This Selected Issues paper on Bangladesh reviews institutional developments in the foreign exchange market since 2002. In 2002, there have been several aspects of the financial system and exchange market in Bangladesh that posed impediments to a floating exchange rate system. The financial system has been dominated by state-owned commercial banks with assets amounting to about 24 percent of GDP and accounting for some 46 percent of industry net assets. Market interventions have been largely confined to building foreign exchange reserves and to countering rare disorderly market conditions.


This Selected Issues paper on Bangladesh reviews institutional developments in the foreign exchange market since 2002. In 2002, there have been several aspects of the financial system and exchange market in Bangladesh that posed impediments to a floating exchange rate system. The financial system has been dominated by state-owned commercial banks with assets amounting to about 24 percent of GDP and accounting for some 46 percent of industry net assets. Market interventions have been largely confined to building foreign exchange reserves and to countering rare disorderly market conditions.

II. Export Diversification and External Competitiveness1

A. Introduction

1. Diversification is an important element of the economic development process. A broader economic base increases the opportunity for inclusive growth and moderates the impact of shocks on growth and living standards. Empirical evidence shows that economies tend to have a long period of diversification before beginning to specialize again at a relatively high level of income—around US$10,000 GDP per capita in 1985 prices (Imbs and Wacziarg, 2003). Diversification is also part of the process of economic discovery (Hausmann and Rodrik, 2003). Introducing and developing new products allows economic agents to learn about cost structures and comparative advantages. Hausmann and Rodrik show that the rate of introduction of new products is closely aligned with growth performance. The type of products that are introduced is also important—countries that diversify into products more associated with higher-income countries tend to have more rapid growth.

2. Export diversification is also associated with strong economic performance. There is little in the underlying theory that suggests that diversification in exports is better than domestic diversification. However, the main economic success stories of recent times (East Asia, China) have been strongly associated with rapid export growth and diversification. Low-income countries with growing import needs, such as Bangladesh, require growth and diversification in their exports to maintain a stable external position. Exports are also often focused on in the literature because of the better quality of trade data.

3. This chapter assesses how Bangladesh has fared in export growth and diversification and assesses its future prospects. Bangladesh still has lower trade relative to GDP than other countries in the region (Table II.1) and its exports, while growing healthily, have remained highly concentrated in the garments sector (Figure II.1). Given, the garment sector’s importance, the chapter begins by updating previous staff analysis of garment sector competitiveness, with a particular focus on diversification.2 It then investigates whether broad sectoral aggregates mask progress in product-level diversification and compares Bangladesh’s performance with peers in South and East Asia. The chapter then briefly reviews data on Bangladesh’s competitiveness to assess its potential for improving its export growth and diversification, and finally assesses policy priorities for improving export performance. The main conclusions are that although Bangladesh has not yet been very successful with diversification, it has considerable potential to improve provided that macroeconomic and political stability are maintained and key structural reforms implemented.

Table II.1.

Bangladesh: 2007 Trade Openess in Low-income Asia

(Trade in Goods and Services in Percent of GDP)

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Source: IMF Asia Pacific Regional Outlook Data Supplement.
Figure II.1.
Figure II.1.

Bangladesh: FY08 Export Composition

Citation: IMF Staff Country Reports 2008, 335; 10.5089/9781451804270.002.A002

B. Growth and Diversification in Garments

4. Bangladesh’s garment export performance was mixed in 2007 (Table II.2). Exports to the European Union (EU)—by far Bangladesh’s largest market—fell by 5 percent in 2007, although market share was retained because overall EU garment imports fell at about the same rate. Bangladesh’s major competitors for garment exports, on the other hand, managed to increase exports to the EU and capture additional market share. Bangladesh fared somewhat better in the United States (US) market, with positive growth of garment exports and some increase in its market share. Once again, however, some of its major competitors—in particular Cambodia, China, and Vietnam—performed better in a growing U.S. market. Preliminary trade data available for 2008 show that Bangladesh is now losing market share and exports to the EU, while its main competitors continued to increase exports and gain market share. In the U.S. market, which is now shrinking, Bangladesh and Cambodia made modest gains in market share, while China and Vietnam continued to gain at a strong pace.

