Assignment (Part 2)

Course: Fin444
Instructor: Sayba Kamal Athoi (SBK)
Prepared by:
Andalib Azfar Chowdhury

1120381530

Md. Shohagh Hossain

1130437030

Md. Noor Hossain Sarkar

1220477030

Abdullah Al Jabed

Currency fluctuations are a natural outcome of the floating exchange rate system that is the
norm for most major economies. The exchange rate of one currency versus the other
is influenced by numerous fundamental and technical factors. These include relative supply
and demand of the two currencies, economic performance, outlook for inflation, interest rate
differentials, capital flows, technical support and resistance levels, and so on. As these factors
are generally in a state of perpetual flux, currency values fluctuate from one moment to the
next. But although a currencys level is largely supposed to be determined by the underlying
economy, the tables are often turned, as huge movements in a currency can dictate the
economys fortunes. In this situation, a currency becomes the tail that wags the dog, in a
manner of speaking.

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

Exchange rate
69.25 BDT
70.79 BDT
81.99 BDT
79.75 BDT
77.75 BDT

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

Exchange rates of the BDT against the USD for

the last 5 years

the past 5 year. But

the fluctuation was
significant in 2011
to 2012. After 2012

85

81.99
79.75

80

77.75

75

the fluctuation was

not

much

significant. In 2010,
the exchange rate of

69.25

70

70.79

65
60
Exchange rate

BDT against USD

Jan 1, 2010

Jan 1, 2011

Jan 1, 2012

Jan 1, 2013

Jan 1, 2014

was 69.25TK. After

one year in 2011, the rate was 70.79TK and in 2012 it was 81.99TK. In 2010 to 2012 the
exchange rate was significantly goes up year by year. From the year 2013 the exchange rate
was decrease to 79.75TK. Then again decrease the rate in 2014, at 77.75TK. Through the last
5 years the highest rate was in 2012 and the lowest rate was 2010. At present year in 2014,
the rate is 77.75tk. So, now the exchange rate is a little bit stable than the previous year.
Factors that are responsible for the fluctuations: The currency market is subject to
frequent fluctuations. The first question that comes to mind is What causes these
fluctuations? The primary cause of these fluctuations is, of course, a shift in demand and
supply. But, what causes this shift?
Movement of net exports:

Net exports in Bangladesh are always negative since

its independence due to merchandise trade account imbalance. The size of the external
trade account deficit becomes smaller or larger at different time periods. The vulnerability of
the net export situation resulted mainly due to inelastic import demand of Bangladesh.
About eighty percent of Bangladesh exports are on account of woven garments and knitwear,
which in-elastically depend on the import of raw materials. The other important import
items namely consumer goods (basically food), machinery and petroleum products are
also inelastic

in nature.

An increase in net exports increases the demand for foreign

exchange and trends to put pressures on the BDT exchange rate against partners' currencies.
Interest Rates: Any change in the interest rates of a country directly impacts the value of its
currency. If a country raises its interest rates, the demand for and, consequently, the value of

its currency will rise in relation to other currencies. When a country lowers its interest rates,
people will start earning lower interest on their deposits and investments, reducing the
incentive of holding this currency. They will then tend to buy other currencies of countries
that offer higher interest rates. This will reduce the demand for the particular currency.
Money Supply and inflation: At the time central bank of country will print more money, the
supply of money will increase in the market. Resulted purchasing power of customer also
will increase and resulted it will invite inflation situation. And as we know in inflation time
home countrys currency value will be weak and may be causes depreciate.

Economic Growth: High economy and fastest growing economy country push FII from
weak economy and developing countries. In this case they will sell their currency (weak
economy) and buy the other currency (strong economy). In this case if countrys currency
will face more supply and less demand value of currency will fall.
Foreign Debt: Many developing and under developing borrowed the fund from international
bank like IMF, world bank and ADB etc. but this is unplanned borrowing . At current time it
adds in balance of payment but if we talk about future its obligation to pay the fund with
interest rate. And therefore it has seen the country which has taken more borrowed fund their
value depreciates in future.
Inward Remittance: The flows of inward remittances in Bangladesh have contributed
significantly to the external current account surplus recorded in recent years. It is also a
very important source of foreign exchange from the supply side of the foreign exchange
market in Bangladesh and thus can potentially play an important role in exchange rate
determination. In this context it is noteworthy that the remittance growth, especially during
the second episode, was disappointing (Fig. 6). The average growth of inward remittance
during the second episode was 8.29 percent where the historical average of inward
remittance was 18.86 percent (during January 2003-June 2012). The slower growth of
inward remittances certainly exacerbated the recent exchange rate pressure in Bangladesh
during the second episode.

