Minutes of Loan Committee Meeting to Consider the Initiating Memorandum for the Proposed Industrial Sector Credit for Bangladesh Held on March 4, 1986 in Room E-1208, Loan Committee - Minutes and Reports - 1986 - 89093-01, Folder ID 30043699, ISAD(G) Reference WB IBRD/IDA LC-01, World Bank Group Archives, Washington, D.C., United States

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Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents (Series 1) Browse by Media Type 3-21-1986 Minutes of Loan Committee Meeting to Consider the Initiating Memorandum for the Proposed Industrial Sector Credit for Bangladesh Held on March 4, 1986 in Room E-1208 World Bank/World Bank Group Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation World Bank/World Bank Group, "Minutes of Loan Committee Meeting to Consider the Initiating Memorandum for the Proposed Industrial Sector Credit for Bangladesh Held on March 4, 1986 in Room E-1208" (1986). YPFS Documents (Series 1). 14278. https://elischolar.library.yale.edu/ypfs-documents/14278 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents (Series 1) by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. 9-83THE WORLD BANK CONFIDENTIALLOAN COMMITIEE DECLA$SFIEDMAR 0 4 22LC/M/86/08 WBG ARCHIVESMarch 21, 1986Minutes of Loan Committee Meeting to Considerthe Initiating Memorandum for the ProposedIndustrial Sector Credit for BangladeshHeld on March 4, 1986 in Room E-1208A. PresentLoan Committee OthersMessrs. Stern Messrs. Aksoy El SerafyHusain Cheetham GouldDherse Chernick HamidMs. Krueger . Clements KoppMessrs. Goldberg Clift TempleLerdau Dubey Ms. Gurgen (IMF)WoodDISTRIBUTIONCOMMITTEE OTHERSSenior Vice President, Operations (Chairman) Standard (see OMS 9.25 page 7)Senior Vice President, FinanceVice President & General CounselVice President, Operations PolicyRegional Vice President concerned*Vice President, Energy & Industry (for lendingin these sectors and SALs)Vice President, Economics and Research (for non-project lending)*Copy to all other Regional Vice Presidents-2-B. Issues1. The meeting was called to consider: (a) a memorandum from Mr. Hopperto Mr. Stern dated February 14, 1985 setting out a revised lending strategyfor Bangladesh; and (b) an Initiating Memorandum for the proposed IndustrialSector Credit submitted to the Loan Committee under Mr. Cheetham's memorandumof February 25, 1985. As a basis for its agenda the Loan Committee hadbefore it Mr. Dubey's memorandum to the Loan Committee, dated February 28,1986.C. DiscussionRevised Lending Strategy2. The Region recalled that the series of 13 Imports Program Credits(IPCs) since Bangladesh's independence had been important vehicles not onlyfor transferring much needed fast-disbursing program type assistance toBangladesh, but also for conducting the country dialogue on a variety ofcritical policy issues. The Region had recently reviewed the range of policyissues likel to constitute the main focus of the country dialogue during thenext five years and had concluded that there were a number of policy andinstitutional issues in the industrial, energy and education sectors whichmight most suitably be addressed through the vehicle of sector credits.However, the Region foresaw other macro-economic and cross-sectoral policyissues, e.g. resource mobilization, public investment programming, possiblyfinancial sector issues, and public administration policies, for which IPCsseemed a more suitable instrument. The Region thus proposed a revised lendingstrategy comprising a mix of sector credits and IPC operations for the pur-poses of conducting the policy dialogue as well as transferring fast disburs-ing resources.3. The Loan Committee considered that the series of sector creditsproposed by the Region constituted an acceptable approach to addressing thesectoral policy issues identified in the Region's memorandum. However, theCommittee questioned whether there was justification for continuing IPCs. TheGovernment should, as a matter of sound economic management, be taking stepsto formulate a sound public investment program and to introduce measures toincrease domestic resource mobilization; action to improve macro-economicmanagement did not, therefore, constitute a convincing case for IDA financialsupport through IPCs. The Region noted that the revised lending strategy wasbased on a gradual phase-out of IPCs; this would be less disruptive to theprogram than an immediate termination of IPCs. The Committee recognized theneed for an instrument through which to address cross-sectoral issues andthat it might prove difficult to transfer a sufficient level of program typeassistance to meet Bangladesh's reasonable needs, if reliance was placedsolely on sector credits. One possibility might be to consider StructuralAdjustment Lending (SAL) in substitution for IPCs. For this, the countryneeded a medium-term development strategy which would hold out