VZCZCXRO3034
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHKA #0301/01 0880926
ZNR UUUUU ZZH
R 290926Z MAR 09
FM AMEMBASSY DHAKA
TO RUEHC/SECSTATE WASHDC 8501
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 1617
RHEHAAA/WHITE HOUSE WASHDC

UNCLAS SECTION 01 OF 11 DHAKA 000301 
 
SIPDIS 
 
DEPARTMENT/WHITE HOUSE PLEASE PASS USTR 
NEW DELHI/KOLKATA FOR FCS 
DEPARTMENT FOR EEB/IFD/OIA, NHATCHER AND GHICKS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR BG
SUBJECT: BANGLADESH INVESTMENT CLIMATE STATEMENT 
 
REF:  08 STATE 123907 
 
¶1.  This is Embassy Dhaka's submission for reftel tasking. 
 
¶2.  Begin text of the 2009 Bangladesh Investment Climate Statement: 
 
Openness to Foreign Investment 
------------------------------ 
 
Bangladesh actively seeks foreign investment under its industrial 
policy and export-oriented, private sector-led growth strategy. 
Foreign and domestic private investors receive the same incentives. 
These include: 100% ownership in most sectors; tax holidays; reduced 
import duties on capital machinery and spares; duty-free imports for 
100% exporters; and tax exemptions. 
 
Foreign investors are generally able to meet the few existing 
performance requirements.  Exporters have access to customs bonded 
warehouses.  Foreign Investors can repatriate profits, which are 
almost fully convertible.  Discriminatory policies and regulations 
exist but are not widespread.  For example, licensing regulations 
issued in 2006 governing freight forwarding agents impose higher 
bonding and capital requirements on foreign-owned companies.  The 
licensing process specifies sharply different treatment of freight 
forwarder/logistics companies that are 100% foreign owned, joint 
ventures with less than 50% foreign owned, and 100% domestically 
owned companies. 
 
After nearly two years of emergency rule under a caretaker 
government, generally free and fair elections took place on December 
29, 2008.  The Awami League (AL), one of Bangladesh's two largest 
political parties, and it alliance partner, the Jatiya Party, 
secured a landslide victory with 263 of a total 299 parliamentary 
seats.  The new government, led by Prime Minister Sheikh Hasina 
Wazed, took office on January 6, 2009. 
 
The AL, which earlier was in power from 1996 to 2001, faces a host 
of challenges, including managing the impact of the global economic 
crisis, fine-tuning monetary policy, encouraging investment flows, 
and rebuilding infrastructure.  The AL's election manifesto focused 
on controlling inflation, addressing chronic energy and power 
shortages, reducing poverty and promoting economic growth and human 
development. 
 
Economic targets: The AL hopes to lessen the impact of the economic 
crisis by encouraging investment, retaining domestic demand, and 
promoting export growth. Its target for GDP growth is 8% by 2013, up 
from the current 6% growth level.  Key focus areas include 
agriculture, IT, textiles, food-processing, pharmaceutical, and 
chemical products.  The GOB will provide incentives to small and 
medium industries. Other focus areas include reducing poverty, labor 
policy reform, improved governance, better income tax collection. 
 
Infrastructure development in the power sector: The AL has pledged 
to carry out a 3-year power sector development program. This is 
intended to increase generation to 7000MW by 2013, up from the 
current 5000MW.  The government plans to formulate a Coal Policy, 
which would help encourage investment in that sector. 
 
 
Economic implications of the election victory: The AL has abandoned 
its socialist past and declared itself business-friendly.  Its 
landslide victory produced increased optimism for higher investment 
inflows, improvements to infrastructure, and progress on poverty 
alleviation.  Set against the backdrop of slowing global growth and 
weak institutions, the new government will face many obstacles and 
political considerations may inhibit reforms. 
 
Citi N.A. South Asia estimates GDP growth of 5% in FY10.  This 
factors in some slowing of export growth and a marginal increase in 
remittances given lessening global demand for Bangladeshi labor. 
 
The Foreign Private Investment (Promotion and Protection) Act, 1980, 
the Industrial Policy Act of 2005, the Bangladesh Export Processing 
Zones Authority Act of 1980, the Companies Act, 1994, and the 
Telecommunications Act, 2001 are the major pieces of legislation 
affecting investors.  The GOB has gradually liberalized trade over 
the past five years.  Import duties and supplemental taxes remain 
high and constitute the largest sources of government revenue. 
 
The FY2009 budget proposals have addressed the structure of the 
personal income tax and selective corporate tax rates.  Mobile phone 
operator companies will be charged a tax rate of 45 per cent unless 
they convert to publicly traded companies.  This is intended to 
persuade the firms to enter the stock exchange and boost local 
 
DHAKA 00000301  002 OF 011 
 
 
equity markets.  The government has decided to continue its tax 
holiday scheme for certain industries established between 1 July, 
2008 and 30 June, 2011.  These include agro-processing, diamond 
cutting, steel production from billet, jute industries, different 
units of textile sector, underground rail, monorail, and telecom 
infrastructure other than mobile phone.  Extension of the tax rebate 
facility to non-resident Bangladeshi investors may attract foreign 
investment. 
 