FDI inflow: The FDI inflow in Bangladesh has generally been very low compared to most
comparator countries in the region. It was even lower during the two episodes under review
compared to the inflow in between the two episodes
Floating Exchange

intervention: Although the floating exchange rate regime has

been prevailing, Bangladesh Bank has to intervene sometimes indirectly through selling and
buying of foreign currency in the market to mitigate the undesirable fluctuations in the
exchange rate. In this context, the amounts of net sales during the first and second
episodes

were

US$1135.9 million

and

US$1680.5

million,

respectively.

Market

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

problems and it never works when the exchange

market

is

fundamentally

in

disequilibrium. Since the interventions were made when the exchange market was
subjected to some fundamental shifts on the supply and demand side both working
toward larger excess demand for foreign exchange Bangladesh Bank interventions were
not sufficient to stabilize the market.
Foreign exchange reserves: Due to both domestic and external factors discussed above the
level of foreign exchange reserves was decreasing during both episode, in part
because of market interventions. Bangladesh Banks inability to stabilize the exchange
rate despite sizable market interventions and the consequent loss of reserves led to a sharp
exchange rate depreciation pressure in during the two episodes in Bangladesh.
Trends in inflation for the last five years
Inflation has appeared to be a major strain on the economy of the country in the recent past.
Though Bangladesh was enjoying lower inflation rates of below 6 per cent during the early
years of the current decade inflation started to rise since the beginning of 2004. After a short
spell of benign trend in terms of lower inflation and prices during 2008 and 2009, the country
has again started to feel the pinch of high inflation which is sneaking into the day to day lives
of common people. Since the second quarter of FY2009-10, inflation started rising and the
uptrend continued throughout FY2009-10 and FY2010-11. During the first five months of
FY2011-12 there has not been any change in the direction of inflationary movement. The 12month point-to-point consumer price index (CPI) inflation has reached as high as 11.58 per
cent in November 2011 compared to 7.54 per cent in November 2010. As in most years, food
inflation was higher than general inflation reaching 12.47 per cent in November 2011 as
opposed to 9.8 per cent in November 2010. High food inflation had a knock-on effect on non-

food inflation as well, pushing it upward to settle at 10.19 per cent in November 2011 from as
low as 3.33 per cent in November 2010. This reflects the fact that prices of food and nonfood items tend to move along the same direction though at a different pace.
As is known, inflation rate has been on the rise over the past three years. In the backdrop of
high level of commodity prices, the annual average inflation target for FY2012 was set at 7.5
per cent. However, general inflation (annual average) rate reached 10.6 per cent in FY2012
which was 8.8 percent in FY2011. Since the mid-2000s price level of food items became the
dominant indicator of inflation in Bangladesh
The inflation rate on point-to-point basis increased in June, 2013, which, according to
analysts, was due mainly to the rise in food prices and excessive rainfall that had largely
disrupted supply chains. In June, the rate of inflation stood at 8.05 per cent, remaining much
higher than 5.54 per cent in June, 2012, according to official data released Sunday by
Bangladesh Bureau of Statistics (BBS).
The annual inflation dropped for the third consecutive month to 6.6 percent in October this
year from 6.84 percent of September. In June, the closing month of the last fiscal year, the
rate was 6.97 percent and it inched up to 7.04 in July. The rate then declined to 6.91 percent
in August. The decline was attributed to decrease in fuel and food prices in international
market. However, food inflation increased in October despite a fall in overall inflation.
Inflation is maintaining downward trend in India too. It has influenced inflation here as
several of our food items are imported from India.

