 1990s, it is possibly most appropriate to compare the performance of the manufacturing sector in phase II and phase III, with the caveat that even phase 2 benefited from significant deregulation and the rapid expansion of the export-oriented garment sector based on establishment of the free trade zones. Nevertheless, it is accepted that tariff reductions and QR removal introduced a substantial degree of import competition in the local manufacturing sector, forcing enterprises to restructure and raise productive efficiency. Many did, such as ceramics, textiles (new spinning capacities), RMG accessories, electrical goods, etc. Those that failed to adjust including many public and private firms had to close down and lay off workers. In this group there were a large number of SOE’s involved in jute and cotton textile mills. Private enterprises which were beneficiaries of high protection for long but failed to adjust following liberalization had no other option but to close down.

The change in trade regime and opportunities created in the world market as part of these developments have been possible also because of the dynamism of the entrepreneurs who could exploit the opportunities in the international market and deal with the risks. The trade regime of Bangladesh has also contributed greatly towards efficient operation of the industry. Manufacturing growth averaged 8.2 percent per annum (only 4.3 percent for non-RMG) in the first half of the 1990s during the peak of the liberalizing period, but tapered off to an average of 5.6 percent in the latter half, to end the decade with an average of 6.9 percent growth, compared to 5 percent in the 1980s. These averages mask the fact that it was the RMG enterprises (in the medium and large scale group) that grew by over 20 percent and drove manufacturing growth, while there was stagnation and even decline in some import-substituting. Import liberalization and the abolition of import licensing improved access of small enterprises to capital machinery, raw materials and implements that could now be purchased readily and at low cost.

An important feature of the export basket has been its concentration on a few commodities. Jute and jute goods, tea, leather and leather products, and frozen foods were the major exports up to late eighties. Since FY88 woven and knit garments, frozen foods, leather and leather products and jute and jute goods have been the major exports. The most remarkable feature of the export basket is the emergence of readymade garment (RMG) in the late 70s as export and its increasing dominance in the basket over the years. Readymade garment has replaced jute and jute goods in importance. Thus while the contribution of jute and jute goods declined from about 69 percent in FY81 to about 3 percent in FY09, readymade garment constitutes more than 75 percent of total exports in recent years. Equally striking is the fact that by the turn of the century, manufactured goods made up over 90% of our exports.

Major Constraints in Manufacturing Sector to be addressed



Weak Investment Climate

Reforms undertaken in the late 1980 and early 1990 led to a secular increase in growth of private sector investment in thus leading to an increase investment in the manufacturing sector. Evidence of this can be seen in the increased average growth rates from the 1980-1999. However, the rate of growth of the private sector has stagnated recently due to various investment climate related and infrastructure issues. Importantly, infrastructure gap has been widening and is being characterized as a binding constraint for growth. Aggregate investment in the domestic economy has stagnated in the 24%-25% of GDP range in recent years, despite a steady increase in the national savings rate. Although private sector investment has been increasing at a pace slightly above the rate of growth of GDP, a secular decline in public investment in relation to GDP largely offsets that, keeping total investment broadly stagnant in relation to GDP. This low level of investment significantly falls short of the investment rate needed to support the 8% GDP growth target set for the end of the Plan period and a vibrant manufacturing sector. Within the private sector, there has been very little inflow of foreign investment, including in the manufacturing sector.

The strategy for the SYFP is to stimulate gross domestic investment early on through acceleration of public investment in major infrastructure projects (e.g. Padma Bridge, Elevated Expressway) while putting in place a policy and legal framework for implementation of public-private partnership projects and private investment. The ultimate goal is to achieve a rate of domestic investment that will lead to GDP growth of 8% by the close of SYFP, i.e. achieving the rate of gross domestic investment equivalent to about 32% of GDP. Much of the additional investment from private sector will need to go to manufacturing. Making the investment climate conducive to attract both domestic and foreign investment into manufacturing is a key policy challenge.

A number of factors have contributed to the depressed level of investment and FDI in Bangladesh compared to other regional counterparts. The World Bank-IFC Doing Business 2010 report highlights some of the factors that have led to a favorable/unfavorable business environment in some Asian countries (Table 2.4).

Table 2.4:Investment Climate in Doing Business 2010
EconomyEase of

Doing

Business

Rank
Starting

a

Business
Employing

Workers
Getting

Credit
Protecting

Investors
Paying

Taxes
Trading

Across

Borders
Enforcing

Contracts
Bangladesh11998124712089107180
India133169104304116994182
Malaysia23886114243559
China8915114061931254418
Vietnam93116103301721477432
Source: International Finance Corporation
Source: International Finance Corporation

Table 2.4 suggests that Bangladesh has performed modestly in terms of creating a conducive investment climate. Compared to East Asian economies massive improvements are required to reach the levels of the required investment for the manufacturing sector. Bangladesh’s weakness in terms of rankings in some of the indicators suggests that the investment climate has not been very friendly, as result of which both domestic and foreign investment suffered. A reversal of the weak investment climate is imperative for achieving the goals of the SFYP.

Anti-export Bias of the Trade Regime

As discussed in previous sections reforms allowed the export sector to flourish, however the success of the export sector is largely attributed to the RMG sector. All other non-RMG major export items have had only a modest growth since the late 1980s. Though some new items have been added to the export basket the country’s export base remains narrow and undiversified. Without export diversification Bangladesh may be exposed to negative export shocks. Therefore the existing policy anomalies have to be removed and supportive steps for diversification of exports will be undertaken during the Sixth Plan period.

Despite the measures for export promotion and tariff rationalization, a measure of anti-export bias still prevails. The structure of incentives created by the trade policy regime still favors the production of domestic import substitutes and creates barriers for emergence of new export industries and expansion of export industries not benefitting from special measures. Given that SFYP puts a lot of emphasis on export of manufactures, concerted efforts will be made to remove the remaining anti-export bias to create a neutral policy regime between import substitution and export promotion in order to focus both on manufactures that have export potential and industries which already export but whose potentials are not fully realized.

Manufacturing Suffers from Power Shortages

Firm level survey data provides useful micro-level data concerning the factors that are holding back the performance of the manufacturing sector. Exponential growth in electricity demand induced by strong economic growth performances has strongly outpaced the available electric supply leading to a situation of acute power shortages. As a result private sector performance is severely hampered. One of the main constraints in the manufacturing sector is the persistent under utilization of capacity due to power scarcity. A recent study highlights this point, it reports that on average firms use 80% of their capacity and in general metropolitan firms point to electricity as the major reason for underutilization of capacity followed by working capital financing shortages.

Problems of electricity outages effect both metropolitan and non-metropolitan manufacturing businesses. The heavy reliance on generators in Bangladesh implies understatement of the true extent of damage to the poorly performing electricity grid. Sectors which heavily rely on power such as RMG, chemicals etc are heavily reliant on generators. However, the historically less successful industries with less access to investment resources are the hardest hit due to their dependency on electricity, including textile, leather and light engineering. Moreover generators represent a significant investment of a firm’s book value. Therefore SME’s are the hardest hit. Continuous power shortages already cost the economy two percentage points of national growth.

The SFYP includes an energy sector plan (Chapter 4) to fully bridge the gap between demand and supply of power by the end of the plan period.

Land Management Emerging as a Serious Problem

Serviced land is the single limiting factor for new or expanding entrepreneurs. The three main issues surrounding access to land are a) the cost of land, b) issues of procuring land and c) availability of serviced land. Other factors such as titling and registration, limited financing for long term commercial mortgages and zoning, have also have been identified as obstacles to the growth of the manufacturing sector. Doing Business in Bangladesh 2008 ranks Bangladesh among the ten worst countries for registering properties.

Given the importance of this resource in an entrepreneur’s decision to invest in the manufacturing sector further reforms and changes have to be introduced otherwise the growth of the manufacturing sector as one of the major sectors in the economy will be in jeopardy.

Access to Credit Still Inadequate

Bangladesh compares favorably with other countries in the South Asian region in terms of the domestic credit to the private sector, though long term lending as well as lending to smaller firms and firms in rural non-farm sector has remained inadequate. The financial system is dominated by the banking sector and massive reforms during 2000-01 resulted in the declining importance of nationalized banks.

The current lending system is based on collateral and hence is not very conducive for most firms in the country. The existing rigidities of the financial system result in inefficient reallocation of resources and reduce growth potential. In general, banking innovation is lacking. The narrow product mix offered by the banks weakly matches’ client preferences. Banks are unable to differentiate between credit worthy customers and offer better financial products suited to their needs.

The situation calls for completing the unfinished reforms in the financial sector to strengthen financial intermediation, and create a modern, dynamic and business friendly banking system, fully equipped to support the goals of the SFYP.

Labor Productivity Remains a Problem

Abundant and cheap labor has been the primary source of Bangladesh’s comparative advantage in labor-intensive manufacturing. In addition, existing labor laws allow greater labor market flexibility than in other South Asian countries. However, while Bangladesh’s manufacturing labor is cheap and growing at a rapid pace, labor productivity has been low. Despite relatively light labor regulations, structural barriers impact the efficiency of the labor markets, including mismatches between economic performance and labor allocation, pressure from the public sector, skill shortages and mismatches. More attention needs to be directed to assist the transition of workers from agriculture to other sectors, as well as addressing an overall rapidly growing labor force, gender issues and skills and training.

Research has shown that there is a tendency for both small and large metropolitan firms to report an acute shortage of skilled labor. Even though there are a high proportion of temporary workers, the situation is not improved since temporary workers tend to be unskilled. The education qualifications of these workers tend to be low both in terms of quality and attainment. Nearly 20 percent of the workers employed in the manufacturing sector have no education at all.

Gender Bias Hampers Entry of Female Workers

From a regional perspective the participation rates of women in metropolitan areas in Bangladesh tend to be higher in large firms and the garment sector. However, in non-metropolitan areas, studies have shown that 26 percent of all women working in nonfarm enterprises are employed in the garments, 22% in textile, 14% in food processing, 11% in the manufacturing of non – metallic mineral products etc. In general most women working in non metropolitan areas tend to be family workers.

However, women entrepreneurs tend be less educated and are more likely to be self-taught compared to their male counterparts; however this trend is changing slowly. Moreover due to financial market imperfections and potential segregation, women tend to report that obtaining finance and cost of finance as major constraints compared to their male counterpart.

Weak Research and Technology

Productivity gains remain low due to weak innovation and low investment in technology. Only a handful of firms have internationally recognized quality certification, with highest proportion in garments and manufacturing. Furthermore, even fewer firms use technology licensed from foreign companies, with higher proportion in garments, light engineering and chemicals/pharmaceuticals.

Some general feature of the manufacturing sector has been the low R&D spending as proportion of the firm’s sales value and minimal employment opportunities for R&D professionals; however, this is not true for the RMG and pharmaceuticals sector. The main methods of innovation have been new equipment, new management, new products and new worker skills. The availability of new technology and technological change are also vital for the rural non farm sector. However, funding scarcity for investment in new technology also works as a major impediment in innovating.

Recognizing the strong relation between innovation and productivity gains, greater efforts will be devoted during the SFYP to facilitate technological innovation and change in the manufacturing sector. An integrated approach will be considered whereby information, cost and financial market rigidities are weakened in order to let the manufacturing sector reap the benefits of industrial spillover effects and be an innovator in their own right.

Government Regulations and Enforcements are a Constraint

Taxation: Taxation in Bangladesh is marred by complex rules, administrative hassle, poor compliance and low collections. The complexity of the tax rules open opportunities of graft and result in minimum tax payment with frequent underreporting of profit. Furthermore, tax lawyers need to be hired to comply with regulation raising the cost of compliance. In the past, corporate income taxes have tended to be one of the highest in the region. Due to high corporate tax rates, evasion is evident. However, recent simplifications have eased the problem for businesses somewhat. Strong lobbying and complicated regulation leads to companies continue to operate tax free even after their infancy. Actual tax payment show significant use of tax holidays and exemptions relative to declared profit.

Red tape: Research has shown that a good proportion of firms in the country consider the economic and regulatory policy uncertainty a major constraint to business. Entry and exit is also not an easy task and acts as a barrier to business. Entry takes a long time and costs a lot due to registration fees; lawyers cost and trade/operating license. Moreover corporate exit is costly. It takes about four years to go through the bankruptcy procedure; this is lower compared to India.

Enforcement of contract: A well functioning legal and judicial system is imperative to create effective checks and balances and to help enforce contracts and settle disputes. While the constitution and laws are generally sound the justice system is subject to excessive delays and is perceived by many as impartial. A research estimate suggests that firms perceive the functioning of courts on business matter as a major obstacle to business. Most companies use informal mechanism to enforce contracts or to avoid agreements.

Slow Privatization of State-owned Enterprises (SOEs)

After three decades, the program of privatization of state-owned enterprises (SOE) remains incomplete due to delays and complicated procedure in the privatization process, problem of proper valuation, land disputes and delay in registration of land and assets, and so on. The vision of attaining middle-income status by 2021 rests squarely on a dynamic private sector. That on vision will remain unfulfilled unless, on the one hand, SOEs are whittled down and substantial investments are forthcoming from the private sector.

Whilst the privatization of identified SOEs will continue, the SFYP stipulates efforts to strengthen the SOEs that remain in the public sector. Policies will include improving management, commercializing these enterprises, improving labor policies and eliminating all bureaucratic interventions. The Government recognizes that SOEs must be profitable enterprises and be able to compete effectively in the market.

Targets, Strategies and Policies for the Manufacturing Sector in the Sixth Plan



SFYP Targets for the Manufacturing Sector

Vision 2021 stipulates that Bangladesh will attain middle income status by 2021. In order to achieve this goal; the government set its economic growth target that rises to 8% in 2015 and 10% in 2021 with an average of 7.3% for the SFYP. In order to fulfill this vision the manufacturing sector would play a central role. The strategy of the Government has been to facilitate a dynamic, vibrant, pro-export and competitive manufacturing sector that would eventually contribute some 30% to national income and be able to absorb 20% of the work force. A possible growth path that is consistent with this target is presented in Table 2.5.

Table 2.5:Projection of Sectoral Growth and shares in GDP
FY2010FY2011FY2012FY2013FY2014FY2015
Growth Rate (%)
Agriculture5.25.04.54.44.34.3
Industry6.69.29.69.910.511.5
of which Manufacturing6.59.59.810.110.711.7
Services6.56.66.87.17.37.8
GDP6.16.77.07.27.68.0
Share as % of GDP
Agriculture18.618.417.716.916.215.5
Industry28.528.728.930.431.332.0
of which Manufacturing17.918.218.719.620.421.1
Services52.952.952.952.752.552.5
Source: BBS and SFYP Projections
Source: BBS and SFYP Projections

It is projected that during the SFYP, the manufacturing sector will have to outpace both the agricultural and service sector and follow a smooth upward trajectory. The manufacturing sector has to perform consistently and follow a steady upward trend. The SFYP aims at an average of 10% annual growth in manufacturing, rising from 6.5% in FY10 to 11.7%. Among the manufacturing activities sectors such as ‘food processing’; ‘leather and footwear’, ‘textile and clothing’, ‘pharmaceutical’, ‘ship building’, toys, ceramics and furniture are likely to be the main growth generators (Table 2.6). These labor-intensive activities are expected to experience double digit growth rates toward the end of the plan period. Diversification of the manufacturing base will be promoted by keeping import channels open and facilitating Bangladeshi firms to vertically integrate within the global production chains. ‘Machinery’ and ‘other-industries’ sectors are also projected to become more buoyant due to the expansion of the economy and gradual diversification of exports. One of the thrusts of the industrial policy during SYFP will be to create scope for emergence of new activities (in exports or domestic production) and expansion of SMEs to take advantage of scale economies. However, due to paucity of gas supplies as well as uncertainty with regard to the use of coal, the growth performance of ‘chemical-fertilizer’ and ‘petroleum’ sub-sectors would likely remain moderate. Removal of critical infrastructure bottlenecks in power and transport sectors through massive new investments will be critical for planned acceleration of manufacturing sector growth.

Table 2.6:Manufacturing Growth Projection for SFYP
FY2010FY2011FY2012FY2013FY20142015
(Annual growth rates %)
Manufacturing6.59.59.810.110.711.7
Leather Products7.78.59.410.511.212.2
Textile & Clothing7.614.413.513.814.215.1
Chemical Fertilizer5.36.16.76.87.07.4
Machinery5.96.26.66.77.27.9
Other Manufacturing5.88.38.38.59.510.2
Share as % of Total GDP
Manufacturing17.918.419.019.720.521.0
Leather Products0.80.80.80.90.90.9
Textile & Clothing7.17.27.58.08.48.7
Chemical Fertilizer1.91.81.91.91.91.9
Machinery4.85.25.45.35.55.5
Other Manufacturing3.33.43.43.63.84.0
Source: SFYP Projections
Source: SFYP Projections

Exports – the driver of manufacturing growth: The main driver of manufacturing growth will be the export markets, although growing domestic demand from higher income generation will also provide impetus to import substitute production. The case for exports is very clear. In spite of a burgeoning domestic market, its size is limited when it comes to the need for creating over a million additional jobs every year with decent wages. The export market is vast allowing industries to take advantage of economies of scale and the scope for creating jobs and income is unlimited. Already manufacturing exports make up more than 90% of our export basket. High manufacturing growth over the next decade will hinge on continuation and improvement on the superb export performance of the past 15 years. The key is to produce competitively products in which Bangladesh has comparative advantage and formulate strategies to open export markets. Based on the recent performance, export sector under the Plan period is projected to grow by 16% per annum in US dollar terms, which is about the same rate as in recent pre-global crisis years. The projection entails an increase in the share of exports in relation to GDP to rise by at least 5 percentage points to 22% of GDP by the end of the SFYP reflecting a leading role that export sector is envisaged to play in the SFYP. While RMG exports would continue to dominate the export outlook, some important non-traditional exports like footwear and leather products, light engineering products (bicycle and electronics), pharmaceuticals, ceramics, jute goods, ocean-going ships, and some labor-intensive products not yet on the export radar, are likely to grow at a much faster rate. This diversification is a key objective underlying the strategy for manufacturing growth.