the prospectof a significant reduction in deficit in the external current account over-3-the next few years so that Bangladesh could over time reduce its reliance onprogram assistance; this strategy would also need to include a satisfactorypublic investment program but identify policies which could lead to increaseddomestic resource mobilization in both the public and private sectors.4. The Committee (a) requested the Region to prepare over the next yeara medium-term development strategy along the lines indicated in paragraph 3above; this strategy should be discussed with the Government as a basis forimplementing an adjustment program; (b) endorsed the Region's proposedapproach to sector credits, although requested the Region to plan alternativelending instruments to IPCs (e.g. SALs) in support of macro-policy reform andas a means of transferring fast disbursing resources to Bangladesh;(c) endorsed the Region's proposals for up to 40% of IDA lending commitmentsto be in the form of fast disbursing non-project operations, provided theGovernment in due course put in place a medium-term adjustment programdesigned to gradually reduce the external current account deficit; and(d) endorsed the Region's proposal that the proceeds of sector credits couldbe utilized for general imports.Resource Mobilizaton5. Loan Committee members felt that the present level of domesticsavings (around 5% of GDP) was unsatisfactory and that the country needed todemonstrate improved performance over the medium term. The Region pointedout that there were obvious limits to increased mobilization in a countrywith a largely subsistence economy. The primary sources of potential revenuewere from taxing domestic consumption or production incomes or certain assetse.g. land, and improved cost recovery. The Region had initiated sector workin FY86 and preliminary findings indicated that raising revenue from the landtax was constrained primarily because of poor land registration data, dif-ficulties in differentiating between land of widely varying value and theweakness of the Ministry of Local Government collection administration.However, there might be a scope for increasing tax revenue from agriculturalincomes. Further study would also be made of the potential for increasingrevenue from excise duties, presently accounting for about 20-25% ofbudgetary revenues. Also, while there had been some improvement in costrecovery and reductions in subsidies in recent years, more could be achievedin the direction of economic pricing of goods and services. On privateresource mobilization, the Region pointed out that interest rates were posi-tive in real terms and that the real problem was in loan recovery.Industrial Sector Credit6. The Loan Committee generally endorsed the policy recommendationsoutlined in the Initiating Memorandum and summarized in Annex I thereof,subject to the conclusions summarized below. The Committee underlined theneed to accomplish irreversible changes in the policy environment, par-ticularly in the area of de-regulation, to ensure that policy changes willbe maintained in the longer run.-4-Investment Sanctioning7. Several members of the Loan Committee questioned the need for con-tinuing the Investment Schedule and having a "discouraged" list ofindustries. The Region pointed out that in view of very weak financialinstitutions, the "discouraged" list would serve a useful purpose in supply-ing information to the financial institutions; however, it would not bebinding on them. The Region pointed out that a rapid dismantling of invest-ment regulations without significant reform in other areas might lead toinvestments that have high financial but low economic returns. The LoanCommittee agreed that broadly parallel action is desirable, and that mutuallyreinforcing reforms should be undertaken in related areas; however, it wouldbe desirable to try to reach an understanding with Government on a program toeventually phase out the Investment Schedule. The Loan Committee alsoemphasized the need to agree on a precise definition of a "free sector" andsuggested that the Region try to reach agreements with GOB on a time-phasedprogram to increase the number of free sectors.Private Sector Response to Liberalization8. It was suggested that, in view of the very limited response byprivate investors to the Export Processing Zone (EPZ), there were risks thatthe proposed policy reformt might not achieve their objectives. The Regionaccepted the existence of such a risk; however, it pointed out that therewere a number of problems, e.g. lack of autonomy, poor administration,associated with the EPZ which should not be regarded as indicative of thepotential for promoting exports; a better example would be the remarkableexpansion of the garment manufacturing industry, which provided the model fora number of the policy reforms proposed in the Initiating Memorandum.Tariff and