Author: Nasirra Ahsan

A new year is an opportunity to wipe the slate clean and start fresh. It’s also a good time to reflect on our actions in the previous year to learn from our mistakes and make resolutions to be our best self in the upcoming months. If we were to extend these practices to Bangladesh Bank, what lessons can be learned from their actions in 2019 and what should they be doing differently in 2020?

2019 has been a bumpy ride for Bangladesh Bank, as news about scams in state-owned banks (and even in private banks), rising cronyism and skyrocketing non-performing loans made headlines. It also did not help that Bangladesh Bank has been making policy changes which have not encouraged loan defaulters or taken precautionary steps to curb scams in the bank.

Let’s Talk About NPLs. Again.

Non-performing loans (NPLs) have been a long-standing thorn on the side for Bangladesh Bank, which has called into question the soundness and safety of the banking sector due to poor lending practices, a lack of corporate governance and the government’s interference.

The International Monetary Fund indicates that a loan is non-performing when payments of interest and/or principal are past due by 90 days or more interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement. A debt can also be classified as NPL if payments are less than 90 days overdue, but there are other good reasons—such as a debtor filing for bankruptcy— to doubt that payments will be made in full. NPLs in Bangladesh are classified as substandard, doubtful, and bad or loss, which is calculated based on uniform criteria. A loan is substandard if it is overdue for 3 months or more but less than 9 months, doubtful if overdue for 9 months or more but less than 12 months, and bad or a loss if it is overdue for 12 months or more.

The size of NPLs in Bangladesh is much higher than in other countries in Asia and the Pacific. From its independence in 1971 until 1999, there was a steady rise in the share of NPLs in Bangladesh, with the gross NPL ratio to total loans in the banking system peaking at 41.1% in 1999. NPLs have increased for all types of banks. The State-Owned Commercial Banks (SCBs) and Development Financial Institutions (DFIs) recorded the highest NPL ratios, as they granted loans on weak appraisal, and under directed lending programs, especially during the 1970s and 1980s. After loan disbursement, the banks’ follow up on repayments was not strong, and such directed lending programs have led to a massive build-up of poor-quality loans, resulting in continued heavy losses. Banks were also reluctant in writing off the long-lasting bad loans mainly due to below standard underlying collateral and fear of probable legal complications. This also contributed to the increase of NPLs in the asset portfolio of these banks.

NPLs in Bangladesh are classified as substandard, doubtful, and bad or loss which are calculated based on uniform criteria. A loan is substandard if it is overdue for 3 months or more but less than 9 months, doubtful if overdue for 9 months or more but less than 12 months, and bad or a loss if it is overdue for 12 months or more.

Numbers Do Not Lie

A cross-country comparison of NPLs is difficult, as there is no universal definition of an NPL and accounting rules vary in different countries. But the 90-day period is widely used by countries to determine a loan to be nonperforming. Cross-country comparison with some countries in Asia and the Pacific shows that the NPL ratio to total loans in 2017 was highest in India (10.0%), followed by Bangladesh (9.3%), Thailand (3.1%), Indonesia (2.6%), Viet Nam (2.3%), Sri Lanka (2.5%), the People’s Republic of China (1.7%), and Malaysia (1.5%).

However, the NPLs of banks rose by a staggering Tk3,863.14 crore in three months till September this year, taking the amount of stress loan in the banking sector to Tk1,16,288.31 crore despite huge facilities in place to regularize default loans. As of September, the total bad loans accounted for 11.99% of the total disbursed loans, according to the latest Bangladesh Bank data. At the end of June this year, the total non-performing loans in the banking system were at Tk1,12,425.17crore or 11.69% of the total disbursed loans.

WHY SHOULD YOU CARE?

NPL is a reflection of the long-term financial health and sustainability of the banking sector. There are four reasons behind this:

  1. Banking is a business. Unless they earn money on their loans, they will not be able to stay in business. So, interest earned on total assets loans is a critical determinant of a bank’s financial sustainability.
  2. If NPL grows and banks face a threat to their profitability, they will respond back by raising the interest on loans that will penalize good borrowers and hurt economic growth.
  3. Provisions can only be kept if banks earn money. The larger the size of NPL, the larger the amount of required provisioning. If profit is being eaten up by NPL, then banks cannot keep provisions for long and will eventually default on their obligations and go out of business. The economic consequence of this will be devastating.
  4. Lastly, there is considerable global evidence that the financial health of the banking sector is negatively correlated with the size of gross NPL. So, the long-term viability of a sound banking system depends on keeping a tight lid on gross NPLs.
    Furthermore, the huge amount of NPL will accelerate the operating costs of the banks, which will increase the lending rates. This scenario will make it difficult for good borrowers to get loans at reasonable rates. This might also result in borrowers not getting loans due to liquidity crunch. A soaring NPL may also exacerbate the liquidity crisis and banks’ ability to pay the money to its depositors, which can potentially trigger the banks’ reputational risk.

HOW IS BANGLADESH BANK RESPONDING?
In January 2015, a number of 15 big groups with more than Tk 500 crore loans in default enjoyed the facility getting their loans rescheduled. A total amount of Tk16,410 crore loans were rescheduled at that time. Officials said the central bank decided not to reschedule loans below Tk 500 crore though the defaulters filed a writ with the High Court in favour of their demand.

One of the conditions of the rescheduling facility was that the borrowers would be marked defaulters, and the benefit would be cancelled if they failed to pay two consecutive instalments. In such cases, they would also be barred from any loan rescheduling benefit in the future. The special rescheduling facilities offered to the big defaulters did not do much to curb NPL. Of the 11 business groups, five have become defaulters again while most of the 11 groups had repeatedly been defaulting on repayment. The overall default loans of these 11 groups ballooned from Tk 15,180 crore in 2015 to Tk 17,103 crore in 2019.

Despite the disappointing results from the previous rescheduling policy, Bangladesh Bank introduced a circular on 16 May 2019 which allowed rescheduling of credit facilities of defaulter borrowers in more favourable terms than the credit facilities enjoyed by borrowers who have been repaying regularly. The circular allowed defaulters to pay only a 2% down payment to reschedule their loans to avail a 10-year loan repayment period with a one-year grace period. The rate of interest for these defaulters have been capped at 9%.

This move by Bangladesh Bank has sent out a clear message to the borrowers that it is better to default than to service the loans regularly. Moreover, the burden of NPL has often been transferred to the taxpayers through treasury transfers. This is not only unsustainable as tax revenues become increasingly constrained, but it is also unethical. In Bangladesh where there are still millions of poor, using tax revenues to bail out public banks because they have loaned out depositor’s money to bad borrowers who often tend to be very rich and powerful would seem to violate all accepted norms of ethics and morality.

Finally, restructuring is a means to avoid the pain of an otherwise good borrower facing unforeseen contingencies. It is not a solution to the NPL problem. Unless it is addressed at the roots by resolving all the weaknesses in portfolio quality, the NPL problem will re-emerge.

RIGHTING THE WRONG
A comprehensive resolution will require the government to bite the bullet and do a proper restructuring of the banking sector based on a sound diagnostic analysis of NPLs of both public and private banks and associated institutional arrangements for regulation and supervision. This diagnosis should be done by a team of experts who are independent and not involved with the present banking system.

A short-cut fix through loan restructuring and redefinition of prudential norms will be like applying band-aid to a cancer wound. Redefinition of prudential norms that are presently aligned to international norms can also jeopardize the international credit risk perception of Bangladesh and must be avoided. The solutions to the NPL problem will need to make a distinction between the stock of NPL and the future flow. The growing stock of NPL suggests that the stock problem cannot be resolved unless the flow problem is addressed.

Scams A Plenty
The roles of the government, particularly the Ministry of Finance and Bangladesh Bank were largely limited to appease bank owners, as they succeeded to amend The Bank Company Act , 1991, reduce corporate tax, and manipulate the pledged 9 % lending rate.

In 2018, banks have no role in stemming soaring NPLs, instead, loan scams of a large magnitude resurfaced in the banking sector. Amid a proliferation of scheduled banks, many of which have been incurring losses for years, the BB stunned the sector by giving permission to another new bank, Community Bank of Bangladesh, to operate.

FARMERS BANK SCANDAL
The Farmers Bank became a hotbed for financial irregularities, just three years after commencing operations, near the end of 2017. Established in 2013, the bank was involved in siphoning off more than Tk3,500 crore, according to Bangladesh Bank. Currently, its NPLs account for 58% of its total outstanding loans.

Muhiuddin Khan Alamgir, board chairman, and Md Mahabubul Haque Chisty, chairman of the audit committee, were forced to resign from their respective posts in November 2017—following corruption allegations. As a result, from January 2018, depositors started withdrawing money from the bank, prompting the central bank and the government to step in and rescue the organization. Later, four state-owned commercial banks—Sonali Bank, Janata Bank, Agrani Bank, and Rupali Bank—and the Investment Corporation of Bangladesh bailed out the bank, buying its equity shares worth Tk715 crore. Managing directors of all five of the aforementioned financial institutions were appointed as directors of The Farmers Bank.

JANATA BANK LOAN SCAM
In August 2018, a loan scam perpetrated by state-owned Janata Bank came to light. A Bangladesh Bank report revealed that Janata bank had lent more than Tk10,000 crore to AnonTex and Crescent Group without complying with the central bank’s single borrower exposure limit criteria.

Janata Bank lent Tk5,500 crore to AnonTex—in clear violation of the Bank Company Act 1991—as it provided 25% of the state-owned bank’s capital base. The law set the single borrower exposure limit to 10%.

Currently, Janata Bank has the most default loans, worth Tk14,376.46 crore. Once considered a strong performer among the state-owned banks, Janata Bank is going through troubled times, former Bangladesh Bank Governor Salehuddin Ahmed has said there is no plan of action insight to solve the crisis. Salehuddin cited a lack of good governance and widespread corruption as major reasons for the current dire situation of Janata Bank. “The politically-appointed bank directors often influence bank officials to sanction loans which cannot be recovered later. Additionally, loyalty to vested groups, corruption, and lack of experience—among a section of bankers—worsens the situation,” he further added.

Other ‘noteworthy’ scams include the Basic Bank and Hallmark incidents. The common factors in most of these scams were the intent of management based on political considerations rather than based on expertise or experience, concentrated power of the Board of Directors, widespread flouting of Bangladesh Bank’s core risk management guidelines by bank officials and, in extreme cases, forgery and other fraudulent practices.

