WB is betting our regional trade can go up 93% by improving connectivity. But is infrastructure really the main problem?

Bangladesh is set to graduate to the status of a developing nation in 2026. Since the creation of the Least Developed Country (LDC) category in 1971, only six countries have managed to leave it. 

Even though it will be an incredible achievement, it has its fair share of challenges. If Bangladesh fails to come up with strategies to devise a smooth transition, our economy might be in for a bumpy ride.

Washington-based lender World Bank (WB) believes they have come up with a plan to ease this transition. They have kick-started a $1.4 billion project to speed up trade and transport connectivity in Eastern South Asia. 

According to WB's estimates, Bangladesh's regional trade can shoot up by an astounding 93 %, thanks to the project. But whether the project can really live up to its promise remains to be seen.

The most common economic challenge that every LDC graduate goes up against is the loss of LDC-specific international support measures, e.g. preferential market access. 

Besides receiving duty-free trading facilities, Bangladesh is currently also enjoying World Trade Organisation's generalised system of preferences (GSP), this too will come at end after LDC graduation.

The termination of preferential access in key markets upon LDC graduation could lead to an annual drop in exports by as much as 11 %, which stands at around $6 billion. According to the World Bank, this can be offset by regional trade with India, Nepal and Bhutan.

The state of regional trade

In a press release by the World Bank, its Vice President for South Asia Hartwig Schafer said, "Regional trade offers enormous untapped potential for South Asian countries. Today, regional trade accounts for only 5% of South Asia's total trade, while in East Asia it accounts for 50%. 

South Asia can boost economic growth significantly and create opportunities for millions of people by increasing regional trade and connectivity." 

In 2020, the total combined GDP of ASEAN members was US$3.0 trillion, leading ASEAN to collectively become the fifth largest economy in the world.

During the last two decades, ASEAN total merchandise trade has multiplied by almost 3.5 times, reaching over US$2.6 trillion in 2020. 

On the other hand, trade among South Asian countries currently totals just $23 billion - far below an estimated value of at least $67 billion. Border challenges mean it is about 20% cheaper for a company in India to trade with Brazil or Germany, instead of a neighbouring South Asian country.

"According to the World Bank, the total amount of regional trade (in South Asia) in 2019 amounted to $25 billion. But according to their projection, it should have been around $73 billion," said  Dr Zaidi Sattar, chairman, Policy Research Institute (CRI) and ex-senior economist, World Bank. 

Dr Zaidi Sattar. Sketch: TBS

"Moreover, intra south Asia only makes up 5% of their total trade. It was 5% 25 years ago, it is 5% now. Regional trade is not increasing as a proportion of total trade. South Asia's trade with the rest of the world has increased manifolds but regional trade as a proportion of total trade has remained 5%," he added. 

The veteran economist also stated these stats only represent official trade. Unofficial trade happens between Bangladesh and India, even India and Pakistan.

In the first phase of the project mentioned earlier, the WB will provide $1.03 billion, with the rest coming in from the governments of Bangladesh and Nepal. India and Bhutan will be brought on to the project later.

Poor infrastructure is the biggest roadblock

According to WB, infrastructure is the biggest barrier to trade flourishing among the South Asian neighbours. The project dubbed Accelerating Transport and Trade Connectivity in Eastern South Asia (ACCESS) in Bangladesh seeks to do just that.

This project will upgrade the 43 km two-lane Sylhet-Charkhai-Sheola road to a climate-resilient four-lane road. World Bank officials believe this will cut down travel time by 30%, facilitating trade in the region. 

"This is a unique project taken up by the WB. The World Bank usually does not focus on projects that aim to develop communication, construct roads etc. They are usually more focused on increasing the efficiency of ports, decreasing the cost of trade by ameliorating non-tariff barriers etc," said Dr Selim Raihan, professor, Department of Economics, University of Dhaka, and the executive director of the South Asian Network on Economic Modelling (Sanem). 

Selim Raihan, executive director, Sanem. Photo: TBS

"In this project, they seem to be investing in a four-lane Dhaka-Sylhet Road, but this will likely be a small portion of the project," he added. 