Table II.2.

Bangladesh: Comparator Market Shares in Major Garment Export Markets

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Sources: Eurostat; US Department of Commerce; Statistics Canada; and Fund staff calculations.

5. The Canadian market provides a cautionary note for Bangladesh. It is the only significant market for garment exports in which Bangladesh has unrestricted duty free access and in which China does not face any garment export limits. The 2007 Canadian data show Bangladesh’s market share was falling while those of Cambodia, China, and Vietnam were steadily rising. Trade data for the 12 months to June 2008 show that in a now shrinking Canadian market, Bangladesh has maintained its market share while those of Cambodia, China, and Vietnam continued to rise.

6. Diversification has occurred through increased use of domestic inputs. Strong domestic backward linkages have now developed for knitwear and sweater production, with more than 70 percent of producers procuring most, if not all, of their yarn from spinners within Bangladesh.3 Woven garment producers, on the other hand, continue to rely on imported cloth due to the small quantity of woven cloth produced domestically, although this domestic supply is gradually increasing. A significant shift in input supply for both knitwear and woven producers over the past several years has resulted from the rapid expansion of domestic production of accessories such as buttons, zippers, and labels that match the quality of imported accessories.

7. The high domestic content of knitwear has allowed it to overtake the woven sector. The strong domestic linkages in the input supply chain have promoted knitwear’s growth—exports surpassed woven exports for the first time in FY2007/08 (Figure II.2). This reflects EU, and to some extent Canadian, Rules of Origin (ROO) that favor products with high domestic content.4 In the minds of retailers, buyers and producers, the strong domestic input supply chain for knitwear means shorter lead times and this enhances knitwear’s competitiveness. Within the knitwear sector, sweaters have emerged as a major export product over the past several years with rapid growth in the number of sweater factories.

Figure II.2.
Figure II.2.

Bangladesh: Woven and Knitwear Export Performance, 2002–08

Citation: IMF Staff Country Reports 2008, 335; 10.5089/9781451804270.002.A002

Sources: Bangladesh Export Promotion Bureau; Fund staff calculations.

C. Export Diversification

8. This section uses disaggregated trade data to investigate how Bangladesh has fared in export diversification. Trade data provide highly disaggregated information on exports. Low-income countries, however, often have significant data gaps at lower levels of disaggregation. This paper’s analysis therefore takes place at the 4-digit level.5 This is sufficient to capture distinctions between final products (for instance fridges and freezers), but will not capture specialization in the manufacture of, for instance, specific types of machinery or electronics components. While these distinctions are an important element of analysis of the growth of regional production networks in East Asia (see, for instance, IMF 2007), they are somewhat less relevant to the labor-intensive operations, in which the comparative advantage of Bangladesh lies.

9. Bangladesh’s performance is compared against competitors in South and East Asia. The analysis looks at six countries: Bangladesh, Cambodia, Nepal, Pakistan, Sri Lanka, and Vietnam. The countries were chosen due to their regional proximity and the similarity of their export bases. Export similarity indices (Table II.3) show that Bangladesh’s exports are most similar to Cambodia and Sri Lanka, due primarily to the dominance of garments in these countries’ export portfolios.6

Table II.3.

Bangladesh: Export Similarity Indices

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10. The analysis focuses mainly on the number of products and their life span rather than their value. The main focus of the analysis is the extent of diversification in the 1990–2006 period—chosen primarily because of data availability. The underlying assumption is that diversification is required to underpin the ultimate objective of sustained growth in the value of exports. Where relevant, however, the analysis does look at the extent to which diversification has contributed to export growth.

11. Bangladesh expanded its number of export products well by South Asian standards, but less than East Asian competitors. All the countries in the study expanded their overall export base during the period, on average doubling their number of products (Figure II.3). Bangladesh increased its total number of products from 366 to 673, an increase of around 80 percent. This was a faster rate of increase than Pakistan and Sri Lanka, but slower than Nepal and considerably slower than Cambodia, which quadrupled its number of products (albeit from a very low base). Vietnam, which as a large country starting from a similar export base, is perhaps the most interesting comparator, increased at twice the rate of Bangladesh. The pattern is magnified in terms of value of exports, with Vietnam and Cambodia increasing at much more rapid rates than Bangladesh, which grew at a faster rate than the other South Asian countries (Figure II.4).