HOW DID BANGLADESH BANK RESPOND?
In the wake of news of massive scams, Bangladesh Bank acted as if it were taking steps to curb the situation. Investigations were carried out by the Bangladesh Bank and cases have been referred to the Anti-Corruption Commission (ACC) for prosecution. In some cases, the bank officials responsible for flouting laws and guidelines were silently removed from the Bank but were not subject to criminal investigation. In other cases, nothing was done.

For instance, in the case of the BASIC Bank, where TK5,000 crore was swindled with/without the help of the banks chairman, Sheikh Abdul Hye Bachchu. In Oct 2019, ACC declared their failure in gathering any information against Bachchu. This becomes even less of a surprise when you realize that in 2009, the government-appointed had Bachchu as chairman and Kazi Fakhrul Islam as managing director of BASIC Bank.

Curse of Cronyism
Crony capitalism with loans to kith and kin of politicians and business conglomerates backed by those in power rules the roost. In short, they hold the banks in ransom. This grotesque magnanimity to the corporates is being attempted to be compensated by recapitalization of banks through public funding, which in other words means that the ordinary Bangladeshis would be bailing out the banks that are still being plundered by the corporates. People with political connections not only find it too easy to get loans from banks the government controls, says Biru Paksha Paul, a former chief economist at the central bank, but face little penalty for defaulting

Public sector banks fulfil an indispensable social necessity and large numbers of poor people need access to finance in a country like Bangladesh. The government must not be allowed to abdicate its responsibility to the common people. It has to end this unholy nexus between the State and big capital to revive the Indian banking system to the needs of the majority of the population.

HOW DID BANGLADESH BANK RESPOND?
The Bangladesh Bank decided to promote crony capitalism by recommending amendment of the Bank Company Act, 1991 which allowed the tenure of board of directors to increase from 6 years to 9 years, and up to four family members would be allowed to be on the Board, instead of the earlier two per family. In the context of an already chaotic banking sector suffering from chronic corporate governance failures, caused by, among others, concentrated powers of the board of directors, this amendment was particularly absurd.

It’s Been A Year of Discontent
In an interview with the Economist, Badiul Alam Majumdar, founder of Shujan, an anti-corruption pressure group, has said, “It’s like the Midas effect in reverse. Everything the government touches turns not to gold, but rather from gold to dust.” He is referring to the countless scams, NPLs and other guffaws faced by the government over the last few years.

While I would not be inclined to even touch this mess with a pole, the article demands that recommendations be provided to improve the position of Bangladesh Bank. Thus here are my few chosen points:
· Corporate governance should be strengthened and careful due diligence followed in lending decisions by banks. In easier terms, it means that all cronyism needs to end when it comes to borrowing from banks.
· State-Owned Banks boards of directors are composed of competent professionals, instead of those appointed on political considerations alone.
· The choice of secured collaterals is important for banks to mitigate the risks associated with loans. To reduce the default risk, fair pricing of collaterals through competent accounting firms with global best practices is necessary.

Moody, downgraded the Macro Profile for the banks of Bangladesh from, ‘Weak’ to ‘Weak-‘, adding a negative one-notch adjustment to Credit Conditions. The credit rating agency was a party pooper for an otherwise terrific year for the Bangladeshi economy. Growth spurted to nearly 8 percent of GDP, the RMG sector continued to dominate the world market and political stability remained as stable as one could hope for. Yet the thorn at the side seems to be the ailing banking sector whose soundness and safety remains uncertain due to poor lending practices, a lack of corporate governance and the government’s interference. 

Default loans at banks went up by a hefty 26.38 percent or Tk 19,608 crore last year, the highest rise in seven years, exposing the precarious condition of the banking sector. The amount of non-performing loan (NPL) stood at Tk 93,911 crore at the end of 2018, up from Tk 74,303 crore a year ago, according to data from the central bank. The NPLs now accounted for 10.30 percent of the banking sector’s total loans, up from 9.31 percent in 2017. 

But before we delve further lets understand what are NPLs and why they are bad for the economy. 

INTRODUCTION TO NPL: 101
Non-performing loan, also known as an NPL, is a loan where the borrower has stopped paying the installments on the principal (original amount) and interest – it is effectively in default or very close.
Most loans become non-performing if payments are more than 90 days overdue – this will depend on the terms of the contract. As soon as a loan is non-performing, the likelihood of it being repaid in full are considered to be significantly lower.
A performing loan will provide a bank with the interest income it needs to make a profit and extend new loans. When customers do not meet their agreed repayment arrangements for 90 days or more, the bank must set aside more capital on the assumption that the loan will not be paid back. This reduces its capacity to provide new loans. To be successful in the long run, banks need to keep the level of bad loans at a minimum so they can still earn a profit from extending new loans to customers.
If a bank has too many bad loans on its balance sheet, its profitability will suffer because it will no longer earn enough money from its credit business. In addition, it will need to put money aside as a safety net in case it needs to write off the full amount of the loan at some point in time.
Provisioning against defaulted loans will also jeopardize the financial health of many institutions. Banks have to keep provisions against their NPLs as per the central bank’s guidelines. The provision amounts are kept aside from the banks’ profits. When provisioning amounts become higher than the profits of a bank, it has to provision amounts from its capital, which can result in capital shortfalls. Capital shortfalls, in turn, hamper trade activities with overseas banks.

BACK TO REALITY
The banking sector faced a combined provisioning shortfall of Tk12,897crore at the end of June this year, exposing their faltering financial health. Thirteen public and private sector banks are on the list, according to the Bangladesh Bank’s latest data. Of the 13 banks, four are state-owned, while the remaining nine are private commercial banks.
The thirteen banks are Sonali Bank, Agrani Bank, Rupali Bank, BASIC Bank, AB Bank, Bangladesh Commerce Bank, Dhaka Bank, Mutual Trust Bank, National Bank, Standard Bank, Shahjalal Islami Bank, Social Islami Bank, and Trust Bank. Some of the banks faced provisioning shortfall because they lent a large number of funds in violation of banking regulations, it was alleged.
Our new Finance Minister, AHM Mustafa Kamal vowed to eradicate NPLs by saying, “Now NPL becomes a matter of grave concern, but it is still in a manageable position. From today, NPL will not increase and Bangladesh Association of Banks (BAB) will take necessary initiatives to cut the existing classified loans.”

HOW ABOUT A RAIN CHECK?
In reality, however, the NPLs have galloped forward, for which we have the finance minister to thank. His latest idea has been received with raised eyebrows and concerns at home and abroad. I am talking about the brilliant loan rescheduling program.
Loans are commonly rescheduled to accommodate a borrower in financial difficulty and, thus, to avoid a default. On May 16 this year, Bangladesh Bank offered a special loan rescheduling facility for loan defaulters with a 2 percent down payment and a long 10-year repayment facility with a one-year grace period and one-time exit provision with maximum interest waiver. Moreover, there will be no new credit facility for the defaulted borrowers, who are the beneficiaries of the bailout scheme.
And if that were not bad enough, loan write-offs are being considered a policy tool to discourage bad loans. Loan write-offs almost quadrupled in the first quarter of the year on the back of the central bank’s easing of rules, which is yet again a sobering reminder of the banking sector’s deteriorating financial health. A loan writes off occurs when the lender decides that a loan is not collectible and removes it from their balance sheet.
Banks prefer to never have to write off bad debt since their loan portfolios are their primary assets and source of future revenue. However, bad loans reflect very poorly on a bank’s financial statements and can divert resources from more productive activity. Banks use write-offs, to remove loans from their balance sheets and reduce their overall tax liability.
Between January and March of 2019, Tk 557.30 crore was written-off, in contrast to Tk 141.26 crore a year earlier, according to data from Bangladesh Bank. Earlier in February 2019, the central bank revised its policy to allow banks to write-off default loans that have been languishing in the bad category for three years, down from five years previously. Furthermore, lenders do not have to file any case with the money loan court to write off delinquent loans worth Tk 2 lakh, up from Tk 50,000 previously.
However Moody (yes, those pesks again) have reported that granting loan rescheduling and writing off bad loans is more like sweeping the problem under the rug than dealing with the problem itself. And to add insult to injury, they marked down 8 local banks with a negative rating.
The Capital, Asset, Management, Earnings, Liquidity and Sensitivity to the market risk (CAMELS) rating of different commercial banks of Bangladesh, seemed to follow a similar trajectory and listed all the state-owned banks as Marginal or ‘D-Class’ banks and only ICB Islamic Bank to Unsatisfactory or ‘E-Class’.

HOW DID WE GET HERE?
But what has caused this massive upheaval of the banking sector? There are many reasons for the rise of non-performing loans in the banking sector. Political influence is one of the big reasons why defaulted loans are soaring. Political parties have used their influence to secure loans for the desired candidates. Over the years, many high officials have been appointed in the state-owned banks with political influence, who has put the banking sector in jeopardy by unethically giving loans to devious customers. A number of new banks were established on political grounds. Consequently, some third-generation banks were involved in massive loan scams which have resulted in significant damage to the financial health of the banking sector.
Issuing loans to bad borrowers is another reason behind the rise of NPLs. Bank officials lack knowledge about the potential customers, and they wrongly select bad borrowers who later turn into willful defaulters.
Lack of good governance in the banking sector is another important factor behind the rise of NPLs. Big loan defaulters are getting various facilities to reschedule their payment of borrowed amounts. Due to a lack of good governance, this problem is increasing. Enforcement of good governance—accountability, transparency, and rule of law—can bring the banking sector on the right track.

FINAL FEW WORDS
In a scathing article, The Economist has labeled the banks of Bangladesh to be ‘crony ridden banks’, urging all political influence to be stopped when allocating loans and requesting hard action against those borrowers who have made a living off people’s misery. Loan defaulters should be brought to book and their businesses should be curtailed. Bangladesh Bank officials should be able to exercise their power without fear and favor against loan defaulters.
By no means, is the above-listed problems the only issues plaguing the banking sector, and listing and explaining them all is a herculean task, not fit for this writer. As such the recommendations have also been shortened. However, if one is interested, in a very detailed presentation, Centre for Policy Dialogue, a local think tank, has identified the problems and listed the recommendations starting from recognizing the problem for what it is, scraping the exit plans for state-owned banks and upholding the independence of Bangladesh Bank.
One can only hope that the government recognizes the peril the banking sector is in and does more than what the sector requires.