Trends in interest rate for the last five years

Interest rate is a rate which is charged or paid for the use of money. An interest rate is
often expressed as an annual percentage of the principal. The benchmark interest rate in
Bangladesh was last recorded at 7.25 percent. Interest Rate in Bangladesh is reported by the
Bangladesh Bank. Interest Rate in Bangladesh averaged 7.25 Percent from 2009 until 2014,
reaching an all time high of 8.75 Percent in September of 2009 and a record low of 4.50
Percent in October of 2010. In Bangladesh, interest rates decisions are taken by the
Bangladesh Bank. The Bangladesh Bank controls two policy interest rates: the repo rate
(repurchase rate), which it uses to inject money into the banking system, and the reverse repo
rate. From 2012 and 2013 was moderately constants rate.
Trends in income levels for the past five years:
Disposable Personal Income in Bangladesh increased to 31079.56 BDT THO in 2013 from
29606.81 BDT THO in 2012. Disposable Personal Income in Bangladesh averaged 18543.01
BDT THO from 1990 until 2013, reaching an all time high of 31079.56 BDT THO in 2013
and a record low of 6808 BDT THO in 1990.

Interest Rate Parity

Interest Rate parity means relationship between the currency exchanges rates of two nations
and their local interest rates, and the essential role that it plays in foreign
exchange markets. According to this concept, the difference between the market interest
rates in any two countries is about the same as the difference between the forward and the
spot exchange rate of their respective currencies. Therefore no arbitrage opportunity in the
mutual trading of their currencies can exist unless this parity breaks down. In practice
however, due to the government interference via currency controls, the full realization of this
parity might not occur. IRP can occur because of the international arbitrage. That is why to
know about IRP at first we should know what international arbitrage is and how does it
happen. If covered interest arbitrage is no longer feasible, and the equilibrium state achieved
is referred to as interest rate parity (IRP).
End-value of a $1 investment in covered interest arbitrage = (1/S) (1+iF) F
= (1/S) (1+iF) [S (1+p)]
= (1+iF) (1+p)
(Where p is the forward premium)
Equating the two and rearranging terms:
P=

(1+iH)

-1

(1+iF)
Forward premium =

(1 + home interest rate)

-1

(1 + foreign interest rate)

This is the method that is used to calculate interest rate parity (IRP). Market forces cause the
forward rate to differ from the spot rate by an amount that is sufficient to offset the interest
rate differential between the two currencies. Then, covered interest arbitrage is no longer
feasible, and the equilibrium state achieved is referred to as interest rate parity (IRP). When
IRP exists, the rate of return achieved from covered interest arbitrage should equal the rate of
return available in the home country. Interest rate parity (IRP) basically influences the
interest rate and interest rate is related to inflation rate. Thus it makes a great effect on
exchange rate of two currencies.

Purchasing power parity (PPP)

The theory of purchasing power parity (PPP) attempts to quantify this inflation - exchange
rate relationship.
Home countrys price index (Ph) = Foreign countrys price index (Pf)
When inflation occurs, the exchange rate will adjust to maintain PPP:
Pf (1 + If ) (1 + ef ) = Ph (1 + Ih )
Where,

Ih

inflation rate in the home country

If

inflation rate in the foreign country

ef

% change in the value of the foreign currency

Since Ph = Pf , solving for ef gives:

ef =

(1 + Ih )

(1 + If )
If Ih > If , ef > 0 (foreign currency appreciates)
If Ih < If , ef < 0 (foreign currency depreciates)

When one countrys inflation rate rises relative to that of another country, decreased exports
and increased imports depress the countrys currency. The theory of purchasing power parity
(PPP) attempts to quantify this inflation - exchange rate relationship. There are two forms of
purchasing power parity (PPP): (1) The absolute form of PPP, or the law of one price,
suggests that similar products in different countries should be equally priced when measured
in the same currency. (2) The relative form of PPP accounts for market imperfections like
transportation costs, tariffs Empirical studies indicate that the relationship between inflation
differentials and exchange rates is not perfect even in the long run. However, the use of
inflation differentials to forecast long-run movements in exchange rates is supported. It also
influences tariffs, and quotas. It states that the rate of price changes should be similar. So we
can see that PPP will influence the inflation rate of both home and foreign countries. It also
affects the critical issues like tax, tariffs, quota and also the transportation cost of a country as
well as the MNCs.

