With Bangladesh going one notch down and India going 30 notches up in one year in the latest Ease of Doing Business report, it has, once again, raised some questions among “friends of Bangladesh” -- what’s wrong?
With more than 30 years “on the job” for facilitation of domestic and foreign investment, I say it is more of “no regulation, over-regulation, regulatory unpredictability, or convenient interpretation of the regulation under different political regime.”
Cause and effects
Regulatory unpredictability in Bangladesh is a giant impediment to the nation’s potential macro-economic boost. The adverse effects could include reduced efficiency leading to dip in productivity and cost surges, which could eventually create an air of uncertainty in reference to major investment decisions, resulting in potential private investors from Bangladesh and abroad alike to back off.
These are, however, only consequences on the surface level. Further in-depth diagnosis is critical to any attempt to solve this long-term, discomforting situation. Regulatory ambiguity could stem anytime starting from the initial design phase to post enforcement.
More often than not, various new rules and regulations are released without prior discussion or evaluation with relevant stakeholders -- in this case, the private sector counterparts. Due to this non-inclusion, the initial regulatory design may be deprived of practical insights that only businesses possess. This results in construction of a regulatory framework on a weak and unstable knowledge base.
Let us know in advance
Hypothetically, however, even if these new regulations are sound, abrupt announcements of their releases are quite likely to cause obstructions to ongoing businesses.
A survey conducted through a joint collaboration between IFC and BUILD, revealed that a whopping 83% of businesses who participated have strongly agreed that rules and regulations released without prior consultation poses major obstacles to doing business. In addition, 67% of the participants expressed the concern that the government hardly informs them about whether or not their inputs were incorporated and why.
This communication gap, unfortunately, is not only present between government and non-government entities; various intra-government agencies have also shown failure in effectively coordinating their respective regulatory decisions.
This causes major inconsistencies and uncertainty in the regulation schemes, leading to possible delays and errors in business-making decisions, hence negatively impacting the overall investment competitiveness of the private sector.
Progress requires updated business markets
Another prime cause of regulatory unpredictability in Bangladesh is the unreliability of documentations. The problem has two critical sources: Firstly, a colossal number of SROs and other legal acts are not reviewed, modified, cancelled, or filtered out to adjust to updated requirements.
The Foreign Exchange Regulation Act 1947 is still in use and over 700 bond-related SROs only scratch the surface.
As a result, businesses are obliged to make decisions based on archaic and redundant information which may not be aligned to contemporary investment cultures and most certainly, not be innovation-friendly.
The communication gap, unfortunately, is not only present between government and non-government entities
Secondly, there is no one-stop destination providing VAT, customs, and income tax laws/ordinances for relevant stakeholders to refer to.
This makes it extremely difficult for one to navigate through and cross-check regulatory data, thus causing great confusion and misunderstanding during interpretation and implementation of rules and regulations that may have both short-term and long-term effects.
As per the survey, a shocking 100% of the participants agree that inconsistency in customs act related regulations is a mammoth complication.
More short-comings and a flawed system
Data obscurity and the initial lack of coordination during inception, discretionary enforcements, or the lack thereof, might result in serious adverse consequences. The unforeseen nature of new regulatory orders, topped up with little to no guidelines, create room for a wide range of discretionary interpretations.
These could leave businesses highly puzzled in the face of choosing the right course of action. More so when a brand new business idea is involved, and there are no pertinent statutory clauses available. One such case is the hesitation involved with implementation of the new VAT law. The speculations and fickle announcements regarding the law has left many related business entities perplexed, having spent a fortune on investing relevant resources that amounted to no results.
Why not talk it out?
In addition to this, there is presence of a weak and dubious grievance mechanism. This translates to the inability of stake-holders to express any issues or difficulty they might be facing due to certain regulations. This creates turmoil in the business environment; as businesses are often left with no choice but to continue with opaque and inconsistent guidelines and forego any expectations of clarification from the authority.
Akin to the problems of poor grievance mechanism is the inherent insecurity of property rights. There is no guarantee that a project will stay afloat in the upcoming years, subject to alterations in both the investment and political climate.
Ekushey TV, and more recently the Islami Bank and SIBL have fallen victim to such regulatory loopholes. Besides, undue leveraging of legal fragility by the more politically favoured and powerful is not an uncommon phenomenon.
In a regular scenario, it is expected and vital for businesses to stay alert of myriad forms of economic risks on a daily basis. Nevertheless, this concrete presence of preferential treatments thanks to weak regulatory stances fuel further uncertainty and disturbance in the business environment, and could eventually discourage many capable and purposeful business entities from undertaking future investments.
Bangladesh has eyed a gallant target of 7.5%-8% GDP growth to potentially land into the upper-middle-income league. This goal will indisputably require a significant degree of contribution from the private sector. It is vital that the sector sustains as highly functional.
One of the determining factors influencing the private sector’s functionality is the governing regulatory environment.
More precisely, the regulatory body’s ability to remain meticulous while simultaneously reflecting rigor and clarity. In order to achieve this, a rigid and sincere operational intervention is mandatory.
A sound regulatory impact assessment policy, establishment of reliable notice, and comment systems and a systematic investor response mechanism could act as some highly effective tools in mitigating regulatory unpredictability. Especially for a “one step forward, many steps back” country like Bangladesh.
Mamun Rashid is a leading economic analyst in Bangladesh. This piece has been enriched by the discussions on the topic at PRI and several corridor discussions with Akhtar Mahmood and Masrur Riaz from the World Bank group.