Strategic Policies for Manufacturing Exports in the Sixth Plan

In order to get the maximum leverage out of manufacturing sector and its competitiveness in the global marketplace, the Sixth Plan would focus on four strategic approaches.

Export diversification. Bangladesh experienced double digit export growth over the past two decades. Yet this superior performance masks the fact that the surge was limited to one product group – readymade garments – aided not least by the MFA regime. With over two million jobs and 77% of export earnings from the RMG sector, too much of the nation’s fortune is riding on this one sector. Export concentration in readymade garments makes the economy, jobs and income, extremely vulnerable to external shocks arising from changes in global demand for RMG. The government’s focus on export diversification as a cornerstone of its export policy will continue and intensify during the Sixth Plan period.

Export concentration is not a new phenomenon for Bangladesh. For many decades prior to the emergence of RMG exports, jute and jute goods dominated the export sector making up 70 percent of exports until 1981. The shift into manufactured exports materialized for the Bangladesh economy thanks largely due to an external event – the multi-fiber arrangement (MFA) of 1974 – that offered a lifeline for the emergence and rapid expansion of the RMG industry. By 1990, RMG exports had overtaken Bangladesh’s traditional exports and, by the close of the 1990s, export concentration emerged afresh, with RMG exports reaching a share of 77 percent. While Bangladesh’s export growth for the last decade and a half could be characterized as robust, a sudden decline in demand for Bangladeshi RMG would send shock waves throughout the economy. Such a prospect can be avoided through the creation of a diversified export basket. Herein lies the rationale for an effective strategy for export diversification.

But in the context of the Sixth Plan, the strategy of export diversification will not be limited to product diversification in the export basket. Rather, the strategy will embrace many different facets, each of which addresses the vulnerability aspect of export concentration, as summarized below:

  • Product diversification – introducing range of new products in the export basket.
  • Geographical diversification – widening the range of destination markets for exports.
  • Quality diversification – upgrading the value of existing products, i.e. moving up market from low end to high end products (described as moving up the value chain).
  • Goods-to-services diversification – seeking opportunities to expand non-merchandise exports.
  • Intermediate goods diversification – product diversification need not imply adding only final consumer goods in the export basket – as is popularly understood in Bangladesh. There are global opportunities for plugging into the supply chain of export powerhouses like China, something that East Asian economies have done successfully. That requires Bangladesh to diversify its manufacturing base into backward linkage industries producing a wide range of intermediate goods for exports within the globalized production chain.

Finally, it is critical that the trade policy regime is geared to ensure export competitiveness in general while facilitating emergence and expansion of new export products. Bangladesh’s labor cost advantage remains strong though productivity is a question mark. Yet this advantage, properly harnessed, could yield surprising rewards within the current scheme of globalized production and supply chains, provided the trade regime is right. The success of RMG is clear evidence of this phenomenon.

If export diversification is to be the cornerstone of an export strategy, at least three aspects of the trade policy regime will deserve close attention during the Sixth Plan:

  • Ensuring export competitiveness in general – by addressing border barriers (e.g. tariffs) and beyond-the border constraints (e.g. trade infrastructure, energy and telecommunications, regulations, finance).
  • Reducing anti-export bias of the trade regime – several researches provided ample evidence of anti-export bias of the current import, tariff and subsidy regime that favors import-substituting production over exports. The duty-drawback scheme to provide world-priced inputs for export production has proved inadequate. Eliminating or reducing the built-in anti-export bias that still remain will be key to switching the incentive regime in favor of exports.
  • Reducing anti-diversification bias – because of the stellar success of RMG exports, trade policy and incentive regime have a clear focus on this sector which is provided a free trade channel plus logistic support (duty free import of inputs, bonded warehousing facilities, back-to-back LC, rapid custom clearance). While such a policy is appropriate for making RMG exports competitive on a global scale, attention needs to be focused on similar policy environment for emerging and potential exports without which they face formidable barriers in the context of a high-tariff and restrictive import regime in Bangladesh. This particular feature of anti-diversification bias could be unique to Bangladesh and will be addressed during the Sixth Plan.

The China opportunity: A window of opportunity that beckons Bangladesh has its roots in what is going on in China known to the world as the export powerhouse, as the biggest source of cheap exports of all manner of goods, from clothing and toys to consumer electronics and durable goods like air conditioners and refrigerators.

Abundant, cheap, and productive labor was the primary source of China’s global competitive advantage. As a natural phenomenon of industrial success, that advantage is fast eroding. Wages are rising in China, where factory workers are paid three to four times the wages of Bangladeshi workers. In addition, acute labor shortages have appeared in key economic zones. Wage-push inflation in China means that competitive advantage is no longer assured, at least not for the labor intensive commodities whose fabrication is less complex and demands relatively low-skilled workers. Examples of these Chinese products include readymade garments, shoes, electrical goods, car parts, toys, kitchenware, and multifarious consumer goods. In these sorts of products, China’s competitive edge stemming from low labor costs is fast eroding.

That is not all. Pressure is mounting on China to revalue the Yuan – a measure that will make its exports dearer and therefore less competitive. Though China has not wilted under this pressure, analysts believe gradual Yuan appreciation in the months ahead is a very real possibility. This adds the third element in the erosion of Chinese cost competitiveness, apart from rising wages and labor shortages. In the current scheme of global competition, the loss in competitive advantage for one country becomes a gain for one or more countries. Those ready to gain from China’s falling competitive edge in labor-intensive products are countries like Bangladesh, Vietnam, Cambodia, Indonesia, Philippines, and even India.

What is notable is that developments in China have set in motion some dynamic adjustments around the globe. Investors are scurrying for the next best location for manufacturing clothing, shoes, toys and other labor-intensive manufactures. Why not Bangladesh? Labor costs, investment climate, and trade policy will be the critical factors determining location and success of the next export powerhouses.

During the Sixth Plan period, Bangladesh will position itself comprehensively – with supportive incentive schemes, investment incentives, and liberal import regime – for a solid berth in the new alignment of exporters. In terms of attractive trade and investment policies, Bangladesh will match countries like Vietnam and Indonesia which are vying to take a bigger chunk of the Chinese pie which is up for grabs. This once-in-a-lifetime window of opportunity may not last for long. Success in this effort will ensure Bangladesh’s claim for middle income status within a decade.

Export restructuring in a globalized economy: Global production sharing has been a striking feature of world trade in recent years. It generally entails the breaking up of the production process into vertically separate stages carried out in more than one country, involving both backward and forward linkages from the production stage in the commodity chain. Analysts have pointed out that the superior export performance of East Asian countries can be partly attributed to their strategic use of cross-national production networks within a globalized production system. Bangladesh manufacturing exports could also get a strong boost if it positions itself suitably within the global production and supply chain.

Two types of commodity chains have been identified:

Producer-driven commodity chains (PDCC): PDCC tends to be characterized in capital and technology intensive industries (e.g. automobiles, computers, semiconductors, and heavy machinery). Transnational corporations play a central role in coordinating production networks. International sub-contracting of components is common for most labor-intensive production processes. The main barrier to entry for this type of production network is capital and propriety know-how. Moreover out sourced production is controlled by TNC mainly through equity investment.

Buyer-driven commodity chains (BDCC): These types of chains are most prevalent in industries which are characterized by large retailers, branded marketers and trading companies. These businesses usually set up decentralized production networks in a variety of exporting countries, moreover the branded companies usually provide the design and order the goods and supply the specification. This pattern is common in labor-intensive consumer goods such as garments, toys, footwear etc. The main barriers to entry are product development, advertising etc. Control of production takes place through non-equity arrangements with local firms through sub contracting. In essence the Wal Marts and Nikes do not manufacture the products; they just design and sell. In the BDCC system there is a physical separation of production activity from the design and marketing stages.

Indeed the new aspect of globalization is the ability of producers to slice up the value chain by breaking up the production process into many geographically separated steps such that a good is produced in a number of stages in a variety of locations, adding value at each stage. The assembly stage is a labor intensive activity using unskilled labor in which countries like Bangladesh have a comparative advantage. In readymade garment exports, Bangladesh has already taken advantage of the BDCC system, but could reap similar benefits in other products such as toys, footwear, auto parts, TV parts and components. Trade in parts and components in the machinery sector are the fastest growing segment of world trade. The rise of China as a low cost assembly hub has boosted component production and assembly in other countries. During 2005-06 components manufacturing trade in Asia were above the world average by 15 percent and made up almost 75% of East Asian trade. During the Sixth Plan period Bangladesh will have to position itself as a player in the global production chain based on its comparative advantage within a market niche. Its long experience with garment production chain gives it a competitive edge over newcomers.

Working on market access issues: Producing products of export interest and in accordance with Bangladesh’s comparative advantage based on its factor endowments is only the first albeit the key step for export growth. Yet being competitive in exports is only a necessary condition for export success. Global trade is subject to various tariff and non-tariff measures that serve as barriers to market access, particularly for an LDC like Bangladesh seeking new export destinations and trying to open existing markets wider. For export success to be ensured on a sustainable basis, the government will be playing a proactive role in continuing efforts under the bilateral and multilateral umbrella to obtain Bangladesh’s rightful claim to market access for diversified products and destinations.

It is well known that the Uruguay Round of trade negotiations opened global trade and reduced overall tariffs, but left the peak tariffs on products of export interest to LDCs like Bangladesh (e.g. tariff peaks on textiles and clothing). Although this has been partly compensated by various preferential schemes offered by OECD countries, such as GSP and EU’s EBA, there are formidable challenges to be faced in reducing tariffs on Bangladesh’s major export product (RMG) and emerging products that might be subject to WTO-compliant rules under SPS and TBT. A two-track initiative is visualized: (a) the government in partnership with chambers and think tanks will vigorously pursue the LDC option for S&D preferential market access under WTO’s Doha Development Round; (b) on a bilateral basis, the government will continue to work on obtaining duty-free access for Bangladesh exports into developed markets such as USA, Japan, and Australia, while pursuing low-tariff market access options via reaching free trade agreements with individual emerging market countries or groups.

Furthermore, Bangladesh will also pursue the regional option to open markets and expand trade with neighboring countries in South and East Asia, under various regional or bilateral trading arrangements (e.g. through SAFTA, BIMSTEC or potential bilateral FTAs). Given Bangladesh’s current tariff regime, most research indicate high cost of trade diversion from these initiatives, thus requiring further rationalization of tariffs so that benefits of trade creation offset trade diversion costs from regional FTAs. To gain market access through RTAs Bangladesh will have to reduce tariffs further, without which it would be difficult to forge regional trade alliances.

Industrial Policy 2010 to Support SFYP Strategy

Industrial Policy 2010 initiates the first year implementation of the Sixth Plan strategy for deepening of industrialization in Bangladesh. It lays the foundations for a dynamic manufacturing sector and robust export growth. Slowly but steadily Bangladesh is now gearing up with the right package of policies to attain double digit manufacturing growth during the SYFP, driven by high-performing exports that should be clocking growth rates of 20% plus on a sustained basis.

Objectives of the 2010 Industrial Policy

  • Provide a policy and institutional framework that creates and sustains a momentum of accelerated industrial growth, employment generation and improvement in living standards.
  • Give clear signal to the private sector highlighting government’s commitment to private sector led industrialization strategy.
  • Attempts to rationalize the existing incentives structure for attracting higher levels of private investment in areas of dynamic comparative advantage in the economy. The Policy also indicates areas of private-public partnership that are critical for enhanced private sector participation in the industrialization process.
  • Identifies needs that are critical for enhancing the competitiveness of the industrial sector and spells out business support and policy measures for meeting these needs.
  • Spells out measures for promotion of cottage, small and medium industries.
  • Outlines measures needed to develop and diversify the exports.
  • Spells out policy and institutional arrangement to ensure that the industrialization process is compliant with internationally agreed environment, health, safety and work standards.

Strategies for Manufacturing Sector

  • Private sector will spearhead the industrialization drive. As its central tactic, it will be abetted by the productive nurturing of agro-processing and labor-intensive industries. The government will be limited to the role of a facilitator, pushing for and creating an enabling environment for attracting increased private investment in areas of dynamic comparative advantage. Tariff protection will be given on a time bound basis to activities determined to have potential comparative advantage in the long run.
  • Industrial investment by the state will only be in areas where there is a need to complement private-sector investment, or where there is an overriding security concern or social objective to be met. Efforts will be made to stimulate inflow of investment, at once nationally and internationally, and especially from non-resident Bangladeshis. The government will ensure assistance for creating alternative employment, keeping the socioeconomic backdrop in mind, for any privatization proposal.
  • Meticulous economic feasibility of the defunct public-sector enterprises which have ceased to attract any investment will be done before setting future course of actions. No new activity or rejuvenation involving these structures will be allowed before settling all outstanding dues.
  • The legal and regulatory framework will be streamlined, and procedures simplified in the name of shielding investors from Gordian knots, procrastination and legal harassment arising from archaic and unnecessary laws, vague and discretionary regulations, and flawed and weak enforcement. The delivery of start-up and routine follow-up services to industrial clients by the Registrar, Joint-stock Companies and Firms, Board of Investment and all other regulatory agencies will be elevated to ‘one-stop service’ through more imaginative use of information and communications technologies. Like in some other well-managed countries, industry associations and think-tanks will be taken into confidence and consultation in the effort to keep the cost-of-doing business at their lowest practicable levels. A relentless effort will be made to do away with the culture of an abject dependence on ‘sponsorship’ by the state.
  • The Government will be resolute in easing up on the access to vacant or unused space for startup enterprises. A variety of measures ranging between the allotment of vacant ‘khas’ land, providing fiscal incentives for setting up private industrial estates, rationalizing BSCIC’s industrial estate program, setting up special economic zones. Effort will be made to set up economic zones in full view of successful relevant experience from other developing countries and relevant best-practices, including the practice of public-private partnership, in the field of creating such economic zones.
  • Priority will be given to infrastructural needs of industrialization such as electricity, gas, port facilities, road and railway transportation, telecommunications etc. Optimal utilization of natural resources such as gas and coal will be made for power generation along with measures to promote alternative sources of energy such as solar energy, generation of electricity from municipal refuse, biogas etc. Participation of the private sector in all infrastructure development endeavors, and the use of public-private partnership will be strongly promoted through various incentives.
  • Necessary reforms of all banks and public financial institutions will be carried out expeditiously preparatory to meeting industries’ prevailing demand for long-term finance. Initiatives will taken on hand to establish modern IT parks, Hi-tech parks, incubation clusters in order to attract national and, above all, foreign investment in such knowledge-dense, environmentally-friendly industries as information technology/IT Enabled Services, biotechnology, nanotechnology, and thus to spur the development of an world-class atmosphere for business.
  • Existing regime of industrial finance including such schemes as the Equity and Entrepreneurship Fund (EEF) will be reorganized and strengthened with provisions to meet working capital needs of the borrowers. Women will have equal access to EEF. A financial institution will not be allowed to participate in any new project investment unless the package included a binding provision offering accommodation of the working capital needs of the borrower. If the entrepreneur did assure the financing institution that the roll-out of the enterprise would not suffer due to the non-availability of working capital loan, such a loan proposal could be entertained.
  • The Government will encourage the private sector to set up and operate venture capital funds. A deep and broad growing pool of venture-capital can throw life-lines at emerging and prospective firms, and can support firms with innovative technologies.
  • The on-going campaign to streamline and strengthen the capital market will be intensified. This will involve improving the oversight functions of the Securities and Exchange Commission (SEC), strengthening the central depository system (CDS), development of the bond market, off-loading government shares in the capital market, introduction of new instruments, and securitization of big infrastructure development projects etc.
  • Government will take various measures to meet growing demand for skilled managers and technology and technical workers. In order to better align the curriculum and capability of those public institutions that impart business and technical education, the government will add to their capacities, modernize their curricula, ramp up their research capability.
  • Government will encourage and support private sector, research organization and NGO initiative towards skill and management development. Effective arrangements will be put in place to ensure adequate coordination and cooperation among the public institutions that complement private-sector. Public-private partnership will be forged to develop specific skills for catering to demand for high-value products and also for meeting quality and standard requirements in the international market.
  • Government will provide support to the private sector industries in their search, acquisition and adaptation of best-practice technologies, which typically originate in foreign countries. The Bangladeshi missions abroad and public institutions involved in technology research and development will play a critically important role in this context. The capacity of local research institutions and the science and technology faculties of Bangladesh’s public universities will be strengthened towards this end. The government will facilitate close interaction between the private sector and pertinent public institutions so that the appropriate technology needs of local industries can be addressed and resolved by these institutions. The government will also encourage foreign direct investment that has scope of technology transfer. Fiscal incentives will be provided for firm-level research and technology development.
  • Development of small, medium, micro, cottage and IT industries, including IT enabled services, will be two cornerstones of government’s industrialization strategy. The achievement of this objective will be the organizing principle governing the implementation of the Small and Medium Enterprises (SME) policy announced by the government. A comprehensive approach to the development of this sector will be adopted which will entail wide-ranging fiscal incentives, preferential access to finance, favorable trade policy, provisioning of land and site services, and the facilitation of technological and marketing support.
  • In line with the provisions of the SME policy, special measures will be taken to develop women entrepreneurship ensuring access to land and finance and business support services.
  • Fostering exports will become one dominant streak in the industrialization strategy of Bangladesh. Special emphasis will also be given to stimulate import-substitution, food and agro-processing industries. Necessary measures will be taken for diversification and rapid increase in manufacturing exports. Towards that end, existing export incentives including those relating to fiscal, trade and exchange rate policies will be broadened. Priority attention will be accorded to resolving various supply-side bottlenecks particularly those relating to finance, infrastructure and port facility. The government will provide accreditation and testing facilities for export and adopt various trade facilitation measures for reducing trade transaction costs and delivery time. Efforts for gaining market access will be intensified both at regional and international levels.
  • Measures will be taken to attract FDI in firms in both export and domestic market oriented industries to make up for the deficient domestic investment resources, to achieve transfer of technology and gain access to export markets.
  • Government will ensure that industrialization in Bangladesh is environmentally sound and compliant with the health and safety and other standards required under the rules of the WTO. As well, the Government will ensure taking the fullest advantage of its time-waiver on the onset of the compliance with rule-book of such globalist agreements as associated with the WTO, Trade-related Investment Measures (TRIMS), TRIPS, GATS, to the point of achieving globalist standards within the deadline on the ground.
  • The Industrial Statistics Wing of the Bangladesh Bureau of Statistics (BBS) and the management information system of various regulatory agencies, such as the Board of investment, BEPZA, BSCIC, SME Foundation, Bangladesh Handloom Board, etc., will be strengthened preparatory to the setting up of an information and data bank where investors can find information regarding investment and market opportunities, sources of machinery and technology etc. Coordination between different public agencies will also be fostered to obtain consistent set of information on private investment, output and employment on an ongoing basis from the web-sites of those agencies.
  • The prevailing legal framework related to intellectual property rights will be revamped for nurturing industrial research and development, and ventures that intensively demand the husbanding of talent. As well, all reasonable assistance and encouragement will be accorded to such industries.
  • Government will actively support growing partnership among financing and training arms of the public-sector, private-sector and non-Governmental organizations to rapidly build investment and skill-base related to eco-tourism. To this end, Government will ensure compliance with the basic standards for protecting environment and safeguarding proper utilization of scarce land.
  • Government will pave the ground of global eco-tourism marketing effort through the Bangladesh Parjatan Corporation (BPC) in order to provide impetus to the growth of eco tourism industry in Bangladesh.
  • The Government will resolutely move to rid the country of the blight of ‘sick industries’. To this end, initiative will be taken to formulate guidelines for dealing with the sick industries’ syndrome. Terminally sick firms which are beyond cost-effective redemption will be identified.
  • Government will provide incentives to the banking sector to proactively exert itself in helping avert the fate of bankruptcy or acute financial distress by firms.
  • The Government’s future reform and re-structuring agenda for will the jute industry will include ownership, operation, technological modernization, quality improvement and diversification of jute goods, employment generation, timely arrangement of access to finance during the raw-jute season, sound management practices, human resources development in jute industry, and marketing of jute and jute goods.
  • In running public-sector jute mills, effort will be undertaken to eliminate wasteful methods and practices of the past through rational reforms in order to restore them to profitability.
  • Government will encourage the establishment of new jute mills for manufacturing innovative, high-value jute goods, and partner the private-sector in the development of new technologies and processes, and sourcing of technical and financial assistance.
  • The administrative, monitoring and implementation mechanisms in the Ministry of Textiles and Jute, various relevant departments and institutions will be revamped and reformed so as to have in Bangladesh a dynamic, skilled and vigorous jute manufacturing sector in the country.
  • Modernization and backward linkages in the textiles sector will be encouraged on the back of new investment and BMRI in old mills in order to meet the growing demand of textiles and apparels, both locally and internationally.
  • Management methods that are fundamentally important in state-owned textile mills will be restructure in the interest of keeping them in operation, including by imbibing greater public private partnership.
  • Modernization and backward linkages will be encouraged in private sector dairy farm, poultry and hides and skin businesses.
  • The government will maintain transparency and accountability in taking decision for new/old/shut-down factories both in public and private sectors.