International Fisher effect (IFE)

According to the Fisher effect, nominal risk-free interest rates contain a real rate of return and
an anticipated inflation.
According to the IFE, E(rf ), the expected effective return on a foreign money market
investment, should equal rh , the effective return on a domestic investment.
rf = (1 + if ) (1 + ef ) 1
Where,

if =

interest rate in the foreign country

ef =

% change in the foreign currencys value

rh = ih = interest rate in the home country

Now,
rf = rh
(1 + if ) (1 + ef ) 1 = ih
Solving for ef :

ef =

(1 + ih ) _

(1 + if )
If ih > if , ef > 0 (foreign currency appreciates)
If ih < if , ef < 0 (foreign currency depreciates)

The above process shows the method of using fisher effect. In the Fisher effect, nominal riskfree interest rates contain a real rate of return and an anticipated inflation. If the same real
return is required, differentials in interest rates may be due to differentials in expected
inflation. The international Fisher effect (IFE) theory suggests that currencies with higher
interest rates will depreciate because the higher rates reflect higher expected inflation. Hence,
investors hoping to capitalize on a higher foreign interest rate should earn a return no better
than what they would have earned domestically. Thus the real interest rate and nominal
interest rate are influenced by the fisher effect in order to influence the currency as well as
the exchange rate.

Bangladesh, an emerging country of the South Asian Region, switched its currency
management from fixed rate system to free floating system in January 2003. Since then the
local currency Bangladesh Taka (BDT) is freely traded in currency markets. Therefore, an
academic interest is arisen to see how a free floating system is working for a developing
economy like Bangladesh. Although BDT has been made freely convertible to any currency,
the exchange rate with other currencies maintains links with the exchange between BDT and
USD. This is because Bangladesh maintains its total foreign reserves and settles all
international transactions in USD.
As a matter of fact that the effect of interest and inflation rates on the exchange rate
movements are opposite to the expectation of IFE and PPP theories. This may indicate that
liberalization of economy with unrestricted flow of funds may have its potential negative
impacts for the developing countries like Bangladesh where demand for foreign currencies is
always high due to more import payments relative to exports earning. This may be possible
because Bangladesh economy yet to be fully integrated with the global financial system, with

required structural changes to allow free flow of foreign and local currencies in response to
the changes in the interest rate and inflation differentials.
Although three major economic variables, e.g., interest rate, inflation rate, and balance of
payment play major role in determining the exchange rate between Bangladesh Taka and US
dollar, though the effects of interest and inflation is not consistent with the IFE and PPP
theories.

Government Regulations on Foreign Currency

Bangladesh, an emerging country of the South Asian Region, switched its currency
management from fixed rate system to free floating system in January 2003. Since then the
local currency Bangladesh Taka (BDT) is freely traded in currency markets. Therefore, an
academic interest is arisen to see how a free floating system is working for a developing
economy like Bangladesh. Although BDT has been made freely convertible to any currency,
the exchange rate with other currencies maintains links with the exchange between BDT and
USD. This is because Bangladesh maintains its total foreign reserves and settles all
international transactions in USD.
As a matter of fact that the effect of interest and inflation rates on the exchange rate
movements are opposite to the expectation of IFE and PPP theories. This may indicate that
liberalization of economy with unrestricted flow of funds may have its potential negative
impacts for the developing countries like Bangladesh where demand for foreign currencies is
always high due to more import payments relative to exports earning. This may be possible
because Bangladesh economy yet to be fully integrated with the global financial system, with
required structural changes to allow free flow of foreign and local currencies in response to
the changes in the interest rate and inflation differentials.
Although three major economic variables, e.g., interest rate, inflation rate, and balance of
payment play major role in determining the exchange rate between Bangladesh Taka and US
dollar, though the effects of interest and inflation is not consistent with the IFE and PPP
theories.
Bangladesh Banks transactions with Ads

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

financial institutions are free to remit their post-tax profits to their head offices through banks
authorized to deal in foreign exchange (Authorized Dealers) without prior approval of
Bangladesh Bank.
Bangladesh Bank's purchases and sales from and to the ADs are in US Dollar only, on
spot basis. All such transactions with Bangladesh Bank are required to be in multiples of US$
10, 000, subject to a minimum of US$ 50,000. ADs are free to quote their own rates, ready
and forward, for transactions in the interbank market and with their customers.
(a) The Central Banks of Bangladesh, India, Iran, Nepal, Pakistan, Sri Lanka, Bhutan and
Myanmar have an Agreement to settle current transactions between these countries through
the Asian Clearing Union (ACU) mechanism. All such payments to the ACU member
countries excepting those covered by loan/ credit agreements are accordingly settled through
the Asian Clearing Union (ACU) mechanism in Asian Monetary Unit (AMU, also called
ACU dollar)which is defined as equivalent to the US dollar.
(b) The ACU Agreement referred to above provides for settlement of the following types
of payments:
(i) Payments from residents in the territory of one participating country to residents in the
territory of another participating country.
(ii) Payments for current international transactions as defined by the Articles of Agreement of
the International Monetary Fund.
(iii) Payments permitted by the country in which the payer resides.
(c) ADs shall maintain nostro accounts in ACU dollars with their correspondent banks in
ACU member countries for the purpose of settlements through ACU. Similarly ACU dollar
accounts may be opened by the ADs in their books in the names of their correspondents in
ACU member countries. Ads may pay interest on the balance of Nostro A/C (ACU Dollar) as
per mutual negotiation.
(d) An AD needing to fund its ACU dollar nostro account with a correspondent bank in an
ACU member country shall do so through Bangladesh Bank against surrender of the required
amounting US dollar, or of equivalent taka at Bangladesh Bank's selling rate. Bangladesh
Bank will advise the central bank of the concerned ACU member country to make the

