Seeking trade policy directions in the FY2020 Budget

The timing is such that FY2020 Budget portends to be a policy document of
critical national importance. FY2020 marks the end-year of the 7th Five Year
Plan. Preparations for the 8th FYP are afoot and the groundwork for mediumand long-term strategies has to be laid no later than this year. Like other
annual national budgets, therefore, this budget will be much more than a
narrow instrument of fiscal policy. Its impacts will be spread across the
sphere of macroeconomics, trade, employment, growth and social equity,
among others. That makes it a formidable bellwether for the future directions
of the economy and society. In a rapidly developing market economy like
Bangladesh, the budget symbolises the visible hand of the state in gearing the
development machinery in the proper direction to attain national goals.
Though one-year is short-term, being the first budget of the new Government
under a new Finance Minister, all eyes will be on every statement made to
decipher the underlying focus and stance of overall economic policy of the
current political regime. It must address a host of questions all at once. Can it
be pro-poor, pro-employment, and pro-growth all at the same time? If my
reading is right, it will be business and investment-friendly like never before,
considering the fact that so many business leaders are in the Cabinet and in
Parliament and the economy is crying out for more investment – in
infrastructure, health, education, industry, agriculture, and services. But it is
up to the Government to strike a realistic balance between business and
national interests, between producer and consumer interests, and so many
other competing claims on scarce national resources. We look forward to the
FY2020 Budget giving the right signals so that the economy is fired on all
cylinders to sustain 7-8%+ annual GDP (gross domestic product) growth for
the next five years as Bangladesh prepares to graduate out of LDC (least
developed country) status in 2024. Entrepreneurs and investors are watching
and waiting for the right signals that will drive growth-oriented resource
allocation in the economy. More of the business-as-usual cannot be the answer
at this challenging moment in our economic destiny. The expectation is for
some visionary if not radical changes in policy direction.
Will the budget be trade-oriented and export-friendly? Among the least talked
about constituent of the budget is trade policy. Yet, more than any other live
policy document, the FY2020 Budget will set the tone and directions for and
signal the stance of trade policy for the next few years. What will that stance
be? Will it be more of the same or a notable change in approach to trade as a
critical driver of growth and employment? Given that considerable inputs into
the budget is being channelled through private sector leadership, effective
trade orientation of the budget geared favourably towards exports and their
diversification would be a reasonable expectation.
Willy-nilly, a big chunk of the budget has to do with setting directions of
trade policy, i.e. the domestic policy content of how exports will be
stimulated and imports will be managed through the imposition of tariffs and
para-tariffs. Though the tri-annual Import Policy Order and the non-binding
Export Policy framed by the Ministry of Commerce make up the regulatory
regime for import-export transactions, the fact that quantitative restrictions on
imports no longer exist for protection purposes, these Government
notifications no longer constitute trade policy per se. As the latest WTO
Bangladesh Trade Policy Review (TPR) indicates, tariffs are the principal
instruments of Bangladesh trade policy. The schedule of tariffs (and para –
tariffs) on imports are set, adjusted, or confirmed under every annual budget,
thus constituting the principal mechanism whereby the Government sets the
direction of trade policy, not just for the ensuing fiscal year but also for
coming years.
The 7th FYP ends with a positive note of achieving sectoral and overall
growth targets. The challenge becomes more daunting as the 8th FYP has to
target 8%+ average GDP growth during FY2021-25, in order to attain the
economy’s long-term goal of eliminating extreme poverty by 2031 and
crossing the high-income threshold by 2041. Economic history presents no
evidence of any country having achieved such growth acceleration without
strong export performance. East Asian economies in the 1970s and China over
the past 30 years posted stellar GDP growth all on the back of strong export
performance. Rather than bask on the laurels of RMG exports alone our
attention must be squarely focused on a diversified export basket. The past
experience shows RMG exports still growing faster than non-RMG exports,
thus resulting in more export concentration than less. If we take RMG out of
the export basket, the rest of our exports appear anemic at best. The FY2020
budget must make serious efforts to change this scenario.