The World Investment Report 2019 has described the deceleration of the global economy. More specifically, the report talks about the slowing down of Foreign Direct Investment (FDI) by 13% in the year 2018 from $1.5 trillion to $1.3 trillion. This translated to global Gross Domestic Product (GDP) slowing from an average figure of 3 percent in 2018 to 2.4 percent in the second quarter of 2019. While South Asia might not be as integrated into the world market as the other regions, it is not isolated from global development. Thus it is safe to say, the impact of the global downward trend will also be faced in Bangladesh. 

GROSS DETAILS ABOUT GROSS DOMESTIC PRODUCT (GDP)
GDP is one of the most widely used measures of an economy’s output or production. The International Monetary Fund (IMF) defined GDP counts as the output generated within the borders of a country, within a specific time period — monthly, quarterly or annually. GDP is composed of goods and services produced for sale in the market and also includes some nonmarket production, such as defense or education services provided by the government. It is an accurate indication of an economy’s size and is probably the single best indicator of economic growth. Moreover, GDP per capita has a close correlation with the trend in living standards over time.

THINGS ARE KIND OF GOING SOUTH IN SOUTH ASIA
Falling in line with the global trend, the South Asian economies also seem to be moderating. While the economic outlook for South Asia is most positive, it is highly divergent across countries. There are some economies, including Bangladesh, Bhutan, and India, where economic conditions are largely positive, with GDP growth projected to remain robust in the near term. In contrast, the outlook in the Islamic Republic of Iran and Pakistan has visibly deteriorated. Consequently, regional GDP growth slowed down markedly in 2018. Yet, given the large size of the Indian economy, on the aggregate, the regional outlook is still moderately favorable, especially in comparison to other developing regions. Regional GDP is expected to expand by 5.4 percent in 2019 and 5.9 percent in 2020, after an estimated expansion of 5.6 percent in 2018. This is shown below.   

STARTED FROM THE BOTTOM, NOW WE HERE!
Bangladesh boasts the second highest Gross Domestic Product (GDP) growth rate in South Asia. The country has successfully maintained GDP growth rates which are over 7 percent consistently over the last 3 years. The World Bank has predicted the GDP growth rate to be 7.2 percent for the year 2019 and expects the numbers to rise to 7.3 percent the following year.
In fact, according to the latest edition of the “South Asia Economic Focus, Making (De) Centralization Work”, a report produced by the World Bank, Bangladesh’s economy is forecasted to grow faster than all countries in South Asia, except for Bhutan, in the current fiscal year.

The rising GDP growth has been attributed to increased net exports, remittances and increased consumption. The ready-made garments industry is still the main driving force behind the rising export with the diversion of export orders from China adding to the growing demand for Bangladeshi garments. Similarly, the country is banking on the record number remittance it has received in 2019- $16.4 billion. This, in turn, boosted consumption and thus largely contributed to the GDP scores.  

EXPORTING GOODS TO EARN SOME DOLLARS
Bangladesh has achieved the second-highest export growth globally over the past decade (2008-2018) and the highest among South Asian nations thanks to the increasing apparel shipment, according to World Statistics Review 2019. Vietnam, which is also one of the top garment exporters worldwide, topped the list with a 14.6 percent export growth while Bangladesh gained 9.8 percent, according to the World Trade Organization report.

“Bangladesh’s exports of apparel and clothing more than trebled between 2008 and 2018,” the WTO report said. Bangladesh maintained the title of the second-largest garment exporter worldwide grabbing 6.4 percent of the global trade.

With the high achievement of export receipts last fiscal year, the government was prompted to set a new export target for the current fiscal year at $54 billion, of which $45.50 billion is expected from merchandise export and $8.50 billion from services exports. The overall export growth has been fixed 15.20 percent higher than the achievements in the year of 2018.

While the above-listed information is something to celebrate, it is important to keep an eye on the trade deficit figures. The trade deficit is when a country’s imports exceed its exports. Overall Bangladesh incurred a $10.8 billion trade deficit during 2018, increasing by 9.6% from $9.8 billion one year earlier.

The notion that trade deficits are bad in and of themselves is overwhelmingly rejected by trade experts and economists. According to the IMF, extreme trade deficits can cause a balance of payments problem, which can affect foreign exchange shortages and hurt countries. Thus while Bangladesh does have a trade deficit, the number is not alarmingly high.

REMITTANCE: STANDING ON THE SHOULDER OF GIANTS
Remittances are funds transferred from migrants to their home countries. They are the private savings of workers and families that are spent in the home country for food, clothing and other expenditures, and which drive the home economy. For many developing nations, remittances from citizens working abroad provide an import source of much-needed funds.

In Bangladesh, remittance is one of the main drivers of the country’s economic growth, accounting for 5.4 percent of the gross domestic product in the year. Bangladesh received $15.5 billion in remittance in the year 2018, up more than 15 percent year-on-year, according to the World Bank. Bangladesh has the third-highest recipient of remittance in South Asia in 2018, after India and Pakistan and 11th highest recipient globally.

But perhaps the most surprising news was when in the month of May, a record amount of remittance flow for a single month as expatriate Bangladeshis sent $1.75 billion to ensure that their loved ones back home can celebrate Eid-ul-Fitr with more festivities.

Economists and bankers believe the government’s announcement to award 2 percent incentives on remittances, increase in manpower export and rise in fuel oil prices in the global market have caused the surge in Bangladesh’s remittance inflow. And the country witnessed a 16.58 percent remittance inflow surge between the months of July-September in the year 2019. 

REAPING WHAT WE SOWED
A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Foreign direct investment is critical for developing and emerging market countries. Their companies need the multinationals’ funding and expertise to expand their international sales. Their countries need private investment in infrastructure, energy, and water to increase jobs and wages.

The World Investment Report states that FDI in Bangladesh went up by 67.94% in 2018. Bangladesh reached the highest ever level of FDI in the country’s history at $3.61 billion. While China became the leading investor in the country with $1.03 billion, the United States, traditionally the top investor, dropped to fourth with only $0.17 billion in FDI for 2018 in Bangladesh, as per the report. The Netherlands stood as the second-largest investor with $0.69 billion, and the United Kingdom was the third-highest investor with $0.37 billion.

The government of Bangladesh over the past few years has taken various initiatives, such as policy reforms, removing infrastructural deficiencies and creating a positive business environment to encourage more investment, and that has paid off.

The increase in FDI is a result of policy reforms and the introduction of a one-stop service (OSS) for investors, which is already in operation. Currently, a total of 22 services are being provided by the OSS. The government, as part of its reforms, enacted the One-Stop Service Act 2017 to facilitate services and reduce the cost of doing business for both foreign and domestic investors.

Beyond these, political stability, and expanded domestic market and a booming economy linked to global economies have played a role. The government has also taken on mega projects such as Padma Bridge, Rooppur Nuclear Power Plant, and LNG terminals, to improve the ‘doing business’ ranking.

YET DAUNTING CHALLENGES REMAIN
Global industrial production cycles are strongly correlated with GDP. The strong and positive correlation shows that when industrial production grew fast, GDP tended to grow fast as well (and the other way around). The correlation between global industrial production and GDP growth from 2009 to 2018 was 0.97. The correlation between industrial production and GDP is strong as well, especially in India and Bangladesh. In Sri Lanka and Pakistan, this correlation is somewhat weaker.

For Bangladesh, in the coming years, the outlook is clouded by rising financial sector vulnerability. However, the economy is likely to sustain a 7 percent growth supported by a robust macroeconomic framework, political stability, and strong public investments. The challenges of the financial sector have been added to by increased NPLs and government borrowing from private banks which could crowd out the private sector. 

NOT THE NPLS AGAIN!
Non-performing loans (NPL) are a troublesome issue for Bangladesh. NPL accounts for 10.41 percent of the total loans given. The figure was 9.31 percent in December of 2018. The rising trend of the NPL is bound to have a long-lasting negative impact on the country’s financial sector. If loanable funds are blocked as NPL, banks will not have enough reserve for issuing future loans, which will affect the economy in multiple ways. For example, it will hinder employment generation. The scarcity of loanable funds for the private sector will widen the rich-poor gap in society. The rising trend of NPL will also have a negative impact on the banks’ profitability.

The banking sector needs more stringent loan-issuing policies and their enforcement, in order to tackle the problem of NPLs. Bangladesh Bank should be given more authority and power so that it can take prompt initiatives to address the NPL crisis. And finally, loan defaulters should be brought to book and their businesses should be curtailed.

OUT WITH THE OLD AND IN WITH THE NEW
Lack of progress in modernizing tax administration may result in revenue shortfalls while higher spending and donor fatigue in response to the Rohingya crisis could add to fiscal pressures.
Tax revenues remained modest, at 10.3 percent of GDP due to a narrow tax base and limited implementation of administrative reforms. After a seven-year delay, the implementation of a new VAT law began in July 2019 but with multiple rates for different types of goods and services, the complexity of the VAT regime has increased.

Bangladesh has one of the lowest tax-to-GDP ratios in the region. According to the National Board of Revenue (NBR) data, as of June 2018, there is about 3.5 million tax identification number (TIN) holders, of which about 1.95 million submitted tax returns.

Tax collection by the National Board of Revenue is also a challenge. For instance, NBR collected Tk38,453 crore in VAT, during the first half of the ongoing 2018-19 fiscal year, against a set target of Tk50,025 crore, according to the board’s data, revenue collection lagged behind by Tk11,572 crore. Unrealistic targets and failure to collect VAT from the gas sector are the most popularly cited reasons.

ALL’S WELL THAT ENDS WELL
Despite all the trials and risks, Bangladesh has defied all odds to emerge as one of the fastest-growing countries not only in South Asia but globally as well. Sustained efforts by the government to forward the development agenda of the country will ensure that Bangladesh attains sustainable and inclusive development.

Achieving normalcy in a war-torn nation is always an uphill battle. While hoping that it becomes one of the fastest-growing economies in the world can be considered to be wishful thinking – Bangladesh has achieved both in under 5 decades. And the country owes this to the steadfast support of the private sector which has positioned the country for hyper-growth and long term success.