Other Policies to Support SFYP Strategy

Trade policy reforms: Although the trade regime in Bangladesh is restrictive when judged by international standards, it is nevertheless true that considerable liberalization has taken place over the past decade or so. Bangladesh’s increasing global integration based on trade liberalization and other economic deregulation, especially since the early 1990s, contributed significantly to the acceleration of per capita income growth and poverty reduction.

Nevertheless, the review of progress with trade policy reforms also showed that international trade is still subject to a host of tariff and non-tariff barriers which makes the trade regime quite restricted in the global context. Bangladesh is the only country among its trading partners that still maintains traditional Quantitative Restrictions (QR) with the explicit purpose of protecting local industries. The most important restrictions are on the import of a range of textile products. It has also retained general administrative controls over imports which, depending on how they are implemented, can amount to a form of import licensing.

In view of the above the trade policy focus in the Sixth Plan for the manufacturing sector will be to further reduce the bias against exports by lowering trade protection arising from remaining quantitative restrictions, tariff rates and supplementary duties. The Government recognizes the importance of both protecting tax revenues from custom duties and supplementary duties as well as the need to provide some support to those dynamic national industries that have high potential but require temporary trade protection as it gains more experience and learns to compete in international markets. These trade-offs from reducing trade protection will be carefully reviewed and managed to ensure a smooth long-tem transition to a broadly liberal and simplified trade regime that does not discriminate against export enterprises or support inefficient domestic enterprises. Over the longer term, the income tax and the VAT will become the primary instrument for domestic resource mobilization with a sharply lower reliance on customs duties and supplementary trade taxes.

Flexible management of the exchange rate: The main objectives of the exchange rate management policies in Bangladesh have been to accelerate exports, reduce pressure of imports and thereby improve the balance of trade. Bangladesh followed a ‘fixed exchange rate’ system until 1979. Between 1979 and mid-2003, the country pursued a managed floating exchange rate regime. Continued devaluation of the domestic currency, in order to maintain a stable real exchange rate and avoid overvaluation of the domestic currency, was the hallmark of these regimes. Since the end of May 2003, Bangladesh had introduced a kind of ‘clean floating’ exchange rate policy by making it fully convertible on the current account, although capital account controls still remain. This flexible exchange rate management since 2003 has served Bangladesh well and will be maintained in the Sixth Plan to protect the incentives for exports.

Monetary policy: The conduct of monetary policy will be to support lending for infrastructure and other productive industries in 2011, while discouraging lending for wasteful consumption. The Bangladesh Bank will monitor the financial stability of financial institutions, including state-owned and private sector banks, to ensure that there is smooth flow of liquidity in the economy. The Government is also supporting the reform program for public sector enterprises with a view to improving performance and minimizing losses, which will be a key to limiting pressures for credit expansion to this sector. While the interest rate structure will continue to be market determined, efforts will be made to reduce the spread between the lending and deposit rates by creating a more competitive environment in financial intermediation.

Special economic zones, industrial parks: The government is in the process of the creation of special economic zones across the country for both export and local market oriented industries based on the cluster principle of the collection of industries, brought together geographically for the purpose of promoting economic development. A key objective of SEZs and industrial parks would be to stimulate efficient use of skilled labor, land, infrastructure, energy and other resources as well as to facilitate backward, horizontal and forward linkages with local industries. The SEZs will also permit the relocation of pollution-prone and manufacturing enterprises from metropolitan areas. It is expected that the SEZs will trigger a significant flow of foreign and domestic investment leading to generation of additional economic activity and creation of employment opportunities. Furthermore the government will be flexible in using a variety of institutional structures ranging from fully public (government operator, government developer, government regulator) to ‘fully’ private (private operator, private developer, public regulator) as well as public-private partnership arrangements, in which the public sector provides some level of support to enable a private sector investor/developer to obtain a reasonable rate of return on the project in a time-bound way.

Export processing zones (EPZs): Currently there are eight EPZ’s in Bangladesh spread throughout the country. They are namely Dhaka EPZ, Chittagong EPZ, Mongla EPZ, Comilla EPZ, Ishwardi EPZ, Uttara EPZ, Adamjee EPZ and Karnaphuli EPZ. Total investments in EPZ’s aggregated to USD 1582.47 million till June 2009. Moreover BEPZA’s exports earnings stood at USD 2.58 billion. Presently, 300 industries are in operation in the EPZ’s of Bangladesh.

The main fiscal and non-fiscal incentives provided to manufacturing enterprises located in the EPZs are shown in Tables 2.7 and 2.8. These incentives will remain in place during the Sixth Plan to attract foreign and domestic investment focused on exports.

Table 2.7:Fiscal Incentives for EPZ Firms
Incentives – Fiscal
1.Tax holiday for 10 years followed by 50% rebate on export sales.
2.Duty free import of const. materials, machinery/spare parts/equipments.
3.Duty free export and import.
4.Relief from double taxation.
5.Exemption from dividend tax.
6.GSP facility available.
7.Duty free import of 2 vehicles.
8.Expatriates exempted from income tax for 3 years.
Source: Export Promotion Bureau
Source: Export Promotion Bureau
Table 2.8:Non-Fiscal Incentives for EPZs
Non-Fiscal Incentives
1.Investment protected under the Foreign Private Investment (Promotion and protection) Act 1980
2.100% foreign ownership permissible
3.Enjoy MFN status.
4.No ceiling on foreign investment.
5.Full repatriation of Capital and dividend.
Source: Export Promotion Bureau
Source: Export Promotion Bureau

Foreign Direct Investment (FDI)

The investment climate of a country is very important determinant of the countries attractiveness to foreign investment. An interaction of openness and sound investment climate creates a sound regulatory environment for investment and production. Low levels of FDI have meant that Bangladesh has missed out on positive technology spillover. Recently though FDI has picked up in extractive industries, telecommunication and energy production, however it is still lagging behind in manufacturing. Studies have indicated that Bangladeshi firm with any level of foreign ownership are ten percent more productive on average than firms that are wholly domestically owned. Over the course of the past 15 years FDI has played a key role in the modernization of the Bangladeshi economy. There was an inflow of $666m foreign direct investment in 2007 which increased significantly in 2008 to $1086m. In 2009, inflows of foreign direct investment approached $700 million (Figure 2.1).

Figure 2.1:FDI Investments in Bangladesh

Source: Bangladesh Bank

FDI policy framework: Evolution of the FDI policy in Bangladesh: In the late 1980s and the 1990s, Bangladesh announced a series of measures and liberalized its FDI policy framework. In recent years, Bangladesh has significantly improved its investment and regulatory environment, including the liberalization of the industrial policy, abolition of performance requirements and allowance of full foreign-owned joint ventures. Since 1996, new sectors have been opened up for foreign investment, including the telecommunications sector.

During the Sixth Plan the foreign direct investment is encouraged in all industrial activities in Bangladesh excluding those on the list of reserved industries such as production of arms and ammunitions; forest plantation and mechanized extraction within the bounds of a reserved forest, production of nuclear energy and printing and minting fresh currency notes. Such investments may be undertaken either independently or through joint ventures, either with the local, private or public sector. The capital market also remains open for portfolio investment. The policy framework for foreign investment in Bangladesh is based on the Foreign Private Investment (Promotion and Protection) Act, 1980, which provides measures for the non-discriminatory treatment and protection of foreign investment.

Incentives to foreign investment. The government has liberalized its industrial and investment policies in recent years by reducing bureaucratic control over private investment and opening up many areas. Some of the major incentives are tax exemptions for power generation, import duty exemptions for export processing, an exemption of import duties for export oriented industries, and tax holidays for different industries. Double taxation can be avoided by foreign investors on the basis of bilateral agreements. Facilities for the full repatriation of invested capital, profit and dividend exist.

Concessionary duty on imported capital machinery. Import duty at the rate of 7.5% ad valorem is payable on capital machinery and spares imported for initial installation or BMR/BMRE* of the existing industries. The value of spare parts should not, however, exceed 10% of the total cost and freight value of the machinery. Out of this, 7.5% rate of duty payable, export-oriented industries and industries in the under-developed areas may enjoy a further concession of import duties as described in Table 2.9.

Table 2.9:Import Duty Concessions
100% export oriented industries:No import duty is charged in case of capital machinery and spares listed in NBR’s* relevant notification. However, import duty at 7.5% is secured in the form of a bank guarantee or an indemnity bond to be returned after installation of the machinery.
Minimum 70% export oriented industries in developed areas:Import duty at 2.5% is charged in case of capital machinery and spares listed in NBR’s relevant notification. Additional duty at 5% is secured in the form of a bank guarantee or cash deposit to be returned after installation of the machinery.
Minimum 70% export oriented industries in developed areas:Import duty at 5% is charged in case of capital machinery and spares listed in NBR’s relevant notification. Additional import duty at 2.5% is secured in the norm of a bank guarantee or cash deposit to be returned after installation of the machinery.
Other industries outside developed areas:Import duty at 5% is charged in case of capital machinery and spares listed in NBR’s relevant notification. Additional import duty at 2.5% is secured in the form of a bank guarantee or cash deposit to be returned after installation of the machinery.
Other industries in developed areas:Import duty at 7.5% is charged in case of capital machinery and spares listed in NBR’s relevant notification.
Source: Ministry of Finance
Source: Ministry of Finance

Value Added Tax (VAT) is not payable for imported capital machinery and spares. Duties and taxes on import of goods which are produced locally will be higher than those applicable to import of raw materials for producing such goods.

Intellectual property rights and investment protection: The government recognizes the importance of intellectual property rights for attracting FDI and is making efforts to update its legislation and improve enforcement. The country has been a member of the World Intellectual Property Organization (WIPO) since 1985 and signed the Paris Convention on Intellectual Property in 1991. The Foreign Private Investment (Promotion and Protection) Act of 1980 guarantees protection against expropriation. If a foreign investor becomes subject to a legal measure that has the effect of expropriation, adequate compensation will be paid to the investor.

Labor laws: Workers are entitled to elect collective bargaining agents (CBAs) to negotiate their demands with management. A trade union may be formed if 30 percent of employees support it. All trade unions need to be registered. There are 47 labor laws covering matters such as wages, industrial disputes, working conditions, etc. Foreign nationals can be employed as long as their number does not exceed 15 percent of the total number of employees.

Tax Policies for Manufacturing Sector

In order induce investment towards the manufacturing sector the Government has made various concessions in past and current Finance Acts (Box 2.1). In 1980 the income tax rates on companies were 60 percent compared to the 27.5% in the 2009-10 FY. The concessions are made to attract investment from both domestic and foreign sources and achieve rapid growth in the manufacturing sector. Tax policy during the FY11-15 will emphasize an expansion of the tax base and rationalization of the tax system. Although the fundamental structure of the tax system is sound, the extensive use of exemptions, incentives and other special provisions have resulted in a tax system that is prone to evasion. The resulting complex structure of trade taxes also gives rise to significant distortion in economic activity and undermines the equity of the tax system. The Internal Resources Division and the National Board of Revenue is reviewing the tax incentives and exemptions with the aim of broadening the tax base and ensuring greater tax equity.

Essentially the tax structure affecting incentives in the manufacturing sector can be broken down into 5 parts: a) corporate tax, b) tax holidays, c) exemptions, d) custom duty e) facilities for NRB. They are discussed in some details below.

Box 2.1:Additional incentives to export oriented and export linkage industries

Encouraging export oriented industries is one of the major objectives of the Industrial Policy 2010 in keeping with the Government’s export policy. Among others, these facilities and incentives are offered:

  • Concessionary duty as per SRO is allowed on the import of capital machinery and spare parts for setting up export-oriented industries or BMRE of existing industries. For 100% export-oriented industries no import duty is payable.
  • Facilities such as special bonded warehouse against back-to-back letters of credit and exemption from Value Added Tax (VAT) are available as per SRO of the government.
  • System for duty drawback is being simplified. The exporter will be able to get back the duty draw-back directly from the concerned commercial bank.
  • With the intention of encouraging backward linkages, export-oriented industries including export-oriented readymade garment industries using indigenous raw materials instead of imported materials are given additional facilities and benefits at prescribed rates.
  • Export-oriented industries are allocated foreign exchange for publicity campaigns and for opening offices abroad.
  • Entire export earnings from handicrafts and cottage industries are exempted from income tax. In case of other industries, proportional income tax rebates on export earnings is given between 30% and 100%.
  • Facilities for importing raw materials are given for manufacturing exportable commodities under banned/restricted list.
  • Import of specified quantities of duty-free samples for manufacturing exportable products is allowed.
  • Local products supplied to local projects against foreign exchange under international tender are treated as indirect exports and the producer is entitled to avail of all export facilities.
  • Export oriented industries like toys, luggage and fashion articles, electronic goods, leather goods, diamond cutting and polishing, jeweler, stationery goods, silk cloth, gift items, cut and artificial flowers and orchid, vegetable processing and engineering consultancy services identified by the government as thrust sectors are provided special facilities in the form of cash incentives, venture capital and other facilities.
  • Export oriented industries are exempted from paying local taxes (such as municipal taxes).
  • Leather industries exporting at least 80% manufactured products will be treated as 100% export oriented industries.
  • Manufactures of indigenous fabrics (such as woven, knit, hosiery, grey, printed, dyed, garment check, hand loom, silk and specialized fabrics) supplying their products to 100% export oriented garment industries are entitled to avail a cash subsidy equivalent to 25% of the value of the fabrics provided the manufacturers of the fabrics do not enjoy duty draw back or duty free bonded warehouse facility.
  • Exemption of tax on income from industrial undertakings set up in an export processing zone for ten years from the date of commercial production.

Corporate taxes: The corporate tax rates in general have been rationalized over the course of time (Table 2.10). From the highs of 60% for public traded companies to 40% for the publicly traded industrial companies in the early nineties to 27.5% in 2010. This rationalization of corporate taxes has helped reduce the bias against the manufacturing sector as compared with income from land and stock holdings that mostly escape taxes.

