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Bangladesh: Second Industrial Sector Adjustment Credit (Credit 2427/0 and 2427/1-BD)

The Implementation Completion Report (ICR) for the Bangladesh Second Industrial Sector Adjustment Project ( Credit 2427/0 and 2427/1-BD in the amount of US$100 million equivalent, approved in FY93 and closed in FY95) was prepared by the South Asia Regional Office, with Appendix B contributed by the Borrower. An amount of US$50 million, corresponding to the second tranche, was cancelled at closing, in December 1994, a year after the original closing date.

The credit was designed to support and assist the Government of Bangladesh's continued efforts in import liberalization, export promotion and private sector development. This reform effort focused on a reduction in tariffs and the removal of overly complex import procedures and quantitative restrictions. In addition, the project aimed at improvements in the country's duty drawback schemes for exporters and strengthening the institutional capabilities of the Export Promotion Bureau. The project also sought to improve the environment for private sector development through deregulation, rationalization of fiscal incentives and a progressive reform of business laws and the legal process.

Most of the project objectives were substantially achieved, except for the removal of quantitative import restrictions which were a condition of second tranche release. Significant reductions in import duties have occurred, and the progressive reduction continued after the project's closure. Customs procedures were streamlined and the vast majority of import controls and quantitative restrictions were removed. Investment regulations and exchange controls were liberalized, operational improvements were made in the duty drawback system and the special bonded warehouse system was extended to cover all potential exporters. Despite these advances, some quantitative restrictions remain for important sectors such as textiles, and the value added tax system still does not treat imports and domestic goods equally. Progress on institutional development of the investment and export promotion agencies (EPB) was deficient and little was achieved in legal and judicial reform. There was a delay of over one year in completing the project's effectiveness conditions, which ultimately caused the closing date to be extended to December, 31 1994. The second tranche of this adjustment operation was not released because of the government's inability to remove critical quantitative restrictions in the second year of the program. Throughout the period of the loan, the macroeconomic situation continued to improve, with growth of over 4 percent per annum and a more sustainable balance of payments position. Exports grew by 42 percent in nominal terms during the life of the project.

The ICR rates the project outcome as satisfactory, sustainability as likely, institutional development impact as moderate and Bank performance as satisfactory. OED agrees with these ratings because the cancellation of the second tranche effectively implied a restructuring of the project, and because the reform agenda was front-loaded, with a large number of improvements already implemented at the time of effectiveness.

The ICR is highly satisfactory, and provides an accurate assessment of the difficulties encountered in project implementation and the progress in the reform agenda. Three main lessons were identified. First, realistic allowance must be given in implementation schedules to overcome an entrenched bureaucracy's ability to thwart essential institutional aspects of policy reform. Second, in complex projects involving reform in many areas of government, the full commitment of all senior government leaders is necessary. Finally, the ICR concludes that in comprehensive and complex reform programs encompassing multiple sectors, this reform agenda should be supported by separate operations, either in series or parallel, rather than one complex operation. No audit is planned.

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