Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15082

IMPLEMENTATION COMPLETION REPORT

BANGLADESH

EXPORT DEVELOPMENT PROJECT(CREDIT 2000-BD)

OCTOBER 24, 1995

Private Sector Development & Finance DivisionCountry Department ISouth Asia Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIYALENTS

Currency Unit = Bangladesh Taka (Tk.)

Appraisal Year (03/88): SDR 1 = US$1.3717US$ 1 = Tk.31.47Tk. 1 = US$0.0318

Completion Year (06/94): SDR 1 = US$1.4285US$ 1 = Tk.40.15Tk. 1 = US$0.0249

FISCAL YEARS

Government July 1 - June 30Banking Sector January 1 - December 31

ABBREVIATIONS AND ACRONYMS

BB - Bangladesh BankDEDO - Duty Exemption and Drawback OfficeECG - Export Credit GuaranteeECGD - Export Credit Guarantee DepartmentEDF - Export Development FundEPB - Export Promotion BureauERD - Economic Relations DivisionFY - Fiscal YearFSAC - Financial Sector Adjustment CreditGDP - Gross Domestic ProductGNP - Gross National ProductGOB - Government of BangladeshICR - Implementation Completion ReportIDA - International Development AssociationISC - Industrial Sector CreditL/C - Letter of CreditLIBOR - London Inter Bank Offer RateMIS - Management Infonration SystemMOC - Ministry of CommerceMOF - Ministry of FinanceNCB - Nationalized Commercial BankSBC - Sadharan Bima CorporationSBW - Special Bonded WarehouseTA - Technical AssistanceUSAID - United States Agency for International Development

FOR OFFICIAL USE ONLY

IPLEMENTATION COMPLETION REPORT

BANGLADESH

FEXPORT DEVELOPMENT PROJECT(Credit 2000-BD)

TABLE OF CONTENTS Page No.

PrefaceEvaluation Summary ................................................................ i

PART I: PROGRAM IMPLEMENTATION ASSESSMENT ........... .................... 1

1. Project Identity .......................................................... 12. Project Background ......................... ................................. 13. Statement/Evaluation of Objectives . ................................................... 24. Achievement of Objectives .......................................................... 35. Major Factors Affecting the Project . ................................................... 56. Project Sustainability .............................. ............................ 67. IDA Performance ...................... .................................... 78. Borrower Performance . .......................................................... 89. Assessment of Outcome ........................................................... 910. Future Operation ...................... .................................... 1011. Key Lessons Learned ................................ 1.......................... 1

PART II: STATISTICAL ANNEXES ............................................................. 12

1. Summary of Assessments ....................................................... ... 122. Related IDA Credits ........................... ............................... 143. Project Timetable ...................... .................................... 154. Credit Disbursements ................................. ......................... 165. Project Costs and Financing .......................................................... 166. Status of Legal Covenants .......................................................... 177. Bank Resources: Staff Inputs .......................................................... 188. Bank Resources: Missions .......................................................... 199. EDF Disbursements ........................... ............................... 2010. Itemized Utilization of EDF .......................................................... 2011. Bank-wide Utilization of EDF .......................................................... 2112. Bangladesh's Exports .......................................................... 22

APPENDIXES

A. Borrower Contribution to the ICR ....................................................... 23B. USAID Comments ...................... .................................... 33

*is document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

RANG~LADESH

E~~WEMEN-TIfRMINPOECTBL~B

(Credit 2M&WBD

PREFACE

This is the Implementation Completion Report (ICR) for the Export DevelopmentProject in Bangladesh, for which Credit 2000-BD in the amount of US$25 million (SDR 19.4million) equivalent was approved on April 11, 1989, and made effective on October 25, 1989.

The Credit was closed on June 30, 1994, compared with the original closing date ofJune 30, 1993. Final disbursement took place on 1994, at which time a balance of SDR 51,351.45was canceled due to an unexpected strengthening of the SDR after the last disbursement request wasreceived. Cofinancing for the project was provided by U. S. Agency for International Development(USAID) through a grant of US$19.4 million for technical assistance.

'Te ICR was jointly prepared by Shamsuddin Ahmad, SA1BG, and AlfredoDammert, SAIPF. It was reviewed by Fred Kilby, Chief, PSD and Finance Division, OwaiseSaadat, Chief, PSD & Finance Unit, SAIBG, and Abid Hasan, SA1PF all of the Country DepartmentI of South Asia Regional Office. The Borrower and USAID provided commnents that are included asappendixes to the ICR.

Preparation of this ICR was initiated during the Bank's completion mission inSeptember 1994. It is based on material in the project file, discussions with the Government ofBangladesh, the Bangladesh Bank and USAID officials, and impact evaluation carried out by RMBstaff. The borrower contributed to the preparation of the ICR by preparing its own evaluation of theproject's execution and initial preparation.

EXPORT DEVLOPMENT PROJECT(Credit 2000-BD)

BANGLADESH

EVALUATIONSARY

Introducetion

i. The Export Development Project was an important link in the sequence of BankGroup industrial sector operations and provided a vehicle for continuing and complementing IDA'sinvolvement with the Government of Bangladesh (GOB) in export development under the Seventh andEighth Import Program Credits (Cr. 866-BD and Cr. 980-BD) and the Industrial Sector Credit(Cr. 1816-BD) (para 7.1).

Pro.ject Objectives

ii. The overall objectives of the Project were to assist GOB's efforts to promote exportsby: (a) providing a line of pre-shipment foreign exchange credit to private sector exporters,particularly to new nontraditional exporters; (b) strengthening the export financing and guaranteeelements of the credit delivery system; and (c) addressing policy and procedural issues whichconstrain the active development of Bangladesh's export potential. The Project responded to theGovernment's request to support its ongoing policy and institutional reforms in the trade, industrialand financial sectors. The objectives were clear, realistic and important for the development ofBangladesh (para 3.1).

iii. The Project consisted of a line of credit component of US$25 million equivalentfinanced by IDA to augment GOB's contribution of US$5 million in an Export Development Fund(EDF) managed by the Bangladesh Bank (BB) for refinancing the imported inputs of exporters, and atechnical assistance component of around US$1.2 million equivalent financed by a grant from theU.S. Agency for International Development (USAID) to strengthen BB, the Duty Exemption andDrawback Office (DEDO), the Export Credit Guarantee Department (ECGD) of Sadharan BimaCorporation (SBC), and the Export Promotion Bureau (EPB), the key institutions engaged in exportfinance and administration (para 3.2).

Implementation Expeand Results

iv. Overall, the project achieved its objectives substantially. The objective of providingpreshipment foreign currency credit to private non-traditional exporters was substantiallyrealized by the setting up of a revolving EDF at BB with US$3 million contributed by GOB and intowhich the entire Credit proceeds of this Project were added. The cumulative utilization of aroundUS$75 million from the EDF by the non-traditional exporters financed more than US$150 million ofnon-traditional exports during the period January 1991 to June 1995. The objective of strengtheningthe export rinancing and guarantee elements of the credit delivery system was achieved partiallyas the export credit guarantee system is still not working efficiently. However, the export financing

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system has been strengthened by the setting up of the EDF which provides exporters with the onlylocal source of foreign currency preshipment financing at internationally competitive rates. Theobjective of addressing policy and procedural issues which constrain the active development ofBangladesh's export potential has also been achieved substantially although such reforms, being acontinuous process, need to be expanded and deepened. The policy of forcing the special bondedwarehouse (SBW) exporters to use suppliers' credit to finance their imported inputs raises the cost ofimports and puts the Bangladeshi exporters at a financial disadvantage vis-a-vis their foreigncompetitors. Financing from the EDF provided the exporters with import finance in foreignexchange at an international market rate of LJBOR+ 1% thereby putting these exporters on an equalfooting with their foreign competitors in so far as the financing cost of imports is concerned.Procedural improvements in the duty drawback scheme have also been achieved so that exporters nowcan expect to get their drawback checks within a week for flat rates and within a month for actualrates. ECGD has streamlined its claim procedures so that claims are processed more regularly thanbefore (paras. 4.2 to 4.5).

v. The design of the Project was appropriate for the achievement of the objectives,although with hindsight two major flaws may be identified. The first relates to the issue of pricing ofthe subloans. Although the fixed spread of 2.5% or 3.5% (for the first subloan to a new exporter)available to the banks for using EDF appeared to be attractive at the design stage because of the BB-administered interest rate regime prevailing at that time, it turned out to be quite insufficient for thebanks later on when interest rates were liberalized under the financial sector reform programsupported by the Financial Sector Adjustment Credit (FSAC). Due to high levels of non-performingassets at all banks, margins charged for all operations were quite high in the order of 6-7%; thus,margins allowed under EDF appeared unattractive to banks. This problem could have been avoidedby fixing the EDF-rates to the banks (and not to the exporters) and allowing banks the freedom todetermine their own spreads. Another design flaw relates to policy reform in that the Project did notcall for mainstreaming export financing in foreign currency by allowing commercial banks to obtainforeign currency from the comfortable foreign exchange reserves held at BB. As a result, EDFfinancing is still available to only a limited number of exporters while a majority of the exporters arestill suffering from the disadvantages of having to accept suppliers' credit (paras. 4.6 and 4.7).

