Learners’ Note

SAARC

BUS102: Business – Basics, Ethics and Environment

SAARC
Topic 4.3 | Week 3

Instructor
Nadia Afroze Disha
Lecturer
BRAC Business School
BRAC University

BBA Program
Spring 2024
SAARC
Topic 4.3 | Week 3

Seven South Asian Nations - Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and
Sri Lanka - formally launched the South Asian Association for Regional Co-operation
(SAARC) on December 8, 1985 with an underlying objective to accelerate the economic
development of the region.

SAARC is a manifestation of the determination of the people of South Asia to work together
towards finding solutions to their common problems in a spirit of friendship, trust, and
understanding and to create an order based on mutual respect, equity, and shared benefits.

OBJECTIVES OF SAARC
Following are the main objectives of SAARC.

To promote the welfare of the peoples of South Asia and to improve

their quality of life;

To accelerate economic growth, social progress and cultural

development in the region and to provide all individuals the
opportunity to live in dignity and to realize their full potentials;

To promote and strengthen collective self-reliance among the

countries of South Asia;

To contribute to mutual trust, understanding and appreciation of one

another's problems;

To promote active collaboration and mutual assistance in the

economic, social, cultural, technical and scientific fields;

To strengthen cooperation with other developing countries;

To strengthen cooperation among themselves in international forums

on matters of common interests; and

To cooperate with international and regional organizations with

similar aims and purposes.

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SAPTA AND TRADE LIBERALIZATION
The agreement on SAARC Preferential Trading Arrangement (SAPTA) was signed in
1993 and four rounds of trade negotiations have been concluded. With the objective of moving
towards a South Asian Economic Union (SAEU), the Agreement on South Asian Free
Trade Area (SAFTA) was signed during the Twelfth Summit in Islamabad in 2004. Beyond
official linkages, SAARC also encourages and facilitates cooperation in private sector through
the SAARC Chamber of Commerce and Industry (SCCI), which is a SAARC Apex Body.

Numerous business opportunities exist for trade and commerce among SAARC countries
owing to their geographic closeness and high population. Though the full potential of
SAARC business cooperation has not been achieved till now due to several political
differences and economic imbalances between member countries, future business
opportunities are bright and promising.

SAPTA was envisaged primarily as the first step towards the transition to a South Asian Free
Trade Area (SAFTA) leading subsequently towards a Customs Union, Common Market and
Economic Union. The Agreement on South Asian Free Trade Area (SAFTA) was signed on
January 6, 2004 during the 12th SAARC Summit in Islamabad. The Agreement came into
force on January 1, 2006. Currently, the Sensitive Lists of products, Rules of Origin, Technical
Assistance as well as a Mechanism for Compensation of Revenue Loss for Least Developed
Member States are under negotiation.

Under the Trade Liberalization Program scheduled for completion in ten years by 2016,
the customs duties on products from the region will be progressively reduced. However, under
an early harvest program for the Least Developed Member States, India, Pakistan and Sri
Lanka are to bring down their customs duties to 0-5 % by January 1, 2009 for the products
from such member states. The Least Developed Member States are expected to benefit from
additional measures under the special and differential treatment accorded to them under the
Agreement.

STRUCTURE OF ECONOMIES
SAARC economies are basically rural in nature. Agriculture plays a vital role in SAARC
region. Except for India, Pakistan, and Sri Lanka, where service sector plays a major role than
agriculture, in all the other countries, the contribution of agriculture to GDP is the highest.
However, over the last few decades, it can also be observed that there has been a fall in the
relative importance of agricultural contribution to GDP in SAARC members, except in the case
of Nepal where agriculture’s role has not changed significantly. SAARC partners have adopted
various strategies for the expansion of their industrial sectors, or the diversification of their
economies, from production of primary products to that of manufactured goods.

As far as Bangladesh, Bhutan, and India are concerned, industrial sector and services sector
have gained at the loss of agriculture. The prominent trading and commerce activities in Sri
Lanka have made the service sector more vital than the agricultural and industrial sectors of
its economy. The relevant economic question for these nations is whether agricultural
development or industrial development is the appropriate strategy for accelerating
their economic development.