Registration with the Board of Investment (BOI) is the only prior 
approval required for foreign direct investment (FDI).  Registration 
with the BOI is necessary to obtain benefits such as concessionary 
duty rates for machinery imports or the ability to import items on 
the "restricted list."  The BOI also approves foreign loans and 
technology remittances on behalf of the Bangladesh Bank (the 
country's central bank).  Government responsibility for dealing with 
foreign investments is fragmented.  BOI, frequently touted as a 
one-stop shop for all investors, can only register investors in 
industrial projects outside the export processing zones (EPZs) and 
assist them with tax inquiries, land acquisition, utility hook-ups, 
and incorporation.  The corresponding EPZ authority is the 
Bangladesh Export Processing Zones Authority (BEPZA).  Investors in 
infrastructure and natural resource sectors, including power, 
mineral resources and telecommunications must seek approval from the 
corresponding government ministries.  Although the BOI is housed in 
the Prime Minister's Office, regulatory and administrative powers 
remain vested in the line ministries.  The BOI has not proven to be 
an effective advocate for foreign investors. 
 
The Government is restructuring several state owned enterprises 
(SOE) to enhance their efficiency.  The efficiency of both 
Chittagong and Mongla Ports has increased in recent times.  The 
Caretaker Government concluded agreements to transfer six land ports 
to the private sector.  Two of these have initiated operations on a 
Build, Own and Transfer (BOT) basis.  The Government has converted 
Biman Bangladesh Airlines into a public limited company.  The 
Government has initiated legal reforms to simplify the land 
registration process.  While the budget contains proposals to reform 
the SOE sector, these initiatives still face formidable challenges. 
 
The Government has converted three Nationalized Commercial Banks 
(NCB), Sonali, Janata and Agrani into public limited companies. 
 
There are signs that government resistance to privatizing utilities 
and opening critical sectors to full competition is starting to 
change.  Bangladesh allowed private investment in power generation 
and natural gas exploration.  Efforts to grant autonomy in petroleum 
marketing and gas distribution have stalled, however. 
 
In 2007, the Caretaker Government amended the International Long 
Distance Telecommunication Services Policy 2007 to legalize voice 
over internet protocols (VoIP).  The first stage of the policy 
involved international gateways (IGW) connected to submarine cable 
and interconnection exchanges.  The second stage would link 
interconnection exchanges (ICX)  to the international gateways and 
access network service.  In the final stage, the access network 
service would provide direct services to customers.  Under the 
policy, the government would provide three licenses to the private 
sector for VoIP.  Two ICX licenses to private operators would be 
awarded to operate national and international calls. 
 
In February 2008, three local companies won bids with state-run 
Bangladesh Telecommunications Company Limited (BTCL), formerly BTTB, 
to set up international gateways to handle international phone calls 
to and from Bangladesh.  Along with IGWs, the Bangladesh 
Telecommunication Regulatory Commission (BTRC) also awarded licenses 
to two other local companies for interconnection exchange (ICX) 
services. 
 
BTCL has enjoyed a monopoly on international calls, handling 20 
million minutes a day. Industry experts predict the entry of the new 
companies would triple the $2 billion market. 
 
Administrative approval for the production plan of a foreign owned 
open-cast coal mine in northwest Bangladesh has been pending since 
November 2005 due to local opposition and political pressure from a 
private citizens' group.  The immediate past caretaker government 
finalized a draft coal policy.  In its election manifesto, the AL 
pledged to approve a coal policy. 
 
According to central bank statistics, annual net foreign direct 
investment (FDI) flows averaged $520.6 million from FY2002 to 
FY2007, with inflows rising significantly in FY 2006 ($743 million) 
and FY2007 ($760 million).  However both local and foreign 
investment fell in the last fiscal year (FY2008).  According to a 
 
DHAKA 00000301  003 OF 011 
 
 
draft economic review of the Ministry of Finance, the net foreign 
direct investment (FDI) in FY2008 was $604 million, while a Central 
Bank provisional estimated it would be $650 million. 
 
While foreign investment has declined, outward transfers of 
FDI-related investment are also falling.  In 2007, outward transfers 
amounted to $705 million against a transfer of $466 million in 
¶2006. 
 
According to the Asian Development Bank (ADB), Bangladesh has not 
been a major recipient of foreign direct investment (FDI) or foreign 
portfolio investment. Thus, the potential disruption of FDI inflows 
or the outflows of portfolio investment are not major concerns. 
However, expected FDI inflows in the energy sector, which the 
country urgently needs, could be affected in the near term as 
investors exercise caution about any large investments.  The 
postponement of energy sector FDI will affect growth prospects given 
the prevailing acute power and gas shortages. 
 
Bangladesh has had three different governments since October 2006. 
This has resulted in discontinuity in dealing with investment 
proposals.  For their part, foreign investors have been reluctant to 
push projects due to a fear that decisions could be reversed 
following subsequent changes of government. 
 
FDI increased in FY05 as service sector foreign investors reinvested 
their earnings.  Such reinvestment declined in the last fiscal year, 
which saw an increase in profit repatriation.  Political 
uncertainty, indecision over some major project proposals, and 
infrastructure constraints contributed to a decrease in FDI. 
 
