Published: Monday, Jun 22, 2009
The overall outcome of the tariff adjustments is computed in terms of average nominal tariffs, which is an economic concept, somewhat different from a simple averaging of tariff rates. ForBangladesh, the protective effect of each tariff and para-tariff has to be factored in, before averaging. For instance, VAT and SD, which were introduced in 1991 as trade-neutral import taxes, have lost their neutral identity - the SD, more than VAT. So, the protective eff/ects of these rates, as well as the protective implications of trade VAT (2.25%) and advance income tax (AIT), have all to be factored into the computation of nominal protection. A preliminary computation of the average nominal tariff for Budget 2010 yields an estimate of 22.9%, compared to 20.1% for FY 2008-09. This rise in average nominal protection is a departure from the historical trend of gradual decline since the start of trade liberalization in the early 1990s (See Fig. 1).
It might be argued that there is more to trade policy than a few tariff adjustments. It turns out that after trade-related quantitative restrictions on imports have been eliminated, tariffs and para-tariffs remain the main instrument of trade policy in Bangladesh. So average tariffs pretty much captures the broad direction of trade policy. At the two Group of Twenty (G20) summits on the global economic crisis, there was a consensus that countries will not raise their protection levels in order to let the stimulus packages have their intended global impact of expanding global consumer demand through open markets. World Trade Organisation (WTO) was given the responsibility of monitoring protectionist developments.
It might be argued that Bangladesh need not worry since it has only bound 15% of its tariff lines under its WTO obligations - that also around 200 per cent, for agricultural products. Its applied tariffs being much below bound levels, one would think there is plenty of head room for raising tariffs. Being a least developed country (LDC), it can also claim special and differential treatment.
In principle, that might be okay. But two immediate concerns will be cause for some unease in bureaucratic quarters. Bangladesh expects to lay claim on its share of the stimulus resources placed with multilateral organizations. These tariff adjustments might not sit well with those assigned to review our trade policy developments. Even the expectation that multilateral donors like the World Bank might be willing to finance a bigger chunk of the budget deficit might hit a snag on grounds of the rise in protection levels, not to mention that proposed changes in Public Procurement Rules are already a bone of contention. It will take all the development diplomacy that Bangladesh can muster to draw higher amounts of concessional project aid, let alone resources for budget support which are usually contingent upon a critical mass of reforms.
To sum up, it all adds up to a rather daunting agenda for the Finance Minister in the coming year that will need much more than good cheer from his domestic and external constituencies. We know from his record of service that he is no quitter. We wish him well. (Dr. Zaidi Sattar is Chairman, Policy Research Institute of Bangladesh. Research support was provided by PRI's Tamzidul Islam Chowdhury. The writer can be reached at e-mail: email@example.com)