The private sector is the part of a country’s economic system that is run by individuals and companies, rather than the government, for profit. In fact, the private sector in every country is simply the community at work and, as a part of that community, business today comprehends its impacts better than ever before. Its influence on economic and social development, respect for the environment, and efficiently and effectively managing resources represents an important contribution to the well-being of its communities.

In Bangladesh, the sector has employed close to four million women across the 4,000 garments factories or through providing basic banking services through microcredit and mobile financial services, the private sector in Bangladesh has played a significant role.

Over the coming years, this role must become more prominent as the world has been going through an unprecedented change over the last few years powered by digital interconnectedness with the rise of new technologies such as Blockchain, AI and so on. This fourth industrial revolution is altering countries, industries, organizations, and even individuals, in unprecedented ways.
The advent of platform business models like Uber and Ubereats led to the evolution of similar models globally including Pathao in Bangladesh or HungryNaki. There is a rising entrepreneurship movement riding on easy access to capital along with low capital requirements that enable companies to be created by any talented individual. Moreover, this rising entrepreneurship spirit, helped by the rising digital interconnectedness, has become more prominent.

However, the private sector cannot act alone. Governments have the main responsibility for providing the legislative and regulatory environment that enables businesses to play their part. Vital issues such as open trade policy, sound and stable governance, infrastructure investment, economic and monetary policy, tax and social protection structures, and the costs of doing business must be balanced by governments in a way that gives the private sector the ability and incentive to act.

Take job creation, one of the biggest development challenges anywhere in the world. To meet this challenge, more employers are needed. Existing enterprises cannot absorb the market entrants of today, let alone those in the future. This means that more entrepreneurs are required – people with ideas, drive and a willingness to take risks. How helpful is the business and regulatory environment in your country when people take the decision to start a new business? How helpful is the legal process in registering and sustaining a business? How adapted is your education system in providing would-be entrepreneurs with the skill-set needed to be enterprising and employment creators?

I suppose we can flip that argument to say, the public sector alone cannot help the case for Bangladesh at a global level. It needs the help and support of the private sector. The country grew 7.86 percent in the last fiscal year and is projected to grow at 8.13 percent for FY 2019-20. As a result, this will be the eighth year in a row that its GDP has exceeded six percent. The private sector played a crucial role in this growth and to transcend to the next level of growth, the private sector needs to move beyond their organizations and help to catalyze systemic change.

In reality, few countries do those things well. Moreover, if any of the sustainable development goals (SDGs) are going to have any kind of chance to deliver for our populations beyond 2019, the area of private-sector development and enterprise growth must also be supported by governments. Jobs are the best way out of poverty. We need good jobs – formal-sector jobs through formal sector enterprises, jobs that fit the needs of the modern economy, jobs that through their taxes contribute to the means of development in any country.

Companies such as Rahimafrooz, United Group of Industries, BSRM, DBL, and many others have continued to pave the way for help meet the country’s development goals.

If one stands back and looks at the goals we set for our societies, the private sector is the main engine of economic growth. It is the base upon which social development, education, health care, and social-security systems rely. Let the private sector do its job!

 

Some would say that the World Investment Report 2019, is the harbinger of bad news. It is easy to see why; according to the report global foreign direct investment (FDI) fell from $1.5 trillion to $1.3 trillion between the years of 2017 to 2018. That’s a fall of 13 percent which signals that the accelerated investment needed to meet the Sustainable Development Goals (SDGs) is just not apparent. This further translates into reduced investment in combating climate change, rising tensions over trade wars and debt vulnerabilities of nations.

The World Investment Report is a thorough analysis conducted by United Nations Conference on Trade and Development (UNCTAD) focusing on the trends in foreign direct investment (FDI) worldwide, at the regional and country levels and emerging measures to improve its contribution to development. The conference released its 2019 World Investment Report this week, showing that global FDI not only hit its lowest since the global financial crisis, but has also been on the decline for three consecutive years. The report has an analysis of the trends in FDI during the previous year, with special emphasis on the development implications, ranking of the largest transnational corporations in the world, policy analysis and recommendations and an in-depth analysis of a selected topic related to FDI.

The Secretary-General of UNCTAD, Dr. Mukhisa Kituyi, seemed to have given the plot away at the very beginning of the report. Dr. Kituyi says, “The new industrial policies that have been adopted in recent years, almost all rely to a significant degree on attracting investment. At the same time, we are observing a declining trend in cross-border productive investment. The market for internationally mobile investment in industrial capacity is thus becoming increasingly difficult and competitive. The demand for investment is as strong as ever, the supply is dwindling and the marketplace is less friendly than before.” But he isn’t all gloom and doom, the report recognizes the importance of Special Economic Zones (SEZs) as key policy instruments for the attraction of investment for industrial development.

The article summarizes the World Investment Report 2019 and gives an insight on how Bangladesh is faring in the global arena.

GLOBAL TRENDS AND PROSPECTS
Global trend in FDI has continued their downward movement to rest at $1.3 trillion in 2018. If you are looking to blame someone, then look no further than the tax reforms in USA introduced at the end of 2017. To be clearer, the decline was mainly due to large-scale repatriations of foreign earnings by United States multinational corporations (MNCs). President Trump signed the “Tax Cuts and Jobs Act” into law on Dec. 22., 2017, bringing sweeping changes to the tax code. For the wealthy, banks and other corporations, the tax reform package can be considered a lopsided victory given its significant and permanent tax cuts to corporate profits, investment income, estate tax, and more.

Furthermore, the law enacts repatriation of overseas profits at a rate of 15.5% for cash and equivalents and 8% for reinvested earnings. Goldman Sachs estimates that U.S. companies hold $3.1 trillion of overseas profits. The law introduces a territorial tax system, under which only domestic earnings are subject to tax. Foreign-derived intangible income (FDII) refers to income from the export of intangibles which are held domestically, which will be taxed at a 13.125% effective rate, rising to 16.406% after 2025. The European Union has accused the U.S. of subsidizing exports through this preferential rate, a violation of World Trade Organization rules.

Perhaps the most surprising of all this is the drop in FDI to developed countries. FDI flows to developed economies reached their lowest point since 2004, declining by 27 per cent. FDI Inflows to Europe was less than $200 billion, half of 2017 figure; FDI flows to Ireland and Switzerland fell to -$66 billion and -$87 billion, respectively. FDI flows to the United Kingdom also declined, by 36 per cent to $64 billion, as new equity investments halved. FDI into the United States declined as well, by 9 per cent to $252 billion – the average of the last 10 years. Australia’s FDI inflows reached $60 billion – a record level – as foreign affiliates reinvested a record $25 billion of their profits in the country.

FDI flows to developing economies remained stable, rising by 2 per cent to $706 billion. As a result of the increase and the unusual fall in developed countries, the share of developing economies in global FDI increased to 54 per cent, a record. The United States remained the largest recipient of FDI, followed by China, Hong Kong (China) and Singapore.

But what of FDI outflow from developed countries? Overall, outward FDI from developed countries fell by 40 per cent to $558 billion. As a result, their share in global outward FDI dropped to 55 per cent – the lowest ever recorded. Nevertheless, outward investment by European MNCs rose 11 per cent to $418 billion. France became the third largest investor home country, with FDI outflows of more than $100 billion in 2018. Outward investment by MNCs from developing economies dove by 10 per cent to $417 billion.

Rebounds Are Likely
But don’t feel too sorry for the developed nations, since a rebound in FDI inflows is likely in 2019 as the effects of the US tax reform wears down. Greenfield project announcements also point at an increase, as they were up 41 per cent in 2018 from their low 2017 levels. A greenfield investment is a type of FDI where a parent company creates a subsidiary in a different country, building its operations from the ground up. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices and living quarters.
In developing economies, the value of announced projects in manufacturing rose by 68 per cent to $271 billion. Most of the increase in greenfield investments took place in Asia, but announced projects also increased markedly in Africa (up 60 per cent); while they slumped in Latin America and the Caribbean. The number of projects in developing countries rose by a more modest 12 per cent. The growth in the number of projects in typical early-industrialization industries – the type often attracted by SEZs – remained lackluster.

REGIONAL TRENDS
One country has defied the downward trend of global FDI: Africa. In 2018, roughly $46 billion worth of FDI flowed into Africa, an 11 percent increase compared to 2017. This is significant for the continent because when a company or an individual makes an FDI, they are said to be establishing a long-term business interest in the said foreign country. The expectation is that they will not only invest money but also time and soft assets such as training, expertise and technology.

Why Africa?
The African Continental Free Trade Agreement (AfCFTA) allows 52 African countries to buy and sell goods without tariffs, thus making them less expensive. Commodities are the other big draw for investors and according to UNCTAD investment in African commodities such as gold is expected to rise. Dr. Kituyi has weighed in on this development and said, “The AfCFTA agreement will bolster regional cooperation along with upbeat growth prospects, this bodes well for FDI flows of the continent.”

A few economies, such as Kenya, Morocco and Tunisia, saw an encouraging increase in diversified investment while Egypt remained the largest FDI recipient in Africa in 2018, although inflows decreased by 8 per cent to $6.8 billion. France was the top investor in Africa, followed by the Netherlands, UK and USA.

How about Asia?
FDI inflows to developing Asia rose by 4 per cent to $512 billion in 2018. Growth occurred mainly in China, Hong Kong (China), Singapore, Indonesia and other ASEAN countries, and Turkey. Asia continued to be the world’s largest FDI recipient region, absorbing 39 per cent of global inflows in 2018, up from 33 per cent in 2017. FDI inflows to South Asia increased by 4 per cent to $54 billion, with a 6 per cent rise in investment in India to $42 billion, driven by an increase in mergers and acquisitions in services, including retail, e-commerce and telecommunication.

Around half of Southeast Asian FDI number went to Singapore. In fact, Singapore’s influx in FDI has been greater than the FDI attracted by all of Africa combined and far exceeded that of India ($42 billion) and Indonesia ($22 billion).

Among other South Asian countries, FDI flows to Sri Lanka and Bangladesh rose to record level, $1.6 billion and $3.6 billion respectively. While Pakistan, experienced a 27 percent decline to reach $2.4 billion.