Bangladesh Bank data shows that investors repatriated $175 million 
in profit in 2001, while the figure was $195m in 2002, $355m in 
2003, $338m in 2004 and $418m in 2005. 
 
According to The United Nations Conference on Trade and Development 
(UNCTAD) 'World Investment Report 2008', of Bangladesh's $666 
million FDI flow in 2007, the textile industry received the highest 
amount with $102 million, followed by telecom $89 million, trade and 
commerce $93 million and the gas sector $71 million. 
 
Investors complain that ministries require seemingly unnecessary 
licenses and permissions.  They also complain about law and order 
problems, poor infrastructure, inadequate commercial laws and 
courts, lack of contract sanctity, and policy instability.  Policies 
are frequently altered at the behest of special interests, and many 
decisions are overturned when governments change.  Authority and 
responsibility for decisions lack transparency and government 
decisions are frequently arbitrary.  Corruption remains a serious 
impediment to efficient business operations. In 2005, Transparency 
International for the fifth year in a row ranked Bangladesh worst on 
its Corruption Perception Index. Bangladesh's ranking improved 
slightly in recent years, but the score achieved has remained steady 
at 2.1. 
 
To a lesser extent, difficulty in attracting foreign investment also 
results from Bangladesh's image as an impoverished and undeveloped 
country subject to frequent and devastating natural disasters. 
 
Conversion and Transfer Policies 
-------------------------------- 
 
The official currency of Bangladesh is the taka.  The Bangladesh 
Bank, the central bank of Bangladesh, does not fix the exchange rate 
of the taka against foreign currencies.  Individual banks set their 
own buying and selling rates for foreign currency based on supply 
and demand.  The taka is almost fully convertible for current 
account transactions, such as import trade and travel needs, but not 
for capital account transactions, such as investing or currency 
speculation.  The Foreign Investment Act guarantees the right of 
repatriation of invested capital, profits, capital gains, post-tax 
dividends, and approved royalties and fees.  The central bank's 
exchange control regulations and the U.S.-Bangladesh Bilateral 
Investment Treaty (entered into force in 1989) provide similar 
investment transfer guarantees.  In practice, foreign firms are able 
to repatriate funds without much difficulty, provided the 
appropriate documentation is in order.  Foreign firms in joint 
ventures, which are only able to remit profits in the form of 
dividends, also report few difficulties.  However, in some cases, 
foreign firms' profit remittances have been delayed for over one 
year pending tax clearance from the National Board of Revenue. 
Although there is no specific restriction on repatriation of capital 
gains in the Foreign Private Investment Act of 1980, one U.S. firm 
was denied permission to repatriate gains on share sales.  The Board 
of Investment may need to approve repatriation of royalties and 
 
DHAKA 00000301  004 OF 011 
 
 
other technology transfer fees over 6% of sales. 
 
Expropriation and Compensation 
------------------------------ 
 
In the years immediately following independence in 1971, widespread 
nationalization resulted in government ownership of over 90% of 
fixed assets in the modern manufacturing sector, as well as all 
banking and insurance interests, except those in foreign (but 
non-Pakistani) hands.  Domestically owned cotton textiles, jute, and 
sugar manufacturing units, none of which were owned by foreigners, 
were placed under government control.  However, the Foreign 
Investment Act of 1980 has forbidden nationalization or 
expropriation without adequate compensation, and there have been no 
instances of foreign property expropriation since the Foreign 
Investment Act was passed. 
 
Dispute Settlement 
------------------ 
 
A fundamental impediment to investment in Bangladesh is a weak and 
slow legal system in which the enforceability of contracts is 
uncertain.  The judicial system does not provide for interest to be 
charged in tort judgments, and hence there is no penalty for 
delaying proceedings.  The immediate past caretaker government 
initiated major reforms to address governance challenges.  One 
reform separated the country's judiciary from the executive.  To 
facilitate the functioning of an independent judiciary, the 
Government created 4,273 posts for the judicial magistracy, 
including 655 posts for judicial magistrates and 3,618 posts for 
support staff.  The new government has pledged to continue this 
reform, but the legal separation of the judiciary from the executive 
is insufficient to ensure justice.  Reforms of other pillars of the 
justice system including the police, courts, and legal profession 
are necessary.  It is widely acknowledged that corruption is a 
serious problem in the lower courts, where cases are first brought. 
At the appellate level, the outcome of commercial cases has usually 
been determined on merit. 
 
Bangladesh is a signatory to the International Convention for the 
Settlement of Disputes (ICSID) and it acceded (on May 6, 1992) to 
the United Nations Convention for the Recognition and Enforcement of 
Foreign Arbitral Awards.  Bangladesh is also a party to the South 
Asia Association for Regional Cooperation (SAARC) Agreement for the 
Establishment of an Arbitration Council, signed November 13, 2005, 
which will establish a permanent alternative dispute resolution 
center in one of the SAARC member countries.  A provision of the 
U.S.-Bangladesh Bilateral Investment Treaty permits submission of 
investment disputes to ICSID for third-party settlement. 
 