Modernisation of ports

The project aims to support digital systems, infrastructure, and more streamlined processes at Benapole, Bhomra, and Burimari land ports, the three largest land ports in Bangladesh handling approximately 80% of land-based trade.

According to Dr Sattar, "Roughly 50% of Bangladesh-India trade takes place via land borders. The capacity of land borders is very limited." 

"When a truck from India arrives it has to be unloaded at the port, then the goods need to be loaded on to another truck in Bangladesh, then it heads for its destination. This is highly costly and time consuming, this is not a 21st century trading arrangement," he explained.  

The project seeks to bring this trading arrangement up to the 21st century standards. Electronic tracking of truck entry and exit, electronic queuing and smart parking would be installed. 

This will enhance transparency and reduce congestion and truck idling, resulting in faster border clearance time and most importantly, greater cargo throughput.

Harmonisation of the customs process

Rapidly growing trade volumes have overburdened the Custom House Chattogram, which was initially constructed in 1920. The customs house is of vital importance to Bangladesh's trade, processing 90% of the country's import and export declarations (13,000 per day) and servicing more than 45,700 unique traders per year.

Another agenda of this project is constructing a state of the art green-building certified, resilient Custom House Chattogram.

"It is also very clear that there is no harmonisation of the customs process. Whether I am exporting or I am importing, I have to go through the customs processing twice. First I have to go through customs processing in India, then again in Bangladesh," said Dr Sattar.  

He added, "That this is cumbersome, time consuming and too costly. And the end consumers are paying the price for this."  

This project seeks to tackle this issue by supporting the development and improvement of IT-enabled services for trade and reducing touch points and human interaction. 

"Given the hassle that traders have to go through to get customs clearance, improving the efficiency of land ports will reduce the cost of trade and make trading more efficient. As a result, the volume of Bangladesh's intra-regional trade should rise," said Dr Raihan.

Pipe dream or attainable goal?

The Bangladesh-India-Nepal Motor Vehicles Agreement (MVA) was signed on June 15, 2015 by the transport ministers of Bangladesh, Bhutan, India and Nepal, but it has not taken off yet. 

Experts believe the gaps holding back the implementation of MVA include restrictions on visa, entry and exit points and routes accessible by vehicles. However, only infrastructures will not solve these issues, countries also need to trust each other enough to let each other have more access, a WB study shows.

So, assuming infrastructure is the only issue plaguing trade in south Asia is too simplistic. There are other issues also at play here.Constraints here go way beyond the brick and mortar. 

" A study shows it costs India less to trade with Brazil than Bangladesh. Brazil is in Latin America. So these costs are not just tariffs. There are lots of other complex issues at play here," said Dr Sattar.

The list of constraints include protective tariffs, real and perceived nontariff barriers, restrictions on investments, and a broad trust deficit throughout the region.

"High tariff is one of the reasons we do not have enough trade amongst South Asian countries. After we graduate from LDC status, if we do not have any trade agreements in place with India we will have to pay higher tariffs. But if we compare tariffs, Bangladesh has higher tariffs than India," said Dr Sattar.

"So, if we want to go for a Free Trade Agreement or Comprehensive Economic Partnership Agreement (CEPA) with India, the first agenda on the table should be tariffs," he added. 

Prime Minister Sheikh Hasina is slated to visit India from 5 to 7 September and it is being speculated that the announcement of starting formal negotiations for the signing of CEPA between the two countries might come then.

"Both Bangladesh and Nepal have high-tariff regimes. However, there are many non-tariff barriers and certification issues with the Bangladesh Foreign Trade Institute," said Dr Raihan. 

There have been many researches regarding why regional trade has not taken off in southern Asia. Talks have taken place at various levels.

"One big reason is the fact that South Asian countries discriminate against their neighbouring countries. They favour trade with the rest of the world more than they favour trade with their own neighbours. It is a mind-set issue," said Dr Sattar. 

"The boundaries that were created during 1947, have now turned into economic barriers," he added.

Experts believe that if trade with our neighbours increases we will be able handle the challenges of LDC graduation and make up for the business we might end up losing. 

But according to Dr Raihan, "There are many bilateral political discontent among the South Asian countries that go beyond infrastructure, which needs to be settled to increase intra-regional trade and help it reach its true potential."