INVESTMENT POLICY TRENDS
Foreign Investment regulations and restrictions are on the rise
Global foreign investment contractions come amid rising global protectionism fueled more so by the US profits being repatriated after the Trump Administrations 2017 tax reform. Dr. Kituyi, secretary-general of the (UNCTAD) said “For some time now, the global policy climate for trade and investment has not been as benign as it was in the heyday of export-led growth and development.”

In 2018, some 55 countries and economies introduced at least 112 policy measures affecting foreign investment. Two thirds of these measures sought to liberalize, promote and facilitate new investment. Thirty-four percent introduced new restrictions or regulations for FDI – the highest share since 2003.

Investment from Chinese multinationals also fell for the second year in a row, dropping 18 per cent to $130 billion, as a result of state policies to curb overseas investment, as well as growing screening of inward investment in the US and Europe. Last year the number of restrictive policy measures affecting foreign investment was close to a record high, according to UNCTAD’s annual global investment report. While only about one in 10 policy measures affecting investment was restrictive 16 years ago, by last year that proportion had risen to one in three.

Most of the trade restrictions introduced last year — 21 of 31 — were in developed countries, while there were substantial increases in 2017 and 2018 in screening processes for FDI. For example, Germany broadened the definition of critical infrastructure in its investment screening process to include news and media, while the UK lowered the thresholds that trigger investment screening from £70m to £1m in high-tech industries. In contrast, emerging economies in Asia overwhelmingly adopted measures aimed at the liberalization, promotion and facilitation of investment.

Unctad’s report also warns that last year an estimated $153bn worth of merger and acquisition deals were blocked or withdrawn for regulatory or political reasons — double the number in 2017. Disregarding the fluctuations caused by US tax reform and other volatile elements, “the underlying FDI trend…was till negative”, stated the report.

Screening of foreign investment
FDI screening has become more prevalent over recent years. At least 24 countries have a specific foreign investment screening mechanism in place. Tighter control over foreign acquisitions due to security and public interest concerns are also being addressed at regional levels.

SPECIAL ECONOMIC ZONES (SEZS)
As countries attract FDI to special economic zones (SEZs), active support to promote clusters and linkages is key to maximizing development impact, according to the UNCTAD report. “But multi-activity zones can extract some of the benefits of colocation. Proactive identification of opportunities, matching efforts and training programs, with firms within and outside the zone, significantly boosts the impact,” the report goes on to explain further.

The zones offer fiscal incentives and have streamlined regulations to attract FDI and can be found in both developed and developing countries. China operated 2543 such zones in 2019, followed closely by Philippines (528), India (373), USA (262). Bangladesh operated 39 SEZs, of which 9 are Export Processing Zones (EPZ) catering to textile and apparels.

“At least 101 countries have industrial policies, of which 80% were formulated over the past five years. We call them the new generation of industrial policies. Special economic zones are one of the major means of achieving industrial policy goals,” Dr James Zhan, lead author of the report, was quoted saying.

Special economic zones (SEZs) have ballooned across the globe in recent years, growing in number to nearly 5400, up from 4000 over the last 5 years. In line with new industrial policies, some SEZs have shifted their focus away from manufacturing, remodeling themselves to attract investments from new industries, such as hi-tech, financial services and tourism.

SEZs Struggle
Despite the proliferation of SEZs, many have failed to meet the expectations of policy-makers, because they have not attracted the anticipated level of investment. “There are many examples of SEZs that have played a key role in transforming economies, promoting greater participation in global value chains and catalyzing industrial upgrading. But for every success story there are multiple zones  policies, some SEZs have shifted their focus away from manufacturing, remodeling themselves to attract investments from new industries, such as hi-tech, financial services and tourism.

SEZs Struggle
Despite the proliferation of SEZs, many have failed to meet the expectations of policy-makers, because they have not attracted the anticipated level of investment. “There are many examples of SEZs that have played a key role in transforming economies, promoting greater participation in global value chains and catalyzing industrial upgrading. But for every success story there are multiple zones that did not attract the anticipated influx of investors, with some becoming costly failures,” said Dr. Kituyi. This failure can be attributed to a number of factors including the use of SEZs as piloting zones for the rest of the economy, the erosion of SEZ privileges relative to the rest of the country and the operational design of the zones themselves.

Given the underperformance of the majority of SEZs, the report outlines a framework to tackle the main challenges, so “that international organizations can advise countries and provide technical assistance to help evaluate the results, and build a new generation of special economic zones for sustainable development,” added Mr. Zhan.

WHERE DOES BANGLADESH STAND?
FDI in Bangladesh went up by 67.94% in 2018, report says. Bangladesh reached the highest ever level of FDI in the country’s history at $3.61 billion. While China became the leading investor in the country with $1.03 billion, the United States, traditionally the top investor, dropped to fourth with only $0.17 billion in FDI for 2018 in Bangladesh, as per the report. The Netherlands stood as the second largest investor with of $0.69 billion, and the United Kingdom was the third highest investor with $0.37 billion.

Bangladesh received its highest net FDI, yet thanks to the one-off payment of $1.47 billion by Japan Tobacco Inc. to purchase Akij Group’s tobacco business. The power sector attracted the highest amount of FDI of $1.01 billion, followed by food at $729.69 million, textile and weaving at $408.08 million, banking at $282.54 million, telecommunication at $219.87 million, leather and leather products at $110.55 million and trading at $101.91 million.

“FDI flows have declined all over the world, but in Asia they increased, particularly in Bangladesh,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh. Yet Bangladesh’s inflows pale in comparison with neighboring India, up 6 percent to $42.29 billion from the previous year.

Still this inflow of funds is an indication that the country’s economy which was previously confined to exports and imports, is now expanding to investment, said Abul Kalam Azad, principal coordinator for the SDG affairs at the Prime Minister’s Office. Moreover, this is an indication of a growing foreign companies interest in local affairs. The latest mergers and acquisitions are testimonies of that rising interest.

It is safe to say that the budget speech delivered by the honorable Finance Minister AHM Mustafa Kamal, on 13th June 2019, had all of us reeling. The budget will be the first for the Finance Minister, who took charge of the ministry in January this year. It is also the first one of the current government since retaining power in the national elections in December last year.
The new budget will provide directives on reforms in education and financial sectors and incentives for the stock market, the finance ministry added. The budget has come up with new directives for the National Board of Revenue on how to simplify the revenue-generating process. It will also have directives on implementing the new VAT law, which will have more than one VAT rate. Even if the targets in the budget are far-reaching there will be wholehearted efforts to attain them, the finance ministry stated.
Perhaps this zeal to attain these overarching goals is what encouraged the government to propose a 7.5% VAT on e-commerce entrepreneurs. Under the new proposed budget, e-commerce businesses have been ascribed under ‘Social Media and Virtual Businesses’. By definition, any kind of sales transactions made by usage of electronic media, through the internet, by means of social media or mobile applications, belongs to this category.

VAT IS HAPPENING?
The proposed VAT rate has been met with extreme opposition by members of the e-commerce industry in Bangladesh who have labeled the planned 7.5% VAT as a ‘travesty’. They cite that the imposition of the new VAT is in direct contradiction to the governments vision of ‘Digital Bangladesh’.
Members of the Bangladesh Association of Software and Information Services (BASIS) and e-CAB (e-Commerce Association of Bangladesh) have strongly voiced their disapproval regarding the new tax and have urged the government to revoke it. Didarul Alam, Director of BASIS have been quoted to say that, “Imposition of such an amount of VAT will reduce the growth rate, and act as a restraint for e-commerce entrepreneurs to promote employability.” Indeed, this is true for a price sensitive consumer market such as Bangladesh where retail margins stand currently in single digits. In fact, in order to bolster the industry, VAT should be held at 0% till the year 2024. This view is held by industry leaders as well, Adnan Imtiaz Halim, CEO of Sheba.xyz, has said that while the government’s efforts to further the work of startups is much appreciated, a 7.5% VAT is ill advised and will set back the industry.
A closer look at the past VAT shows that this is not the only time that the government has tried to impose VAT on e-commerce. Ex-Finance Minister, AMA Muhith proposed a VAT on e-commerce at 5% in the budget for fiscal year 2018-19. The businesses included those that operated on Facebook. However, National Board of Revenue (NBR) chairman Md. Mosharraf Hossain Bhuiyan, went on to save the day when he pointed out that the budgetary provision to impose 5% Value Added Tax on e-commerce businesses was a “printing mistake”. He clarified that a process has been initiated to bring virtual businesses like Facebook, YouTube, and Google under tax net. E-commerce businesses were exempted from this tax bracket. Similar effort was made in 2015, when a VAT of 4% was attempted to impose on e-commerce, but failed due to increased protests from the stakeholders.

VAT YOU NEED TO KNOW
Government’s continued efforts to impose a VAT on e-commerce sectors takes its root in the profitability of the sector and the NBR’s despair to generate greater revenue from VAT collection. The size of the e-commerce market crossed TK 17 Billion in 2017 from TK 4 Billion in 2016 according to the data provided by e-CAB. All this growth has been generated by the customers in Dhaka alone. Expansion of e-commerce to other cities and even the rural regions means the possibility of exponential growth for the sector. It is expected that the industry will further grow to TK 70 Billion by the year 2021.
Couple this information with the National Board of Revenue expectation to collect about TK 11,000 crore more from VAT on various goods and services and increasing rates on many others, the 7.5% VAT on the e-commerce suddenly makes sense. The NBR’s collection target from VAT in the incoming fiscal year is TK 117,672 crore. This year, it is expecting to collect TK 81,820 crore, meaning it has to come up with new ways to bring home an additional TK 35,852 crore in fiscal 2019-20.
However, what is equally frustrating is the flippy floppy stance of the government which has been accused of sending confusing messages to members of the e-commerce sector and thus put them in an uncertain business environment. At the beginning of this year, commerce ministry took up a plan to train up about 5,000 e-commerce entrepreneurs. Furthermore, global reports clearly state that 70% of the businesses across the globe would be conducted online by 2025. “Does the ideology of creating 5,000 e-commerce entrepreneurs and the 7.5% VAT not controvert?”asked Fahim Mashroor, ex-President of BASIS.
Uncertainty in a business environment means greater instability for the businesses operating in a particular sector. This in turn means fewer businesses will be investing in the sector and growth either dwindles down or stops all together. In other words, say goodbye to receiving investment (both foreign and local) in the future. Deligram, an e-commerce startup raised US $2 Million in series A investment. Just before Eid, we came across the piece of news that local e-commerce platform, Sindabad.com has received $4.15 million from Aavishkaar Frontier Fund (AFF), a venture fund managed by Aavishkaar, a leading Asian impact investment company. Continued threats of VAT imposition of 7.5% can seriously hurt such investments in the future.