amount available to the transferee bank in that country. After making the payment, the central
bank of the recipient ACU member country shall advise the GM of the ACU secretariat to
credit its account by debit to Bangladesh Bank's account.
(e) For repatriating funds from an ACU dollar nostro account with a correspondent bank in an
ACU member country an AD shall advise the correspondent bank to route the payment
through the central bank of that country, which will advise Bangladesh Bank to make the
amount available to the recipient AD. Bangladesh Bank on receipt of the advice, shall make
the fund available to the recipient AD (either in US dollar or in equivalent taka. at BB's
buying rate, at the AD's option) and shall advise the GM of the ACU secretariat to credit its
account by debit to the account of the central bank of the transferor ACU member country.

(a) Bangladesh Bank operates a foreign currency clearing system enabling the AD banks to
settle their mutual claims in US dollar, Pound Sterling, Euro and Japanese Yen arising from
inter bank transactions; to economize the time and cost involved in settlements through
correspondents abroad. Under

this arrangement, AD banks

maintain

clearing

accounts

with the BB in US dollar, pound sterling, Euro and Japanese yen. Apart from the purpose of
settlement with other ADs, these accounts may also be used for transfers to and from
correspondents abroad.
(b) Settlement of the balances lying in each of the clearing accounts take place at the end of
each month. The Bangladesh Bank charges interest on the debit balance in an account on
daily product basis and debit the bank's account at the end of each month and pays interest on
the amount of credit balance at the rates prescribed from time to time.
(c) Operation of the clearing system is centralized in the International Department of
Bangladesh Bank, Head Office, Dhaka; but the ADs in other centers may transfer funds to
other banks through their head/main office in Dhaka.

After the Independence, Bangladesh adopted a policy of nationalisation of all large and
medium industries. So, there was no new inflow of FDI in the country until 1977. Subsequent
governments experimented with various industrial policies, but because of very uncertain

political situation in the country, the FDI flows remained negligible until 1993. Only 220 FDI
units were registered in Bangladesh between 1977 and 1993, but subsequently, FDI has
experienced a fairly high annual growth. The number of FDI units registered in the country
during the period from July 1996 to May 1999 was 425. The expected volume of total
investments in these enterprises accounted for Tk 288.8 billion. These would create
employment for more than 94,000 persons. Sectors that now attract FDI are readymade
garments, textiles and fabrics, chemicals, paper and paper products, equipment and
spares, printing, packaging, plastic products, metal industries, food processing, electrical
goods,

pharmaceuticals

etc.

Of

late,

oil

and naturalgas,

electricity, telecommunication, cement, hotels and restaurants, and hospitals and clinics have
become sectors favoured by many foreign investors. The choice of FDI in initial years was
limited in low investment, quick yield projects, while recent years show some diversification
in lines of high-tech, capital intensive projects as well as of preferential distribution within
the traditional sectors and sub-sectors. The share of agriculture, construction, storage and
communication, however, remains historically low and account for less than 3% of the total
FDI. Despite a continuous increase in the number of FDI projects registered with the BOI
over the last few years, the net FDI flows into the country remained low and in 2005, the
figure accounted for around 1.3% of the countys GDP. In 2007-08, the BOI recorded 143
proposals of FDI projects with a total FDI of Tk 54.33 billion, while the corresponding
figures for 1995-96 were 127 and Tk 62.61 billion.
The industrial policy of the government provides extensive incentives and facilities to attract
FDI in Bangladesh. These include tax holidays, concession in import duty on machinery,
repatriation of profits dividends, invested capital and capital gain, and salaries of foreign
personnel and exemption of tax on these incomes, exemption of export oriented industries
from paying local taxes, up to 90% financing of the L/C value of export products. The
government has liberalised the trade regime and significantly reduced non-tariff restrictions.
Foreign investors in Bangladesh have access to domestic capital markets for working capital
in the form of loans from commercial banks and development financial institutions. They also
have access to the services of the countrys stock exchanges. Export-oriented industries of the
thrust sector (toys, luggage and fashion articles, leather goods, diamond cutting and
polishing, stationery goods, silk cloth, gift items, cut and artificial flowers and orchid,
vegetable processing, and engineering consultancy services) are provided cash incentives,
venture capital, and other facilities. The establishment of export processing zones (EPZ)