The ability of the Bangladeshi judicial system to enforce its own 
awards is weak, and there is no reason to think enforcement of 
foreign judgments would be stronger.  The Bangladesh Export 
Promotion Bureau is sometimes helpful in assisting in dispute 
settlement of export-related transactions.  Major Bangladeshi trade 
and business associations can also be helpful in assisting in 
transaction disputes. 
 
Many laws affecting investment in Bangladesh are old and outdated. 
Some of these laws have been amended, but many drafts of proposed 
new legislation produced by ad hoc government committees are more 
than ten years old and are themselves out of date.  Resource 
constraints in the Law Ministry are a major problem.  The insolvency 
laws, which apply mainly to individual insolvency, are not being 
used because of a web of falsified assets and uncollectible 
cross-indebtedness supporting insolvent banks and companies.  A 
Bankruptcy Act was enacted in 1997 but has been ineffective in 
addressing the insolvency and cross-indebtedness problem of 
borrowers.  Companies have often dealt with legal issues by 
including a clause in arbitration agreements that allows for one of 
the parties to bring a dispute before another nation's court.  This 
practice is allowed under Bangladeshi law. 
 
Shortcomings in accounting practices and the registration of real 
property also hamper dispute settlement.  With the exception of 
those conducted by a few internationally affiliated accounting 
firms, audits of balance sheets and profit and loss statements often 
follow clients' instructions and fail to conform to international 
standards.  Documents affecting title to real property are often not 
registered, complicating transfer of ownership and collateral 
agreements. 
 
Performance Requirements and Incentives 
--------------------------------------- 
 
 
DHAKA 00000301  005 OF 011 
 
 
The government's industrial policies emphasize manufacturing and 
labor-intensive industries that use local inputs.  There are a 
variety of subsidies and other incentives provided to different 
industrial sectors, primarily the export sectors and, to a lesser 
extent, import substitution sectors.  The government also provides 
loans at concessionary rates through its nationalized banks and 
government-owned development banks for exports, cottage industries, 
and agriculture.  These incentives are available to both domestic 
and foreign investors. 
 
To simplify the tariff structure and generate more revenue through 
import duty in the FY2009 budget, the government proposed 
transforming the previous (FY2008) three-tier customs duty 
structure.  The proposal calls for creating a four-tier structure by 
reducing duty on capital machinery and spares, basic raw materials 
and intermediate raw materials, and retaining the highest slab, for 
finished products, at 25 percent. The government's fiscal year ends 
June 30th.  Experts believe that the new tariff structure would 
benefit finished goods importers, who will now face lower tariff 
incidence and may create an anti-domestic industry bias. 
 
The government also provides a variety of tax incentives to selected 
sectors of the economy, including: 
 
--  A 50% rebate for taxable income generated from export earnings. 
 
--  An exemption from income tax for export earnings from 
handicrafts and cottage industries. 
 
--  Tax holidays of four to six years, depending on location, for 
new industrial enterprises in these sectors: textiles, 
pharmaceuticals, melamine, plastic, ceramics, sanitary ware, iron 
and steel industries, fertilizer, insecticide and pesticide, 
computer hardware, petrochemicals, drug chemicals and pharmaceutical 
raw materials, agricultural equipment, shipyard, boiler and 
compressor, textile machineries, and infrastructure facilities. The 
tax holiday is expected to be available up to 2011. 
 
--  A 10-year tax holiday for enterprises in the EPZs 
 
--  Accelerated depreciation for enterprises not eligible for a tax 
holiday 
 
--  Income tax exemption for 15 years for power projects 
 
As of December 2008, the World Trade Organization did not show any 
notifications alleging Bangladeshi violations of the Agreement on 
Trade-Related Investment Measures. 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
Foreign and domestic private entities can establish and own, 
operate, and dispose of interests in most types of business 
enterprises.  Four sectors, however, are reserved for government 
investment: 
 
arms and ammunition and other defense equipment and machinery 
 
forest plantation and mechanized extraction within the bounds of 
reserved forests 
 
production of nuclear energy 
 
security printing and mining 
 
Protection of Property Rights 
----------------------------- 
 
Although land, whether for purchase or lease, is often critical for 
investment and as security for loans, antiquated real property laws 
guarantee chaos.  Land registration records are unreliable.  Parties 
avoid registering mortgages, liens, and encumbrances because certain 
stamp duties and charges have been set at high levels.  Instruments 
take effect from the date of execution, not the date of 
registration, so a bona fide purchaser can never be certain of 
title. 
 
The government is progressing slowly in bringing its intellectual 
property rights laws into compliance with the World Trade 
Organization's Trade Related Aspects of Intellectual Property Rights 
(TRIPS) Agreement. The government enacted a Copyright Law in July 
2000, updating its copyright system and bringing the country's 
copyright regime into compliance with TRIPS.  The immediate past 
caretaker government drafted legislation to implement its TRIPS 
 
DHAKA 00000301  006 OF 011 
 
 
obligations with respect to patents and design as well as 
trademarks.  The Amendment of Trademark Act 1940 is undergoing 
inter-ministerial substantive review.  The draft Patent and Design 
Act is ready for legal review by the Ministry of Law and 
Parliamentary Affairs. 
 