SAARC nations tend to focus more towards industrial development than agricultural
development because of the belief that rich countries are rich because they are industrialized
and poor countries are believed to be poor because they are primary-producing. Thus, SAARC
nations are keen on expanding and developing the industrial sectors of their economies.

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 Agricultural Productivity
Agriculture continues to be dominant in all the member countries though the secondary
and territory sectors show a rising trend. Productivity of cultivable land is reflected in
the form of yield of crop per unit area. India’s productivity with respect to wheat,
vegetables, and pulses is higher compared to other SAARC counties. Productivity of
tobacco is highest in Pakistan; paddy highest in Sri Lanka and in the case of millets,
Nepal ranks first.

Political Environment
One point of view with respect to economic co-operation is that unless the political
matters are settled first, there is little scope for fostering regional economic co-
operation. Thus, political factors do play a vital role which has a bearing on economic
and other matters. Say, for example, the war like situation between India and Pakistan
definitely has a high level of correlation on other matters too. Similarly, the unsettled
issues of Indian origin Tamils in Sri Lanka have a say in the Indo-Sri Lankan co-
operation.

Foreign Trade
Manufactured goods play a major role in both the export as well as the import structure
of the member countries of SAARC. However, most of the SAARC countries have been
dependent on the production and export of a few agricultural commodities for the
expansion of their economies. A major share of their international trade is also based
on the export of these primary products, and the import of raw materials and other
capital goods required for various sectors of the economy.

As far as trade statistics is concerned, India’s export and import values are the highest
among SAARC members.

Trade within SAARC: Major portion of exports of Bangladesh is to Pakistan;

India is to Bangladesh; Pakistan is to Bangladesh; and Sri Lanka is to Pakistan.
On the other hand, major portion of imports of Bangladesh is from India;
Pakistan is from Bangladesh; and Sri Lanka is from India. It has to be noted
that the proportion of trade flows within the SAARC region are small
and there exists low trade growth rate within region.

BANGLADESH
Bangladesh is located in the broad, fertile delta of the Ganges and Brahmaputra rivers. Ninety
per cent of the land is less than 10m above sea level. A combination of cyclones and floods,
internal political problems, and poor infrastructure affects the people’s struggle to rise to the
high-income group.

Country Analysis and Business Opportunities

Bangladesh is one of the world’s most densely populated countries with about 169.4 million
people (2021) of mixed races. Muslims represent about 91.04% (2022) of the total
population. Bangla is the official language of the country. English is the second language and
widely used in education, business, and commerce. The literacy rate is around 74.66%
(2022) but the trend towards higher education in the urban society is noticeable.

Dhaka, the capital of Bangladesh, is situated almost in the middle of the country on the bank
of the river Buriganga. There are two sea ports - Chittagong and Khulna. The main centers of
commercial activities are the capital city of Dhaka and the port city of Chittagong.

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Though Bangladesh has a number of natural resources, the country does not have enough
capital and the right level of technical know-how. The government is keen on securing
participation of foreign investment for accelerating production and economic growth. To that
end, the government has announced a number of incentives including tax holidays and
repatriation of profits from the country. The government has recently undertaken the work of
updating the Companies Act, Patent Laws, Trade Mark Laws and the Customs Act to
complement its new industrial and investment policies.

The major items of exports are ready-made garments and clothing, jute goods, shrimps and
frozen foods, raw jute and jute products, leather, newsprint, fertilizer and so on. The country
exports its apparel products (an all-time high of nearly $47 billion in 2023) per year to the
USA, EU, Canada, and other countries of the world. At present, the country is the 2nd largest
apparel supplier to the US and EU countries. The major products are knit and woven shirts
and blouses, trousers, skirts, shorts, jackets, sweaters, sportswear and many more casual
and fashion apparels.