The proposed VAT rate has been met with extreme opposition by members of the e-commerce industry in Bangladesh who have labeled the planned 7.5% VAT as a ‘travesty’. They cite that the imposition of the new VAT is in direct contradiction to the governments vision of ‘Digital Bangladesh’.

VAT WILL YOU DO WHEN THEY COME FOR YOU?
But the e-Commerce industry is not going to take the new proposed VAT sitting down. e-CAB organized a press conference to discuss the new budget. It was attended by some of the leading companies such as Chaldal, Pathao, Daraz, Sheba.xyz, Ajker Deal, Bagdoom and Priyoshop to show support to withdraw the proposed VAT.
Shumi Kaiser, President of e-CAB, has stated that the importance of e-commerce in adhering to the vision of ‘Digital Bangladesh’. She highlighted how the burden of the VAT falls unfairly on the entrepreneurs as they will have to shoulder the incidence of the VAT twice. The entrepreneurs pay a VAT when they are buying the product and then again when the product is sold. This tax incidence can either be borne by the entrepreneurs or passed on to the consumers as a form of high prices. Either way the end result is that the business suffers. She also highlighted that our neighbor, India has an e-commerce sector which is much more advanced than that of Bangladesh, yet VAT is still not implemented as the sector is considered to be crucial for the development of the country.
The case against the VAT was further strengthened when members of the government also voiced their concern. State Minister for Post, Telecommunications and Information Technology Zunaid Ahmed Palak, has requested National Board of Revenue (NBR) to withdraw the 7.5% VAT from e-commerce businesses. The minister took it upon himself to write to the NBR to request the withdrawal of the VAT, a mere five days after the budget was presented before the parliament.

VAT NOW?
The NBR hopes to collect half of their target by introducing four main VAT rates. The government proposed multiple rates of VAT under the VAT and Supplementary Duty Act 2012, diverting much from the spirit of the law when it was formulated in 2011.
A new VAT law will take effect from July 1. Under the new law, the NBR has proposed 5% VAT on most of the 84 products on which it collected the tax on tariff or assumed value. These include spices, biscuits, paper, LP gas, transformers, buses and water vessels.
Unfortunately, these revenue generating efforts takes focus away from the imposing problem of the poor collection of income tax in Bangladesh. Only 1.5 million people pay tax, causing Bangladesh to have the lowest tax-to-GDP ratio in South Asia. The country has failed to collect tax and non-tax revenues in line with its economic growth momentum. The end result is a disproportionate reliance on VAT to generate revenue for the government.
“The budget will promise to turn the dreams of 16 crore people into reality. This is not a budget for just a single year; it has been prepared keeping in mind the far-reaching goals, including the 2041 goal”, stated the new Finance Minister. While being ambitious has its virtues, haphazard ideas of slapping taxes on small but flourishing sectors of the country will not help the country move forward.

The financial budget for the year 2019-2020 was presented before the parliament on 13th June 2019. It is a very solemn ceremony, where the Minister of Finance defends the fiscal budget by stating the amounts that has been allocated to different sectors and the reasons behind it. Two of the sectors that has received special attention from the government includes the social security and welfare and healthcare sector. This article aims to explain the importance of this sector and how their budget allocation has changed over the years.

SOCIAL SAFETY & WELFARE SECTOR:
Social security/safety provides a foundation of income on which workers can build to plan for their retirement. It also provides valuable social insurance protection to workers who become disabled and to families whose breadwinner dies. According to the World Bank, safety net programs in Bangladesh have been contributing to the reduction of poverty and vulnerability by addressing a range of population groups through different forms of assistance. These include the provision of income security for the elderly, widows and persons-with-disabilities, generating temporary employment for the working age men and women and supporting the healthy development of young mothers and children.
The Government of Bangladesh also allocates significant resources to implement a wide spectrum of social programs. In 2019, a budget of approximately BDT 642 billion, or equivalent to 2.5 percent of the Gross Domestic Product (GDP), has been allocated for this purpose. Among these, about BDT 372 billion is being used to implement safety net programs as per the globally recognized classification. They are in the form of cash allowances, public works, and education and health incentives for poor and vulnerable households, which aim to contribute to the fight against poverty and improving human capital. It covers the activities of five ministries, such as Ministry of Social Welfare, Ministry of Women and Children Affairs, etcetera.
The safety net programs have been divided into 4 categories under which there are several programs. These categories are – Unconditional Cash Transfer, Public Work, Humanitarian Relief and Conditional Cash Transfer. Unconditional cash transfer includes programs such as old age allowance, allowance for widows, destitute and deserted women and allowance for the financially insolvent disabled. Public work consists of two programs- employment generation for the poorest and food for work. While humanitarian relief and conditional cash transfer both includes individual programs- vulnerable group feeding and towards a child feeding scheme.

 


With promises of doubling the allocation to social safety and welfare sector in the next five years, the government aims to reduce poverty to 12.30 percent and the extreme poverty rate to 4.50 percent of the population by 2023-24. To proposed budget lays out an ambitious plan for the sector, which includes raising state honorariums, increasing the number of beneficiaries under the social security program by raising the number of recipients for adult allowances, for windows and disabled persons who are financially insolvent and/or are students.
As if this alone was not challenging enough, there is a need to ensure the selection of genuine beneficiaries to enhance the effectiveness of social safety net programs. For this purpose, steps have been taken to establish MIS for all programs and database for all beneficiaries. Payments are being made directly from the government to the beneficiaries through the G2P (Government-to-Public) system. Social safety net MIS has been established in the Finance Division for bringing transparency and improving efficiency of social safety net payments. With this MIS, selection process of beneficiaries is easier after verification of information from the National ID server. By using this MIS, payments from the government exchequer to the beneficiary’s bank or mobile bank account are processed through the G2P method.
Investigation into the past allocation of the budget to the social safety and welfare sector reveals that the government has consistently maintained its allocation to the sector. In fact, the sector has consistently retained 5.8% of the total budget. This has been shown below:
As can be seen from the attached graphs, the allocation to the social safety and welfare sector has been steadily maintained at above 5 percentages since the financial year 2016-17.
Despite such gallant effort, there is much room for improvement for the entire sector. A UNDP study conducted a comprehensive study of the social safety nets that are available in Bangladesh. The study was conducted in 2012 and helped identify the coverage of the program, the programs that should be renewed and recommendations going forward. The study discovered that the social safety net coverage was an estimated 25-30% of the poor where the proportional coverage was higher for the poorest groups, indicating a progressive incidence of safety net benefits.
The recommendations of the study seem relevant even to this day. It suggested that Bangladesh has a reasonably good foundation on which social protection can be strategically scaled up to be a key component of poverty reduction and growth. However, issues in scaling up the protection can be attributed to the absence of innovative benefit packages, database on extreme poor, limited focus on nutrition and so on.

HEALTHCARE SECTOR:
A good healthcare system is vital. It means the population has access to combat illness and therefore, there are no financial burdens, because of healthcare, on the country and the individual, due to a reliable workforce. This generates a thriving economy. The OCED Observer, a business magazine, also cements the idea of how the economy depends on a strong healthcare system. Through the data they collected, they state a 10% increase in life expectancy which creates an economic growth of around 0.3%-0.4% a year.
Factors such as GDP, healthcare and life expectancy affect a country’s growth. For example, in the UK, national income is relatively high and it has a direct effect on the health system.
In contrast, Less Economically Developed Countries (LEDCs) such as Sierra Leone feel the effects of an inefficient healthcare system, and this impacts the economy. For example, 4,000 people in Sierra Leone lost their lives to the Ebola virus, and this correlates with the country having a GDP of $4.1 billion USD.
Healthcare spending not only relates to government initiatives but to consumers. A reliable healthcare system means people will put their money into the healthcare system, whether that be personal customer costs like insurance, retail items such as prescriptions or a hospital bill. This is good for the economy.


Healthcare spending has to take into account the benefits of technology, in terms of acquiring advanced equipment and educating health professionals on how to use it. This technology includes instruments for non-invasive surgery, which will result in more effective treatment and less suffering for the patient, and software to predict and therefore prevent outbreaks. Evidence suggests that advances in medical technology contribute to a higher life expectancy. As a result, this means people can contribute more to society, without worrying about their health, which can only be a good thing for a country.
For the financial year 2019, Tk. 29,464 crore (294.64 billion), which is 1.02 percent of GDP and 5.63 percent of total budget has been allocated to the health sector. The health care sector currently includes 12 ministries and divisions which are implementing their programs.
Although both allocations have increased in size, as a proportion of the total budget and of GDP they have either been frozen, or have declined. According to a United Nations Economic and Social Commission for Asia and the Pacific survey published on May 7, 2018 the share of GDP given to health in Bangladesh has fallen from 1.1% in 2010 to 0.8% since 2017, and is now the lowest among 21 countries of south, southwest and southeast Asia.
According to the Healthcare Access and Quality Index published by leading British medical journal The Lancet in May, Bangladesh ranks 133rd out of 195 countries worldwide in providing access to quality healthcare, ahead of regional neighbors India, Pakistan, Nepal, and Afghanistan. However, even though the Seventh Five-Year Plan (7FYP) aimed to spend 1.04% of the GDP on the health sector in the FY19 budget, the sector was allocated only 0.92% of the GDP.
Bangladesh’s share for the health sector is declining at a time when it needs proportionately more funds to attain the UN-mandated Sustainable Development Goals (SDGs) of ensuring healthy lives and promoting individual wellbeing. Furthermore, the country suffers from underspending the budget allocated to healthcare. For instance, in FY2016-17, two-thirds of the allocated Tk20,652 crore went unspent.
The picture painted by the government is rosy, it has launched programs such as the Fourth Health, Population and Nutritional Sector Programme (4th HPNSP) which is being implemented in the health service sector at an estimated cost of Tk. 1,15,486 crore over a period from January 2017 to June 2022. Nested on 29 operational plans, the program is providing health and family planning services and improved medical education throughout the country. It is also worth noting that 84 percent of the HPNSP program is being financed by the government.
The projects undertaken by the government to ensure health service include modernization and expansion of the Dhaka Medical College Hospital, establishment of nephrology units and kidney dialysis centers in government medical college hospitals and all district headquarters hospitals, and establishment of cancer treatment units in all medical college hospitals at the divisional level.
However, according to Bangladesh National Health Accounts 1997-2015, out of pocket (OOP) health expenditure (private spending) in Bangladesh is 67 percent, which is more than double the global average of 32 percent.