Table 2.10:Corporate Tax Structure in Bangladesh
Income

Tax

Year
Public Traded

Companies
Non Publicly Traded

Companies
Banks, Insurance Companies and

Other Financial Institutions
1998-199935%40%40%
1999-200035%40%40%
2000-200135%40%40%
2001-200230%40%40%
2002-200330%35%40%
2003-200430%37.5%45%
2008-200927.5%37.5%45%
2009-201027.5%37.5%45%
Source: Ministry of Finance
Source: Ministry of Finance

Tax holidays: The government has decided to continue with its tax holiday scheme for newly set up industries between 1 July 2008 and 30 June 2011. The tax holiday scheme is detailed out below:

(1) For industries set up in Dhaka and Chittagong (except three Hilly Districts) Divisions – 100 percent income for first two years; 50 percent of income for next two years; and 25 percent income for next one year;

(2) For industries set up in Rajshahi, Khulna, Sylhet and Barisal Divisions and three Hilly Districts – 100 percent of income for first three years; 50 percent of income for next three years; and 25 percent of income for next one year;

(3) Keeping the existing sectors under Tax Holiday intact the additional sectors included are agro-processing, diamond cutting, steel production from billet, jute industries, different units of textile sector, underground rail, monorail, telecom infrastructure except mobile phone.

Furthermore Accelerated depreciation will continue be until 30 June 2010 and tax holiday certificate will be issued by NBR for the total period within 90 days of submission of application. This facility can be availed of by industries set up within June30, 2000.

Exemptions: A number of exemptions are allowed. These include:

  • Tax exemption on royalties, technical know-how fees received by any foreign collaborator, firm, company and expert.
  • Tax exemption on income of the private sector power generation company for 15 years from the date of commercial production.
  • Tax exemption on capital gains from the transfer of shares of public limited companies listed with a stock exchange.
  • Special facilities and venture capital support will be provided to export-oriented industries under “Thrust sectors”.

Customs Duty: Considering the development needs of local industries, the Government has replaced the current three-tier customs duty structure by a four-tier structure consisting of:

  • 1) 3 percent rate of duty on capital machinery and spare parts;
  • 2) 7 percent rate of duty on basic raw materials
  • 3) 12 percent rate of duty on intermediate raw materials
  • 4) Highest slab, for finished goods, to remain at 25 percent. However, 0 percent duty of food stuff, fertilizer, medicines and raw cotton will continue.

Furthermore, duties and taxes on import of goods which are produced locally will be higher than those applicable to import of raw materials for producing such goods.

Supporting Institutions for Manufacturing Growth

Strengthening institutions is an essential part of a strategy to boost manufacturing growth, exports and employment in the Sixth Plan. Several institutions provide essential services that will be strengthened and motivated to provide better services to the manufacturing enterprises.

Board of Investment (BOI)

In order to boost up and promote private investment during the Sixth Plan, the Board of Investment will continue to perform its following mandated functions:

  • promotion of investment;
  • providing facilities for capital investment and rapid industrialization;
  • registration of industrial projects, foreign loan agreements, royalty, technical know-how and technical assistance agreement wherever required;
  • providing assistance to provide infrastructural facilities for industries;
  • issuing work permits to expatriate personnel working in the private sector industrial enterprises;
  • providing import facilities to industrial units in the private sector;
  • approval of the payment of royalty, technical know-how and technical assistance fee to foreign nationals/organizations beyond the prescribed limits; and
  • Recommendations for acquisition and allotment of land in the industrial areas/estates for industrial purpose.

Privatization Commission (PC)

The Privatization Commission is entrusted with the overall responsibilities of privatizing state-owned enterprises (SOE) identified for privatization. Ministries having state-owned enterprises under their control have set up privatization cells for assisting the Privatization Board in identifying, preparing, processing, implementing and monitoring SOEs for privatization. The process of privatization till the end of 1996 was not very satisfactory. The Privatization Commission has been reinvigorated to undertake the process of privatization of industrial, commercial and state owned enterprises in an orderly manner. In order to materialize the targets, the Privatization Commission will take-up the following measures to:

  • develop selection criteria, recommend SOEs for enlistment in the privatization program and subsequently take measures for the transfer of such enterprises to the private sector.
  • determine the priority and sequencing of such privatization, including a detailed work plan and time table for the various enterprises proposed to be transferred;
  • identify the optimal methods such as public offering, private placement, sale of assets, management contracts, leasing or management/employee buy outs by which the process of privatization will be implemented in particular cases;
  • co-ordinate among and recommend to the Ministry of Finance, Ministry of Jute, Ministry of Textiles and other relevant ministries and agencies steps which may be necessary for the successful privatization of the enterprises, such as revaluation of the enterprises, restructuring of debt in accordance with sound financial principle, retrenchment of redundant workers, closure of obsolete facilities of the enterprises;
  • formulate and revisit privatization policies from time to time and advise the government with regard to private sector development, investment and participation in previously reserved sectors such as telecommunication energy and power organize public information campaign about the merits and benefits of privatization; and
  • undertake any other activities connected with privatization.

Chamber of Commerce and Industries (CCI)

Under the present policy of private sector led export-oriented growth, the responsibility of the private sector has increased tremendously. Private Sector is now considered to be the pivotal economic player. During the Sixth five year Plan the institutional capability of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) and its member organizations will be developed and strengthened so that they can lead the private sector to perform its role so as to attain higher growth target. To prevent unfair trade practices, in particular, circumvention of domestic and foreign laws, rules and regulations, these bodies will be encouraged to put in place appropriate code of conduct for their members to observe. With this end in view necessary promotional and support services will be provided to FBCCI and other chambers to improve their institutional capability so that they can discharge their functions for promotion of trade, investment and industry.

Export Promotion Bureau (EPB)

In the wake of the establishment of the World Trade Organization to administer GATT 1994, GATS (General Agreement on Trade in Services) and TRIPS (Trade Related Aspects of Intellectual Property Rights) under an integrated Dispute Settlement Mechanism, the Bangladesh Export Promotion Bureau (EPB) will have to play a dynamic role to achieve the following objectives: (i) to identify obligations of the government to the business and industrial community of the country, to customers abroad as well as under contracts, agreements, arrangements, conventions, etc. of WTO and other relevant international/regional organizations and take all necessary steps towards meeting these obligations; (ii) to remove existing regulatory constraints; (iii) to provide policy support comparable with those of other competing countries; (iv) to provide improved services for export promotion activities; (v) to provide access to supportive infrastructure services; (vi) to improve entrepreneurial and managerial capabilities through human resources development and (vii) to implement export development program to help expand and diversify the range of exportable products. Towards the fulfillment of the above objectives, EPB will be required to be revamped in conjunction with effective private sector co-operation and collaboration, including establishment of a joint institute of foreign trade involving representatives of both public and private sectors.

Bangladesh Tariff Commission (BTC)

The Tariff Commission will carry out in-depth studies and formulate policies for further tariff rationalization, liberalization of the import regime and evolving an incentive structure for strengthening the domestic production and export base. It will review, on a continuing basis, the tariffs on imported inputs – raw materials and intermediate inputs – as well as on capital goods. While rationalizing the tariff structure, adequate attention will be given to ensure that inputs for any domestic product are not subjected to rates of duties and taxes higher than those on competing finished imports and that the domestic industries do not suffer loss because of dumping on the one hand and denial of access to foreign market on the other. The BTC will establish effective co-ordination with the National Board of Revenue (NBR), the Bangladesh Bureau of Statistics (BBS), the Bangladesh Bank (BB), the Ministry of Planning/Planning Commission and the Ministry of Commerce for establishment of a rational and dynamic tariff structure consistent with existing government policy of pursuing free market economy. For discharging its functions more effectively, BTC will build up its capacity further through necessary strengthening and up gradation as well as human resources development.

Bangladesh Standard Testing Institute (BSTI)

Standardization is the gateway to trade and industrialization. A well conceived standardization program lays the foundation for growth of domestic production, protection of consumer interest through ensuring requisite product quality and progressive assimilation of imported technology through adoption and adaptation. Standardization of products as well as of inputs minimizes wastage of resources and ensures compatibility of manufacturing processes and practices. In view of these factors, during the Sixth Plan period, the performance of the Bangladesh Standard Testing Institute will be reviewed and effective measures will be introduced to enhance its functional capability through necessary expansion and modernization. Some vital components of modernizing the Institute will be strengthening its methodology, quality control and testing sections and induction of sufficient number of quality professionals into it.

Bangladesh Institute of Management (BIM)

In the Sixth Plan period, BIM will conduct research on management development and will impart training on socio-economic and other functional areas of management. The main objectives of the institute will be to : (i) upgrade the existing centre to a self-sustained higher institute of training, research and learning, (ii) train and develop managers at all levels of the economy, (iii) assist, develop and maintain higher productivity in business and industry through adoption of technological and engineering innovation and services, (iv) give consultancy services for solving management and related problems faced by various sectors of the economy, and (v) carry out research in different fields of management, economics and business. Activities and courses will be designed and implemented to support private sector industrial and business units.

Bangladesh Industrial Technical Assistance Centre (BITAC)

The Bangladesh Industrial and Technical Assistance Centre (BITAC) have been providing technical and advisory services to the entrepreneurs. Presently BITAC Dhaka, Chittagong, Chandpur and Khulna are in operation. During the Sixth Plan the performance of existing centers will be duly evaluated and new centers will be established keeping in view the needs of the industrial areas. BITAC will assist the private sector entrepreneurs, particularly the small entrepreneurs, to solve their technical problems as well as in adopting/adapting new technologies in their production practices.

National Productivity Organization (NPO)

The National Productivity Organization (NPO) was established in 1989 under the Ministry of Industries. The institutional capability of this organization will be further developed to create productivity consciousness and awareness to the people for launching productivity as a national objective to be pursued by a national movement in the country, undertake program for human resource development for productivity improvement, build productivity infrastructure and convert industrial enterprises into an efficient and profitable organization, work as a catalyst to promote plant-level productivity through consultancy services, conduct survey, study and research work on productivity, and assist the government in formulating productivity policy.

Specific Large and Medium Scale Manufacturing Activities

The philosophy of the current government is for Bangladesh to attain middle income status by 2021. It is felt that the industrial sector has to fuel the much needed dynamism that is required to attain the challenge of earning middle income status. In line with this belief the government has identified three pivotal aspects of the industrial sector of Bangladesh that has to be further developed and improved. These three pivotal areas are a) promotion of domestic content in output, b) wherever practicable substitution of imports and c) sustainable development and husbandry of export oriented industries. Moreover the government aims to create a more investor friendly atmosphere for both local and foreign investors to fuel industrial growth. Moreover the government aims to improve access of khas land for industrial usage and more efforts will be directed at setting up EPZ and SPEZ. In order to unleash the large scale industrial sector the government is taking an integrated approach i.e. there will be increased concentration in improving the infrastructural needs of industrialization and improvement in the financial sector. The government realizes that in order to extract the true potential of the labor and improve total factor productivity the labor force has to be trained further both vocationally and academically and hence various government agencies will work very closely to the industrial sector in order to improve the skill gap. In order to improve Bangladeshi goods the government would support the sector by aiding and encouraging them to carry out. Research so that the goods produce could be of high value and unique and thus greater value exports. Finally it is the firm belief of the government that the private sector would be the leader of industrial development and there the government aims to aid this sector by various policy measures including industrial policy.

The Readymade Garments (RMG) Sector

The Ready-Made Garments (RMG) industry contributes to the Bangladesh economy in a distinctive manner. The last 20 years witnessed unparalleled growth in this sector, which is also the largest exporting industry in Bangladesh. It has attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a significant role in terms of employment generation. Nearly three million workers are directly and more than ten million inhabitants are indirectly associated with the industry. In addition to its economic contribution, the expansion of RMG industry has caused noticeable changes by bringing more than 2.5 million women into the workforce. RMG’s growing contribution to GDP is remarkable; it has reached 13 percent of GDP in 2010 compared to about 3 percent in 1991. It also plays a pivotal role to promote the development of other key sectors of the economy like banking, insurance, shipping, courier services, hotel, tourism, road transportation, railway container services, etc.

Since the inception of the trade liberalization program in the early 1990’s, the RMG sector has grown by leaps and bounds (Table 2.11). From a miniscule share of about 4 percent in total exports in the early 1980s, garments now constitute more than 80 percent of total exports from Bangladesh, raking in nearly $12.5 billion of foreign exchange, out of total export earnings of $15.5 billion in 2008-09. Net domestic value addition–hitherto a weak point, on account of the heavy dependence of the sector on imported fabrics, yarn and accessories–has risen substantially, so much so that nearly 60 percent of the required inputs are now domestically sourced, as compared to a mere 36 percent in 1991-92.

Table 2.11:Growth of the RMG sector
YearExport Volume

(‘000 dozen)
Export Value

(US$ million)
Share in Total

Exports (%)
1990-9130,566.60866.850.5
1995-9672,005.002,547.1065.6
1999-2000111,905.804,349.4075.6
2001-02140,444.604,583.8076.6
2002-03152,013.004,912.0975.1
2003-04182,080.005685.7674.8
2004-05212,390.006424.2774.8
2005-06273,840.007899.5975.1
2006-07332,620.009211.3175.6
2007-08389,030.0010699.875.8
2008-09460,510.0012348.279.5
Source: Bangladesh Bureau of Statistics
Source: Bangladesh Bureau of Statistics

One of the key advantages of the RMG industry is its cheap labor force, which provides a competitive edge over its competitors. The sector has created employment opportunities for about three million people of which 80 percent are women who mostly come from rural areas. Notwithstanding the fact that this sector’s emergence and expansion is the direct outcome of the global MFA regime, there is no denying that it has had a stellar impact on overall economic growth, income generation and poverty reduction in Bangladesh

A Snapshot of RMG Sector: Since the late 70s government initiative such as special bonded warehouse schemes, duty drawback systems and export policy reforms (mid eighties) all helped the RMG sector to operate in almost a free trade environment. Currently, there are nearly 5,000 RMG firms in Bangladesh. More than 95 per cent of those firms are locally owned with the exception of a few foreign firms located in export processing zones. The RMG firms are located mainly in three main cities: the capital city Dhaka, the port city Chittagong and the industrial city Narayanganj. Garment companies in Bangladesh form formal or informal groups. The grouping helps to share manufacturing activities, and to diversify risks; horizontal as well as vertical coordination can be easily found in such group activities.

Readymade garments manufactured in Bangladesh are divided mainly into two broad categories: woven and knit products. Shirts, and trousers are the main woven products and undergarments, socks, stockings, T-shirts, sweaters and other casual and soft garments are the main knit products. Woven garment products still dominate the garment export earnings of the country. The share of knit garment products has been increasing since the early 1990s; and now accounts for just over 50% of the country’s total RMG export earnings. Although various types of garments are manufactured in the country, only a few categories, such as shirts, T-shirts, trousers, jackets and sweaters, constitute the major production-share. The United States was the main export destination for Bangladeshi RMG products in the early 1990s followed by the European Union, but the European Union has surpassed the United States over time. These two destinations generate more than 90 per cent of the total RMG export earnings of Bangladesh (Table 2.12).

Table 2.12:Bangladesh RMG Exports to EU and US(in million USD)
YearEUUS
20076036.23191.2
20086480.23537.5
20096998.73519.7
20107783.7*4076.3*
Source: Export Promotion Bureau

Annualized

Source: Export Promotion Bureau

Annualized

It is important to note that the RMG sector helped create jobs in complementary industries or services, such as accessories, packaging, toiletries (demanded by newly employed female RMG workers), courier, finance, transport and telecommunications services, etc. BGMEA claims that the RMG sector creates as many jobs in these complementary enterprises as there are in RMG units themselves. Although RMG operates in a free trade enclave environment, its growth is clearly based on Bangladesh’s comparative advantage in a labor- and non-skill intensive activity – one that has been sustained by trade and exchange liberalization in addition to the quota regime offered under the MFA.

Challenges for the RMG Sector

While the export-quota system cushioned the Bangladesh RMG industry, enabling it to remain competitive as a prominent garment supplier in international markets until 2004, the phase-out of the system was expected by many analysts to threaten the very survival of this industry. That apprehension was proved wrong as RMG exports continued to grow after 2005 putting Bangladesh securely on the world map as a leading exporter of garments. Yet there are challenges. Backward and forward linkage expansion, meeting compliance standards, product/market diversification and upgrades are some important strategies for the industry to improve competitiveness and seize global opportunities.

Linkage Expansion

Thanks to domestic investments in textiles, the consumption-production gap of yarn decreased over time, although actual consumption increased every year. The fabric-manufacturing capacity of the country also increased over time. Such a trend indicates that the linkage expansion process of the Bangladesh RMG industry, started in the early 1990s, has not lost momentum. Still, many garment manufacturers in Bangladesh are prefer using imported raw materials instead of using local raw materials owing to price and quality differences. The price of RMG inputs supplied by local sources is relatively high. Bangladesh is just a price taker in sourcing RMG inputs from external sources, whereas competitor countries such as India and China have a certain level of influence on RMG input pricing, as they themselves are prominent textile suppliers in the world market.

Compliance Issues

In addition to speedy supply, the social dimensions of the RMG industry are getting more attention from consumers, social workers, welfare organizations and brand name international buyers. Currently, many international buyers demand compliance with their “code of conduct” before placing any garment import order. Although Bangladesh was able to solve the problem of child labor very successfully in the mid-1990s, the country’s performance in improving the factory working environment is not yet satisfactory. Informal recruitment, low literacy levels, wage discrimination, irregular payment and short contracts of service are very common practices in the RMG factories in Bangladesh. It is true that the country still enjoys some comparative advantage in manufacturing garment products based on low labor costs. However, such advantages cannot be sustained forever nor can they be expected from a humanitarian perspective. Rented factory premises, narrow staircases, low roofs, closed environments, absence of lunch rooms, unavailability of clean drinking water and no separate toilets or common rooms for female workers, low wages etc are other concerns in the garment factories of Bangladesh.