These amendments are intended to bring the country's intellectual 
property laws into full compliance with WTO TRIPS requirements. 
Implementing regulations, however, must also be drafted. 
 
The government allocates too few resources to intellectual property 
rights (IPR) enforcement, and the IPR situation has deteriorate. 
The prevention and punishment of IPR violations is very low compared 
to the number of infringements.  The government sets a poor example 
by failing to account fully for software in its tenders.  A number 
of American firms, including film studios, manufacturers of consumer 
goods, and software firms, have reported violations of their 
intellectual property rights.  Some commercial establishments have 
adopted the trade name, trademarks and trade dress of U.S. 
businesses without authorization.  Bangladesh is a member of the 
World Intellectual Property Organization (WIPO), and acceded to the 
Paris Convention on Intellectual Property in 1991. 
 
Transparency of Regulatory System 
--------------------------------- 
 
Starting from a position of extreme over-regulation, the trend since 
1989 has been a gradual decrease of governmental obstruction of 
private business.  Many regulatory changes, however, have not yet 
been politically possible to implement.  Although some civil 
servants and ministers have displayed genuine commitment, reforms 
face broad based resistance from many groups in the economy, 
including influential members of the business community. The 
official chambers of commerce include manufacturers in protected 
industries and well-connected commission agents pursuing government 
contracts.  Chamber members call for a greater voice for the private 
sector in government decisions and for privatization, but at the 
same time many support protectionism and subsidies for their own 
industries. 
 
Policy and regulations in Bangladesh are often not clear, 
consistent, or publicized.  Generally, the civil service, 
businesses, professionals, trade unions and political parties have 
vested interests in a system in which confidentiality is used as an 
excuse for lack of transparency, and in which patron-client 
relationships are the norm.  Businesses must always turn to civil 
servants to get action, yet may not receive any, even with support 
from higher political levels.  Traditionally, the country's poorly 
paid civil servants have regarded business people as exploitative, 
and regard themselves as having a near monopoly on economic acumen 
and patriotism.  Accounts from foreign investors of solicitation of 
bribes by public officials and politicians are common.  Bangladesh's 
donors regard public administration reforms as central to overall 
economic reform. 
 
In practice, government laws and regulations and their 
implementation create distortions or impediments to investment. 
Unhelpful treatment of businesses by some government officials, 
coupled with other negatives in the investment climate, raise 
startup and operational costs, add to risk, and tend to counteract 
the government's praiseworthy investment incentives.  There is 
little opportunity for the private sector to comment on proposed 
regulations. 
 
Efficient Capital Markets and Portfolio Investment 
------------------- ------------------------------ 
 
The Dhaka Stock Exchange (DSE) saw an increased amount of foreign 
portfolio investment in the past two years (2008 & 2007) amid a 
steady growth in the country's stock market.   Foreign trade 
turnover at the market, however, dropped to US$ 193.67 million in 
2008 from the previous year's US$ 292.70 million, DSE statistics 
show.  According to the DSE statistics foreign trade turnover 
accounted for 1.97 per cent of the total turnover at the DSE in 
2008, while it was 6.16 per cent in 2007.  Chittagong Stock Exchange 
(CSE), the other bourse, also observed similar hikes in turnover and 
prices. The overall stock markets experienced moderate declines in 
early 2009. 
 
Foreign investors showed increased interest in the country's stock 
market as it attained significant growth in the last couple of 
years.  Infrastructural development over the years also attracted 
foreign portfolio investors to the country's capital market. 
However, experts believe the present volume of foreign investment in 
Bangladesh is tiny compared to the market capitalization and such a 
 
DHAKA 00000301  007 OF 011 
 
 
volume of the foreign portfolio investment could not significantly 
influence the market. 
 
The shares of a number of state-owned enterprises (SoEs) and 
government shares of various private companies are being off-loaded 
to increase the supply of shares in the capital market.  As part of 
this process, shares of the nationalized Jamuna Oil Company Ltd. and 
Meghna Oil Company Ltd. are already in the capital market and the 
shares of Titas Gas Transmission and Distribution Company Ltd. are 
in the process of being off-loaded. The immediate past caretaker 
government approved the off-loading of government shares of 9 SoEs 
in the power sector, 10 SoEs in the industries sector and 2 
enterprises of the telecommunication sector. The immediate past 
caretaker government also took steps to introduce a Book Building 
System in the capital market to attract private companies having a 
strong financial foundation. 
 
Despite a recent surge in liquidity and turnover, the capital market 
in Bangladesh remains thin compared with those of its regional peers 
and the size of the economy. The market capitalization to GDP ratio 
stands at 68% in India and 41% in Pakistan, far exceeding that of 
Bangladesh.  The depth of the equity market remains 
shallow-vulnerable to overheating and price shocks; while the debt 
market remains at an incipient stage, characterized by limited 
listings and trading.  An efficient bond market needs to encompass 
resourceful primary and secondary markets, lucid rules and 
regulations, well functioning settlement and custody systems, 
reliable ratings, and benchmark yield curves. 
 