A country’s healthcare system can make or break society and this is why it is always an important topic in business as well as in political debates. There are strong opinions on healthcare because the situation is tricky. However, the one thing that can be agreed is that an efficient and reliable healthcare system is an influential factor in establishing a good economy.

AFTER ALL THAT HAS BEEN SAID AND DONE
A balanced budget is where funds are allocated to sectors depending on their requirement and importance to the growth of the economy. While Bangladesh has achieved great feats, its continued support to nurturing the social safety sector and raised expenditure on the healthcare sector can help ensure the country’s prosperity.

 

How much trouble is the banking sector in

Every year, the World Bank Group releases its annual review, known as Bangladesh Development Update, of the country they are operating in. The report is prepared by leading economists of the country with utmost care to provide the most realistic expectations for an economy. And give an unbiased view of what can be done better. Fortunately for Bangladesh, the country is experiencing the joys of being in the limelight after toiling for years to achieve growth rates which are greater than 7%. Hence the World Bank’s annual review report had a greater number of positive news to share than negatives.

However, a lingering fear exists regarding the banking sector of the country. A rising number of non-performing loans (NPLs), dipping lending rates and botched attempts as debt servicing has eroded the credibility of the banking sector of the country’s economy. In fact, one of the worlds best rating agencies, Moody’s has put Bangladesh’s banking system on ‘negative watch’ in their report due to worsening assets quality. Two other global rating agencies- Standard & Poor’s and Fitch- also expressed concerns over the health of the banking sector of Bangladesh.

Data Doesn’t Lie
It seems like the quality of the bank assets is not its only concern. The growth in bank credit has moderated while the NPLs have ballooned. Banks’ return on assets (ROA) narrowed by 57% in 2018, as a result of the high amount of non-performing loans (NPLs) in the sector. ROA is a profitability ratio that provides information on how much profit a bank is able to generate from its assets. The higher the number, the more efficient a bank’s management is at managing its balance sheet to generate profits. In 2018, net profit of banks stood at only Tk0.30 against assets worth Tk100, down from Tk0.70 per Tk100 of assets in 2017, according to the Bangladesh Bank. In 2018, state-owned commercial banks lost Tk1.30 against assets worth Tk100. In 2017, these banks had made profits of Tk0.20 against assets worth Tk100. On the other hand, private commercial banks made a net profit of Tk0.80 per Tk100 of assets last year.

When Bangladesh Bank officials are asked the reason behind the worsening ROAs they are quick to point their fingers at unscrupulous businesses which have failed or are unwilling to return the money they have borrowed from banks. However, the World Bank annual review reports that the problem is with the governance structure itself. Corporate governance weaknesses, especially at state-owned banks and legal complexities in contract enforcement are sinking the banking sector of Bangladesh. South Asian Network on Economic Modeling (SANEM), a local think-tank has said the country’s banking sector was on the wrong path, causing the economy to bleed and believes that the frail banking sector could be a huge hindrance to achieving the Sustainable Development Goals 2030 and other targets.

Why YOU Should Be Concerned About NPLs
NPLs is a sum of borrowed money upon which the debtor has not made the scheduled payments for a specified period. Banks operate as financial intermediaries. Bank owners put up a minimally required amount as equity or capital that then allows them to mobilize deposits which are loaned out. Banks offer depositors a return on their deposits (average deposit rate) and charge borrowers a loan rate (average lending rate).

A loan becomes NPL when the borrower is unable to pay the scheduled principal and interest for more than 90 days. As the size of NPL grows the financial health of the banking sector weakens because it reduces its ability to earn a profit, increase capital base and repay depositors. When the NPL problem grows very large, it could jeopardize the entire banking sector through bank failures and liquidity crisis.

The NPLs at the end of 2017 was TK743 billion and reached TK39.1 Billion by the end of 2018. It was 10.4 percent of total outstanding loans. There are two points to note: one is the upward trend in NPLs as a percent of total loans and the other is the growing size in value terms. In fact, the World Bank states that the NPL has grown by 26.4% in 2018, a growth which has been the highest in 5 years. Either way, on both counts, NPL is a major threat to the financial health of the banking sector and the government’s concern to address this threat is well placed. This is shown below:

Here’s another interesting fact about the NPLs; they are not evenly distributed amongst the private commercial banks (PCB) and the state-owned banks. In fact, 5 banks are responsible for half of the total NPLs. World Bank has reported that the NPL of State-owned Commercial Bank (SCB) is 31% and State-owned Development Bank (SDB) 22%. To think that state-owned banks would have such high NPLs isn’t surprising given that they suffer from severe weakness in corporate governance, poor risk management and often resort to direct lending.

Why Write-Offs Are NOT the Answer
Dr. Selim Raihan, Executive Director for SANEM, is amongst some of the esteemed figures who are opposed to the government’s tactics to write-off loans. Expressing frustration, Dr. Raihan said the situation in the banking sector would be at its worst if the government eventually relaxes the definition of defaulting loans, and loan rescheduling policies to favor bank defaulters.
Banks write off bad debt that is declared non-collectible (such as a loan on a defunct business, or a credit card due that is in default), removing it from their balance sheets. The result is a reduction in the value of an asset or earnings by the amount of an expense or loss for the bank.

Bangladesh Bank has granted a huge waiver for loan defaulters to expedite debt servicing in the banking sector. Experts, however, criticized the latest policy given effect through two separate central bank circulars. A circular issued by Bangladesh Bank on February 2019 allows banks to

· Write-off loans that remain classified as bad debt for three years instead of the previous five years
· Write-off bad loans up to TK200,000, instead of the previous TK 500,000, without filing any lawsuit
· Write-off loans without keeping 100% provisions

A similar circular was released in May 2019, which focused on lowering down payments, extending the loan repayment period and other special features such as ‘One Time Exit’ facility. The latest directive of the central bank says defaulters can regularize their bad loans now by paying only a 2% down payment, instead of 10-50%.

Rescheduling of loans has allowed defaulters to repay their rescheduled loans within the next 10 years, with a one-year grace period, according to the circular. The rescheduled loan would have to be repaid at only 9% interest rate and the central bank in the circular said banks could waive all interest for defaulters, depending on the bank-client relationship. And if that wasn’t enough, defaulters can enjoy a ‘One Time Exit’ facility by paying only the bank’s cost of funds and the principal loan amount. To avail the facility, defaulters have to pay the outstanding amount within a year.

So while it might help wipe the slates clean and bolster the balance sheets for the bank, it possibly sends the wrong signal to the borrowers who are defaulting and could contribute to the already poor NPL collection efforts. Toufiq Ahmed Chowdhury, Director General of Bangladesh Institute of Bank Management is of a similar opinion. He has stated that the new waivers not only cast a shadow on the banking sector of Bangladesh, it undermines confidence in the banking sector and discourages good borrowers from repaying their loans.

What’s with the Lending Rates?
Lending rates have remained rigidly on a downward trend. In June 2018, the Bangladesh Association of Bankers (BAB), a forum for the owners of private banks, suggested to fix the lending rates at 9% and deposit rates at 6% respectively. However, the banks have struggled to keep the lending rates low. The saving instruments offered by the government, the National Savings Directorate Certificates offers double-digit interest rates and thus it is more attractive for households to invest in rather than the ones being offered by private banks at the BAB rates. It was estimated that the government was likely to borrow about TK13,000 Crore from banks in December, which would have made the money market tighter and adding to the liquidity crunch.
The interest rate on lending, however, is on the rise amid high import pressure and hunt for deposits at the end of last year. Though the average remained within single digits, 28 out of the 40 private banks are lending at interest rates which are in double digits. Given that the money market is tight and there is a persistent liquidity crunch, such high numbers are to be expected. This is shown below:

What’s Next Then?
Bangladesh is adding to its growing list of private banks. For most countries, a growing list of commercial banks signifies good tidings. It is an attestation to a growing economy and abundance of funds which requires some efficient financial institutions to manage. Unfortunately, in Bangladesh, it does less to inspire hope in the financial sector and harks the possibility of greater fund mismanagement.

Furthermore, in order to become an upper middle-income country by 2031 and achieve high-income country status by 2041, Bangladesh will require huge investments in physical capital, human capital, and innovation enabled by reforms in areas such as financial sector, business regulation, and addressing the infrastructure gap.
Massive reforms are needed to fix the banking sector of Bangladesh. Bangladesh Bank has formed several committees, including a high profile one led by its one deputy governor, in a bid to reform the country’s ailing banking sector.

The committees have been tasked with making specific recommendations to reduce default loans and take actions against willful defaulters, said a senior central bank official. Furthermore, the committees will also recommend amending the Bank Companies Act, Ortho Rin Adalat (Money Loan Court), the Financial Institutions Act, and other bankruptcy-related legislation. These and many other activities will be undertaken by the committee to rev up the banking sector.

While such efforts are commendable, historically government formed committee is slow to act. And for a fast-paced sector such as the banking sector, failure to act at the correct time can be a very expensive mistake for the entire country. The answer, therefore, lies, in giving Bangladesh bank greater independence and authority to take actions when needed and uphaul the financial laws that govern the banking sector.

 

The government of Bangladesh today signed a $165 million grant financing agreement with the World Bank to provide basic services and build disaster and social resilience for the Rohingya who are fleeing violence in Myanmar.

To help Bangladesh deal with world’s fastest growing exodus, the Emergency Multi-Sector Rohingya Crisis Response Project will build 53 multi-purpose disaster shelters in and around the camps; pave more than 200 km of roads; provide water and sanitation services for around 200,000 people, and set up 1,500 solar street lights. The project will also strengthen emergency response services, provide community works and services, and prevent gender-based violence.

