US report: Off-the-record payments by firms reduce Bangladesh’s GDP by 2-3%

Black_cats · Jul 28, 2023

US report: Off-the-record payments by firms reduce Bangladesh’s GDP by 2-3%

Report analyzes economies that can be markets for US businesses
Bangladesh made progress in reducing constraints on investment

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Tribune Report
Published: July 27, 2023 9:21 AM | Last updated: July 27, 2023 9:45 AM
A US state department report, citing “some estimates”, said that off-the-record payments by firms reduce Bangladesh's GDP by 2-3%.

“Corruption remains a serious impediment to investment and economic growth,” according to the US Department of State's “Investment Climate Statements” report.

The report published on Wednesday in Washington provides information on the business climates of more than 160 economies and is prepared by the US economic officers stationed in embassies and posts around the world.

They analyze a variety of economies that are or could be markets for US businesses.

According to the report, Bangladesh has made gradual progress over the past decade in reducing some constraints on investment, such as taking steps to better ensure reliable electricity, but inadequate infrastructure, limited financing instruments, bureaucratic delays, lax enforcement of labour laws, and corruption continue to hinder foreign investment.

The government has made efforts to improve the business environment, but the full implementation of its foreign investment policies has yet to materialize.

Capital markets in Bangladesh are still developing and the financial sector is highly dependent on banks, which suffered a major scandal in 2022 in which 11 banks faced a collective shortfall of $3.1 billion.

A sluggish and reportedly corrupt judicial process and limits on alternative dispute resolution mechanisms impede the enforcement of contracts and the resolution of business disputes.

In the areas of labour, intellectual property rights (IPR), and environment, the government has passed various modern laws but does not effectively enforce many of them. It devotes limited resources to IPR protection.

Although Bangladesh has made measurable progress over the past decade to improve fire and building safety standards, workers' rights to associate freely and bargain collectively are limited. Despite the many environmental conventions Bangladesh joined, Dhaka is among the world's worst cities for air pollution.

About corruption, the report says corruption remains a serious impediment to investment and economic growth.

“Bangladesh is a party to the UN Anticorruption Convention and has laws to combat bribery, embezzlement, and other forms of corruption, but enforcement is inconsistent.

“Corruption is common in public procurement, tax and customs collection, and among regulatory authorities. Off-the-record payments by firms reduce Bangladesh's GDP by two to three percent, according to some estimates.”

The Anti Corruption Commission (ACC) is the main institutional anti corruption watchdog and investigator in cases of bribery and corruption. The police, the National Board of Revenue, and the Department of Narcotics Control can investigate corruption in their jurisdictions.

“The current Awami League-led government publicly states its commitment to fighting corruption, but opposition parties claim the ACC is used by the government to harass political opponents. Government efforts to ease public procurement rules and a recent constitutional amendment to diminish the independence of the ACC may undermine institutional safeguards against corruption,” according to the report.

Historically, Bangladesh had annual GDP growth of over 6% between 2010-2020. Its strategic location between the emergent South and Southeast Asian markets and its large workforce were reasons for US companies to invest. Bangladesh received $3.44 billion in foreign direct investment in FY2021-2022, according to Bangladesh Bank.

The Covid-19 pandemic and Russia's war in Ukraine impacted Bangladesh by reducing demand for its main export—ready-made garments—while contributing to a sharp rise in the prices of energy and food.

Bangladesh's rising commodity prices and a surge in imports in 2022 resulted in a widening balance of payments deficit. Foreign currency reserves declined from $48 billion in August 2021 to under $32.2 billion in January 2023. The government responded with measures to delay foreign currency payments.

The foreign currency shortage also coincided with a banking scandal in which several major Bangladeshi banks made large, questionable loans to companies that then defaulted on the loans.

In September 2022, nonperforming loans (NPL) in the banking system reportedly surged to a record USD 12.8 billion, much of which the government has been unable to trace, according to the report.

The report also cited the International Monetary Fund (IMF) loan that bolsters Bangladesh's foreign currency reserves.

The IMF Executive Board approved $3.3 billion under the Extended Credit Facility/Extended Fund Facility and $1.4 billion under the Resilience and Sustainability Facility.

Bangladesh's business community is becoming aware of responsible business conduct (RBC) due to the example set by multinational firms operating in Bangladesh.

Leading local firms have incorporated environmental and safety standards to appeal to, and retain lucrative contracts with, international brands.

However, many local firms lack familiarity with international RBC standards. The government has not adopted RBC standards and does not mandate any specific guidelines but encourages companies to follow general RBC principles.

On the political aspect, the report says as the country nears the general elections in late 2023 or early 2024, the political and security situation may become volatile.

The Investment Climate Statements report also references working with partner governments to create enabling business environments that are not only economically sound but address issues of labour, human rights, responsible business conduct, and steps taken to combat corruption.

The reports cover topics including -- Openness to Investment, Legal and Regulatory Systems, Protection of Real and Intellectual Property Rights, Financial Sector, State-Owned Enterprises, Responsible Business Conduct, and Corruption.