Foreign investors have access to local credit markets, but many seek 
offshore financing.  If they finance locally, it is usually with a 
foreign bank branch.  Four state-owned banks, known as nationalized 
commercial banks (NCBs), comprise a significant portion of the 
banking sector's total assets. The largest NCB has assets totaling 
approximately $4.6 billion.  An estimated 30% of the country's total 
asset base is non-performing, primarily because of long-outstanding 
debts to the NCBs.  The share of non-performing assets for private 
commercial banks ranges from two to eleven percent.  The World Bank 
has approved a $250 million International Development Association 
(IDA) soft loan to Bangladesh for an ongoing enterprise growth and 
bank modernization project.  As a part of the process, private 
management teams from international consulting firms have been put 
in charge of the four NCBs.  One of the four is in the final stages 
of privatization. 
 
The Securities and Exchange Commission (SEC) was formed in 1993 to 
regulate the DSE and CSE and protect investors.  In 1997, the SEC 
imposed new restrictions on the involvement of foreign investors in 
the Bangladesh capital market.  The guidelines stipulate that 10% of 
primary issues are reserved for non-resident Bangladeshis.  Major 
foreign investors have protested these measures, claiming that these 
measures exacerbate the market's greatest drawback: the difficulty 
of buying or selling in volume over a reasonably short period.  The 
SEC and the Institute of Chartered Accountants of Bangladesh have 
the task of enforcing reporting and audit requirements and bringing 
those requirements up to international standards. 
 
Political Violence 
------------------ 
 
In the past, there have been incidents of politically directed 
damage to foreign projects or installations.  Following U.S. 
military action in Iraq, a number of sizeable anti-American 
demonstrations occurred (between 10,000 and 80,000 participants). 
A few of these demonstrations resulted in minor property damage to 
U.S.- affiliated businesses.  Calls for boycotts of American goods 
and services have had limited impact and ended within a few months. 
 
Extortion of money from businesses by thugs claiming political 
backing is common.  Clashes between supporters of rival political 
parties and their student and youth wings and even factions within 
the same party occur regularly.  General strikes and blockades 
called by political parties  affect businesses by keeping workers 
away with the threat of violence and blocking transport, resulting 
in productivity losses.  Vehicles and other property are at risk 
from vandalism or arson during such incidents, and looting of shops 
has occurred. 
 
Responding to public concern over law and order, the government in 
March 2004 authorized a special elite force, known as the Rapid 
Action Battalion (RAB) as part of its anti-crime initiative.  The 
RAB is comprised of members of the armed forces, the police, and the 
Bangladesh Rifles and Ansars, both paramilitary groups.  The RAB 
became operational in June 2004 and has been credited by many 
Bangladeshis with improving domestic law and order.  Soon after its 
 
DHAKA 00000301  008 OF 011 
 
 
formation, however, the local media began reporting on 
"cross-fires", a euphemism for extrajudicial killings, particularly 
by the RAB.  In 2006, 355 deaths of individuals in law enforcement 
custody were reported, 290 of which were attributed to crossfire. 
The RAB was involved in 181 crossfire deaths; members of the police 
were involved in 100; other security forces were involved in nine 
crossfire deaths.   The number of crossfires has declined 
considerably in recent months. 
 
In February 2005 the government banned two extremist groups: 
Jama'atul Mujahedin Bangladesh (JMB) and Jagroto Muslim Janata 
Bangladesh (JMJB).  On August 17, 2005, JMB, with the assistance of 
JMJB, exploded several hundred small, improvised explosive devices 
(IEDs) in a coordinated attack in 63 of the 64 districts of 
Bangladesh.  The devices were accompanied by leaflets demanding the 
establishment of Islamic law in Bangladesh. From September to early 
December 2005, JMB conducted several suicide attacks targeting local 
judges, courts and district government facilities.  The government 
responded vigorously, arresting several high-ranking leaders of JMB 
and recovering detonators, explosives and related materials used to 
construct IEDs.  As of December 2008, there had been no attacks by 
extremist groups on foreign diplomatic, commercial or social 
interests in Bangladesh. 
 
Corruption 
---------- 
 
Corruption has been the most telling indicator of poor governance in 
Bangladesh for a long time.  Off-the-record payments by firms result 
in an annual loss of 2%-3% of GDP.  The country scores poorly in 
Transparency International's corruption perceptions index.  However, 
the immediate past caretaker Government's reform initiatives have 
started to improve administrative efficiency in some areas.  Public 
services such as law enforcement agencies, power generation and 
distribution, ports, and customs have turned around markedly. 
 
The immediate past caretaker government had directly addressed the 
culture of impunity that existed in Bangladesh by taking a tough 
line on corruption.  It showed political willingness to fight 
corruption and to institute needed systemic reforms. The tough line 
on corruption centers on reforms being carried out by the 
Anticorruption Commission (ACC).  In early 2007, to provide the 
commission with a more vibrant leadership, the ACC was reconstituted 
with three new commissioners, and was given added powers to fulfill 
its functions. 
 