Import Regime9. Some members of the Loan Committee considered that the dual exchangerate system should be unified and asked the IMF representative whether atimetable had been agreed under the recent Stand-By Arrangement (December1985-June 1987) for the unification of these markets. The Fund repre-sentative said a timetable had not been agreed but the GOB was moving towardsunification by increasing the proportion of imports under the secondarymarket. The Loan Committee endorsed this policy and considered that under-standings should be sought by the appraisal mission with GOB that an increas-ing share of total imports should be financed through the secondary market;to assist this process the proceeds of the credit should be used to financeimports through the secondary market.10. On the issue of import restrictions it was suggested that in view ofthe revenue constraints facing the Government, first priority might be givento replacing QRs with tariffs; a program for the tariff reductions could bedeveloped in a second phase. The Region pointed out that the move to a nega--5-tive list was very recent and that the list itself was being revised by theGovernment in light of appeals by the importers. The Loan Committee concludedthat priority should be given to phasing out the restricted list, whichcontains industry and firm specific import restrictions, and the associatedregulatory administration. The Committee recognized that revenue considera-tions might limit the pace at which tariff reductions could be made andaccepted that reforms needed to be undertaken in parallel with alternativeresource mobilization efforts; initially, emphasis should be placed onrevenue neutral rationalization of the tariff system.Public Sector Industrial Enterprises11. The Committee noted the extensive denationalization that had takenplace in Bangladesh and enquired about potential for further denationaliza-tion under the proposed credit. The Region replied that extensive and veryrapid denationalization had caused problems in the financial sector, par-ticularly with regard to settlement of financial liabilities and a period ofconsolidation was desirable. The Committee concurred but considered that itwould be desirable to have a general policy statement by Government, perhapsset out in the Development Policy Letter, regarding its future intentionswith regard to denationalization of public sector assets.Financial Sector12. In view of the severity of the problems of the public sector finan-cial intermediaries described in the Initiating Memorandum, some members ofthe Loan Committee asked what measures were being taken to improve theseinstitutions structurally, while others suggested that it might be preferableto abandon the public sector institutions in favor of the privately ownedbanks. The Region explained that an Action Program aimed at strengtheningthe development finance institutions had been agreed between IDA, KfW, ADBand GOB and its implementation was now underway; the private banks were stillrelatively new and very small; they also suffered from a variety of problemsof their own. Improvement in the performance of both public and privatesector institutions is dependent on broader systemic reform with respect tosuch matters as the autonomy of the bank system, the quality of Central Banksupervision and the legal recourse of lenders to collect from borrowers. Astudy of the financial system was planned for FY87 and based on this work itwas hoped to formulate a program of further financial reform to be supportedthrough future lending operations. The Region also pointed out that,although no proceeds of the proposed industrial sector credit would be chan-nelled through financial intermediaries, the further processing of theindustrial credit as well as future agricultural and industrial creditprojects would be contingent on significant improvements in the financialsector, including recovery rates. The Loan Committee endorsed the Region'sproposals in the Initiating Memorandum making the processing of theIndustrial Sector Credit conditional upon improvements in the recovery per-formance by the public sector financial institutions.-6-Appraisal13. The Loan Committee agreed that the appraisal mission should proceedto Dhaka on the basis of the Initiating Memorandum taking into account obser-vations made in the Loan Committee meeting.Cleared with: Members of the Loan CommitteeMessrs. Cheetham, Dubey, El Serafy, GouldAJClift:c

Minutes of Loan Committee Meeting to Consider the Initiating Memorandum for the Proposed Industrial Sector Credit for Bangladesh Held on March 4, 1986 in Room E-1208

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Minutes of Loan Committee Meeting to Consider the Initiating Memorandum for the Proposed Industrial Sector Credit for Bangladesh Held on March 4, 1986 in Room E-1208

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