Product and Market Composition

The product and market composition of garments from Bangladesh requires special attention to ensure the long-term sustainability of the Bangladesh RMG industry as a prominent supplier in the global market. The export-quota system diverted the attention of some international garment suppliers from quantitative expansion to qualitative improvement of exportable garment products. China and other competitor countries took that opportunity, but Bangladesh failed to do likewise. The country stands far behind in the race to upgrade products compared with its rivals. Bangladesh is still focused on manufacturing lower-end products, although recently the country has emerged slowly from being a lower-end producer towards becoming a middle/high-end producer, from being a simple male-wear producer to become a producer of fashionable female wear. Strengthening the process of upgrading products is very important for the Bangladesh RMG industry if it is to enhance its competitiveness and continue to augment foreign exchange earnings.

Medium-term Goals for the RMG Sector

  • Diversify export destination.
  • Improve supply of both skilled and unskilled workers.
  • Improve the availability of more skilled people in the managerial levels
  • Further product diversification
  • Vertical integration, developing brand name
  • Improve competitive edge through higher productivity, investment in R&D
  • Produce more high value goods

Strategies under the SFYP

  • Have both Bilateral and Multilateral agreements with various countries
  • BGMEA and BKMEA will have to invest more in their training facilities to increase and improve on both coverage and training curriculum.
  • Improve capacity of owners of RMG by providing training on how to move up the value chain.
  • Public infrastructure (such as electricity and roads etc) would have to improve to ensure that RMG factories are operating at full capacity.
  • Political stability along with other features pertinent to the enabling environment has to be improved in order to attract more FDI and make the business environment more conducive for business.
  • Greater use of IT in order to quicken the pace at which business is conducted both with local and international counterparts.

Non-RMG Textiles and Selected Thrust Industries



Non-RMG Textiles

The non-RMG textile industry has gained added significance with the emergence of the RMG sector. The textile industry provides the very important backward linkage in terms of raw materials for RMG as well as for the domestic market. Indeed with the growth of per capita income, the domestic demand for textiles has grown rapidly and has provided the basis for a buoyant textiles market.

Challenges faced by Textile Industry

The textile sector as a whole faces various constraints and problems majority of which are described as under:

  • Inadequate infrastructure and logistic support: port and shipping, road and telecommunication, E-commerce etc.
  • Shortage of skilled manpower: particularly in weaving & dyeing-finishing.
  • Dependence on imported raw cotton (Basic raw material);
  • Fast changing technology (costly for investors);
  • Competition with low cost countries like Vietnam, Cambodia, Indonesia, Nepal, etc.
  • Weak immediate backward linkage of export-oriented RMG i.e. weaving & dyeing – finishing.

Policies and Medium-term Goals in the Textile Sector

  • To attain self reliance in supply of textile products for domestic market as well as supply of yarn and fabrics required for export-oriented readymade garment industry of the country through establishing backward linkages and to ensure direct export of textile goods by expanding production of quality fabrics at competitive prices.
  • To enable textile sector to play the major role for economic development of the country by creating more employment opportunity, enhancing export earnings and value addition.
  • To ensure integrated development of Primary Textile Sector such as spinning, weaving, knitting, dyeing-finishing, hosiery, terry-towel, handloom, sericulture and silk industry to play their appropriate roles based on integrated planning and efficient implementation.
  • To create scope for marketing of textiles and RMG products by ensuring duty free access in global markets.
  • To create investment friendly special fund for financing new investment in the textile sector in line with the facilities provided by the competing countries.
  • To create facilities for development of skilled human resources for textile sector in order to make the products competitive in the global market by increasing productivity and quality.
  • To place emphasis on product diversification and their marketing.

Strategies under the SFYP

  • To facilitate setting up of new textile mills in different regions to meet the present and future demand gap of textile products for the domestic market and export demand.
  • To set up new educational and training institutes to meet the demand gap of manpower needed for rapidly expanding textile mills;
  • To increase skill levels of the technical and marketing manpower employed in the existing industry;
  • To make the textile products competitive in the domestic and export market through increasing productivity, quality and competitiveness.

Jute Industry

Jute Industry has long been playing a significant role in the national economy of Bangladesh. Soon after independence of Bangladesh, Jute mills under private ownership including abandoned Jute Mills and the then EPIDC sponsored Jute Mills were nationalized through promulgation of the Bangladesh Industrial Nationalization Order-1972 and the responsibility for managing, supervising, controlling and co-coordinating the activities of the mills were vested with Bangladesh Jute Mills Corporation (BJMC). Subsequently in pursuance of the Privatization Policy, 50 mills have been privatized during 1977 to 1985-86, 2 mills have been scrapped and another 2 mills handed over to the Privatization Commission. So there remain 27 Jute mills under BJMC including 3 closed mills and 3 non-jute mills. At present, there are 88 mills under Bangladesh Jute Mills Association (BJMA) – the association of privately owned jute mills - including 38 denationalized and 50 mills established by the members of BJMA. The jute sub-sector has been making considerable contribution to the economy by exporting jute and jute products and a large number of workers are involved in jute and jute goods production. Majority of the locally produced raw jute are used in the domestic mills and the remaining jute and jute goods are exported to overseas countries.

Challenges faced by the Jute Industry

  • Inadequate availability of good quality seeds. (ii) Jute products have to compete with low cost packaging products of polypropylene / man-made fibers;
  • Rotting of raw jute is a major problem for the farmers of the areas where water is not available;
  • The cost of production of jute goods in public mills tend to be high due to engagement of excess labor;
  • Power shortage is a major problem for attaining desired level of production;
  • Due to lack of aggressive marketing, jute products cannot enter into new overseas market;
  • There is no legal provision/Act to make the use of local jute products compulsory in the domestic market.

Policies & Medium-term Objectives

  • Production of raw jute and jute goods according to their demand in the domestic and export markets;
  • Proper coordination between Ministry of Agriculture and Ministry of Textiles and Jute for ensuring production of good quality seeds. To encourage raw jute growers to use high yield and quality jute seeds.
  • To encourage the farmers for adoption of modern technology and use of appropriate fertilizers;
  • Improvement of productivity through use of modern machinery;
  • To initiate integrated measures including but not limited to marketing and promotion campaigns for increasing production of eco-friendly raw jute and jute goods for consumption in the domestic and export markets;
  • Appropriate initiative for increased production and marketing of diversified jute products.
  • All possible efforts will be made to make the public sector jute mills profitable.

Strategies under the SFYP

  • Modernization of old machinery of public and private sector jute mills for improving productivity and quality of products;
  • Facilitating the establishment of new jute spinning, weaving and finishing units with modern technology to make the jute products competitive in the domestic and export markets;
  • Appropriate initiatives for human resource development will be made for improvement of productivity and quality of jute products.
  • Proper marketing networks will be developed and promotion campaigns undertaken for increasing the overseas market for jute goods;
  • The new entrepreneurs will be encouraged to produce diversified and high valued jute goods including technical textiles, geo-jute textiles, and health care, automotive parts and bodies etc.
  • Research activities on jute cultivation and jute product manufacturing should be brought under the Ministry of Textiles and Jute with effective coordination maintained with private associations, BJMA and BJSA.
  • Activities of Jute Research Institute will be revamped to facilitate innovation and creation of diversified jute products that can cater to the latest demands of consumers at home and abroad.

Footwear and Leather Industry

Bangladesh is on course to be the next manufacturing hub for the global footwear industry. Many international manufacturers are now interested in setting up factories in Bangladesh mainly due to a good supply of cheap labor. Moreover a number of foreign investors have planned to setup their factories in the EPZ’s. Buyers from the EU and Japan are showing a lot of interest in Bangladeshi produce. All in all, the footwear sector seems very promising but competition from China, India and Vietnam is severe. Exports of footwear doubled from about US$100 million in 2007 to US$ 204 million in 2010. Further surges in growth in export are expected from Bangladesh despite competition from China, India and Vietnam who already possess a well developed leather and footwear export industry. The growth in footwear exports will aid in achieving the goal of export diversification and will act as a safeguard against fall in revenue from leather products for instance. Given the economic slowdown high priced products may register negative growth as consumers tighten their finances and look for slightly low priced goods. This provides a golden opportunity for Bangladesh and mainly for the footwear and leather sector to increase its share. With a good policy environment this sector is likely to succeed and follow in the footsteps of RMG.

Leather manufacturing is one of the oldest manufacturing sub sectors in Bangladesh. Essentially there are three broad components of the leather industry and they are a) leather tanning, b) leather footwear and c) carry bags, wallets etc. The industry requires modest level of fixed capital and mostly uses hand tools and sewing machines. Moreover, most of the enterprises may be classified in the small to medium category. Most of the entrepreneurs take advantage of the liberalized trade regime and import significant part of their inputs from abroad and manufacture footwear inputs locally. However, initially availability of footwear based imported ingredients has been one of the key factors in spurring the growth of small footwear making enterprises in Bangladesh.

Interestingly, pre-1990 there was no export of leather footwear and during 1990-91 export of leather footwear stood at a paltry US$ 2.8 million. Since 1990, however, export of leather and leather products increased from US$137 million in 1990-1991 to US$ 415 million by 2007-2008 having a trend growth rate of 11.6%. As of 2010-11 the country has a fixed export target of US$ 564 million. Industry analysts have argued that given the rapid growth of exports the 1billion mark can be reached by FY 2012-13. Furthermore the demand for Bangladesh leather is picking up pace mainly due increase in production cost (wages in particular) in competing countries. The government’s decision to allow concessionary 1% duty on export oriented capital machinery also had a major positive impact on the sector. Given the high quality leather and leather products that Bangladesh produces at the moment the export contribution is likely to jump in the near future. Bangladesh has to gear up and be able to deliver on its orders to stamp its authority in this market as orders from China and India are shifting to the local manufacturers. Many buyers from China are coming to Bangladesh for the low cost of production. Moreover many European buyers are trying to take advantage of the duty-free export facility to the EU as an additional 16.5 percent tax is levied on footwear exports from China.

Challenges Faced by the Footwear Industry

Some of the challenges faced by the footwear and leather industry are common to other industries as shown in the constraints to manufacturing section. Listed below are some industry specific challenges:

  • Lack of an integrated comprehensive policy with proper inputs by all the stakeholders such as exporters, government, suppliers and buyers;
  • Shortage of adequately trained and skilled human resources for production as well as for managerial personnel in the leather footwear industry;
  • No training institute or facilities for skill development;
  • No support industry in terms of linkage factories such as lasts, cutting dies etc, so there is a high import dependence thereby reducing price competitiveness as well as increasing lead times;
  • Low awareness amongst international buyers as not enough factories are working in the industry
  • Poor representation in major international product fairs and shows;
  • No design, product development or product testing capability in the country;
  • No awareness of international quality standards such as eco-labeling and packaging, occupational standards and environmental management requirements and their growing importance to foreign buyers;
  • Lack of a suitable enabling environment in the customs facilities of the country at time of import of raw materials, due to harassment and delays in clearance;
  • Inadequate working capital finance as most banks insist on Master L/C and back to back L/C procedures for import. Unfortunately in today’s highly competitive market most buyers no longer operate on L/C. Our competitors offer much easier payment terms such as open account, D/A basis delivery, etc;
  • No easy access to the local market for exporters, making them highly vulnerable to the perils of stock lots and cancellations. In China as well as India up to 50% of the total output can be sold onto the local market, whilst still enjoying exporter status. In contrast, in Bangladesh local sales are taxed at such high rates of duty which makes the price too high for the mass market;
  • Political instability may be a binding constraint.

Medium-term Goals

  • Be a market leader in producing high quality but low cost shoes and products.
  • Simplify the process of setting up of leather industries.
  • Make the production and disposal process environmentally safe.
  • Improve the communication strategy to international markets so that more people are aware of Bangladesh as an upcoming market player.
  • Improve the trade environment further to help the industry expand.
  • Recruit high quality managers and workers.
  • Modernize production techniques and communication strategies

Strategies under the SFYP:

  • Set up training institutes to train workers and managers and potential designers.
  • Advise private and public sector financial institutions to design financial products tailor-made for this sector.
  • Bangladesh missions abroad should start up information campaign and host trade shows to bolster the industry.
  • Design an integrated policy for the industry
  • Provide more favorable import and export regimes.

Light Engineering Industry (LEI)

LEI sector plays an important role in the economy in terms of its contribution to employment, output, value addition and exports. Essentially, LEIs are labor intensive industries requiring less capital and generating more employment per unit of capital. This sector has been playing an important role in the growth of many industries by supplying various types of machines, spare parts and providing essential repair services (Box 2.2). Most industries of the manufacturing sector has been historically dependent on imported machines and analysts have suggested that if Bangladesh is able to produce high quality light machinery then value addition of most products that are exported will rise significantly. LEI sector comprises of various types of engineering enterprises and a most of them are small in size comprising of 10-49 workers. As of June 2010 there are about 40,000 LE firms generating 0.6 million jobs. Moreover about 12200 LEI firms enlisted with Bangladesh Small and Cottage Industries Corporation (BSCIC). The main products of this sector are metal, electrical, electronic and electromechanical products. Since this sector plays a pivotal role in fuelling growth in a number of sectors such as jute textile, food processing, fertilizer, shipping, marine transport, automobiles etc it has received special attention from past and present industrial policies of the government. In 2005, 2009 and 2010 this sector has been considered as a thrust sector for development. Moreover, the current and past Export Policy has highlighted the LEI sector as a priority sector.

Box 2.2:Product Lines of LEI

Automobile Sector: The areas of work in this sub-sector cover Bracket, Accelerator, Brake Drum, Bubble, Oil Expeller, Bumper, Bush, Carburetor, Clutch, Crankshaft, Cylinder, Dies, Differentials, Engine Over Hauling, Fans, Free Ball, Gasket, Gear & Pinion, Gudgeon Pin, Hatch Bolt, Head, Hubs, Jack, liner etc.

Marine: Accelerator, Bush, Crankshaft, Differential, Diesel Engine, Fans, Petrol Engine, Liner, Piston & Piston Ring, Marine Spare Parts, etc.

Agricultural Sector: The line of work of LE for this sector (Agriculture) mostly relates to Power Tiller & Spare Parts, Generator, Irrigation Pump, Crankshaft, Gear & Pinion, Piston & Piston Ring, Bearing Case & Cover, Bush, Chain Cover, Chassis Bas, Gland, Grass Cutting Machine, Garden Sprayer, Insecticides Sprayer, Hubs, Liners, Suction, Tube well etc.

Textile: Handloom, Power loom, Spare Parts of all Textile Machinery, Bobbin, Bracket, Carding, Die, Dye, Gear & Pinion, Liner, Pulley, Ring, Silver Can, Spinning Tubes, Spinning Can, Dobbins & Jacquards, Timing Wheel, Rubber Roller, Twisting Machine, Doubling Machine, Scroll Roller etc.

Capital Machinery: Lathe Machine, Packaging Plant Machinery, Precision Welding Machine, Power Loom, Biscuit & Bakery Plant, Washing Plant, Printing Machinery, Laminating Machine, Color Paint machine etc.

Jute & Tea: Precision Winding Machine, Jute Mill Machinery Spares, Base Plate, Softener Machine, 48/64 Pair Roller, Spare Parts of Jargon Broad Loom, Complete Tea Processing Plant etc., are very well covered by LES.

Construction: Concrete Mixture, Brick Crasher, Crane, Grill & Window, Door, Grand Roller, Roof Whist Machine etc are successful examples of the performance of LES.

Food Processing: Biscuit & Bakery Plant, Spare Parts of Sugar Mills Machinery, Flour Mill, Shemai & Noodles Making Machines, Juice (Sugarcane) Machine etc., are very economically fabricated and supplied by the fellow members of LES.

Furniture: Household furniture, office furniture & equipment etc., made of steel, wrought iron, fiberglass, laminated board, are the recent line of work which is well accepted in the market.

Other Machinery & Spare Parts: All types of Bearing, All kinds of Pump, Gas Regulator, Lock Wing Cock, Forged Elbow & Service Tee, Cast Iron Elbow & other Spare Parts for Gas Sector, Machinery & Spare Parts of Poultry, Blister (Pharmaceuticals Sector) etc.

Source: A strategy for developing the Light Engineering sector of Bangladesh – August 2008

LEI enterprises are spread across the country. Table 2.13 below indicates the concentration of various products across Bangladesh.

Table 2.13:Regional Product Concentration of LEI
RegionProduct Concentration
RangpurConcentration on spare parts of automobiles, railway, mills, maintenance works etc.
SylhetConcentration on spare parts of factories, mills, maintenance works etc
Dhaka/Gazipur /NarayanganjConcentration on capital machinery, bicycle, construction equipment and spare parts of automobiles, factory mills, maintenance works etc
Barisal/KhulnaConcentration on spare parts of mills, factories and industries, maintenance, works, etc
BograConcentration on foundry, agro machinery, spare parts of mills factories, LPG Cylinder and maintenance works etc
ChittagongConcentration on spare parts of shipbuilding automobile, industries, factory mills and maintenance work etc

Apart from a few items most light engineering products are mainly produced for the local market. The LE products are mainly exported to the EU and the US. Exporters receive 10 percent cash incentive from government on export value. Furthermore along with this benefit LE products from Bangladesh also enjoy zero duty under the GSP facility in the European markets. In general products that are exported include paper and Cement Mills, Bicycle, fancy light fitting, battery, voltage stabilizer, Iron chain etc. The share of light engineering goods in total exports have gone down in the past few years however in the first half of the 2000’s the export of LEI items increased substantially (Table 2.14). Given the massive potential for the sector (both catering domestic needs of rapidly growing industries and international demand) the focus should be to obtain greater show casing of local works in international markets. Given the focus on having a strong manufacturing sector the next few years will be crucial for strengthening LEI and reducing and managing the challenges that the industry faces.