vi. A host of factors, both subject to and not subject to government control, affectedachievement of major objectives. For instance, the delay in initiating the USAID-funded technicalassistance component was mainly due to the lengthy procedures that USAID had to follow to hire aGeneral Contractor to inplement the technical assistance (TA) program. This delay affectedadversely the dissemination activities, such as workshops and seminars for exporters and their banks,and slowed down the pace of project implementation and utilization of the Credit funds.Implementation was also adversely affected by the long time that GOB/BB took to accept andimplement the IDA recommendations to remove the factors that were impeding proper projectimplementation (paras. 5.7 and 5.8).

vii. Given that the probability of maintaining and even surpassing the achievements of theProject objectives is quite high, it is quite likely that the Project will be sustained in the near future.Moreover, after the Credit closed on June 30, 1994, the EDF Advisory Committee decided, with theconcurrence of IDA, to continue with the operations of the EDF in accordance with the Lending

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Policy and Operating Procedures in effect at that time, thus confirming strong borrower commitmentto the objectives of the Project. Accordingly, the operations of EDF continue till date with utilizationshowing an increasing trend (paras. 6.1 and 6.2).

viii. While the performance of IDA in the preparation and implementation of this projectwas generally satisfactory, with hindsight it now appears that the design of the Project could havebeen given more attention. Some of the weaknesses in the design which were corrected duringproject implementation were that: the subloan size and outstanding turned out to be too small for theexporters and they were required to obtain export credit guarantee even if the banks did not requestfor it, and the credit was made available only against letters of credit received by the exporter.Although GOB did not realize the need to amend some of the subloan terms and conditions initially,they agreed to the changes after constructive dialogue with the Resident Mission and implemented thecorrective actions, albeit with some delay (paras. 7.2 and 7.3).

ix. The substantial achievement of Project objectives as described earlier combined withthe likelihood of sustaining the achievements indicate that the outcome of the Project is highlysatisfactory. The use of EDF is increasing sharply and as of June 30, 1995, about 135 exporters haveused it to finance more than 2,000 L/Cs, through thirteen banks for an approximate amount of US$80million to export goods worth more than US$200 million. The repayment experience under EDF hasbeen highly satisfactory since almost the full amount of the subloans have been repaid except for asmall sum of US$80,655.69 which could not be recovered from the export proceeds. The outcome ofthe TA component was mixed since the TA did not always produce the desired results even thoughimplementation was complete (paras. 9.1 to 9.3).

Summary of Findings. Future Operations, and Key Lessons Learned

x. The key finding of the project implementation experience is that credit lines like theone under this Project should be guided by market conditions and should have sufficient flexibility tochange and adapt to the changes in the market.

xi. Although this Project appears to be sustainable at the moment, the benefits areavailable to only a small segment of the potential beneficiaries in the export sector. The benefitscould be opened up to all exporters if GOB lifted all the existing restrictions on foreign currencypreshipment financing, allowed banks to fully determine the interest rates on export financing underEDF, and eliminated minimum value added requirements.

xii. The implementation experience under this Project has provided some importantlessons about design and implementation. These lessons may be grouped into three categories:(a) design issues; (b) coordination issues; and (c) quality issues, as discussed below:

(a) Project Desigrn Issues. The experience under this Project has shown that properincentives built in to the Project design are important for successful implementation.The major incentive for the exporters to use EDF was the interest rate. When theEDF rate was above the local currency rate, exporters preferred the local currencyloans and vice versa. Moreover, the mandatory export credit guarantee discouraged

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the more qualified exporters from using EDF because of the additional premium.Although GOB agreed to make the guarantee optional later on, it did not agree toincrease the EDF rate structure. The incentive for the banks was the spread offeredunder EDF which was fixed at 2.5% for most subloans. This fixed spreaddiscouraged banks from actively promoting EDF to its clients since it could charge itsown spread for other loans because of the financial sector liberalization that occurredafter effectiveness of this Credit. GOB did not agree to free the spread to the banksunder EDF. Allowing these incentives to be determined by the market rather thanbeing predetermined in the credit design would substantially improve the quality of aproject at entry. Moreover, additional requirements, such as export credit guaranteesshould also be kept optional. BB's role in administering the credit line should also bekept at a minimum with participating banks given the responsibility to maintain therequired documentation for using the facility (para 4.7). In order to provide trainingassistance for a particular institution, adequate personnel policies should be in place atsuch institution to ensure permanence of trained staff (para 9.3).

(b) Project Coordination Issues. Good project coordination ensures that all participantsproceed according to the project's timetable, are informed promptly of actions takenby other parties so that they may act accordingly, and participate in the design andimplementation of corrective measures on a timely manner. The implementation ofthis Project suffered from the lack of a clear cut institutional authority within GOB forproject implementation as a whole, thereby leading to delays in taking appropriatecorrective measures. However, this problem was partially overcome by the constantdialogue carried out by the Resident Mission and by the positive response of thevarious Government entities in taking corrective actions (para 8.1).

(c) Ensuring Quaity at Entry. The Project was successful because it supported GOB'son-going trade reforms and export promotion strategy. This ensured strong GOBparticipation and commitment which allowed effective implementation of somecomponents and the taking of corrective actions on other components when problemsof project implementation arose. Thus, the need for a pre-export line of credit wasestablished by a BB task force created as a result of the Goverrnent's concern for thesector. Similarly, GOB was able to respond appropriately, although with delays, toIDA's advice on project modifications and other measures to ensure achievement ofproject objectives (para 7.2).

BANGLADESH

EXPOT DVLQPMFNT PROJIECT(Credit 2000-BD)

PART I: PROJECT IMPIFMFNTATION ASSESSMENT

1. Project Identity

Name Export Development ProjectCredit No. Cr. 2000-BDRVP Unit : South Asia RegionCountry BangladeshSector : Industry (Export)

2. Proiect Background

2.1 The manufacturing sector in Bangladesh is characterized by its low level of growthand development: its share of GDP averaged 12% during FY73-80 and declined to 10% during the1980s. Although a 7.8% p.a. growth rate registered by this sector during FY73-80 suggested that itsimportance within the economy was on the increase, the subsequent less than 3.0% p.a. growthduring the 1980s did away with these expectations. However, there were some promising structuralchanges, since during the latter period, nontraditional export industries -- mainly ready-madegarments (RMG), frozen fish and shrimp, leather products and natural gas based fertilizers -- createdthe basis for a new path of industrial development, registering an average growth rate of 11 % p.a.between FY82-83 and FY89-90, in contrast with the traditional manufacturing sector dominated byjute industries, textiles and light consumer goods, which stagnated.

2.2 To improve the performance of the manufacturing sector, and particularly that ofexport oriented industries, the Government implemented during the 1980s: (a) a series of deregulationmeasure such as liberalizing import policies, rationalizing tariffs, widening the use of secondaryexchange markets by producers, and eliminating investment licensing requirements for mostindustries; and (b) a program of incentives including establishing a flexible exchange rate policy,allowing duty free imports for exporters through the special bonded warehouse (SBW) scheme andduty drawback scheme, establishing an export processing zone, promoting the establishment of anexport credit guarantee scheme, and facilitating the establishment of an inland back-to-back letter ofcredit system, in order to link direct exporters' financing with that for indirect exporters. However,by the end of that decade, there were still problems with implementation of these policies due mainlyto institutional limitations, which coupled with lack of access to credit, particularly by new andindirect exporters, did not allow manufacturers to benefit fully from the Government's trade reforms.

2.3 A key element of Bangladesh's development strategy was to promote rapid export-ledgrowth to generate foreign exchange and provide employment for a large, rapidly growing laborforce. While the manufacturing sector performance has been uneven in the 1980s, a bright spot in theeconomy has been the strong performance of non-traditional exports, specially readymade garments

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and frozen foods. However, rapid growth of exports was constrained to some extent by the limitedexport financing available through banks and the absence of foreign currency financing from domesticsources. RMG and other 100% exporters using the SBW facility, therefore, had to rely exclusivelyon suppliers' credit through the back-to-back L/C mechanism. An export development fund was,therefore, considered a useful mechanism to supplement the existing sources of financing by makingworking capital loans available in foreign currency at competitive international interest rates and toimprove access to credit by new exporters of non-traditional goods just entering the market.

3. Statement/Evaluation of Objectiv

3.1 Project bjectives. The overall objectives of the Project were to assist GOB's effortsto promote exports by: (a) providing a line of pre-shipment foreign exchange credit to private sectorexporters, particularly to new nontraditional exporters; (b) strengthening the export financing andguarantee elements of the credit delivery system; and (c) addressing policy and procedural issueswhich constrain the active development of Bangladesh's export potential. The Project responded tothe Government's request to support its ongoing policy and institutional reforms in the trade,industrial and financial sectors.

3.2 Institutional Arrangements. The Project consisted of a line of credit component ofUS$25 million equivalent financed by IDA to augment GOB's contribution of US$5 million in anExport Development Fund (EDF) managed by BB for refinancing the imported inputs of exporters,and a technical assistance component of around US$1.2 million equivalent financed by a grant fromthe U.S. Agency for International Development (USAID) to strengthen BB, DEDO, ECGD and EPB,the key institutions engaged in export finance and administration.