The major items of imports are machineries, crude petroleum and petroleum products, raw
cotton yarn, fabrics, cement, edible oils, food grains, etc.

Extensive programs of incentives, to expedite investment (FDI), are now in place in the
country. Some of them are listed below.

 No ceiling for investment in most of the sectors

 Tax holiday of up to 10 years
 Tax-exemption and duty-free importation of capital machinery and spare parts for 100%
export-oriented industries
 Residency permits for foreign nationals including citizenship
 Easy capital profit and divided repatriation facilities
 Double taxation avoidance
 Tax-exemption on the interest payable on foreign loans
 No limitation pertaining to equity participation, i.e. up to 100 per cent foreign private
investment allowed
 15 year’s tax holiday for private power generation companies
 Exemption of tax on interest on foreign loan
 Tax exemption on royalties, technical know-how and technical assistance fees
 Avoidance of double taxation on the basis of bilateral agreement
 Six months multiple entry visa for the investors
 TAKA, the nation’s currency, is convertible for international payments in the current
account
 Working capital loan, as well as term loan, from local commercial banks allowed to the
industries set up with foreign capital
 Citizenship by investing a minimum of US$ 5,00,000 or by transferring US$ 10,00,000 to
any recognized financial institution (non-repatriable)
 Except five reserve sectors, all industries are open for private investment.

Industries earmarked for public sector investment are included in the reserve sector namely:
i. arms, ammunition and other defense equipment and machinery
ii. production of nuclear energy
iii. forest plantation and mechanized extraction within the bounds of reserved forests
iv. security printing (currency notes) and minting, and
v. railways and air transportation (except certain domestic routes and air cargo)

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While import tariffs have been reduced in recent years, the use of fixed tariff values has
in many cases resulted in an effective tariff rate far beyond the actual rate. Thus, custom
duty is paid on a fixed tariff value of the imported goods rather than on the actual price. The
fixed tariff value system has recently been supplemented through the acceptance of pre-
shipment inspection certificates from four international inspection companies. An additional
import permit fee of 2.5% is paid on most imported items and a trade-neutral value-added
tax (VAT) of 15% is added to the price of all traded goods. A supplementary duty is levied
on luxury items such as cars with an engine capacity greater than 1,000 cc, some electronic
devices such as computers and “undesirable” items such as cigarettes. There is no limit to
the amount of foreign exchange that may be brought to Bangladesh, but all foreign
currency exceeding the amount of US $5,000 must be declared upon entry, and visitors should
be prepared to account for it on departure.

Estimate shows that about 80 per cent of the exported garment accessories like cartons,
threads, buttons, labels, poly bags, gum tapes, shirt boards and neck boards are now being
produced in the country, contributing to the national GDP. But, the textile (spinning, weaving,
finishing, etc.) industry is just budding. Presently, the total fabric requirement in Bangladesh
is for about 3 billion yards, of which about 85-90 per cent is imported from countries like
China, India, Hong Kong, Singapore, Thailand, Korea, Indonesia and Taiwan. Fabric
requirement is increasing at the rate of about 20 per cent per annum. This offers a tremendous
opportunity for exporters from other countries. Prospects for a huge textile industry capable
of supplying over 3 billion yards of fabrics a year to the export-oriented garment industry is
bright.

Other areas of investment that has bright prospects are as follows.

a. Infrastructure
Energy, telecommunication, oil and gas, ports, highways and bridges.

b. Agro-Based Industry
Dairy of poultry, processing of fruits and vegetables, shrimp, fish culture and processing,
shrimp feed plants etc.

c. Labor-Intensive Industries
Electronics, data processing and software development, electrical goods and accessories, light
engineering goods, toys, and jewelry. The current fiscal deficit hovers at around 4.2% of the
GDP. This is possibly due to the restraints imposed on current expenditures to keep inflation
under control. As a share of GDP, revenues remained at a low rate of 10.6%. Domestic
resources funded 43% of the deficit with foreign financing the rest. The per capita GDP has
been gradually improving with the current per capita income nearing US $1900 (Purchasing
Power Parity Adjusted) and US$ 400 (actual) respectively. On the contrary, the income
inequality at the national level has increased from 25.9 per cent in 1991–92 to 32.6 per cent
in 2004 with the urban inequality rising at a faster pace than rural inequality.