Table 2.14:Export of Light Engineering Products(million US$)
Products2006-072007-082008-09
Engineering Products Total236.91

(1.95)
219.68

(1.56)
189.48

(1.22)
Bicycle54.05

(0.44)
64.28

(0.46)
84.54

(0.54)
Iron Chain9.66

(0.08)
2.09

(0.01)
1.62

(0.01)
Others173.2

(1.42)
153.31

(1.09)
103.32

(0.66)
Total Exports12170.314108.3715561.85
Source: Export Promotion Bureau
Source: Export Promotion Bureau

Key Challenges Facing LEI

  • Occasional price hike of raw materials such as scrap, sorted scrap, plain carbon steel, alloy steel etc
  • Certain special and high quality raw materials are required for some specialized items which need to be imported after being subject to high duties.
  • Entrepreneurs entering this market have very little basic education and training and thus expansion of business and production of high quality products become tough.
  • Little or no R & D and thus the industry depends on learning-by-doing.
  • Very little working capital available.
  • Obtaining bank loans can be cumbersome.
  • Extremely difficult to get financial support for technological innovation.
  • Lack of metal testing facility making it difficult to identify the metal and its quality.
  • Lack of Heat testing facility
  • Lack of skilled manpower for product diversification
  • Power cuts
  • Poor marketing techniques by unqualified managers
  • Lack of designing ability.

Medium-term Objectives

  • Develop a LEI which would strive to be a regional leader in producing spare parts, basic electrical equipments and components
  • Improve quality of finished products.
  • Have more diversification in the types of LEI goods that are now being exported.
  • Improve the skill of the labor force such that they are able to cope with international orders
  • Encourage R & D in the sector so that firms are able to innovate and introduce new technology.
  • Provide encouragement to entrepreneurs to invest in this sector.

Strategies under the SFYP

  • Banks would be encouraged to design financial products that would be suited to the sectors needs.
  • Show-casing of potential talent in the labor force and products in international trade shows. Bangladeshi Missions abroad will have to play a key role in this.
  • Provide financial incentive along with holding training sessions and workshops to aid entrepreneurs and managers.
  • Develop testing facilities to improve the quality of both inputs and finished products.
  • Develop specialized degree/certificate programs to obtain an increase in skilled labor so both the design and making of the product takes place in Bangladesh thus having more value addition.

Pharmaceutical Industry

Pharmaceutical industry is one of the most promising sectors in the economy. After the promulgation of the 1982 Drug Control Ordinance the industry took off. The knowledge, innovative thoughts and ideas of the professionals working in this sector are the key factors for the development of the sector. The sector has been supplying about 97 percent of total medicine requirement of the local market. Due to recent improvements and development in this sector it has been successful in exporting medicines to the global market including the European market. Furthermore with growing local and international demand a number of new companies are being established with high tech equipments and skilled professionals. Industry analysts have suggested that due to healthy investment and favorable government policy to explore foreign markets the sector has grown by 13 percent in 2010 this compares relatively well (given the low starting point for Bangladesh) with other countries such as India and China which has grown by 21 and 18 percent in the same year (Source: Armtek Pharma LLC, Consulting firm). With over an investment of 250 million USD the sector has emerged as a major player in the Bangladeshi economy. From humble beginnings, pharmaceutical exports are expected to reach $45 million in 2010-11.

Bangladesh is already exporting medicine to over 72 countries across the globe including the EU. Furthermore, the industry is also trying to break into the massive African market. This sector has been a prime example of how the private sector can thrive in a favorable policy sphere. Investment worth up to Taka 20 billion is already on process as the government has decided to set up an API Park in Chittagong with the facility to house 20 plants. In the last few years as many as 10 firms each investing Taka 400 million or more have emerged. Some are already marketing their products while others are in the process. Moreover, the sector has set its target to take advantage of TRIPS and the Public Health agreement which allows Bangladesh to export pharmaceuticals worth potentially billions of dollars in the period between 2005-2016 during which Bangladesh companies are allowed to produce patented products.

Key Challenges

  • Overall poor image of Bangladesh in general also hurts the image of Bangladeshi companies.
  • Lack of promotion capacity of Bangladeshi Missions abroad.
  • Embassies have not been very effective and export of an upcoming industry requires full support of embassies.
  • The new drug policy doesn’t deal with the issue of pharmaceutical export let alone outlay plans for the development of the industries export.
  • Lack of much needed information regarding overseas market. For example starting from product registration to other documents such as bioequivalence study, validation report, and manufacturing plan audit report may be required depending on the export destination.
  • Quality of government documents and has been poor.
  • There are limits to sending product samples abroad. Given the export potentials of the country the limits are not justifiable.
  • There are also limits on the imports of raw materials and these may lead to cutting down of production. Furthermore the limits were set some time back and hence needs to be reviewed in light of the current situation and future possibilities.
  • Lack of local testing facilities means that companies need to conduct their laboratory tests abroad.
  • Registration fees and the documentation procedure can be cumbersome in certain export destinations.
  • Bangladesh Bank has limits relating to foreign currency transactions. Since there are no proper banking relationships with some export destinations and the fact that pharmaceutical companies need to maintain marketing offices abroad this limit is low and essentially works as a hindrance.

Medium-term Goals for the Industry

  • Be a major player at the regional level in the next 5 years.
  • Carryout more R&D activities to develop new products.
  • Improve the quality of professionals entering into this industry.
  • Have a more favorable straight forward policy stance for this sector.
  • More showcasing of industry achievement abroad.

Strategies under the SFYP

  • Foreign Missions will be oriented to help the industry.
  • The import limit will be reviewed to ensure that the production schedule of firms are not hurt
  • More investment will be put into place to ensure that high quality laboratories are set up so that firms do not need to go abroad for testing their product.
  • A one stop information service could be developed under the ministry of commerce to ensure that all the required information to export abroad is found in one place.
  • Bangladesh Bank may review the limit on foreign currency in line with the complaints from the industry to ensure that exporters don’t have to go through a lot of hassle.
  • Improve Pharmacy/Business management courses both in the Private and public universities to ensure that the industry has access to high quality skilled labor.
  • Improve the quality of government documentation

Agro-processing Industry

Within the manufacturing sector, the growth of the agro-processing industry is particularly important for Bangladesh as this is one of the major industries in terms of contribution to total manufacturing production and employment. Some industry analysts have argued that the agro-processing industry is a US$4.5 billion industry. In general, Bangladesh has a rapidly growing agro-processing sector, which mostly relies on domestic agricultural production focusing on serving domestic demands. Furthermore, despite having good potential for high volume exports, these potentials have not been realized. In recent times, fisheries, fruit and vegetables processing have received more attention though export is limited to a few countries. The agro-processing sector includes rice and wheat milling, sugar refining, production of edible oils, processing and preserving of fruits and fruit juices as well as fish processing, both white fish and shrimps. The export coverage of agro-processing industry is increasing at a rapid rate. Local food processors and exporters have mostly focused in and have been successful in entering into ethnic markets with ethnic products. The sector has been successful in exporting around 90 types of agro processing food products to over 70 countries across the world. 81percent of the products are exported to 10 major importing countries including Italy and UK in Europe and USA and Canada in North America and a number of Middle Eastern countries including KSA, UAE, Kuwait etc.

The investment climate in Bangladesh with regards to agro-processing and production is attractive and the policy support from the government is quite healthy. The sector has been declared as a “Thrust Sector” in the current Industrial Policy 2010 and therefore receives preferential treatment. Till now the mainstream supermarket chains with processed food products of international standards has not been targeted despite vast production opportunities within fruits like pineapples, mangoes and different kinds of vegetables, spices, oils etc (these could be only produced for supermarkets). Bangladesh only has 0.1% of total world export. It is strongly believed that only changes in product range and ensuring strict standards of compliance combined with increased market knowledge could create enormous export opportunities for the US and EU mainstream markets.

Key Challenges

  • Improving the quality of inputs, products, technology, business services and environment etc vital for a successful food processing sector.
  • Increase production efficiency and product quality to better meet consumer and export demands.
  • Limited number of products
  • Lack of information about compliance requirements for export items at various destinations.
  • Improve Food safety and agricultural food standards.
  • Weak supply chains.
  • Lack of information about Bangladeshi agro-processing produce in countries where Bangladesh is not currently exporting to.

Medium-term Goals

  • Develop a dynamic high quality export driven sector creating massive employment opportunities for both skilled, unskilled and semi skilled workers.
  • Develop an effective supply chain so cost can be further minimized
  • Develop and improve food quality both by investing more in R&D within firms and also reviewing Bangladesh’s food and health standards

Strategies under the SFYP

  • Bangladeshi missions abroad will show case the achievements of the sector by holding trade fairs, seminars etc
  • Make available more funding for increasing R&D to increase quality and variety of products that can be exported.
  • One stop service at the EPB so that exporters can find information about overseas markets and their requirements

Shipbuilding Industry

Shipbuilding has a long history in Bangladesh. Aided by wide coastlines it potentially has the capacity to be a leader in the small ship building industry in the Asian region. Furthermore, it is expected to be one of the key sectors fuelling export growth during the SFYP. As it currently stands there are roughly 200 shipyards in the country which are mainly involved in building and repairing low quality inland vessels. However, a growing number of shipyards have received orders for and delivered international class vessels. Some analysts suggest that it is roughly 15% percent cheaper to produce ships in Bangladesh than anywhere else in the region. Unfortunately till very recently shipbuilding only catered to domestic demand.

Over the last two decades shipbuilding has moved away from European countries to low cost countries in Asia such as Korea, China, India, Indonesia Vietnam etc. Due to the high cost of skilled labor in the overall cost of smaller ships as compared to larger ships, some Asian producers have moved away from building small ocean-faring vessels to large vessels to enjoy economies of scale. As of 2008-09 Japan and Korea are still the market leaders accounting for 73 percent of world output, China and the EU region has also got a share of 13.5 percent and 7 percent respectively. Due to its relatively late start Bangladesh has a world share of less than 0.1 percent. It is currently understood that shipyards in China, Korea, Taiwan, Singapore and Japan are completely booked for the next ten years for building super-ships and many owners are not finding yards to build smaller ships and this has provided Bangladesh the opportunity. Moreover, the growth of international trade volume to areas where shipments do not take place in large volumes has also increased and along with it increased the market for small ocean faring ships to be as big as $200-400 billion. Industry experts are optimistic that if Bangladesh is able to obtain at least 1% of the market in the coming years exports will rise substantially. As measured by a recent study the value added in shipbuilding varies between 30-40% compared to Bangladesh’s biggest export (RMG) where value addition vary between 20-40%. It has been argued that if certain raw materials and components could be produced in Bangladesh value additions will increase further. There are a number of types of vessel that can be produced ranging from container ships to gas carriers. Germanischer Lloyd indicated recently that Bangladesh should concentrate on multipurpose vessels than specialize.

Currently the three main ocean faring ship builders are Ananda Shipyard Ltd, High Speed Shipbuilding and Engineering Co Ltd and Western Marine Shipyard Ltd. Of the three companies Ananda is by far the most advanced in terms of executing orders. Furthermore, some reports have indicated that orders worth up to $225 million dollars were received in 2005 and the ships are to be delivered by 2011. In general most of the shipbuilders are trying to increase their capacity in order to both increase the number of ships they can build and be able to take on larger orders. As a sign of excellence in quality Ananda received Geneva Century Golden award for quality. Western Marine was awarded the World Maritime Day Award in 2007 for its contribution to the shipbuilding industry in Bangladesh. Furthermore, all these business have a number of orders in the pipeline and therefore rapid expansion is must from avoiding losing orders. There are several requirements that are quintessential in a decision to enter the ship building industry or to change from building riverine and coastal vessels to ocean faring vessels. A successful shipbuilding industry requires certain basic features: (a) the country has to be a riverine country, (b) have decent infrastructure, (c) have skilled manpower, with (d) quality management system. Bangladesh poses all these features in varying degrees. Essentially there are a number of factors that act as a barrier to entry in this business. Some are listed below:

  • Availability of suitable land: The shipyards need large tracts of land and moreover the land has to be adjacent to relatively deep water so that newly built vessels can be launched.
  • Significant funding: Roughly $9 million is required to convert established shipyards to one producing ocean faring vessels.
  • Skilled labor: Skilled labor is a key requirement for a successful shipbuilding industry. The availability of good quality artisans, welders etc are crucial. Furthermore, a major proportion of the total cost involved in ship building is involved in the actual design of the ship and as a result the abundance of high skilled naval architects, marine engineers is imperative.
  • Meeting international standard: International ocean faring vessels have to be built to a certain class such as Germanischer Lloyd (GL) Class. If a vessel is not certified a buyer will not take delivery of the vessel.
  • Access to raw materials and components: A variety of components are required in the ship building industry. The most expensive items of these include Engines, steel, furnishings, piping and cables etc. Engines are usually by the relatively new ship building nations. Bangladesh is completely dependent on importing its entire requirement for ship building.
  • Import and export processing requirements: Procedures used to clear imported raw materials and components have to be simplified. Moreover, it is crucial that ship building obtains the free trade environment that RMG operates in.

A Regulation entered into force on 27 March 2002 that established a timetable for phasing out single-hull oil tankers from EU waters by 2015. Therefore Bangladesh can play an important role in obtaining orders for replacing these ships. Moreover, the shipbuilding capacity of Bangladesh also has to be increased in order to absorb these orders. Listed below are a number of shipbuilders that have been identified: 1) Khulna Shipyard Ltd, 2) Meghna Group (Signed a $35 million deal with a South Korea Ship building giant to build the country’s largest ship manufacturing facility, 3) Dockyards and Engineering Works limited, 4) Desh Ship Building and Bengal electric. All these facilities have to be upgraded to bring it up to international standard.

Challenges of the Ship Building Industry

According to estimates made in 2009 the industry has grown by 10 percent every year and about 100,000 skilled workers and 150,000 semi skilled workers are employed in the ship building industry. Moreover, around 2 million people are linked directly or indirectly to it. Furthermore, by 2011 at least ten more ship yards are expected to have reached international standard. Other ancillary services may grow with the ship building industry for example over the course of time world class components and service suppliers may develop. This in turn may grow into a lucrative export opportunity. Essentially, more growth will take place in the industry for five main reasons they are:

  • a) Labor rates are one of the cheapest in the world.
  • b) Human Resources are available (Thousands of skilled engineers, architects graduate each year and little training is needed to elevate their skills to international standards).
  • c) The Government has declared ship building a priority area and has given five years of tax holiday. Furthermore, a green channel program has been put in place for easing import and export of components.
  • d) Business culture is close to western style and the main communication of business with clients is in English.
  • e) Bangladesh is placed in a convenient geographical location in regards to imports and exports of materials and closeness to regional high growth markets.

However, the industry faces a number of challenges

  • Almost all raw materials, ranging from engines to steel, electronics, furnishings, cabling and piping etc have to be imported from abroad. Moreover, local component and service suppliers are not of international standard. Only about 10 percent of classed vessel component is locally produced.
  • Due to imperfections in the credit markets, ship builders tend to face higher interest and service charges from local banks than other sectors.
  • Poor quality and public utilities also affect the sector considerable.
  • Problem of Red tape, especially when trying to obtain licenses and exporting and importing goods.
  • A shortage of qualified mid management workers.
  • The cost of doing business has to be substantially reduced to attract more FDI and joint partnerships with foreign firms in this sector.

Medium-term Objectives

  • Develop and produce high quality ocean going ships
  • Improve both technical facilities and develop financial services tailor made for the industry
  • Maintain the almost ‘free trade environment’ to ensure rapid growth in the sector
  • Attract more skilled professional from abroad to give training and insights in regards to the technology
  • Focus on how to diversify and move into developing large ocean going ships and components

Strategies under the SFYP

  • The government will invest in setting up training institutes to ensure the right kind of manpower is available for the industry.
  • Bangladeshi Embassies abroad will showcase and further the cause of shipbuilding industries
  • Maintain the free trade environment to help the sector develop a competitive edge
  • Develop and ensure public utilities so that ship yards are close to working in full capacity and are able to deliver on time.
  • Reduce the license raj that currently exist by making simple application procedure and reduce the number of days required for processing documents.

Electronics Industry

Electronics industry has tremendous prospect for efficient import substitution as well as exports. Trade in semiconductors is very large and it is relocating to developing countries. Through subcontracting substantial employment can be generated in this sector. An embryo of this industry already exists, mostly in the export processing zones. Internationally some of the electronics industries, particularly those with low technology content, have become sunset industries in countries like Japan, Hong Kong and Singapore. During the Sixth Plan, efforts will be made to attract foreign direct investment in these areas.

Steel and Engineering

The engineering industries produce investment goods which determine the technological capability and consequently the production level and efficiency of an economy. The engineering industries are also suppliers of important consumer durables. This is particularly so in the electrical and transport equipment industries. In the developed economies, the growth of the subsector generally exceeds that of the manufacturing as a whole. In the developing economies, on the other hand, the sub-sector lags behind.

Bangladesh has a ‘mini’ steel plant at Chittagong which has been out of operation for quite some time. Its engineering base is very weak despite the fact that the country has a machine tools factory, a diesel engine manufacturing plant as well as a plant for manufacturing general electrical equipment. The performance of the sector has not been satisfactory for various reasons though this is the basic sub-sector for industrial development. During the first four years of the Fourth Plan (1990-95), the production volume of this sub-sector showed downward trend because of the low capacity utilization, low productivity, lack of investment fund in the public sector, major constraints in the private sector consisting of demand constraints, inefficient operation of existing units both in the private and public sectors, dearth of skilled and trained personnel, inadequate R&D, inadequate infrastructures, inconsistent tariff policies etc.