3.3 The Project objectives were clear, realistic and important for Bangladesh, and whenthe new democratic Government took office in 1991 they immediately put special emphasis on itsimplementation. The objectives fit well with GOB's policy of pursuing a market-oriented economywith special emphasis on exports. It was also consistent with the key objectives of the lendingassistance strategy of the 80s, which was to enhance the export orientation of the manufacturingsector and to enhance the role of the private domestic and foreign sector. The Project was neithercomplex nor very risky and also not particularly demanding for GOB or for BB which managed theEDF. The institutional strengthening part under the TA component, however, turned out to be moredifficult to accomplish than was envisaged.

3.4 The technical assistance component, which was located in the Duty Exemption andDrawback Office (DEDO), consisted of consultancy services, computers and other equipment,overseas training, promotional seminars and workshops, and financing of reference and researchmaterials. It was principally aimed at providing the necessary assistance for the properimplementation of the Project by strengthening the institutional capabilities related to export financingand administration in the following entities: (a) BE - to prepare manuals on export procedures andfinancing, including the EDF, expand the use of inland L/C system, provide seminars, and travel tolearn about similar programs in ASEAN countries; (b) DEDO - to calculate input coefficients,estimate tax effects on exports, and train personnel in the administration and processing of dutydrawback schemes; (c) E(Ci- - to design and implement a management information system, conducta study to revise ECGD's fee structure and provide guidelines to increase its autonomy, assist in

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promotional activities, and train personnel to strengthen the scheme; and (d) EP - to implement aninformation system to monitor quota utilization for exports subject to quota limitations, through thecomputerization of the quota monitoring system.

4. Acievement of Objectives

4.1 Overall, the project achieved its objectives substantially. A summary of assessmentsof the degree of achievement of various objectives is provided in Part II, Table 1 of this ICR. Someof the major factors underlying the assessments and the implementation experience are discussedbelow.

4.2 The objective of providing preshipment credit to private sector exporters,particularly to new nontraditional exporters, has been achieved substantially. With foreign exchangereserves dropping alarmingly in FY89, reaching a low level of US$585 million (less than two monthsimport requirement) at the end of June 1989, Bangladeshi exporters were finding it difficult to obtaindomestic preshipment financing for their imported inputs due to the shortage of foreign exchange.Exporters were, therefore, forced to seek offshore financing for their imported inputs, such assuppliers credit, or risk losing the export order. The objective, of providing preshipment foreigncurrency credit to non-traditional exporters through the establishment of a separate funding source forfinancing their import requirements, was substantially realized by the setting up of a revolving EDFat BB into which the entire Credit proceeds of this Project were added. The cumulative utilization ofaround US$75 million from the EDF by the non-traditional exporters resulted in a direct contributionof more than US$150 million to the growth of non-traditional exports during the period January 1991to June 1995. The Project financed exports for a total of about US$70 million during FY95 alone,which is more than three times the amount of the Credit. Moreover, the EDF financed exports ofsuch new non-traditional items as footwear, ceramic and porcelain wares, besides readymadegarments, hosiery and knitwears. The EDF also provided finance to new indirect exporters such as abutton manufacturer and a packaging manufacturer, thereby promoting backward linkage andincreasing total value added.

4.3 During the Project period about 80 exporters utilized the EDF of which 74 wereready-made garment and knitwear exporters, two were ceramic ware exporters, and three indirectexporters (one button manufacturer and two packaging materials manufacturer) and one footwearexporter. At the end of the Project, the RMG exporters used 90% of the Credit funds while the othernon-traditional exporters used the remaining 10%. These exporters received EDF through tencommercial banks, including two nationalized commercial banks (NCBs) (out of four), a foreign bank(out of eight), and seven private domestic banks (out of eleven).

4.4 The objective of strengthening the export rlancing and guarantee elements of thecredit delivery system was achieved partially as the export credit guarantee system is still notworking efficiently. However, the export financing system has been strengthened by the setting up ofthe EDF. Prior to EDF, exporters enjoying duty-free import facility under the SBW scheme wererestricted from getting preshipment financing in foreign exchange from domestic banks due to a BBCircular letter issued in 1982 to that effect. That misguided policy forced exporters to seek andaccept foreign suppliers' credit at a higher cost. The EDF provided exporters with the only localsource of foreign currency preshipment financing at internationally competitive rates. The export

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credit guarantee scheme could not be strengthened since GOB and USAID could not resolve the basicquestions about the ownership, organization structure and management of ECGD.

4.5 The objective of addressing policy and procedural issues which constrain theactive development of Bangladesh's export potential -- access to export financing in foreigncurrency at international market rates, improved access to duty-free imports through the dutydrawback scheme, and adequacy of the export credit guarantee system -- has also been achievedsubstantially although such reforms, being a continuous process, need to be expanded and deepened.The policy of forcing SBW exporters to use suppliers' credit to finance their imported inputs raisesthe cost of imports and puts the Bangladeshi exporters at a financial disadvantage vis-a-vis theirforeign competitors. The higher cost of such imports results from the higher interest rates charged byforeign suppliers and the higher bank charges for handling suppliers' credit compared to those fordirect bank financing of those imports. A rough estimate made by an IDA expert on exportfinancing' shows that Bangladeshi exporters paid, on average, at least 8% p.a. more for suppliers'credit than what they would pay for domestic bank financing; although if interest rates from the EDPwere deregulated this difference would be reduced. Financing from the EDF provided the exporterswith import finance in foreign exchange at an international market rate of LIBOR +1 % therebyputting these exporters on an equal footing with their foreign competitors in so far as the financingcost of imports is concerned. Unfortunately, however, the EDF facility could only be enjoyed by lessthan one hundred and fifty non-traditional exporters, due to the limited size of the EDF, and has notbeen made generally available to all exporters even today. Procedural improvements in the dutydrawback scheme have also been achieved so that exporters now can expect to get their drawbackchecks within seven days for flat rates and within a month for actual rates. Although ECGD hasstreamlined its claim procedures, it still takes considerable time to process claims.

4.6 The design of the Project was appropriate for the achievement of the objectives.Restricting the use of EDF to non-traditional exporters helped to diversify the export base whilelimiting the maximum size and outstanding balances of subloans to an individual exporter ensuredthat the entire EDF would not be used up by only a handful of large exporters. When the size andoutstanding limits appeared to be too small the Credit was amended to double those limits, as a resultof which utilization increased significantly. With hindsight, however, two major flaws in the designmay be identified. The first relates to pricing of the subloans. Although the fixed spread of 2.5% or3.5% (for the first subloan to a new exporter) available to the banks for using EDF appeared to beattractive at the design stage because of the BB-administered interest rate regime prevailing at thattime, it turned out to be quite insufficient for the banks later on when interest rates were liberalizedunder the financial sector reform program supported by the Financial Sector Adjustment Credit(FSAC). Due to high levels of non-performing assets at all banks, margins charged for all operationswere quite high in the order of 6-7%; thus, margins allowed under EDF appeared unattractive tobanks. This problem could have been avoided by fixing the EDF-rates to the banks (and not to theexporters) and allowing the freedom to banks to determine their own spreads.

I Yung Whee Rhee, Principal Economnist, PSD, calculated the extra cost of suppliers' credit forBangladeshi exporters in his BTOR dated March 7, 1995, for the proposed Second Export Development Project.

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4.7 The other design flaw relates to the policy reform objective in that the Project did notcall for mainstreaming export financing in foreign exchange by allowing commercial banks to obtainforeign currency from the currently comfortable foreign exchange reserves of the country. As aresult, EDF financing is still available to only a limited number of exporters while a majority of theexporters are still suffering from the disadvantages of having to accept suppliers' credit.

5. MaJor Factors Affecting the Project

5.1 The Credit became effective on October 25, 1989, six months after signing. Thedelay was mainly due to the time taken by GOB to set up the Export Development Fund (EDF) withits initial contribution of US$3 million, out of its US$5 million share, and to sign the TechnicalAssistance Agreement with USAID. Although the first disbursement of US$3 million to a SpecialAccount was made on December 18, 1989, the first subloan under EDF was made only in August1990, full ten months after the Credit became effective and eight months after the Special Accountwas set up. The highlights of the implementation of the line of credit component is discussed below.

5.2 The utilization of EDF picked up slowly (Table 9) from an annual aggregate of aboutUS$120,000 during FY91 to more than an annual aggregate of US$16 million in FY94. AggregateEDF loans during FY95 jumped to more than US$40 million. The average annual outstanding alsojumped from US$30,000 in FY91 to more than US$5 million in FY94. The increase in utilization ofEDF continued to rise even after the Credit was closed so that the average outstanding during FY95jumped to more than US$15 million.