The government and people of Bangladesh have generously provided shelter to about a million Rohingya refugees but the needs of both the Rohingya and the host community are huge,” said Dandan Chen, World Bank Acting Country Director for Bangladesh and Bhutan. “This project addresses the current refugee crisis but goes further to help strengthen the government’s overall capacity to plan, coordinate and respond to emergencies.”

More than half of the Rohingya population are women and girls and many were exposed to gender-based violence before coming to Bangladesh. The services delivered under the project will focus on women and children as key beneficiaries and will include measures to prevent gender-based violence. The project will build gender-friendly public spaces. All facilities including water and sanitation facilities and cyclone shelters will cater to the needs of women, children and disabled individuals. The street lights will improve the safety for women.

“Under the leadership of the Honorable Prime Minister, the Bangladesh government has provided shelter to the Forcibly Displaced Rohingya Population (FDRP). But, this has placed enormous strain on our resources and infrastructure,” said Monowar Ahmed, Secretary, Economic Relations Division, Government of Bangladesh. “We are happy that the World Bank has joined hands with grant support to build disaster resilience and basic infrastructure and improve service delivery for FDRP.”

The agreement was signed by Monowar Ahmed and Dandan Chen on behalf of the government and the World Bank, respectively, at the Economic Relations Division.

This is the third in a series of planned financings of approximately half a billion dollars announced by the World Bank in June 2018. Earlier the World Bank has committed a $75 million grant that includes a $13 million grant from Canada, to provide for the health and learning needs of the Rohingya.

The World Bank is helping the host communities with about $200 million support in Cox’s Bazar through ongoing projects: disaster preparedness including building and rehabilitating cyclone shelters; basic infrastructures and governance in union parishads, pourashabhas, and municipal areas; social protection and safety net programs; and collaborative forest management and income generation opportunities for the host communities.

The World Bank was among the first development partners to support Bangladesh following its independence. Since then the World Bank has committed more than $30 billion in grants and interest-free credits to Bangladesh.

 

It is a general belief that there are four elements of life i.e. Earth, Air, Fire, and Water. Fire, which is synonymous to energy has always been more important and still considered the most significant. Since ancient times, energy has been important in the daily life of people, leading human beings to find out the most efficient energy resources. In this quest, they have evolved from using wood and coal to gas, wind, solar, nuclear energy and the list goes on. Globally, Liquefied Petroleum Gas (LPG) industry has become an essential part of the energy sector. In Bangladesh the demand for this alternate source of energy has peaked too.

There was once a popular assumption that LPG is a poor man’s fuel, however, with around three million household consumers of LPG throughout the country, this inexpensive fuel has now become unaffordable given the prices surging every now and again. Once prevalent among the lower stratum of the society, this fuel is now generally used by CNG drivers, small restaurants and the majority of the households in Bangladesh.

In fact, Bangladesh is one of the few countries in the world which provides piped gas connections to households for cooking purposes. Although LPG containers have been available for sale since the 1980s, the state-owned BPC (Bangladesh Petroleum Company) was the lone supplier. With the growing demand for LPG, came the private suppliers and currently, there are 10 key players in the market.

Bashundhara LP Gas Limited, Jamuna Joint Venture Ltd. (JSJVL), Omera Petroleum Ltd. (OPL), TK Gas are local companies whereas TotalGaz and Laugfs Gas (corporate brand name Kleanheat gas) are foreign companies. Bashundhara, TotalGaz, Jamuna, and Cleanheat each have a production capacity of one lakh tons. Only Bashundhara, Omera and Jamuna make their own LPG cylinders, while the others import them. TK Gas (Supergas) and Bin Habib Bangladesh Ltd do not import LPG. They buy gas from importing companies and bottle them from their own plants. The Government has granted more than 30 new licenses to private operators, who are willing to set up downstream LPG operations with five new players coming up with Tk 900 crore in investment.

Locally, the current operations of the companies can be broken down as Buying bulk LPG from foreign refineries or traders; Shipping the bulk LPG to their terminals in Bangladesh via seagoing gas carriers – storing the bulk LPG into spheres or bullets via jetty pipeline – finally filling the gases into pressurized cylinders for onward distribution to the final consumers. Ideally, once the customers use up all the gas, the empty cylinders are sent back to their respective operators for refilling. By retail market share, the top three operators are Bashundhara LP Gas Limited, Omera Petroleum Ltd (OPL) and Jamuna Spacetech Joint Venture Ltd (JSJVL).

Keeping in view the limited gas reserves, we can say Bangladesh is an energy-starved country. Local energy appetite is expected to grow at an astounding rate while our local reserve of LPG is dwindling. A Government study conducted in 2015 showed that the natural gas reserves of Bangladesh is 14.16 trillion cubic feet and is enough to last till 2031 if the current rate of extraction is maintained. The rapid use of natural gas in power production has been the main source of gas consumption, since it contributed to 56% of domestic energy demand, depleting gas fields and putting pressure on the energy sector. This was followed by industrial consumption of LPG at 15% and domestic consumption at 12%. Titas gas has already started rationing gas connection to higher priority areas as of 2016.

With a dwindling supply of LPG in Bangladesh, local gas providers are looking to import it from foreign countries. The United States reached a record high becoming the world’s top producer of petroleum and natural gas in 2017. The United States has been the world’s top producer of natural gas since 2009, when U.S. natural gas production surpassed that of Russia, and the world’s top producer of petroleum hydrocarbons since 2013, when U.S. production exceeded Saudi Arabia’s. Since 2008, U.S. petroleum and natural gas production has increased by nearly 60%.
The standard import price is the Saudi Aramco (the state-owned oil company of Saudi Arabia) monthly contract price. When buyers order bulk LPG from the international market, they have to pay that month’s Aramco Contract Price and add the freight per ton charge (for shipment to Bangladesh). While the government subsidizes their portion of LPG, the importers sell their products in line with import price.

Russian and Saudi natural gas production expanded significantly in 2017, at 8% and 6% year-on-year growth, respectively. In contrast, Russian and Saudi total liquids production fell in 2017 compared with 2016. Saudi Arabia and Russia lowered oil production as part of an agreement by the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers (including Russia) to reduce total crude oil production in an effort to lower global oil inventories.

The standard import price is the Saudi Aramco (the state-owned oil company of Saudi Arabia) monthly contract price. When buyers order bulk LPG from the international market, they have to pay that month’s Aramco Contract Price and add the freight per ton charge (for shipment to Bangladesh). While the government subsidizes their portion of LPG, the importers sell their products in line with import price.

Thus it would be remiss to discuss the supply chain of LPG without discussing the seven steps which make up the entire supply chain.

1. Production – The production process starts with oil and gas wells.
2. Upstream Transportation – The mass quantities are transported by ship, rail, and pipeline.
3. Refining & Storage – The refining of the LPG, from oil, takes place at oil refineries.
4. Downstream Transportation – The fully processed LPG is transported to market by ship, rail, truck, and pipeline.
5. Bottling & Storage – The LPG is either used to fill LPG gas bottles or is stored in bulk LPG depots.
6. Distribution – LPG cylinder delivery trucks and bulk LPG tankers are used to get the LPG to the end users.
7. LPG End Users – There are many types of LPG end users including residential, commercial, agriculture, autogas, and petchem customers.

With an industry which is estimated to be priced at billions and with a supply chain which spans over multiple nations, it is not surprising that the producers of LPG have organizations dedicated to maintaining a healthy supply chain. Take for instance the National Propane Gas Association (NPGA) which represents the US Propane industry. The NPGA is developing a far-reaching set of initiatives and solutions to help distributors throughout the chain prepare to meet periodic supply challenges. Moreover, when the resource in question helps provide essential services, such as heat during winter, the role of having an efficient association becomes even more relevant.

The association set up a task force after it experienced unparalleled shortages in supply in 2014, which was caused by a combination of extreme weather and logistical problems. The NPGA Task Force focuses on five specific areas relating to the supply chain during winter: infrastructure and distribution; exports and national inventory analysis; industry/marketer education; public relations; and consumer education. During the spring and summer, the Task Force has focused primarily on marketer education, public policy, and a “game plan” for future winters to ensure that the industry is prepared to meet whatever challenges occur.

The local operators in Bangladesh are steadily catching up and have adopted world-class operating procedures too. Omera is one of the largest LPG operators in Bangladesh who owns and manage a sophisticated LPG supply infrastructure with control over the whole value chain (international shipping, storage, local shipping, cylinder manufacturing, etc.)

The company operates four LPG bottling terminals across the country and can supply 35,000 LPG cylinders in single shift operation. In recognition of the company’s immense contribution to the nations energy diversity, Omera Petroleum Limited was awarded the best private company in the national energy sector by the Prime Minister, Sheikh Hasina in December 2016.

LAUGFS Gas Bangladesh is another one of the largest LPG players across Bangladesh. Being the only 100% owned international entity in LPG industry of Bangladesh, the company distributes to domestic, commercial and industrial customers with an extensive nationwide cylinder distribution network under the brand name of LAUGFS, PETREGAZ & KLEENHEAT. LAUGFS is also the pioneer to introduce Autogas to Bangladesh, supplies LPG to service stations across the country. The company opened the largest LPG depot in Jhenidah last year with hopes of catering to the market demand of Jhenaidah, Kushtia, Meherpur, Chuadanga, and Rajbari, a region crossing Padma river which is showing a lot of socio-economic promise in the country.

However, the pioneers in the field of LPG distribution in Bangladesh is Bashundhara LP Gas Limited. Starting off in 1999, as the first private LPG importing, bottling and marketing company in Bangladesh, the company has grown from strength to strength. The company has a state of the art LPG plant in Mongla port where they established a world-class cylinder manufacturing plant called Sundarban Industrial Complex. With the growing demand came the further expansion to areas of Chittagong and Bogra.

With the dependency of the nation on LPG for catering to its power and energy needs and the rising demand from the domestic front, maintaining a healthy supply chain for the LPG industry is crucial. The future remains in innovation and customer-oriented services. Companies such as Beximco focus on the safety design of cylinders, while Omera focuses on their retail distribution network, and again other companies can leverage different modes of partnerships and additional services to leverage their brand image. LPG use can extend beyond just cooking fuel. Already permits for LPG conversion centers and LPG pumps have been procured by Basundhara Group and Jamuna Group. In the future, when gas reserves will be more restricted, the ‘CNG’ vehicles will be converted to LPG fuel or autogas.