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

allow creation of private EPZs in the country has been a welcome decision.
Problems that have restricted FDI potentials in the country include excessive bureaucratic
interference, alleged irregularities in processing papers, lack of commitment on the part of
local investors, inordinate delays in selecting projects for feasibility studies, and frequent
changes in policies on import duties for raw materials, machinery and equipment.
Overlapping administrative procedures and absence of a transparent system of formalities
often confuse not only investors proposing projects, but also staff and personnel assigned for
discharging procedural responsibilities. Frequent transfers of top and mid level officials in
various ministries, directorates and departments affect continuity and prevent timely
implementation of strategic, procedural, and even routine duties. Many foreign companies
feel disturbed and ultimately are discouraged by disruptions in the production processes in
the country because of frequent power failures, poor infrastructure support, and labour and
political unrest. An additional problem is the lack of professional personnel, i.e., the
technical, managerial and innovative skills in the country needed to efficiently handle
entrepreneurial function including risk taking, planning and coordination and control.
Bangladesh has an advantage in labour costs, which can be converted into an exportable
product, but the advantage has many difficulties. The factories in the country have to deal
with constraints beyond their control, such as, power failures, poor communications or
increased transaction costs and cumbersome procedures in customs in many government
offices. The political instability, including frequent hartals is a real hazard. The World Bank
and IFC document named Doing Business 2009 ranked Bangladesh 110th in the list of a
total of 181 assessed in terms of ease of doing business. The document however, ranked the
country 18th according to the index protecting investors and 59th in availability of loan
funds, which make the country relatively attractive for FDI. The situation is expected to
improve if the political commitment of the government to promote and protect FDI in the
country can be increased and the policy environment can be changed from one that is
regulatory to one that is supportive/complementary in nature.

Barriers of FDI in Bangladesh:

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

Policy legislation and implementation

In this context, the extent of the administrative barriers is quite longwinded and inter-related.
Poor policy design and implementation, competitive weakness, structural impediments, low
quality of infrastructure and skills, weak institutions, poor governance and administrative
hassles represent the administrative barriers that discourage potential FDI. But the main
drawbacks in the bureaucratic system are inefficiency and corruption, turning the whole
administrative functionaries into a harassing experience. Administrative barriers are also
translated in different forms and vary from sector to sector. In Bangladesh, we are used to
face barriers in different regulatory bodies in the form of their policy,

legislation and functions. National Board of Revenue (NBR) and Board of Investment (the
Investment Promotion Agency) are two important agencies directly related with FDI
operations.
Cost of inefficiency is high indeed
The governance and management of the government entities has been largely inefficient,
ineffective and unresponsive. The cost of economy of inefficient services of state-owned
entities in energy, telecommunication, ports, railways and other public utilities and banking,
in terms of increased cost of doing business has been high indeed. Power outages and voltage
fluctuations, shortage of gas supply particularly due to limited network, limited telephone
services, inadequate urban water supply, and the high incidental and transaction costs
associated with these services have imposed considerable costs on entrepreneurs. In fact, the
activities of the public sector utility service providers have been inward looking and have not
worked well, while the rationale for public provision has been weak or missing in many
areas. And much of the short fall in their performance can be linked to ineffective and
inefficient management and unresponsive governance.
Corruption is a disguised form of taxation
Reasons for the extensiveness of official corruption can be numerous. Many of these are
cultural or sociological, but the more important ones are organization-related and economic
policy-related in nature. Corruption thrives in an environment of pervasive bureaucratic and
regulatory controls. Extensive discretionary powers in the hands of the officials and weakness
in the legal framework also induce corruption. Though corruption afflicts different sections of
the society in diverse ways its costs fall heavily on the investors and entrepreneurs as well
as the business community. For them, corruption is a disguised form of taxation. When
regulations and controls are pervasive, and effective means of obtaining redress through legal
or administrative procedures are absent, businessmen end up bribing officials to overcome
them. Many companies regard bribery as just one of the costs of doing business and show
these payments as legitimate business expenses.