5.3 Four reasons could be identified for the low level of EDF utilization during the firstthree years of the Project. These are: (a) higher interest rate charged under EDF compared to that forlocal currency financing. During FY90 and FY91 the EDF rate (which was LIBOR+ 1%) wasaround 9.6% whereas the local currency rate was 9%. Exporters preferred to borrow in Taka at 9%and buy spot US Dollars to finance their imported inputs. As LIBOR started to fall the EDF rate(going down to 4.25%) became more attractive as the Taka rate remained the same and exporterspreferred to use EDF; (b) recent expansion and maturity of RMG exporters compared to their statusat effectiveness. At effectiveness, most of the RMG exporters were involved in cutting and makingoperations where the raw materials were supplied by the buyers under suppliers' credit and the RMGexporter did not require EDF financing. As the RMG exporters gathered experience and began toexpand they started to shop for the raw materials themselves and offered cash terms for better pricesand hence demanded EDF financing to pay the suppliers at sight rather than usance; (c) higher cost ofEDF because of mandatory use of export credit guarantee (ECG). The initial mandatory requirementof ECG under EDF discouraged good exporters from using EDF due to the additional premium costs.As ECG became optional from 1993 more exporters preferred EDF as their banks did not demand

ECG; and (d) lack of awareness about EDF amongst the exporters. The delay in the implementationof the TA component delayed the dissemination activities planned under the Project. As the seminarsand workshops began to be held under the TA more exporters became aware of EDF and demanded itfrom their banks.

5.4 Except for a few banks that promoted the use of EDF to its export clients (because ofits large base of RMG exporters whose financing needs could not be satisfied from its own resources)most of the banks did not actively promote the use of EDF because: (a) the fixed spread of 2.5%

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(3.5% for the first subloan to a new exporter) became unattractive with the liberalization of interestrates; (b) BB took a long ime (even up to 30 days) to refinance the subloans; and (c) the documentaryevidence required by BB for refinancing was considered excessive.

5.5 The major factors that affected the implementation pace and content of the Project aregiven below.

5.6 Factors not generally subject to government control. The delay in initiating theUSAID-funded technical assistance component was mainly due to the lengthy procedures that USAIDhad to follow to hire a General Contractor to implement the TA program. Thus, although the Creditbecame effective in October 1989, the General Contractor could only be mobilized in April 1991, afull eighteen months after effectiveness. The delay in initiating the implementation of the TAseverely delayed the dissemination activities, such as workshops and seminars for exporters and theirbanks, planned under the TA. Most of the exporters, therefore, came to know of EDF almost twoyears after it was set up. The dissemination activities which were critical for the effectiveimplementation of the Project and should have started prior to effectiveness actually began almost twoyears after the Credit became effective thereby producing an adverse effect on project implementationand on the utilization of the Credit funds.

5.7 Factors generally subject to GOB and/or RB control. The slow pace of utilization ofthe Credit during the first two years of the Project was partially attributable to factors generallywithin GOB and/or BB control. The second IDA supervision mission in September 1990, identifiedseveral factors that were impeding project implementation and recommended that: (a) the spread tothe banks for utilizing the EDF be increased from 2.5% to 4% so that they were encouraged toparticipate actively in the project; (b) the back-to-back letter of credit requirement for EDF financingbe relaxed so that more exporters could use EDF for financing larger raw material inventories;(c) the fixed value addition requirement of 30% be lowered to 20% so that more exporters could availof the EDF; and (d) BB together with EPB carry out a dissemination campaign to promote the use ofEDF. None of the recommendations were accepted by GOB/BB at that time althoughrecommendations (b), (c) and (d) were finally implemented almost three years later in 1993, therebyslowing down the initial utilization.

6. t Suect inabilit

6.1 Sustainabiity of the Project would imply that: (a) the number of non-traditionalexporters and export volumes continue to increase; (b) the preshipment credit offered to exportersunder EDF continue to be available and possibly become a normal export financing instrument ofcommercial banks; and (c) institutional development objectives under the technical assistancecomponent, in particular improvements in the duty drawback scheme, the SBW scheme, the exportcredit guarantee scheme and the information system on quota utilization, be maintained. Given thatthe probability of maintaining and even surpassing the achievements of the above objectives is quitehigh as described below, it is quite likely that the Project will be sustained in the near future.

6.2 After the Credit closed on June 30, 1994, the EDF Advisory Committee decided,with the concurrence of IDA, to continue with the operations of the EDF in accordance with theLending Policy and Operating Procedures in effect at that time, thus confirming strong borrower

- 7 -

commitment to the objectives of the Project. Accordingly, the operations of EDF continue till datewith utilization showing an increasing trend. In the twelve months since the Credit closed, theachievements of EDF are as follows: (a) the number of non-traditional exporters using EDF jumpedfrom 80 to 135, while the average annual outstanding of EDF subloans increased from around US$5million to more than US$15 million; (b) two more commercial banks began using EDF thusincreasing the number of utilizing banks from 10 to 12 and the total annual disbursement from aroundUS$16 million to around US$43 million. However, the local availability of export fmancing inforeign currency continues to be restricted to funds under EDF, due to the BB Circular letterprohibiting commercial banks from opening back-to-back sight L/Cs for imports of SBW exportersexcept under EDF; and (c) the improvements in the duty drawback schemes and the SBW schemesare being strengthened with the formulation of plans for more streamlined procedures. The exportcredit guarantee scheme was, however, not operating efficiently at the time of completion of thisICR; it would require extensive additional effort on the part of the Government and possibleassistance from IDA or other institutions to establish an appropriate and effective scheme. In spite ofthis drawback, considering the other achievements, it may be concluded that the probability ofsustaining the project is very high.

7. IDA Perfonnance

7.1 Identification. This Project was an important link in the sequence of Bank Groupindustrial sector operations and provided a vehicle for continuing and complementing IDA'sinvolvement with GOB in export development under the Seventh and Eighth Import Program Credits(Cr. 866-BD and Cr. 980-BD) and the Industrial Sector Credit (ISC) (Cr. 1816-BD). It was designedto complement the IDA initiatives under the ISC, specifically focusing on reforms in export policyand administration. During project identification, IDA took into account the shift in Government'sdevelopment strategy from reliance on state owned enterprises to private sector-led export promotingindustrial growth. To further support the export sector, a BB Task Force on Export Finance hadconcluded that access to foreign exchange preshipment financing was an important constraint inexport development and recommended the establishment of an export development fund in foreignexchange to meet the import requirements of exporters. IDA's performance was satisfactory inidentifying this Project to reform the export sector and provide exporters with a reliable source offoreign exchange credit at world market rates. The Project was consistent with both the Bank's andGOB's development strategy.

7.2 Project Preparation and Appraisal. For project preparation and appraisal, IDA reliedon its vast experience in Bangladesh obtained through IDA financed Trade and Industrial PolicyStudies (Cr. 1124-BD) and the ISC. To complete project preparation, a study on the export financesystem was commissioned by IDA to a consulting firm. The technical assistance componentconsidered the additional technical support necessary to improve institutions and procedures related tothe export sector. Thus, the Project placed emphasis on utilizing the institutional set-up, part ofwhich had been developed under previous IDA assistance and strengthening those areas which neededimprovement. A shortcoming in project design was the lack of a central coordinating unit to ensuresuccessful implementation of all project components. Other design weaknesses have been mentionedin paras. 4.6 and 4.7. Technically the project was well conceived, as it considered the use of avariety of instruments widely recognized as useful in supporting and developing exports, such as the

- 8 -

Duty Drawback Scheme, the SBW Scheme for duty exemption, the Inland Letter of Credit system,the Export Credit Guarantee Scheme and the EDF for pre-shipment financing.

7.3 Supervision. Overall, IDA's supervision of the project was highly satisfactory.Although the average number of formal supervision missions was 1.5 per year, the missions carriedout in-depth evaluation of the project status, which together with the continuous dialogue between theResident Mission and GOB, allowed the implementation of corrective actions, albeit with some delay.These actions included the amendment of certain clauses guiding the use of EDF, which were found

to be restrictive in the more liberal trade regime of the early 1990s. By agreeing with GOB on theneed to relax the individual size and outstanding of the EDF sub-loans and to make export creditguarantee optional rather than mandatory for using EDF, IDA showed flexibility in modifying theeligibility criteria and the subloan terms and conditions without major departure from Projectobjectives. These amendments, which were effected in October 1992, together with the changes inGovernment policies, and a one-year extension of the Closing Date improved project implementationand led to full credit disbursement and the achievement of most of the project objectives.

7.4 Relationships under the project were mostly cordial. Although, some differencescrept up initially between IDA and BB regarding the corrective actions that were needed to improveProject implementation and disbursement of funds, they were subsequently removed through constantdialogue carried out by the Resident Mission, which led to agreements on the DCA amendments.IDA and USAID had a satisfactory working relationship, with the latter responding adequately toIDA's concerns about delays in implementing the technical assistance component. The implemen-tation of the TA component was monitored by a steering committee composed of representatives ofBB, DEDO, EPB, ECGD, IDA, USAID, the Economic Relations Division (ERD), the Ministry ofCommerce (MOC), the Ministry of Finance (MOF) and the TA Consultants, which met often todiscuss the problems, reviewed the progress and the future work plan. The steering committeesucceeded in resolving most of the implementation problems of the TA component and forged astrong relationship between all the parties concerned. There were no deviations from IDA policiesand procedures under the project.