The newly elected Awami League-led Grand Alliance has also 
underlined the need for a strong anticorruption commission backed by 
a long-term vision, strategy, and achievement of anticorruption 
outcomes across sectors, institutions, and government.  This 
commitment remains to be seen, however, as many Awami League leaders 
were implicated in corruption cases under previous governments. 
 
Bilateral Investment Agreements 
------------------------------- 
 
The Foreign Investment Act includes a guarantee of national 
treatment.  National treatment is also provided in bilateral 
treaties for the promotion and protection of foreign investment. 
Treaties have been signed with the United States, Austria, Belgium, 
Canada, China, Democratic Peoples Republic of Korea, France, 
Germany, Indonesia, Iran, Italy, Japan, Malaysia, Pakistan, 
Philippines, Poland, Republic of Korea, Romania, Switzerland, 
Thailand, The Netherlands, Turkey, and the United Kingdom, 
Uzbekistan. The U.S.-Bangladesh Bilateral Investment Treaty, signed 
on March 12, 1986, entered into force on July 23, 1989. 
 
A bilateral treaty between the United States and Bangladesh for the 
avoidance of double taxation was signed on September 26, 2004 and 
ratified by the United States on March 31, 2006.  The parties 
exchanged instruments of ratification on August 7, 2006.  The treaty 
has been effective for most taxpayers beginning in their 2007 tax 
year. 
 
OPIC and Other Investment Insurance Programs 
------------------- ------------------------ 
 
The U.S. Overseas Private Investment Corporation provides insurance 
coverage for some U.S. firms currently doing business in Bangladesh. 
 In recent years, authorities have been cooperative in approving 
requests for OPIC insurance, and in one case, for a loan.  OPIC and 
the Bangladesh government signed an updated bilateral agreement in 
May 1998.  Bangladesh is a member of the Multilateral Investment 
Guarantee Agency.  The Export-Import Bank of the U.S. (ExIm Bank) is 
an independent U.S. government agency that helps finance the 
 
DHAKA 00000301  009 OF 011 
 
 
overseas sales of U.S. goods and services.  It provides export 
credit insurance policies to cover political and commercial risk, 
and loan guarantees to banks for medium and long-term loans.  In 
Bangladesh, only the Bangladesh Government is eligible for ExIm Bank 
cover with a sovereign guarantee.  The bank does not lend or provide 
cover to private enterprises in Bangladesh purchasing U.S. exports 
except in cases where ExIm Bank can provide a guarantee to enable a 
private firm to buy U.S. products to construct a processing facility 
whose output will be sold offshore for hard currency and such funds 
can be captured offshore. 
 
Labor 
----- 
 
Bangladesh has a population of about 150 million people.  The labor 
force is about 70 million people, with 63% working in the 
agricultural sector, 11% in industry and the remaining 26% in the 
services sector.  Low official unemployment statistics obscure a 
huge and growing under-employment problem in Bangladesh. 
Bangladesh's comparative advantage in cheap labor for manufacturing 
is partially offset by low productivity, due to low skills, poor 
management, and inefficient infrastructure and machinery.  Foreign 
managers report that Bangladeshi workers generally respond well to 
training. 
 
Skilled Bangladeshis often seek and find employment in the Middle 
East and East Asia at substantially higher wages than they would 
receive in Bangladesh.  Over the past 20 years, Bangladesh has 
become a reliable source of labor.  Expatriate workers remitted over 
$7.9 billion in foreign exchange to Bangladesh in FY2008 through 
official banking channels. Remittances have become an important 
source of foreign exchange in recent years, and now exceed aid 
provided in the form of concessionary loans and grants.  However, in 
early 2009 global economic uncertainty threatens to reduce the 
volume of remittances returning to Bangladesh. 
 
All employers are expected to comply with the government's labor 
laws, which specify employment conditions, working hours, wage 
levels, leave policies, health and sanitary conditions, and 
compensation for injured workers.  Freedom of association and the 
right to join unions is guaranteed in the Bangladesh constitution. 
There are over 6,400 registered trade unions in Bangladesh, with 
over 1.9 million union members. 
 
In July 2004, the Bangladesh parliament enacted a law granting 
limited freedom of association rights in the export processing zones 
(EPZs).  Workers of the industrial units are allowed to form a 
welfare council to develop and grow into organizations, defending 
their welfare through collective bargains, according to the law.  As 
of December, 2008, workers are permitted to form unions at firms 
located in the EPZs. 
 
Bangladesh's labor unions, most of them associated with political 
parties, can be militant. Violence and the threat of violence by 
some trade unions have produced wage increases in excess of 
productivity increases, raising unit labor costs.  Worker layoffs, 
or the mere threat of reductions-in-force, can be expected to cause 
serious and confrontational labor disputes.  Labor disputes do not 
necessarily need to be heard before a legal court.  Many companies 
have found it effective to resolve issues before a Labor Tribunal. 
Labor in private sector enterprises is mostly not unionized and 
comparatively more productive.  Productivity in Bangladesh has been 
affected by 'hartals' (general strikes) called by political parties 
and movements.  These hartals, enforced by political activists, 
essentially close down business throughout the country and raise the 
cost of doing business in Bangladesh due to the downtime they impose 
on commercial activity. 
 