d. Growth Sectors
GDP in Bangladesh is driven by industrial production, services and agriculture. The percentage
contribution of the different sectors to the overall GDP has been almost constant in the past
two decades. However, over the years trend shows marginal decrease in contribution of
agriculture and increase in industry contribution whereas services has been constantly
growing.

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e. External Sector
The exports from Bangladesh have been growing steadily over the past decade with figures
touching US$ 7603.0 million. The current trend reflects increased exports for the items like
apparels, frozen food and leather. Similar trend has been observed in export earnings as per
cent of GDP with the percentage contribution of exports to GDP close to 12–14 percent now.
Imports has also increased over the years touching US$ 10,903 million. Imports in Bangladesh
were induced by higher input demand of the import-dependent apparels sector, stronger
growth in intermediate goods (chemical, fertilizer) and increased demand for certain
consumer goods (e.g. edible oil, sugar, etc.).

f. Balance of Payment
The balance of payments (BOP), also known as the balance of international payments, is
a statement of all transactions made between entities in one country and the rest of the world
over a defined period, such as a quarter or a year. It summarizes all transactions that a
country's individuals, companies, and government bodies complete with individuals,
companies, and government bodies outside the country.

Funds entering a country from a foreign source are booked as credit and recorded in the BOP.
Outflows from a country are recorded as debits in the BOP. For example, say Japan exports
100 cars to the U.S. Japan books the export of the 100 cars as a debit in the BOP, while the
U.S. books the imports as a credit in the BOP.

The formula for calculating the balance of payments is current account + capital account
+ financial account + balancing item = 0.

The gross official foreign exchange reserves of the Bangladesh’s Central Bank continued to
grow against the backdrop of steadily increasing export earnings, and stood at US $2,705
million. The following Graph depicts the values for the overall BOP for the last 7 years.

Figure: Balance of Payment in Bangladesh (in US$ billion) (2015 – 2022)

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g. Exchange Rate
As a growing economy, Bangladesh is actively involved in international trade and foreign direct
investment (FDI). As such, the exchange rate greatly matters to the Bangladesh economy
because of its influence on trade and financial flows between Bangladesh and the rest of the
world, thus making it an important economic variable.

An exchange rate is a rate at which one currency is exchanged for another currency (or a
group of currencies). The exchange rate of the Bangladesh taka (BDT) against the US dollar
(USD) has been depreciating since the last quarter of 2021. A decrease in the value of the
BDT is known as depreciation. Currency depreciation can take place for a variety of reasons.
Countries with weak economic fundamentals, such as chronic current account deficits and
high inflation rates, usually lead to depreciating currencies.

h. Social Structure
Bangladesh has made major progress in improving the standard of living of its people over
the past two decades.

 Bangladesh has successfully reduced the fertility rate over the past decade. The current
fertility rate for Bangladesh in 2024 is 1.908 births per woman, a 1.14% decline from
2023.
 The current infant mortality rate for Bangladesh in 2024 is 20.755 deaths per 1000 live
births, a 3.72% decline from 2023.
 The current life expectancy for Bangladesh in 2024 is 73.82 years, a 0.34% increase from
2023.
 The population growth rate fell from over 3% in the 1970s to 1.03% in 2022.
 The gross enrolment ratio in primary education in 2021 has reached 105.72% and net
enrolment rate 97.42%.
 The general literacy rate across the country is 74.23 percent. However, when focusing on
the age group of 11 to 45 years, the functional literacy rate has significantly increased to
73.69 percent in 2023, compared to 53.70 percent in 2011.
 Progress is still very much required as the UNDP Human Development Index places
Bangladesh in 129th position out of 191 countries and among medium human-
development countries.

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