8. Borrower Performance

8.1 The Government's participation in the Project was satisfactory, reflecting its overallcommitment to the Project objectives and to improve trade prospects particularly the promotion ofexports. Although, there was a lack of a clear cut institutional authority within the Government tohandle the project as a whole, leading to delays in taking appropriate corrective measures, it wasovercome by the high degree of commitment to promoting exports by the various Governmententities. The Government complied, albeit with some delay, with most of the covenants in the creditagreement, including: (a) carrying-on a review of SBC's export credit insurance policies;(b) preparing a study of ECGD's fee structure; (c) providing adequate funds to cover administrativeand promotional expenditures of ECGD; and (d) preparing a training program for ECGD staff.Another covenant, which required the Government to deposit US$5 million to capitalize the EDF,was complied partially, since the Government deposited US$3 million required for crediteffectiveness, but not the remainder due by July 1, 1990, alleging that the demand for credit was verylow. IDA accepted the Government's justification in view of the slow utilization of the Creditinitially. Concerning implementation steps to promote the use of the EDF, BB issued circulars to the

-9 -

banks informing them about the setting up of EDF, but the promotional efforts with exporters wereinitially weak. At IDA's suggestion, BB agreed on a promotional seminar with bankers and exportersin April/May 1990, which was followed by several more well attended seminars under the TA.Although most of the technical assistance components were well implemented by the Government, theattempts to strengthen ECGD were not successful, since this institution continued to have difficultiesin disbursing claims and collecting premiums.

8.2 GOB's performance with respect to IDA supervision missions' recommendations forimproving Project implementation was mixed. It did not implement some of the recommen-dations atall, while implementing some with certain modifications and with a delay of more than a year. Thetwo major policy recommendations implemented by GOB were: (a) the adoption by the Governmentof an Export Development Strategy, 1992-2000, which was announced to the public; and (b) thepreparation and publication by DEDO of flat rates of drawback for exportable items covering almost90% of non-traditional export products.

8.3 BB's performance was mixed. Although BB cooperated well during projectpreparation and appraisal it opposed some critical corrective actions proposed by supervision missionsbecause of a lack of experience in export financing methods. The time lost in convincing BB of theneed for changes in subloan terms and conditions to reflect market requirements contributed to theslow pace of implementation during the first three years of the Project.

9. Assessment of Outcome

9.1 The substantial achievement of Project objectives as described earlier combined withthe likelihood of sustaining the achievements indicate that the outcome of the Project is highlysatisfactory.

9.2 As already indicated, EDF is the only domestic source of financing a back-to-backsight L/C for duty-free imports of exporters. While it may be assumed that some establishedexporters may have resorted to back-to-back usance method of importing their inputs at a higher cost,not all EDF users could have availed of that other method. For all EDF users, the Project provided avaluable least-cost method of financing their imported inputs on a duty-free basis. This improved thesector's competitiveness and provided a boost to exports. The use of EDF is increasing sharply andas of July 31, 1995, about 140 exporters have used it to finance more than 2,350 L/Cs, throughthirteen banks for more than an amount of US$80 million to export goods worth more than US$200million. The repayment experience under EDF has been highly satisfactory since the full amount ofthe subloans have been repaid, except for a small sum of US$80,655.69 which could not be recoveredfrom the export proceeds.

9.3 The outcome of the TA component was mixed. Although the TA was fullyimplemented as planned, the outcome did not always produce the desired results. Thus, the TAassisted BB to: develop a manual on export financing procedures and the EDF, expand the use of theinland back-to-back L/C system, organize a series of seminars on export financing and EDF, andconduct a study tour of some Asian countries. The manual and the seminars had a positive effect onProject implementation but the inland back-to-back L/Cs, which are now widely used by all theindirect exporters in the RMG sector, are not operating efficiently for a number of reasons outside the

- 10-

purview of the TA component. Of the various reasons, the most critical relate to BB's: (a) rigidity inallowing only inland back-to-back usan L/Cs and not back-to-back sight L/Cs; and(b) ineffectiveness in ensuring that the terms and conditions of the L/C (payment of interest and theprincipal upon maturity) are honored promptly by the issuing bank. The EPB established acomputerized information system on quotas as agreed under the program which is workingsatisfactorily. The TA strengthened DEDO with computer systems for calculating input coefficientsfor most products to establish flat rates of drawback (more than 900 flat rates of drawback have beenpublished), streamlined the drawback system so that exporters can get their refund check in a weekfor flat rates, and organized a number of seminars and study trips. However, the staff training atDEDO was not effective as only a few staff were trained who were subsequently transferred out ofDEDO. At the ECGD, a study to improve the structure and operations of the ECGD was carriedout, the premium rates were revised, and the claim settlement process was streamlined. However,the system showed very little improvement since ECGD: (a) has not become financially viable; (b) isstill slow in collecting premiums and reimbursing claims; and (c) has a negative image with bankswhich are still reluctant to offer export credit based solely on ECGD guarantee.

10. Future Opration

10.1 The Project called for a joint IDA/GOB review of the EDF at the end to determine ifthe EDF should continue. The review established the continuing need for EDF based on the verypositive feedback received from all the exporters that used EDF and their banks, as well as on thesharp increase in demand. BB, therefore, decided to continue with the operations of EDF on thesame terms and conditions.

10.2 The following areas should be emphasized in follow-up operations:

(a) deepening and expansion of the financial sector reforms. Follow on operations shouldbe linked to comprehensive reform of the financial/banking sector. They should focuson encouraging banks to operate on a sound basis and assist BB in improving itsregulatory role through well designed eligibility criteria;

(b) mainstreaming export financing by commercial banks by removing interest ratedistortions, eliminating mandatory offshore credit requirements for RMG exporters,and increasing the banks' foreign exchange holding limits;

(c) continuing trade policy reforms supported under the Second Industrial SectorAdjustment Credit (ISAC-II) and extending to cargo handling and storage andforwarding at the ports and airport; and

(d) restructuring of the export credit guarantee system to make it an effective collateralfor banks to extend export credit to small and successful exporters who do not haveany collateral to offer.

- 11 -

11. Lon e

11.1 The key finding of the project implementation experience is that credit lines like theone under this Project should be guided by market conditions and should have sufficient flexibility tochange and adapt to the changes in the market. The implementation experience has provided someimportant lessons which may be grouped into three categories: (a) design issues; (b) coordinationissues; and (c) quality issues, as discussed below:

11.2 Project Design Issues. The early experience under this Project has shown thatproper incentives built into the Project design are important for successful implementation. Themajor incentive for exporters to use EDF was the interest rate. When the EDF rate was above thelocal currency rate, exporters preferred the local currency loans and vice versa. The incentive forthe banks was the spread offered under EDF which was fixed at 2.5% for most subloans. Thisfixed spread discouraged banks from actively promoting EDF to their clients since it could chargeits own (higher) spread for other loans because of the financial sector liberalization that occurredafter effectiveness of this Credit. Since GOB did not subsequently agree to free the spread to thebanks under EDF, most banks refrained from promoting EDF to their clients. The lesson learnedfrom this experience is that the pricing of subloans and spread to banks under investment creditsshould be flexible and market determined rather than predetermined and fixed. Similar credit linesin the future should, therefore, not dictate either the final interest rate to the exporter or the spreadto the banks using the facility. Moreover, the mandatory export credit guarantee for subloansdiscouraged good exporters from using EDF because of the additional premium cost. Suchadditional requirements should also be kept optional for the market to determine. BB's role inadministering the credit line should be kept to a minimum and the participating banks should begiven full responsibility for maintaining the required documentation for using the facility (para4.7). Concerning training, the negative experience at DEDO (para 9.3) shows the need to ensurethat adequate personnel policies are in place at the institution in which training of staff is beingprovided in order to ensure permanence of trained staff.

11.3 Project Coordination Issues. Good project coordination ensures that all participantsproceed according to the project's timetable, are informed promptly of actions taken by other partiesso that they may act accordingly, and participate in the design and implementation of correctivemeasures in a timely manner. The implementation of this Project was affected by the lack of a clearcut institutional authority within GOB for project implementation as a whole, which led to delays intaking appropriate corrective measures. However, this problem was partially overcome by theconstant dialogue carried out by the Resident Mission and by the positive response of the Governmententities in taking corrective actions (para 8.1).

11.4 Ensuring Quality at Entry. The Project was successful because it supported GOB'son-going trade reforns and export promotion strategy. This ensured strong GOB participation andcommitment which allowed effective implementation of some components and the taking of correctiveactions on other components when problems of project implementation arose. Thus, the need for apre-export line of credit was established by a BB task force created as a result of the Government'sconcern for the sector. Similarly, GOB was able to respond appropriately, although with delays, toIDA's advice on project modifications and other measures to ensure achievement of projectobjectives.