Bangladeshi laws do not uniformly prohibit the employment of 
children or set a minimum age for employment.  Numerous laws 
prohibit child labor in certain sectors, ranging from transport 
workers to tea plantation labor, but these have not addressed the 
informal sectors, such as agriculture and domestic work, where the 
majority of children are employed.  As a result, child labor in 
Bangladesh has historically been a fact of life.  On July 4, 1995, 
Bangladesh's garment exporters association signed a memorandum of 
understanding (MOU) with the United Nations Children's Fund (UNICEF) 
and the International Labor Organization (ILO) under which child 
laborers in the EPZ textile factories were removed and enrolled in 
education programs.  ILO-assisted monitoring teams, which found 
child laborers in 43% of EPZ factories in 1996, found fewer than 5% 
in 2001.  The MOU program has been phased out, and the U.S. Embassy 
considers the project a success, with most child labor now 
eradicated from the EPZs. Child labor laws outside of the EPZs are 
not effectively enforced. Bangladesh, however, is working to comply 
 
DHAKA 00000301  010 OF 011 
 
 
with ILO conventions on child labor in an effort to eradicate child 
labor in all sectors. 
 
Foreign-Trade Zones/Free Ports 
------------------------------ 
 
Under the Bangladesh Export Processing Zones Authority Act of 1980, 
the government established an EPZ in Chittagong in 1983.  Additional 
EPZs now operate in Dhaka (Savar), Mongla, Ishwardi, Comilla, and 
Uttara.  In addition, two new EPZs are being established: Karnaphuli 
EPZ (Chittagong) and Adamjee EPZ (Dhaka). A private EPZ has been 
developed in Chittagong by a Korean investor and after prolonged 
delays it received the licenses to operate in 2007. 
 
Investments that are 100% foreign-owned, joint ventures and 100% 
Bangladeshi-owned companies are all permitted to operate and enjoy 
equal treatment in the EPZs.  The country's EPZs have been extremely 
successful in attracting investment, increasing employment, and 
producing exports. Due to increased demand by investors, the 
government has doubled the capacity of the Dhaka EPZ.  Investors 
seem generally satisfied, although there has been occasional labor 
unrest associated with the introduction of workers associations in 
the EPZs. 
 
Approximately a dozen U.S. firms - mostly textile producers - are 
currently operating in Bangladesh EPZs.  South Korea is the largest 
foreign investor in the Dhaka and Chittagong EPZs; Japan, Hong Kong, 
Singapore, the United Kingdom, Sweden, Thailand, India, Malaysia, 
Germany, Taiwan, China, U.A.E., France, Italy, Denmark, Panama and 
Pakistan are the other foreign investors in the EPZs.  The remaining 
EPZ industries are Bangladeshi.  The U.S. is the top destination of 
exports from EPZs.  Industries range from garments and textiles to 
electronics, sporting goods, steel chains, and services (including 
equipment leasing and container repairs and handling). 
 
Foreign Direct Investment Statistics 
------------------------------------ 
 
According to the United Nations Conference on Trade and Development 
(UNCTAD) World Investment Report 2008, total inward foreign direct 
investment to Bangladesh was $666 million in 2007, a 16% decrease 
over figures for 2006 [$793]. Outward foreign direct investment 
flows were negligible. UNCTAD estimates the stock of inward foreign 
direct investment was $4.4 billion in 2007. 
 
UNCTAD reports the following annual FDI inflows (in millions) for 
Bangladesh: 
 
1990-2000 (Annual Average)-$218 million 
2004 - $460 million 
2005 - $845 million 
2006 - $793 million 
2007-$666 million 
 
According to UNCTAD, the stock of inward FDI was: 
 
2000 - $3,848 million 
2004 - $3,098 million 
2006 - $4,189 million 
2007 - $4,404 million 
 
Figures from the Bangladesh Bank (the central bank) show total net 
FDI flows (in millions) for the fiscal years 2002-2008 (ending June 
30) as follows: 
 
2003 - $376 million 
30) as follows: 
 
2003 - QQQQQ$376 million 
2004 - $276 million 
2005 -$800 million 
2006 -$743 million 
2007 - $793 million 
2008 (provisional) - $650 million 
 
Note: discrepancies with UNCTAD data reflect calendar year versus 
fiscal year accounting. UNCTAD figures show FDI inflows; central 
bank figures are for net FDI. 
 
There are no reliable figures in Bangladesh on country-specific 
stocks or flows of foreign direct investment.  Studies by various 
organizations rank the U.S. among the five largest foreign investors 
in Bangladesh, together with Norway, Malaysia, Japan, and the United 
Kingdom.  The second tier of investors includes Singapore, India, 
Thailand, Hong Kong, Germany, and South Korea.  U.S. investment in 
 
DHAKA 00000301  011 OF 011 
 
 
Bangladesh includes power and energy companies, numerous 
manufacturers, a life insurance company, banking operations of a 
U.S. commercial bank, and various U.S. services and marketing 
firms. 
 
End text. 
 
Moriarty 
 
 
Moriarty