Morning brief: LDC transition back in the limelight

The chief adviser weighed in on Bangladesh's looming graduation from least developed country (LDC) status yesterday. 

Meanwhile, Salman F Rahman, a close aide to former prime minister Sheikh Hasina, was slapped with a life ban from the capital market.

LDC transition: A high-level review meeting on the country's preparation to graduate from least developed country (LDC) status to a developing country was held yesterday, with Chief Adviser Muhammad Yunus in the chair.

The progress of implementing 16 decisions was discussed during the meeting. 

"We have to do these things in our own interest, in the interest of our economy. We have to find ways to move forward by changing the policies and laws that are not working. These are fundamental issues. We have to do these things for our transition," Yunus said. 

Have to move at full speed towards LDC graduation: CA

Why it matters: For decades, Bangladesh's garment sector has thrived under duty-free and quota-free access to the European Union and other key markets. 

• RMG exports have steadily accounted for over 80% of the nation's annual export earnings, reflecting an extreme reliance on these exports to earn foreign exchange. 
• However, upon graduation, tariffs could rise from zero to as high as 12%, making Bangladeshi goods pricier.
• This is just one of the duty privileges afforded to LDCs that Bangladesh now enjoys. In fact, this tiny nation alone accounts for more than 67% of the benefits extended to LDCs.
• However, when the country graduates in November next year, it will see most preferential benefits evaporate.
• According to a study by the World Trade Organisation, Bangladesh is projected to lose around 14% of its exports.
• Apart from the impact of direct tariffs, the industrial sector, especially the garments industry, will face consequences, with workers losing their jobs if exports fall.
• The country will also face higher borrowing costs as soft loans and grants will reduce. LDCs get low-interest loans from the World Bank, IMF, and Asian Development Bank, but, post-graduation, it will be based on market rates, increasing the nation's ballooning debt burden.
• Pressure will also ramp up to improve labour and environmental standards. If European countries make ESG standards mandatory and Bangladesh fails to comply, exports to the bloc may immediately drop by around 30%, according to the South Asian Network on Economic Modelling.
• Another of the most important criteria for the transition, macroeconomic stability, remains a far cry. Although inflation has somewhat stabilised, finally falling below 9% in June, it had hovered above that mark for the 27 months prior.
• Additionally, foreign direct investment inflows have been on a downward trend for four years.

The bigger picture: While the EU and some countries such as Canada, Australia and the UK have already agreed to continue LDC-linked benefits for Bangladesh for three more years after 2026, the lack of a broader framework of trade agreements may prove to be the Achilles' heel.

• As duty-free export facilities are eroded, the onus is on Bangladesh to sign trade pacts with other countries in order to keep the preferential market access. 
• Although discussions with several countries have been ongoing for a long time, Bangladesh's only notable bilateral trade achievement has been a Preferential Trade Agreement (PTA) with Bhutan in 2020, providing duty-free access for selected products. 
• Although it is also involved in some regional deals, such as the South Asian Free Trade Area (SAFTA) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), the country is yet to sign comprehensive FTAs with major trading partners like the EU, the US, or China. 
• Without them, Bangladeshi exports often face higher tariffs compared to competitors, such as Vietnam, which benefits from numerous FTAs, including the CPTPP and EU-Vietnam FTA.
• As Bangladesh prepares to graduate from LDC status in 2026, the loss of trade privileges under the Generalised System of Preferences (GSP) will exacerbate this challenge.
• However, such deals would also come at a cost. For example, if free trade agreements (FTAs) are signed, the country may lose a major source of revenue in the form of import duties.
• The country also needs to improve the investment climate by addressing outdated regulations, gaps in infrastructure, and the absence of streamlined processes. 
• Alongside export diversification, market diversification is another need of the hour, with the exploration of export markets in emerging economies in Asia, Africa, and Latin America a major talking point.
• Experts also opine that skills development and technological advancement are key to overcoming LDC-graduation related challenges.
• However, Bangladesh has the third-lowest average education expenditures as a percentage of GDP from FY 2016-FY 2023 among 38 LDCs, only better than Haiti and Somalia, according to The World Bank, making this more difficult to attain.

Shibli, Salman F Rahman banned from capital market for life

The Bangladesh Securities and Exchange Commission (BSEC) imposed a lifetime ban on Salman F Rahman, former IFIC Bank PLC chairman, vice-chairman of Beximco Group and a special adviser to deposed prime minister Sheikh Hasina.

In a rare act of self-correction, the regulator also barred former BSEC chairman Shibli Rubayat-Ul-Islam for life for procedural violations tied to the issuance of bonds.

Why it matters: Salman was a very controversial figure in Bangladesh, with widespread rumours of him engaging in rampant loan fraud.

• The Beximco boss, one of Sheikh Hasina's closest aides, held so much influence in the financial sector that his recommendations were difficult for anyone to disobey.
• After the political changeover in August last year, Salman was accused of embezzling Tk 1,100 crore from IFIC Bank. There are also allegations that he would weaponise his close ties to the PM to order other banks to approve loans for various individuals and fictitious companies.
• At the same time, Salman was active in the stock market. Although his illicit dealings in the capital market have not been fully uncovered, investor deception was a common theme, especially when it came to the issuance of bonds under the IFIC banner.
• The securities regulator uncovered irregularities found in raising Tk 1,000 crore by selling the IFIC Amar Bond.
• The commission also found evidence of regulatory violations and abuse of power in raising Tk 3,000 crore through the Beximco Green Sukuk, often referred to as a Shariah-compliant bond.
• Despite misgivings about these bonds, they faced little hurdles in getting regulatory approval.
• That was made possible by Shibli, who quickly became known for missteps after assuming the position in 2020.
• Under his leadership, the BSEC took several flawed decisions, including a stop-start floor price policy that wreaked havoc on the market and the approval of several overpriced and weak companies for IPOs. Allegedly to satisfy political or business giants, he would also often let "pump-and-dump" schemes fly under the radar.
• It is alleged he played favourites among subordinates too, favouring certain brokers, syndicates and business groups.

Zoom in: In Bangladesh, the brazen impunity of manipulators has led to market rigging becoming endemic.

• Collusive behaviour between institutional investors, high-net-worth investors and brokerage firms drove the majority of the volume of shares traded, leaving the general public with little input.
• Most commonly, they would execute circular trades, where some investors sell shares and their accomplices buy them up, conjuring a series of trades to create the appearance of active trading. 
• For example, over the years, junk stocks have repeatedly shown up in the top gainers or top turnover lists. The BSEC investigated such manipulation, but only gave slaps on the wrists to wrongdoers. 
• As a result, those with ulterior motives are encouraged to game the system.
• Due to concerns over corrupt practices and a lack of transparency, foreign participation in the capital market remains insignificant.
• Even big-ticket mutual funds were not spared, as vested groups slowly took them over. Specifically, allegations of embezzlement of unit holders' funds were made against the top two institutions in the closed-end mutual fund sector. 

However, the BSEC looked the other way and, in a move that devastated general investors, extended the duration of all closed-end mutual funds by 10 years. 

• The white paper on the state of the economy, a document commissioned by the interim government, mentioned:
• "The BSEC, tasked with the job of regulating the capital market, has failed in the job of accountability before vested group pressure. 
• "Decisions… as taken by the commission, fall short of regulatory best practices. This has resulted in the erosion of investor confidence in the system."
• "Excessive government tutelage held back market development and constrained responsible institutions from carrying out their mandates. This, combined with strong vested interest, resulted in an entrenched status quo of gambling and swindling."