- 12 -

PART HI. STATISTICALANNEXES

Statistical Tables

Table 1: Summary of AssessmentsTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements:

Cumulative Estimated and ActualTable 5A: Project CostsTable 5B: Project FinancingTable 6: Status of Legal CovenantsTable 7: Bank Resources: Staff InputsTable 8: Bank Resources: Missions

Table 1: Summary of Assessments

A. Achievement of objectives Substantial Partial Negligible Not appiable

Macro policies O [ O [/]

Sector policies [/1] El

Financial objectives [/] E El

Institutional development O [1/1 E

Physical objectives O E E Il/]

Poverty reduction O E E [/]

Gender issues EE El [D]

Other social objectives E O E [a/]

Environmental objectives Ol E [V]

Public sector management O El E []

Private sector development [1/] 0 E E

Other (specify) O E E [V]

- 13 -

B. Project sustainability Likely Unlikely Uncertain

[/] Ol El

HighlyC. Bank performance Satisfactory Satisfactory Deficient

Identification [1 E El

Preparation assistance [01 a O

Appraisal [/] a O

Supervision [/] E E

HighlyD. Borrower performance Satisfactory SatisfactQry Deficie

Preparation [/] D E

Implementation U [/I E

Covenant compliance a [0/] E

Operation (if applicable) U E E

HighlyE. Assessment of outcome satisfactory Satisfactoly Deficient

[/] El E

- 14 -

Table 2: Related Bank Loans/Credits'

LoanlCredit Title Purpose Year of StatusApproval

Preceeding Operations

1. Industrial Sector Credit Policy and institutional June 1987 Closed in March 1990.improvements to boost exports

Following Operations

1. Financial Sector Liberalizing the financial sector June 1990 Closed in December 1993Adjustment Credit and restructuring the NCBs

2. Private Sector Industrial Financing of private sector March 1992 Slow disbursements andCredit investments unsatisfactory

implementation progress

3. Second Industrial Sector Liberalizing regulatory and October 1992 Closed in December 1993Adjustment Credit fiscal policies to encourage without release of 2nd

private sector investment tranche

4. Jute Sector Adjustment Restructuring the jute sector January 1994 UnsatisfactoryCredit implementation progress

due to slow down inprivatizing public sectorjute mills.

Includes projects in the same sector/subsector as this project and adjustment operations with related objectives.A limit of 10 years is observed when listing preceding operations.

- 15 -

Table 3: Project Timetable

Date actual/Steps in project cycle Date planned' latest estimate

Identification (Executive Project Summary) 08/28/87

Preparation 11/10/87

Appraisal 01/21/88* 02/06/88

Negotiations March 1988* 10/24/88

Letter of development policy (if applicable) NA

Board presentation May 1988* 04/11/89

Signing 04/26/89

Effectiveness 07/31/89 10/25/89

First tranche release (if applicable) NA

Midterm review (if applicable) NA

Second (and third) tranche release (if applicable) NA

Project completion 06/30/94

Loan closing 06/30/94

* Final EPS.

I As provided, for example, in the Staff Appraisal Report (SAR).

- 16 -

Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual(US$ millions)

FY90 FY91 FY92 FY93 FY94 FY95 *

Appraisal estimate 4.5 12.0 21.0 25.0Actual 3.0 3.1 4.1 14.8 26.9 27.0

Actual as % of estimate 66% 25% 20% 59% - -

Date of final disbursement July 6, 1994

* Total cumulative disbursements are higher than total credit amount due to variations in exchange rate.

Table 5A: Project Costs

Appraisal estimate (US$M) Actual/latest estimate (US$M)

Items Local Foreign Total Local Foreign Totalcosts costs costs costs

1. Pre-shipment Import - 30.0 30.0 - 30.1 30.1Financing

2. Technical Assistance 0.5* 0.7 1.2 0.5 0.7 1.2

TOTAL 0.5 30.7 31.2 0.5 30.8 31.3

* Inclusive of US$0.02 million equivalent in duties & taxes.

Table 5B: Project Financing

Appraisal estimate (US$M) Actual/latest estimate (US$M)

Local Foreign Total Local Foreign TotalSource costs costs costs costs

IBRD/IDA - 25.0 25.0 - 27.1 27.1

Cofinancing institutions 0.5 0.7 1.20 0.5 0.7 1.2(USAID)

Domestic contribution (GOB) - 5.0 5.0 - 3.0 3.0

TOTAL 0.5 30.7 31.2 0.5 30.8 31.3

-17-

Table 6: Status of Legal Covenants'

Agreement Section Description of Covenant Status Comments

DCA 3.02(a) GOB to establish and maintain an EDF CP EDF was set up with an initialwith an initial contribution of US$3 GOB contribution of US$3 millionmillion before effectiveness and US$2 prior to effectiveness. Themillion by July 1, 1990. remaining US$2 million was not

deposited by July 1, 1990, due toinsufficient demand for EDF atthat time.

DCA 3.02(c) GOB to establish and maintain an advisory Ccommittee for EDF with satisfactory termsof reference.

DCA 3.04 Procedure for procurement. C

DCA 4.01 Maintenance of Accounts and Audit. C

DCA Schedule 2, Joint Review of EDF to determine whether CPara 4 it should continue after Project

completion.

DCA Schedule 2, Conditions to strengthen the ECGD and CPara 5 train its staff.

DCA Schedule 2, SBC to provide ECGD with adequate Cpara 6 administrative and promotional

expenditures and review ECGD's feestructure.

This table is based on Annex D5 of OD 13.05, Project Supervision.

- 18 -

Table 7: Bank Resources: Staff Inputs'

Stage of project cycle Actual Staff Weeks

Through appraisal 29.3 sw

Appraisal-Board 48.2 sw

Board-effectiveness NA

Supervision 50.3 sw

Completion 16.3 sw

TOTAL 144.1 sw

Also includes Bank-financed and trust fund consultants.

- 19 -

Table 8: Bank Resources: Missions

Stage of Month/ Number Days in Specializedproject cycle year of field staff skills Performance rating2

persons represented l

Implemen- Develop-tation mentstatus objectives

Through appraisal 7/17/87 3 24

Appraisal through 7/5-28 4 24Board approval 1988

Board approval - - - - -

througheffectiveness

03/18/90 2 6 Ind. Economist 2 2Supervision 10/01/90 2 (20) Fin. Analyst 3 2

06/01/91 2 (20) Fin. Analyst 3 301/1/92 2 (23) Fin. Analyst 3 24/25/93 2 (15) Fin. Analyst 1 14/20/94 2 (2) Program Officer I I

Completion_.

Key to specialized staff skills.

2 Key to status as shown in Supervision Form 590 (in revision).

- 20 -

Table 9: EDF Disbursements and Interest Rates

Fiscal Annual Cumulative EDF RateYear Disbursement Disbursement (LIBOR + 1) Local Currency

(US$ Million) (US$ Million) High Low Rate1989-1990 0.00 0.00 9.56% 9.56% 9.00%1990-1991 0.12 0.12 9.56% 7.50% 9.00%1991-1992 5.80 5.92 7.50% 5.06% 11.00%1992-1993 7.68 13.60 5.06% 4.25% 10.00%1993-1994 16.36 29.96 6.25% 5.13% 9.25%1994-1995 42.67 72.63 7.00% 6.25% 9.25% l

Table 10: Itemized Utilization of EDF

Cumulative CumulativeExport Item Disbursement Percentage Disbursement Percentage

(Upto 06/30/94) Share (Upto 06/30/95) Share(US$ Million) (US$ Million)

Readymade 27.00 90.01% 65.04 89.54%GarmentsFootwear 1.09 3.64% 4.32 5.95%Printing & 1.81 6.04% 3.22 4.42%PackagingButtons 0.04 0.13% 0.04 0.06%Ceramic 0.02 0.06% 0.02 0.03%

TOTAL 29.96 100.00% 72.64 100.00%

- 21 -

Table 11: Bank-wide Utilization of EDF(as of July 31, 1995)

No. of L/C EDFName of Bank Opened Disbursed Major Export Item

NCsAgrani 745 19.351 RMG, Knitwear, Ceramics, FootwearSonali 240 11.147 RMG, KnitwearJanata 18 1.726 RMG, Knitwear

NCB Total 1,003 32.224

National 780 27.889 RMGPubali 214 10.063 RMB, KnitwearUCBL 150 2.744 Printing & PackagingIFIC 75 4.132 RMGBASIC 29 1.786 RMGUttara 25 1.961 RMGABBL 9 0.384 RMGCity 1 0.065 RMG

PCB Total 1,283 49.024EC&SBI 61 1.089 FootwearHabib 6 0.021 RMG

|FCB Total 66 1.110

Grand Total 2,352 82.358

- 22 -

Table 12: Bangladesh's Exports of Traditional and Non-traditional Goods

Traditional Exrts Non-traditional Exports Total ExportsFiscal % % Share % Growth % %Year Value Growth Value Share Value share

FY83 473.69 - 69% 212.91 - 31% 686.60 100%FY84 541.44 14% 67% 269.56 27% 33% 811.00 100%FY85 599.90 11% 64% 334.53 24% 36% 934.43 100%FY86 447.84 -25% 55% 371.37 11% 45% 819.21 100%FY87 435.54 -3% 40% 641.07 73% 60% 1,076.61 100%FY88 420.65 -3% 34% 810.55 26% 66% 1,231.20 100%FY89 416.78 -0% 32% 874.78 8% 68% 1,291.56 100%FY90 491.61 18% 32% 1,032.09 18% 68% 1,523.70 100%FY91 431.99 -12% 25% 1,285.56 25% 75% 1,717.55 100%FY92 411.19 -5% 21% 1,582.73 23% 79% 1,993.92 100%FY93 399.36 -3% 17% 1,983.53 25% 83% 2,382.89 100%FY94 367.05 -8% 14% 2,166.85 9% 86% 2,533.90 100%

- 23 -APPENDIX A

Page 1

Economk Relations DivisionMinistry of FinanceSh.,.4angla Nagar

*+tJ From : Md. Saifullahl, MAh1207Sr. Aesiatant 'ecretary.