Under the current industrial policy, the growth of this sub-sector has come to depend on private sector initiative. In pursuance of the government’s privatization policies, BSEC is endeavoring to increase the efficiency of the enterprises under its control. Proposals for financial re-structuring of some of the enterprises are under consideration by the government. BSEC has already issued public shares to the extent of 49 percent in three of its enterprises namely Atlas (Bd) Ltd, National Tubes Ltd and Eastern Cables Ltd. Bangladesh Machine Tools Factory (BMTF) and Bangladesh Diesel Plant have been handed over to the Bangladesh Army. Furthermore, Karnaphuli EPZ is being established on the property of Chittagong Steel Mills Ltd. Both General Electric Mfg. Co. Ltd and Bangladesh Blade Factory Ltd are SOEs under BSEC and in the context of their cumulative losses, new projects have been undertaken to make these enterprises viable and profitable. Moreover, properties of Bangladesh CAN Company Ltd is under the process of selling out to Progoti Industries Ltd which is another SOE under BSEC for constructing their head office in Chittagong

The objectives for the Sixth Plan for the Steel and Engineering sub-sector are to:

  • support mechanization of the agricultural sector;
  • supply capital goods and spares to various sectors of the economy, e.g., agriculture, power, gas, natural resources, transport, communication, construction as well as manufacturing sector itself;
  • substantially reduce dependence on import of machinery and essential spares and components for jute, textile, sugar mills and electronic industries, thereby improving the balance of payments of the country;
  • strengthen and diversify the existing export structure through production and export of engineering goods;
  • maximize capacity utilization of the existing capital intensive industries through necessary balancing, modernization, replacement and expansion;
  • provide linkage, through sub-contracting, to light engineering industries throughout the country and thus create gainful employment opportunities with special emphasis on rural employment through promotion and development of industries in rural areas;
  • create employment opportunities through development of skills in major sectors like steel, engineering, ship-building and electronics;
  • accelerate transfer of appropriate technology through establishment of project design and engineering company and thereby reducing dependence on expatriate consultants/experts with regard to undertaking feasibility study, project design, engineering services, etc.; and
  • accelerate research and development activities for consolidating the industrial base as well as for the development of indigenous technology.

The general development strategies for the steel and engineering sub-sector as a whole are outlined as follows:

  • consolidation and effective utilization of existing capacities will be achieved through planned capacity expansion, product diversification, BMREs and introduction of additional working shifts;
  • with a view to improving the balance of payments position, reducing dependence on imports and promoting self reliance, necessary programs will be undertaken to diversify the industrial base and to set up import substitute industries for the progressive manufacture of agricultural equipment, jute textile, sugar, electrical machinery and equipment as well as their spares and accessories;
  • measures will be taken to develop viable products which are high technology based and require venture capital for which private investment is not forthcoming;
  • a significant feature of the strategy for industrial development in general and for steel and engineering industries in particular will be to set up projects under joint-venture with the reputed local/foreign manufacturer mainly to create strong export base and thereby to improve country’s balance of payments position;
  • new capacity will be created in the areas of steel making, electrical cables and conductors and basic electronic components manufacturing; and
  • viability of sick projects like Bangladesh Machine Tools Factory, Bangladesh Diesel Plant and other projects will be restored through improvement of management capability of the enterprises and also through phasing out of inefficient manpower for progressive transfer to the private sector.

In line with the objectives and strategies mentioned above a number of projects would be implemented in the next five years for example there will be an MOU signed with Mitsubishi, establishment of shipyards and dockyards for sea-going vessels etc with the proposed budget for all the projects under the steel and engineering sub-sector of around Taka 383 crores.

Chemical Industries

BCIC is currently managing thirteen enterprises under its control. Among these enterprises, there are six urea fertilizer factories, one TSP fertilizer factory, one DAP fertilizer factory, one paper mill, one cement factory, one glass sheet factory, one insulator and sanitary-ware factory and one hardboard mill. It may be mentioned that as per the government decision, ten enterprises of BCIC were included in the privatization list of which, four enterprises have recently been privatized and handed over to the private entrepreneurs by the privatization commission.

With a view of attaining self-sufficiency in Phosphatic fertilizer and to reduce dependence on Triple-Super-phosphate (TSP), Di-Ammonium Phosphate (DAP) plant-1 was constructed at a cost of Tk.510.64 crore and Di-Ammonium Phosphate (DAP) plant-2 was constructed, at a cost of Tk.519.64 crore at the premises of Chittagong Urea Fertilizer Limited. The production capacity of each plant is 800 metric tons per day. Since inception of these two plants, a total of 1,88,678.00 metric tons Di-Ammonium Phosphate was produced up-to June, 2009.

In order to achieve the goals of SFYP a number of projects will be taken up by the government, for example, the accreditation of the national metrology laboratory, establishment of the office of South Asian Regional Standards Organization, strengthening product certification system of BSTI in line with international standards etc. It is expected that in order to implement the entire range of projects for the chemical sector the government will need to allocate a sum of Taka 198 crores in the chemical sector.

On the basis of data compiled from various sources and using estimates, Table 2.15 gives a snapshot of some key manufacturing industries discussed above.

Table 2.15:Summary of Key Manufacturing Sub-sectors
IndustriesEmployment in 2010

(thousand)
Gross value added

2010 (% of mfg)
Exports FY2010

(million US$)
Leather footwear industry16.60.8204.1
Food & beverage1340.04.1687.5
Light engineering718.40.517165
Pharmaceuticals69.01.040.97
RMG3100.036.712496.7
Jute textile18.20.8540
Shipbuilding250.0n/a9.34
Textile industry6007.713.1598.1
Agro processing1529.138.2921.9
Source: BBS, EPB, and websites of various industry associations
Source: BBS, EPB, and websites of various industry associations

Thrust Sectors to Get Priority

On the basis of past performance and some notion of future potential, the Government has prepared a list of thrust manufacturing sectors which will deserve priority in assigning favorable treatment with regard to taxes, subsidies, credit facilities, land allotments, foreign exchange allocations, and the like. The list is given below:

  • Agro-based and agro-processing industry
  • Ship Building
  • Renewable Energy (Solar Power, Windmill)
  • Basic chemicals/dye and chemicals
  • Readymade Garments Industry
  • Active Pharmaceuticals Ingredient Industry and Radio Pharmaceuticals Industry
  • Herbal Medicinal Plant
  • Radio-active (diffusion) Application Industry (e.g. developing quality of decaying polymer/preservation of food/ disinfecting medicinal equipment)
  • Development of Polymer Industry
  • Jute and Jute products
  • Leather and Leather products
  • Light Engineering Industry
  • Plastic Industry
  • Furniture
  • Handicrafts
  • Energy Efficient Appliances/Manufacturing of Electronic goods/Development of Electronic materials
  • Frozen Fish Industry
  • Tea Industry
  • Home Textiles
  • Ceramics
  • Tissue Grafting and Biotechnology
  • Jewellery
  • Toy
  • Innovative and import substitute industry
  • Cosmetics and toiletries
  • Light engineering industry.

Several service activities are also in the list: tourism, ICT, hospital and clinics, container service, and warehousing.

By and large, the list contains the name of sectors that have already achieved success in domestic or export markets or both. In the context of limited public resources, according them priority attention could yield benefits in terms of higher growth performance of the manufacturing sector. But this should not mean that other activities not listed lack the potential for achieving export success. History has shown that neither RMG nor shipbuilding was expected to become high achievers but they did. In the current globalized production system, where different stages of production can be fragmented, it is possible to locate these various stages in different countries in accordance with their comparative advantage. What is more important is to maintain a favorable policy environment and an open trade regime where imports of intermediate inputs can be seamlessly ensured. For the next decade, Bangladesh can be the center of diverse labor-intensive production activity, some of which, like RMG and shipbuilding was in the 1970s or 1980s, are not on the radar as yet.

Small and Medium Enterprises (SMEs)

In a labor surplus country like Bangladesh small and medium enterprises can play a substantial role in providing the impetus to the development of a modern manufacturing sector and in job creation outside of agriculture and informal services. Unfortunately the lack of data makes it very difficult to understand the role of SMEs, especially the small industrial enterprises. Some rudimentary data is available from The National Report of BBS based on the nationwide census of all non-farm economic activities in 2001 and 2003.

An overwhelming majority—98 per cent of establishments—are micro units having less than 10 workers. Only 13 per cent are in manufacturing and the remaining 87 per cent are involved in trade and services (Table 2.16). Within manufacturing, 58 percent of the enterprises are in the category of SMEs (less than 50 workers) employing about 20 percent of total manufacturing labor force.

Table 2.16:Total Non-Farm Enterprises in Bangladesh, 2003
Micro

< 10
Small

10-49
Medium

50-99
SME

10-99
Large

100+
Total

10 +
All
No. of Establishment (000)3620765816873708
% of total units97.62.00.132.180.162.35100.0
% of 10+ units87.45.793.16.9100.0
Sectoral composition (% of total)
Manufacturing12.634.845.135.566.437.513.2
Trades and Service87.465.254.964.533.662.586.8
All100100100100100100100
Rural-urban distribution (% of total)
Urban35.560.173.660.983.162.436.1
Rural64.539.926.439.116.937.663.9
All100100100100100100100
Source: Compiled from Economic Census 2001 & 2003, National Report, BBS, July 2005.
Source: Compiled from Economic Census 2001 & 2003, National Report, BBS, July 2005.

Performance of SMEs

The target of achieving double digit growth hinges largely on the performance of the small and micro enterprises. So far SME enterprises have contributed only about 5.2 percent to the total GDP in 2008-09 and this share has not increased much over the last decade (Table 2.17). In terms of value addition, the performance is also not very satisfactory as the growth of value addition has declined in 1995-2000 from the period 1989-95 (Table 2.18). Over the period 1989-2000 value addition of SMEs had grown at an annual rate of 6.6 percent while in the later five years it grew at only 5.5 percent.

Table 2.17:Contribution of Large & Medium scale and Small Scale Industries to GDP (%)
Large & Medium Scale

Industry (%)
Small Scale Industry

(%)
Total (%)
1999-200011.014.3915.40
2000-200111.134.4615.59
2001-200211.164.6015.76
2002-200311.294.6815.97
2003-200411.414.7616.17
2004-200511.664.8516.51
2005-200612.144.9417.08
2006-200712.475.0817.55
2007-200812.605.1617.77
2008-200912.615.1717.78
2009-201012.685.2017.80
Source: Bangladesh Economic Review, Ministry of Finance, GOB, 2009
Source: Bangladesh Economic Review, Ministry of Finance, GOB, 2009
Table 2.18:Value Addition by Small Industry and its Growth
YearValue added in small

industry (million taka)
Yearly compound growth

rate (%)
1989-9045037
1990-91483167.3
1991-92519297.4
1992-93559257.5
1993-94603347.6
1994-95652207.7
Annual Average 1989/90-1994/95544607.7
1995-96706198.3
1996-97760918.0
1997-98812407.6
1998-99818495.8
1999-2000851225.5
Annual Average 1995/96-1999/2000789845.5
Annual Average 1989/90-1999/2000656076.6
Source: Bangladesh Bureau of Statistics
Source: Bangladesh Bureau of Statistics

Sectoral Performance

Though current overall performance of the SME sector is not adequate, there have been stark differences in performance across sectors. Moreover, sectoral composition of SMEs is so diverse that overall aggregate picture may sometimes be misleading as some sectors may completely outperform the rest. Therefore, it is imperative to paint a sectoral picture in order to be able to craft sector specific policies. A comprehensive report for six key sectors was prepared by SME Foundation and this background report will rely mostly on this study for sectoral analysis. The report is based on a survey carried out in 2006/2007. The sectors included in the study are:

  • i) Agro and Food Processing
  • ii) Designer goods
  • iii) Electrical and Electronics
  • iv) Leather and leather goods
  • v) Light engineering
  • vi) Plastic

The following discussion provides the major findings of the survey report. Based on quantitative analysis the survey reports the size, employment, factor intensities and productivities and some other diagnostics. The survey followed the BBS definition in defining the micro, small, the medium, and the large enterprises2.

Table 2.19 describes the sectors in terms of gross value added by each firm. Gross value added is defined as the difference between gross value of output and the cost of all material goods and services that have been used in the production. The designer goods industry has the highest average percentage share that gross value added has relative to value of gross output for all firm size, including small and micro ones. The reason is that the industry has the lowest percentage share of materials in the total (see Table 2.20). Plastic industry has the smallest value added among the sectors for all firm-sizes.

Table 2.19:Gross Value Added Relative to Value of Gross Output in Six Sectors
Firm

Sizes
Agro & food

processing
Leather &

Footwear
Designer

goods
Electrical &

electronics
PlasticsLight

engineering
AllAllAllAllAllAll
Micro40.447.3374.138.823258.4
Small44.322.5959.436.7932.434.8
Medium52.245.3246.829.6130.436.74
Large5156.956034.613531.03
Source: SMEF survey of six sectors, 2006/07
Source: SMEF survey of six sectors, 2006/07
Table 2.20:Material Cost as Percentage of Total Cost
Firm SizesAgro &

food

processing
Leather &

Footwear
Designer

goods
Electrical

&

electronics
PlasticsLight

engineering
Micro72.983.740.8771.776.776.89
Small71.89153.057776.490.52
Medium64.191.654.0768.783.682.51
Large62.586.953.5378.474.481.13
Micro Small71.990.952.6875.876.589.99
Medium Large63.688.253.77379.780.28
All69.288.853.5475.277.585.99
Source: SMEF survey of six sectors, 2006/07
Source: SMEF survey of six sectors, 2006/07

Table 2.21 profiles the average firm size in terms of employment across six sectors. The designer goods industry has the highest average employment size, followed by leather and leather goods. Agro processing and plastics are in the middle whereas light engineering is reported to have the smallest average size in terms of employment. Among the small and micro industries, designer goods industry employs the highest number of labor per firm.

Table 2.21:Employment per Firm across Four Size Classes in Six Sectors
Firm

Size
Agro

processing
Leather &

Footwear
Electrical &

Electronics
Light

Engineering
Designer

goods
Plastics
Micro5.95.96.34.66.55.6
Small23.621.823.919.135.721.0
Medium70.669.765.874.471.975.8
Large254.2620.8170.3196.9666.7261.2
Source: SMEF survey of six sectors, 2006/07
Source: SMEF survey of six sectors, 2006/07

Products of electrical, light engineering and agro processing are mostly targeted for the domestic markets; revenue from domestic sales is higher in those industries. Revenue from export is higher in designer goods and in leather and leather goods industry. Table 2.22 and Table 2.23 report percentage revenue from domestic sales and from exports for the six sectors. It is noteworthy that more than 80 percent of revenue comes from export of leather & footwear and designer goods of micro-sized industries.

Table 2.22:Percentage of Revenue from Domestic Sales
Firm

Size
Agro & food

processing
Leather &

Footwear
Electrical&

electronics
Light

engineering
Designer

goods
Plastic
Micro10015.3810010016.67100
Small94.7650.2210010040.3158
Medium86.1854.4810010053.1462
Large869010010039.2537
Source: SMEF survey of six sectors, 2006/07
Source: SMEF survey of six sectors, 2006/07
Table 2.23:Percentage of Revenue from Export
Firm

Size
Agro & food

processing
Leather &

Footwear
Electrical &

electronics
Light

engineering
Designer

goods
Plastic
Micro084.610083.330
Small5.2449.770059.6939
Medium13.8245.510046.8638
Large14100060.7557
Source: SMEF survey of six sectors, 2006/07
Source: SMEF survey of six sectors, 2006/07

Limited access to modern technology is a major challenge facing the Bangladesh SME sector. Table 2.24 presents the average number of machines per firm. Agro and food processing industry uses the smallest number of machines. Leather and leather goods industry uses the largest number of machines followed by designer goods industry and this is true for small and micro enterprises too.

Table 2.24:Average Number of Machines in Use across Six Sectors, 2007
Firm size

classes
Agro

processing
Leather &

Footwear
Electrical &

Electronics
Light

Engineering
Designer

goods
Plastics
Micro2.16.153.87.06.132.7
Small4.29.937.813.28.446.7
Medium6.621.9511.217.1819.1716
Large24.487.8229.329.6359.2941
Source: SMEF survey of six sectors, 2006/07
Source: SMEF survey of six sectors, 2006/07

Table 2.25 reports the average capital-labor ratio for each of the six sectors. Capital-labor ratio is calculated as the replacement cost of machinery of the firm by dividing the employment size. The estimates show that for small and micro industries, leather and plastic industry are the most capital intensive than others.

Table 2.25:Capital-Labor Ratio across Six Sectors(Tk. 000s)
Firm SizesAgroLeatherDesignElectricalPlasticsLight. Eng.
Micro53.5283.563.538.5822969.97
Small80.12248.893.727.9924375.99
Medium160.51289.1284.630.3743863.12
Large217.2852.7988.522.3154277.36
Source: SMEF survey of six sectors, 2006/07
Source: SMEF survey of six sectors, 2006/07

Table 2.26 reports the average labor productivity of each of the six sectors. Labor productivity is calculated as physical volume of the firm divided by the employment size. Plastic industry ranks the top for all firm sizes. Designer goods industry has the lowest labor productivity per worker among the sectors.

Table 2.26:Labor Productivity per Worker
Firm SizesAgroLeatherDesignElectricalPlasticsLight. Eng.
Micro830.03081.8978.6163568122000
Small967.63543.86138107678534110
Medium3966045.96164.8457106362490
Large784.73502.2457.658785012350
Source: SMEF survey of six sectors, 2006/07
Source: SMEF survey of six sectors, 2006/07

In summary, the designer goods industry rank the top in terms of gross value added, average employment size, revenue from export. However, capital-labor ratio is relatively high and labor productivity is relatively low in this industry compared to other industries in the study report. Leather and footwear goods industry produce for both domestic market and for export. Products of electrical, light engineering and agro processing are mostly targeted for the domestic markets. In terms of capital labor ratio the agro and food processing industry is in the middle. However labor productivity per worker is relatively lower in this industry compared to other industries. Plastic industry has the smallest value added among the sectors. The industry has the highest unit replacement cost, lowest labor productivity and the highest capital-labor ratio. Leather and leather goods industry is the second highest in terms of value added, employment and capital-labor ratio. Labor productivity is highest in this industry among all the six. Light engineering industry has the lowest value added; employment per firm in this industry is the smallest.