After two decades of double digit export growth, that particular leading
indicator of our economy is faltering. Exports in FY2015-18 averaged only
5.0% growth, though it has started picking up in FY2019. This happens at a
time when Vietnam’s exports crossed $220 billion in an economy of $230
billion, and is still growing at 7%+ in 2019 with a fairly diversified export
basket. That should set off alarm bells. A notable change of course in trade
policy under the FY2020 budget is a national policy imperative.
First, taking note of the global economic trends the outlook appears modestly
negative. According to the latest version of IMF’s Global Economic Outlook
the world economy is not yet out of the “slow growth” syndrome, and trade
tensions are weighing in on trade as well as global growth. But the effects
need not be catastrophic. What this means for Bangladesh exports is that
while there are challenges ahead, global demand for Bangladesh’s exports
should remain steady in the near to medium-term. That is because Bangladesh
is technically a small economy in global trade and should be able to sell all its
exports in the world market provided they are cost competitive. So the trade
policy challenge for Bangladesh policy makers is to maintain export
momentum by sustained cost competitiveness.
Given that there is a significant backlog of incomplete reforms, there is
indeed an urgency to act fast in addressing the priority policy and institutional
constraints to improving Bangladesh’s competitiveness. First, global markets
are undergoing rapid technological transformation and trade integration with
mounting competitive pressures. There is no option for Bangladesh but to
strengthen its competitiveness and diversify its export in order to improve our
export performance to engender faster growth. To ensure competitiveness, the
Budget should announce creation of fast, hassle-free “export channels” for
RMG as well as non-RMG exports at seaports, land ports and airports. Road
and rail infrastructure will have to be upgraded to include “export lanes” in
Dhaka-Chittagong corridor. That should include “import-for-export lanes” as
well.
We have a mono-product export basket with 83% of our exports made up of
RMG. Yet, over the past 10 years, Bangladesh has been exporting non -RMG
goods numbering 1000 to 1300 products (at HS6-code level) mostly under
$1.0 million in value (75% of non-RMG exports in FY2018). The potential for
export diversification has not been fully exploited. For non-RMG exports in
particular a strong case has been made for giving them the same treatment as
RMG exports. Provision of duty-free imported inputs (through special bonded
warehouse system) for non-RMG exports is a must to ensure competitiveness
in the world market. A clear announcement to this effect would give traction
to addressing the challenge of export diversification.
But competitiveness is not enough in the Bangladesh scenario, which is
unique amongst developing countries. High protection to domestic industries
and recurrent phases of exchange rate over-valuation create significant antiexport bias to divert resources away from non-RMG exports to importsubstitution activities. Protection-induced profitability from domestic sales is
significantly higher than that from exports so policy is essentially skewed in
favour of domestic sales. A priority trade policy agenda will be to rationalise
tariff protection to balance incentives between exports and domestic
production/sales of import substitutes. The 2019 WTO TPR stated that
supplementary duties (SD) were being used for protection. With the exception
of automobiles, alcoholic beverages, cigarettes, and firea rms, scaling down
SD rates and making them uniform (to eliminate discriminatory rates) should
be high on the FY2020 tariff reform agenda. Little known to most analysts in
Bangladesh is the significant deterrence to non-RMG exports that stems from
high protection. The FY2020 budget ought to have a clear statement on this
fundamental conflict between our policy of industrial protection and the desire
to diversify exports.
There is a lot of talk on FTAs with various countries. Typically, the first item
in an FTA (free trade agreement) framework is tariffs and Bangladesh would
have a hard time surmounting this first hurdle. Indeed, resistance from local
protectionists would be so strong as to stifle any government move to reach an
FTA with other countries. Note that an FTA is based on reciprocity, unlike
preferential access regimes like EU’s Everything but Arms (EBA). The Budget
ought to lay down a policy regarding the pursuit of FTAs.
We are on the cusp of graduating out of LDC status with a goal of crossing
Upper Middle Income Country threshold by 2031 and High-Income Country
threshold by 2041. Attaining both of these milestones will require growth
acceleration to an annual average of 9.0% over the next 20 years. That is only
possible on the back of strong trade and export orientation of the economy by
leveraging the enabling effect of the global economy. Unless the FY2020
Budget recognises this reality and seeks to mainstream trade policy, we will
have missed another year of opportunity.