D.-O No .... 94I,# ,,t/94/71 Opmd..d.P=,J R.* .11 3 ....

i)ear Mr. Shcimsuddin,

Sub : Export Development Proj ect ( Credit No. 2000 3D)ImDlenentlation of CoMpletion Report.

Please refer to your letter dated August 17, 1994

on the above subjeot. I am pleased to send herewith the

comments on the draft Implementation Complotion Report of

Eixport Development ProJ ect (Credit No.2O00-MD) an received

from the Banglaldoeh Bank, Oadharan Bima Corporation ana, DEofor your kind information and necessary action. Ministry of

Commiiiierce, EP3 & IUBR do not have any further comment on the

said repprt.

Yours Sincerely,

l( d. Saifu h)

tAr. Shamsnddin Ahmed,Sr. Program Officor(Tr,ade & 1Firn;Lnco ) IWorld Dank Resident iTiusionin 1angludesh, 3A', Paribagh,Dhaka*.

- 24 -

APPENDIX APage 2

OI12 DRV=IOPWINT PUID-WIVAUATIOIJNIlPORT AIR MlPOSAL1B

The soononio devolopmnt of our oountry is interlinked

with proMotion of ezpotr.earAings. It ham been observed

that the contributioA of nontraditional items in export

sector has bean onsiderably increasing smnog last faw

years. However,the export sator in stll. oonfined with a

limited nunmber of comodIileo. The need. for diversi'fioation

of to expoort products to widen the export bass Io a must

tor our suwivel. The *xporter of non-traditionlal Item

particularly the manufaoturiag products Uoed to tace t-yere

problem in gotting financing againof their mported ia*-

mLterril. for manufaotuiting the export producto. They,

had to sacept the hard term loan which was also generally.

inadequate with respect to their requireoments. The nw

exporters used to Leo. thWe problem more soutely. Then the

Biport Development lwsA wm oreated to alleviate thEse

problems of the ezoa'br,

The projeot was 1aed -to assure a continued'

availabllLty of foreianEexohange to moet import requremeAts

of non-tradltional exp9rtirs, specilly'nower uxportera and

exporters divermifying iAto new markets and qxporterii

divseraifying into higher value exporto.The Internatlonal

Development Asooiatlon jam provided finanoiol assiuinice

by giving a oredit esxounting US$ equivElaAt to ODR 19.4

million under a oredLt agroenat with dovernment of

saagladeoh, The aovo2.inpt 6f Blanodeaii also committed

to providA...this fund ith U84 5 milllon. Th creh t,

ap6menA wax signed on 24.4.1989 and beome offective on

25. 10.1 989.

Contd....PO

- 25 -

APPENDIX-A

Durind the imuitial stage of the project tie Page 3

utliolation poeition of the fnd -was very uneLc,Liwsfaotorye

But at the out net of the fin..ncial yes.r 1991-92 the

utilisation got momentum. Some smendlme±its in policies

regardinZ the eligibility oriterea for utiliuing the fund

r3ade the fund attractive to the exporter. The amnendmentt are

s9 followas

1. )1axhiaUm sub-loan size has been increaced from

US$ 200,000 to US$ 5000-00

2. Maxirwum oi~tstanding loan of an exporter has been

increased from US$ 500,000 to Ul$ 1,000,000

3. T-,e compLasion of obtaini.ng export credit guarantee

for the scheduled bunk again3t saoh suoh loan ham

been waived

Besides tlxenc the ED? otatement of lending policy and

operating Procedure has been amended to allow, thie 100%

export oriented induLstrieA to util±so EDP finsncing against

advanoe irnports. The fall of LIr0B rate also played an

important role to lure the *Xporter using this fund. The9

Project started with intereat rate 9T6% whLlch rediced upto

,lnim= 44% , The preseat inftoreat rate ii 44 The seuinar,meetingjadvertis.ement eto.plctzed a vital

role to malce the conoerned people well aware about the

project. Bangladeah Bamk held several meetings with the

exporters end bwnkers at its own initiatives to fumilipries th

projeot with them. Eight somincxhhave been held in different

districtAon export divelopment Pund In joint oillab,syt ion of

Bsansladesh Bank and USAID sp0Y*eby3 the latter to make the

concerned agencies/persons oonversant about the projeot. A

booklet has also been publisedd on Dxport financing &

Cont... *P/3 t

- 26 -

APPEFNDIX APage 4

manual. It was distributed among the oonoerned personseXporter s

specially the reputed & bonafide & bankers attended in

the aemAaur6 . Your persona were sent abroad on a study

tour on behalf of Export Development PuAd. These two

abigmments wre aeaso spongored by UtSAID.

The ploaject hias made a wide reaponse among the

nonitr tdilional exporters. It is observed that onoe an

exporter oozes to utillse this fund uslly av'L-Ud; uoc_

thia fa;nd. The suooesx of the Projeot oan be asertained a bit

from the following data on utilisation of this Aind.

Year-wine Di,pursemntLt

;9g_50 ~ ~ ~ ~~~.Ia D o isbur_12dat11L

1990-91 121,416.93

1991-92 5,804,939.47

1992-93 7,676,324.13

1993-94 16,364,408.31Total UBW 29,969,091.84

Itideed it may be ooncluded here that If there is a

incere will then nothing cam dlster/prevent once's suaoesa

which )u-c uloo beca ason in 0c50 of lxport Developmient ?und.

The proJect vicoS just t3bout to be foiled. Dut the allout

effoits of the world Oan3k,USAIb ,Ranglu.deuh Bezk and

oonoorned miristrriAngommeroisl banks and persona made the

project n euoucice in one year axtendod time.

8 xeortera of dLffernet oomnmoditus vi7,pyintti;g g

paokagt5g produoto,foot1 wear,ce:renio,button and readymade

garsoents huve availd of this ftiud for lmportinng their required

rwmaterails for production of the above mentioned produots.

The rate of ropoymenta io 10O% within the atipula 6

of the 15DP (180 days).

- 27 -

APPENDIX A

Prom the experience of EDY we have learnt that holdis Page 5

of regular meetinzg,seminar,workship with the oonoerned agencies,

persons and spectally the benificiurieu of the fund' provides

the required suggecbivi SInformation rLbout lthe Ileling of the

projeot so that one can ohange/amend the.proJeot policy

accordingly. It helps a lot for succOsful implementation of any

projeot. NJe *4o thing that If a feQa number of xeminar. on

ED31 could had been held befor. the starting 'of the proJeot end

tho rest j'tnt during the first fJz.anoial yeer of the projeot

tl-A -tao ut1±ilsation of tho fund would have got momentum

at the firiit phago oftlie pz'oJeot,The study tour of the offSoialu

on behlaf of Export Development uad was oonducted. very lately.

For this reason the,r experino.u acquired from tho tour hardl3y

contribute anything for the projeot,

ronp±te all these oonstrutntu the project haS uuoeDfuly

been iriiplcmented.

The experioenoes gathered' from the lmpiemeAtation of the

xpirt Development projeot make us givq follv*ing recouendati.o-

nf.

The follow±n:, componontu and proposals' may please be

cormni3dered for inolunA.on in tho propoood Second Export

Development Prol ect.

1.PinZoirt'an.istaz,oe :of LpDo.rbt 1 ovital mischinerYs

'the p2rtiolpants, pecially the exporters attending

different seininars and meetings on Export Development Fund

expreesMed the nieed for providing financial aesi,t&noe iunder

long term pro,iramu.e and liberal conditions for iinportm of

c4pital'maohineries loang w'th the fecility providing under the

present project for import-' of raw materiiluh We elsc thik

that the present Luadequate fin4roi.l nvisstenee for import of

- 28 -

APPENDIXAcapital machinery is one of the main impedimenta in Page 6

increasing the country'o export earnltnga through settingup

more export oriented iaoustries & ezpszonAo e existig

induatries. Particularly the new exporters are facing thin

problem aoutely. Taking all these factors Into concideration

we propose to create a fund amounting US$ 75 million to help

the gehiuine exporters to boost up country's export.Priority

may be given to the exporters having uuffioia.t technaoal

know-how. ̂ nev and prospeotous sector. Manufacturing &

asiembling of eleetron±o products and export of information

technology and computing services ejay open =w area.e.el'c C4 'Ad.. ODS

in the export sector an garments i in Banglafdsh if

we can provide the required financing and' patronisation.

2. Seminar.Advortiqement and gtudY Tour.

Prpm the experienoes of the present Export Development

lund it is observed that seminar,meeting and advertisement

oan play an importont role to make the ooncerned peraons

fully convergent about the project. Besides thEe banking

comunity can acquire praotioal Knowledge visiting devreloping

oo3ntrieg to observe lhow they have beoome suooeusful to raise

their export earnings by introducing innovative ideas covering

export inoentives and liberal export financing. After having

expooures from those countries they will be able to contribute

a lot for the export development by formulating now policy/

guidelines for the purpose. A fund forkO.1 million may be

created to faoil.tate the impleinentation of the above mentioned

scheme.