Policy discrepancy

Bangladesh offers generous opportunities for investment under its liberalized Industrial
Policy and export-oriented, private sector-led growth strategy and the relevant policies are
attractive in paper. But, there are several policy discrepancies that are quite enough to
discourage FDI.
Differential treatment
Although existing regulations provide for equal treatment of domestic and foreign investors,
certain discriminatory rules continue with regard to foreign investment. Sanctioning
requirements for particular categories of foreign investment, restrictions against capacity
expansion, special regulations for suppliers credit an
d pay-as-you-earn-schemes are some of the areas of differential treatment.
One stop service of BOI
In Bangladesh, the Board of Investment (BOI) has created a cell to provide all types of
services and assistance to private investments including FDI. But, offering one stop service to
the existing and prospective investors in real terms is yet to materialize. The officials of
several state-owned utility service providers, working for BOI one stop service, are less
capable and less powered to provide necessary service.
Lawsuits
There are many lawsuits by taxpayers against the government and majority of which the
government loses. But, due to cumbersome legal procedure such lawsuits become
inconvenient for the businessmen.
Hassles in implementation
The major quandary of administrative barriers lies in the gap between investment and trade
related policies, and lack of co-ordination between various government agencies in the
implementation process. As a result, investors face hassles and the cost of doing business
goesup.

Registration complexity
The procedure for registration with the sponsoring agency has been an annoyance to
entrepreneurs and does not serve any useful purpose. With regard to registration with the

Inspectorate of Factories and Establishments the rules governing the role of the inspector
seem to provide ample discretionary power and put industries in a disadvantaged situation.
Lack of coordination among state entities
There is a serious lack of co-ordination between the policy implementing agencies of the
government and because of this investors suffering goes up. This induces lot of hassles in the
implementation process and creates barriers for the investors in getting due incentives offered
by the government and ultimately discourages foreign investors to proceed on.
Fiscal policy changes
Any change in the fiscal change after passage of Finance Act seriously disturbs any
business plan and discourages FDI in particular. In Bangladesh, quite often policies are
changed through issuance of Statutory Regulatory Orders (SROs).
Lengthy customs processing
It takes something like 25 signatures to release a consignment from customs. And it takes
more than the stipulated time to release a consignment supervised by an authorized PSI firm
even when the consignment is not selected for physical inspection.
Infrastructure
Also linked with administrative barriers the level of infrastructure development is another
factor that affects the level of foreign investment and it can be hardly claimed that South
Asian countries have reached a level of infrastructure development that will satisfy foreign
investors. Again this administrative and bureaucratic inefficiency failed to increase proper
infrastructure support.
Power supply
Bangladesh has one of the lowest per capita consumption of power and coverage of
electrification among developing countries. System losses in the power sector have often
exceeded 40 per cent of gross generation. Involvement of the government in the power sector
has created an overlapping and confusing situation regarding responsibilities. In fact,
inadequate and inefficient power supply continues to impose a high cost on the economy. The
extensive load-shedding from time to time, particularly during peak hours, has disrupted
industrial production thus affecting the countrys external competitiveness.

Expensive port
The cost of inefficient cargo handling at the Port has been particularly high, thus affecting
the external competitiveness of the economy. There are numerous workers unions at the
port, all of which are crucial for handling cargo. In case that one of these associations decides
to call a strike, the whole system comes to a standstill. There are, of course, the hidden
unofficial costs for clearing cargo, be it for import, be it for exports. In fact the port happens
to be one of the most expensive ports (container wise) in the world, singularly due to these
unofficial payments, to which the authorities concerned are comfortably oblivious,
evidently to their benefits. Another factor is the inefficiency and bureaucratic logjam, which
increases the lead-time for shipments. Hence, even if a foreign client is interested in ordering
from Bangladesh, the company is compelled to procure the products from elsewhere if it is
quite urgent. Not only do the entrepreneurs lose, the government also loses its due tariffs and
levies from the port.