Past Government Policies for SME Development

All governments have emphasized the importance of developing the micro and small enterprises. Some of the recent policy initiatives include the following:

National Taskforce on Small Enterprise Development: The Government constituted a National Taskforce on small enterprise development to draw up a realistic strategy for promoting rapid growth and vigorous competitiveness among these enterprises. The Taskforce submitted its report including a comprehensive slate of recommendations that, if implemented, will mount a coherent strategy to promote the development of small enterprises in Bangladesh in three phases: short, medium and long-term. The Government accepted most of the recommendations with some modifications.

Small Enterprise Cell and Small Enterprise Foundation: Considering the importance of small enterprise financing, a Small and Medium Enterprise (SME) cell was created in 2003 in the Ministry of Industries (MoI). The cell has announced that 80 percent of total resources available for Small and Medium Enterprises would be allocated specially for small enterprises. The SME cell also decided that BASIC and BRAC bank will be working together as lead banks and will be responsible for distribution of credit and venture capital fund in the short run.

Creation of Special Funding Arrangements: The following funds are now in operation in Bangladesh governed by different entities like the Bangladesh Bank, the SME Foundation and the Ministry of Finance (Banking & Financial Institutions Division)

i) Bangladesh Bank Fund:

  • a) Total fund of Tk.600 crore (revolving).
  • b) 17 banks & 23 non-bank financial institutions have signed Participation Agreement.
  • c) Tk. 853 crore is refinanced up to December 2009 to 17 banks and 21 nonbank financial institutions signed the agreement.
  • d) Total number of enterprises being served is 8317.

ii) EGBMP/IDA Fund:

  • a) Total fund of Tk. 116 crore (revolving).
  • b) 18 banks & 23 non-bank financial institutions have signed Participation Agreement.
  • c) Tk. 244 crore is refinanced up to December 2009 to 14 banks and 14 nonbank financial institutions.
  • d) Total number of enterprises being served is 2541.

iii) ADB Fund:

  • a) Total fund of Tk.202 crore (revolving).
  • b) 13 banks & 15 non-bank financial institutions have signed Participation Agreement.
  • c) Tk. 335 crore is refinanced to 9 banks and 7 non-bank financial institution up to December 2009.
  • d) Total number of enterprises being served is 3264.

Major Constraints Faced by Micro and Small Enterprises in Bangladesh

Despite these measures, the development of SMEs has been lack luster and requires a big push to enable it to play its potential development role. SMEs are heterogeneous by their characteristics, mode of operation and types of SME products and processes. As such it is difficult to make sweeping generalization about constraints facing SME entrepreneurs. Some of the major issues are:

Inability to market products: The present and future growth prospect of any product depends to a large extent upon marketing activity. This requires having a well-planned marketing strategy including advertisement campaign as well as resources for implementing that strategy. Unfortunately, most SME entrepreneurs are heavily constrained in this respect as they cannot make adequate investments in marketing and also lack necessary marketing skills.

Inability to maintain product quality: A major constraint to the sustainability of SME growth in Bangladesh is the inability to maintain the quality of SME products. At present Bangladesh produces mostly common consumer goods which are labor-intensive and require relatively simple technology. But due to poor quality these products cannot stand competition from imported products. The challenge for Bangladesh today is not in competing with high-tech products of developed countries but to make its SME sector survive competition from its rivals.

Lack of investment and working capital: It goes without saying that access to finance particularly working capital finance and investment finance to enable them to expand their business is a prime constraint facing the SMEs. Banks in general do not consider SME financing as profitable activity. SMEs are also regarded as high risk borrowers because of their low capitalization, insufficient assets and high mortality rates, and consequently banks are not keen to offer them credit at comparable interest rates. SMEs in the export sector also face problems of access to working capital.

Lack of skilled technicians and workers: Lack of skilled manpower is a perennial problem in Bangladesh. This problem is particularly acute for small and medium scale export oriented enterprises. Bangladesh has made large inroads in the world’s apparel market through commendable performance of RMG sector. However, the value addition of the products is low. Despite high demand, Bangladesh cannot make much entry into high value fashion wear exports due to dearth of trained workers. Supply capacity is thus constrained by non-availability of skilled workers.

Poor management skills of entrepreneurs: In the modern day economy, managerial skills for undertaking planning, marketing, and cash-flow management are vital for survival of an industry, small or large. SME entrepreneurs in Bangladesh are very much lacking in managerial skills and are not used to strategic planning. It is natural that they are unable to survive market failures. The concept of managerial training for SME entrepreneurs is yet to take root in Bangladesh.

Lack of information: In a competitive world, market information regarding demand and supply situation for a product at a particular period, changing consumer tastes, etc. are crucial elements for the success of an SME. In Bangladesh, although some financial institutions and few trade bodies like Dhaka Chamber of Commerce (DCCI) have introduced help desk and knowledge centers with internet facilities, such services are too few to provide service to the SME entrepreneurs on the whole. Lack of market information is a serious constraint to SME development.

Non-tariff barriers (NTB) and changes in world trade regimes: Liberalization of industrial and trade regimes in the wake of globalization are likely to have significant effects on Bangladesh’s SMEs. Over the past decade there has been a significant change in the world trade regime with new regulations coming into effect. WTO agreements such as Application of Sanitary and Phytosanitary Measures (WTO SPS Agreement) to trade in agriculture products raises the barrier for SME exports to developed markets. WTO agreements not only cover the traditional goods sector, but also new sectors like services. Lack of knowledge about the current status and essential components of WTO Agreements hampers trade and business. The need for product standardization and compliance with health and hygiene requirements is an unavoidable part of international trade in farm and non-farm products catered by SMEs. Long-run economic prosperity will critically hinge upon turning the challenges of globalization into opportunities.

Enabling environment for trade and business: Although trade and business activities are carried out by the private sector independent of government control, existence of enabling environment like supportive regulatory framework, congenial tax regime, developed transport and communications infrastructure is vital for SME development. Bangladesh has made some progress in this direction but it still falls short of present day needs.

Other constraints of a general nature are inefficient infrastructure support especially power, widespread tariff anomalies, low productivity of labor, low level of technology, lack of research and development and low level of education of SME entrepreneurs.

Additional insights on what constraints the SMEs can be obtained from the results of enterprise survey conducted in 2003 by the international Consultancy Group (ICG) of the UK and Micro Industries Development Assistance and Services (MIDAS). A summary of the major obstacles identified by the survey is presented in the table below (Table 2.27).

Table 2.27:Policy Suggestions by Survey Respondents(percentage of firms in an industry)
SuggestionsLeather &

Footwear
Electrical&

electronics
Light

engineering
Designer

goods
PlasticAgro &

food

processing
The VAT rate to be decreased27.437.8
Import duties on inputs to fall24.4611.319.0115.533.123.6
Power outage to be reduced20.110.552.829.753.822
Interest rate to be decreased12.5120.416.920.4
Bank loan to be easily available11.218.530.287.810.815.8
Decrease direct taxes5.6311.59.4
Increase production7.8
Greater transparency in rules6.24.2312.616.27.8
Political Stability3.96.2
Greater emphasis on training0.7110.06.2
Refrigerated space on cargo plane3.2
Increasing buyers/ orders8.7
Arrangement of international fair2.9
Separate clusters3.911.316.2010.0
Easy shipment1.2613.1
Land for job worker5.71
Bigger protection from imports10.5
Upgrade technology5.93
Common facility center5.63
Others3.7525
Source: SMEF survey of six sectors, 2006/07
Source: SMEF survey of six sectors, 2006/07

The most important policy recommendations as suggested by the survey respondents are

  • i) Reduction of import duties on inputs.
  • ii) More symmetrical VAT administration
  • iii) Reduction of power outage

SME Objectives, Strategies and Policies in the Sixth Plan

In order to achieve double digit growth, the contribution of small and micro enterprises to GDP should also be increased to double digit. This can be achieved through 3 major ways:

  • By increasing the number of micro and small enterprises through proper monetary and non monetary incentives so that people with entrepreneurial capabilities are more willing to start small businesses.
  • By scaling up the size of the existing micro and small enterprises.
  • By enhancing the productivity of the existing micro and small enterprises.

Therefore, all the strategies and policies should aim at increasing the number, size and productivity of the SMEs. While governments in the past have sought to emphasize the role of SMEs, a coherent strategy and underlying policy framework for supporting SMEs has been lacking. This shortcoming will be addressed in the Sixth Plan. The broad objectives of the SME strategy and policy framework will be to:

  • Accept SMEs as an indispensable player in growth acceleration and poverty reduction, worthy of its great potential and commitment in the requisite overall policy formulation and execution.
  • Identify the key constraints to SME and address them specifically through appropriate policy and institutional changes.
  • Re-orient the existing fiscal and regulatory framework and government support institutions towards facilitating the achievement of the goals of SME Policy;
  • Nurture and partner SME focused civil-society institution(s) having credible management teams in terms of the delivery of needed services, leadership, initiation, counseling, mentoring and tutoring, etc.
  • Create innovative arrangements so that deserving and small enterprises with desired entrepreneurial track record and/or promise can be offered financial incentives for development.
  • Help implement dispute settlement procedures that proactively shield small enterprises especially from high legal costs and insidious harassments.
  • Take measures to create avenues of mobilizing debt without collaterals to match (either using debt-guarantee schemes or mapping intellectual-property capital into pseudo-venture capital) in order to assist small enterprises to have better access to finance.
  • Systematically accord precedence to small enterprises in the allocation of budgetary funds and, within the limitations of government’s resources.
  • Harness information & communications technologies, Internet Protocol (IP)-based infrastructure, and electronic-governance in an effort to make regulatory and other support services accessible to SMEs through the internet.

Credit Policies

Availability of credit is the most important factor for SME development. The Bangladesh Bank has already developed a comprehensive credit policy for SMEs. These loans will be disbursed to the small, medium and women entrepreneurs. In future, the banks and the financial institutions will have to set sector, zone and branch-wise credit disbursement targets and such reports will have to be sent to the corresponding branch offices of the Bangladesh Bank. The details of the credit disbursement targets set by the banks and the financial institutions for 2010 are shown in Table 2.28.

Table 2.28:SME Loan Disbursement Target set by Bangladesh Bank
Sl. No.Types of Bank & Financial InstitutionsTarget

(Crore Taka)
1Nationalized Commercial Banks3897
2Specialized Banks600
3Private Commercial Banks17478
4Foreign Banks707
5Non-Bank Financial Institutions1313
Total23995
Source: Bangladesh Bank SME Credit Policy, 2010
Source: Bangladesh Bank SME Credit Policy, 2010

This important policy initiative will be made more effective by focusing attention on a number of issues. These are:

Targeting: Targeting is the most important part of the credit policy for SME development. Bangladesh Bank has adopted area and cluster approaches to target small and micro enterprises. In line with these approaches, targeting will be strengthened through:

  • A census of small and micro enterprises containing detail information of inputs, outputs, technology and management.
  • Issuing of identification card (SME ID) for small enterprises with registration number.
  • Creating a database of SME ID and update it periodically (e.g., in every two years)
  • Detail Upazila level map of small and micro enterprises to identify cluster

Development of new and customized products: ‘One size fits all’ credit policy will not work for small and micro enterprises. One major criticism of microcredit disbursed by microfinance institutions is that it fails to tailor their products according to demand. Terms and conditions for credit (repayment period, interest rate, grace period, installment, insurance, etc.) taken for cow-fattening should be different from a credit taken for retail business. Therefore, attention will be given to developing loan products that relate better to specific type of credit needed.

Interest rates: In order to encourage people with entrepreneurial skill to start new business and also the existing entrepreneur to scale up the production, subsidy on bank interest rate can be considered actively through both private and public banks. However, this may result in rechanneling or misuse of credit to non SME sectors. Therefore, monitoring the use of credit both at bank and borrower levels is also a critical part of the implementation of credit policy. Possible options include:

  • 10-15 percent interest rate subsidy based on the priority sectors upon identification through SME ID.
  • Since clusters create externalities, greater subsidy (e.g., 15 percent) can be offered to small and micro enterprises which belong to a cluster.
  • Greater subsidy for backward regions, disaster prone areas (e.g., Monga prone area, coastal area, etc.).
  • Agro-based collateral free credit facility can be offered to the poor specially women at a low interest rate.

Capacity building of banking sectors: Credit for SMEs differ from other conventional credit banks are use to lend. Banks are required to build and expand capacity to develop new products, to identify the potential borrowers, to disburse and collect loan in time, and to monitor the use of credit. Some banks have already created SME cell. Specific actions to strengthen capacity include:

  • Bangladesh Institute of Bank Management and Bangladesh Bank Training Academy in collaboration with SME Foundation can offer courses on SME credit to the bankers
  • Bangladesh Bank can persuade and also prepare regulations to ensure that all banks have a specialized cell for SMEs.

Credit through PKSF

NGO sector of Bangladesh has a long history in disbursing credit for small and micro enterprises. PKSF (Palli Karma Sahayak Foundation) is the wholesale credit seller who lends credit to its partner NGO-MFIs. In 2009, PKSF disbursed micro enterprise loan worth of Taka 1.95 billion to 0.14 million borrowers. PKSF will continue to be an important source of credit to SMEs

Tax Policy and Other Fiscal Incentives

A large part of small and micro enterprises belong to the informal economy of Bangladesh. These enterprises do not have any legal identity and therefore do not pay any tax even if their income is taxable. Cost of being legal (registration fees, tax, harassment, etc) can be much higher than being in the shadow economy. Therefore, in order to target the small and micro enterprises effectively, to bring them in the formal sector, adequate incentives should be offered so that smaller enterprises are encouraged to have a legal identity. Therefore, SFYP recommends that

  • A definition based on annual turnover, not only on the number of employees, is required to classify the enterprises for tax purposes. One can define as many as ten groups based on annual turnover so that tax rates can increase linearly and smoothly with size without abrupt jump.
  • Based on the distribution of enterprises in terms of annual turnover, the lowest group (e.g., micro enterprises) should be completely exempted from VAT. The difference of tax rates between two adjacent size-groups should not exceed 1 percent. The fiscal cost of exemption and lower tax rates is likely to be outweighed by the benefit of larger number and greater size of the enterprises.
  • Greater tax incentives for export oriented small and micro enterprises are recommended. For example, handicraft has higher export orientation than other SMEs. So, based on export share of total production, tax subsidy can be offered.
  • 2-5 years of tax holiday can be considered for larger SMEs, especially manufacturing, which take time to take off and make profit.
  • Generally the legal form of small industries is the sole proprietorship and these enterprises are subject to wealth tax on their business capital. Exemption of wealth tax for smaller manufacturing can be considered.

Skills Development

Skill development of the entrepreneur and the workers of the small and micro enterprises is a precondition for the development of this sector. Following steps will be taken in the Sixth Plan to strengthen availability of skills for SMEs:

  • Education policy and national skill development policy would reflect the demand for skilled labor in SMEs and how this demand can be met with current stock of training and educational institutes.
  • SME Foundation with the help of The National Council for Skill Development and Training (NCSDT), Bangladesh Technical Education Board (BTEB) and Directorate of Technical Education (DTE) will offer specialized vocational training/courses at the Upazila level based on the local demand.
  • Upon identifying the clusters of enterprises, SME Foundation will collaborate with local vocational training institutes and NGOs to offer on job training to the workers.

Gender Policy for SMEs

Women can play a major role in the expansion of the SME sector, especially in rural areas. The Entrepreneurship skills of women are already well established from the experience of the micro-credit revolution. The Sixth Plan will build on this positive experience by encouraging women entrepreneurs through preferential access to credit and training programs.

The Industrial sector has created employment opportunities for women who mostly come from rural areas, for creating a positive and enabling working environment a Gender Policy for all the industries in the Industrial Sector will be formulated.

Institutional Capacity Building

In order to put SME on the forefront of national policy domain and to implement the policies, institutional capacity of the relevant ministries, Bangladesh Small and Cottage Industries Corporation (BSCIC)/Small and Cottage Industries Training Institute (SCITI), Bangladesh Institute of Management (BIM), Bangladesh Industrial Technical Assistance Center (BITAC) and National Productivity Organization (NPO) SME Foundation, etc. will be upgraded.

Development Resource Allocations in the Sixth Plan

Much of the manufacturing activities are in the private sector. The main role of the Government is funding of support services in areas of trade policy, industrial policy, and small and micro enterprises. For manufacturing SOEs, the investment program will be mainly financed from own resources. The allocation of resources in the sixth plan is basically intended to finance these support services for the manufacturing sector. Indicative allocations of development resources to support the manufacturing sector in current and constant (FY2011) prices are shown in Tables 2.29 and 2.30 respectively.

Table 2.29:Allocation of Development Resources Manufacturing in the Sixth Plan(crore taka; current price)
Ministry/ActivitiesFY2011FY2012FY2013FY2014FY2015
Ministry of Commerce123126114133152
Ministry of Industry475555630741843
Ministry of Textiles and Jute103131149175199
Total manufacturing70281289310491193
Table 2.30:Allocation of Development Resources for Manufacturing in the Sixth Plan(crore taka; FY2011 price)
Ministry/ActivitiesFY2011FY2012FY2013FY2014FY2015
Ministry of Commerce123117100109117
Ministry of Industry475516547605649
Ministry of Textiles and Jute103122129143153
Total manufacturing702755776857919
Annex Tables and Figures
Annex Table 2.1:Cross-Country Comparison of Manufacturing Performance
1980199020002008
Manufacturing Share as % of GDP
Malaysia21.524.230.928.0
Thailand21273435
Vietnam10.512.318.621.1
S. Korea25272828
China30.232.732.132.9
Bangladesh10.812.714.717.2
Source: World Development Indicators, World Bank
Source: World Development Indicators, World Bank

Annex Figure 2.1:Structure of the Bangladeshi Economy, 1973-2008

Source: Bangladesh Bureau of Statistics

2Following BBS definition respectively micro, small, medium and large enterprises are those employing 1-9, 10-49 workers, 50-99 workers, and 100 or more workers.

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