3.prenent BzDort DoveloDment andi

The Project has sucoeugully been L.mplenented. It has

beooome very helpful to the ezporters and im playing a vitai

rolo in inoreasing the country's export earninge. Based kn

t1hese experiences anid takimg into consideration of the now

dan=d of the fund lve recownd for oontinuation t Jeot

Oontd. ... P/6

- 29 -APPENDIX A

Page 7

through reoycling of the fiuund after the freaomt

completion date of the project.

4. An reoomended in the aovernment's Aotion plan for

Implemelttation of Ban3ladeeh Exp .ptrt Development st orategy

for 1992-2000 we are also in favour of oreation of a fund

for produot developmentm]arlet promotion by carrying out on

oxtensive publioity campaign in order to turn the drive for

the export led growth into an economic molveme±vt.

5. If the proposal for continuation of the present

export Development Iund is coaepted thenx we also propooe for

strengthening of the aeotion/depaLtment which is directly

lncolved with implementation & operatinZ the fu.nd of the

project. It is obvious from the trend of the utilisRlion of the

fund that tbe volume of the work of export Development fund

will inorease Xainfold within a few years. For emoth & proper

functioning of the fund and enasring keeping with the§&untain4n&

suucces of the project the above mentioned seotion may be

equipped with .computsr.photooopy.machine,eleetronlc typewriter

mcailine and other modern anmenaties. A portion of the fund

for the proposed tohiniojal part of the E9UNZXRX proposed

second Exp ort Development Pro,jeot may be used for this

furpose.

r4'iq

- 30 -APPENDIX A

Page 8

ECO's comments on the ImplementationCompletion Report of ExportDevelopment Project (Loan 2000 BD)

The knowledlge and efficiency of ECOD's officers & staff has increased in respector the existing schemea due to technical assistance provided under the ExportDevelopment Project. Moreover, the scheme has become familiar to Banks andexporters to a great extent in view of Seminar/Training arranged under EDP.However, dtie to late supply of computers under the project, training of ECGofficlals thereon could not be completed. But owing to the following bottlenecks,the achievemnent in the growth of ECG's business has not reached the desired level.

a) Witlhdrawal of ECG from EDFdjs bursement -conditiopalitiea

it was provided in the agreement signed between the Govt cf People'sRepublic of Bangladesh and IDA that all loans from EDF must be coveredunlder ECO. But due to the withdrawal of the above condition subsequently,the significance of ECO in the eyes of banks uirid exporters lessened causingLLnfavourable effect in the growth of ECG business.

b) Controversy regarding payment ofPrmium nder finAnce g3aThnteeL

Due to the circular issued by Bangladesh Bank directing the commercialbanks to bear the premium cost of export finance guarantee the banks havelost interest in ECG. Because, if they bear premium cost, they incur loss inexport credit transactions. Banks being cominercial organisations are notexpected to bear loss in a particular field for an indefinite period. In othercountries of the world, premium under export finance guarantee isultimately boi ne by the exporters. Hence the Ministry of Commerce hasalready asked Bangladesh Bank to withdraw the above directive.

c) Lt Er e

So far we have been able to introduce three types of Export CreditGuarantee Schemes, But banks and exporters have a tendencv to cover onlythe risky export credits under these guarantees resulting u lhigher claimratio. On the other hand due to lack of experience and knowledge in therelevant field it is not possible to introduce new schemes as desired bytheml. Since training provided to ECG officials under EDP was concerned withexisting schemes only imiediate steps shoutld be taken to provide furtherforeign training to them so that it is possible tll ,ntroduce new srchemes inthie near future.

cl) ~j~arate rition for, EC

Sad haran Bima Corporatioii being a coinmercial organisation is not theproper place to administer a promotional scheme liF': ECCI;. In othter countrieaof the World, ECO is administered either by a Govt. voluartment or by aseparate Government organisation on no losp no profit basis. Henceexpatriate conaultarit of the project, World Bank & USAID heave stronglyrecom mended to form a separate organisation for running ECG Schemes butso fair the recomnmendation has not been materialieed:

- 31 -

APPENDIX APage 9

e) Premium Rate & Claim SettleMent:

Premium rates of our schemes have been kept low as far as possible so thatour clients can bear theni easily. These are compatible with those of similarschemes in our neiglhbouring countries, The ECG consultant of the WorldBank who examined our schemes was also of the same opinion.

The claim settlement process has been streanmlined so that inordinate delaydoes noi-occur in settlement of ECG claims.

Somne steps have been taken towards the solution of the above problems. Ithas already been decided to introduce a new scheme under the caption of'wiholeturnover pre-shipment finance guarantee'. It is expected that ECO'spremium income will increase to a great extent if the new scheme is acceptedby some cornmercial banks. However, in order to increase the effectivenessof the scheme in promoting national exports, suggestions indicated aboveshiould be iniplemented. Further technical assistance is a must for improvingthe efficiency and knowledge of ECGD officials so that it is possible tointroduce new ECO schernes for meeting the growing needs of our bankers& exporters.

- 32 -APPENDIX A

Page 10

DEDo was one of the agencies benefited under the TA project (No.EDP 2000 BD TRP-II, 388-0074) funded by USAID under the umbrella of tho ExportDevelopmerit Project , the other agencies being the Bangladesh Bank,S.B.C, andthe EPB.

2. The TA project aimed at achieving the following in bEDO-

1. Simplified procedure of duty,drawback calculation aridnotification of Flat Rates of lRefund.

2. Estimate Tax effects on Export.l

3. Computerize DEDO's MIS, and help in the creation of a database.

4. Provide hardware and also training to officers and staff incomputer usage.

5. Arrange Seminars about export procedures, and DEDO's system ofduty drawback for the benefit of the exporters, and

6. Help in the exposure of selected DEDO officials to outsidepractices by funding foreign visits.

ACHIEVEMENT:

The Project objectives in DEDO were partially achieved before the projectexpired on 31st August,1993. 6(six) computers and a server linked to a LANsystem were provided. Program for Flat rate calculation was developed and 500flat rates notified,no mean achievement. 2(two) weU publicized seminars andworkshops were organized in Dhaka and Chittagong. Because of Governmentrestrictions, DEDO was unable to recruit regular computer professionals by thetime the project ended and therefore with USAID's concurrence Governmentextended the projgct for another year for the limited purpose of hiring a localcomputer contractor to help run DEDO's computer room and also train officersand staff. With tlhe training received from the (local) contractor, DEDO is nowable to run the coimputer room in some fashion. DEDO is trying to expediteregular appointmnent of computer professional.At the same time with specialGovernment funds, it is in the process of engaging a computer contractor to helprun its computer roonm.

During the Project Life, a total of 3 small delegations comprising DEDOofficials, including its D.C., visited regional countries to aquaint themselves withexport incentives and duty drawback facilities provided in these countries.

Overall, the objectives of the Project in DEDO may be said to have beenachieved.

MCS arak A. MollaD.G.

- 33 -APPENDIX B

Page 1

UNITED STATES OF AMERICAAGENCY FOR INTERNATIONAL DEVELOPMENT

quEji.. Dftka, Bangladsh

1 1OCT 195

Mr. Shamsuddin Ahmad raSenior Financial Analyst AID Lr No .......- -World Bank RMB3A ParibaghDhaka

Subject: Export Development Project: Implementation CompletionReport

Dear Mr. Ahmad;

Thank you for sharing with USAID the subject Export DevelopmentProject Implementation Completion Report. We regret that we wereunable to review the subject report and provide you with USAID'scomments earlier. However, we hope that you will find the attachedcomments prepared by our staff to be useful for your final report.

Thank you and regards,

Sincerely,

Richard M. grownMigsion Director

Attachments: a/s

- 34 -

APPENDIXBPage 2

m2S2ort DeveloRment Prolect

Comments on World Bank's Imleetain CoMpletion Report,

The World Bank'S ation 8 n Retort (ICR) for theExport Development Project (EDP) in Bangladesh provides a goodanalysis of the implementation success of EDP. 'While the reportsignificantly covere the implementation issues of the IDA Credit(Credit 2000-BD) to assist GOB's efforts to promote exports,. thedescription of the implementation of the USAID-funded TechnicalAssistance and'its impact could be enhanced. The TA component,though delayed in initial implementation, played critical role infacilitating resolution of project coordinating problems.Therefore, in section 9 of the report, Assessment of Outcome, werecommend that the para 9.3 be revised to reflect the contributionof the TA component and separate the analysis of eome of the causesof inefficiency of BTB L/Cs which was beyond the purview of the TATeam. Except for this issue, all components of the TA activitieswere implemented successfully and produced positive results. Thereport should also include a table of the growth in disbursement(amount and number, as well time taken) of duty drawbacks by DEDOsince the implementation of the TA. In identifying the lose of -

trained personnel due to frequent transfers, the report could focusmore on this systemic problem in GOB, and the need to resolve thisproblem before any additional training assistance is provided.

- K rf f - It 1 i

F:v,,, tv s t . 1r -; -T '; F w-: 1 ' :