Figure II.3.
Figure II.3.

Bangladesh: Number of Products Exported

Citation: IMF Staff Country Reports 2008, 335; 10.5089/9781451804270.002.A002

Figure II.4.
Figure II.4.

Bangladesh: Value of Products Exported

(US$ billions)

Citation: IMF Staff Country Reports 2008, 335; 10.5089/9781451804270.002.A002

12. Bangladesh’s exports have, however, become more concentrated in value terms. All of the countries in the sample have high concentrations of exports when analyzed by value, and Bangladesh and Cambodia are more concentrated than any of the other countries (Table II.4). For instance, in Bangladesh the top 10 export products (which for Bangladesh represent around 1 percent of total products) account for 70 percent of total export value. Bangladesh, in contrast to all the other countries in the sample, increased its concentration over the period.7

Table II.4.

Bangladesh: Concentration of Exports

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13. The sectoral composition of Bangladesh’s diversification was comparable to that in the other countries. New products were added in a broad range of sectors by all of the countries in the sample.8 Bangladesh was broadly in the middle range of the number of new products in categories that suggest higher-value added—electronics, machinery, and pharmaceuticals—generally performing better than South Asian peers, but behind Vietnam and Cambodia (Table II.5).

Table II.5.

Bangladesh: New Export Products 1991–2006

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14. Bangladesh’s new products have a relatively poor record of retention. Table II.6 shows a number of different indicators of the likelihood of a product remaining within the export mix once it has been introduced. The process of economic discovery described in the introduction suggests that the failure of a new product is not necessarily a bad thing—it contributes to the knowledge of comparative advantage. However, the fact that Bangladesh’s new products tend to have a shorter duration in the export portfolio than most of its competitors and that they have a worse record in gaining market share supports the initial hypothesis that, as yet, export diversification in Bangladesh has not been fully successful.

Table II.6.

Bangladesh: New Product Retention

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D. Prospects for Export Diversification

15. Opportunities for export diversification are growing. Globalization has been closely associated with the “unbundling” of the production process (Baldwin, 2007). Offshoring of the production process has been succeeded by fragmentation of it. Reduced communication costs and better production management have allowed corporations to increasingly separate different aspects of the production process and locate them in different countries, thereby enabling comparative advantage to work at a much finer level of detail. This fragmentation has been instrumental in the establishment of the production networks of East Asia (Ando and Kimura, 2003), many of which have China as the final stage. However, as costs rise in China (and it moves up the value chain), there is a chance for other labor-abundant low-income countries to attract investment in assembly operations.

16. Improving competitiveness will be crucial in attracting investment in exporting industries. Bangladesh will be competing for market share and foreign investment with many other countries, including the countries discussed in this study, which have very similar export structures, and also with inland China and India. It is likely that the physical and cultural remoteness of Bangladesh and the other South Asian economies from the East Asian production networks that predominately currently use coastal China for assembly operations will work against their integration into those East Asian networks.

17. There are a number of factors that suggest that Bangladesh is well placed to expand its manufacturing exports. A key factor is its abundant and relatively low-cost labor force, which makes it an attractive destination for investors looking to locate assembly operations. Its success in the garments industry, which was the starting point in the industrialization process for many of the East Asian economies, will make it attractive to investors as will its growing domestic market and good access to the huge Indian market. These factors have already been internationally recognized; Bangladesh often appears in analyses of potential emerging markets—including Goldman Sachs’s Next 11 and JP Morgan’s Frontier Five.

18. Recent developments have shown tangible signs of this potential. For instance, Bangladesh has recently become an exporter of small oceangoing ships. This is a niche in the market that is not currently serviced by the major shipbuilding nations of China, Japan, and Korea. Bangladesh shipyards have received over the past year orders totaling $450 million from Denmark, The Netherlands, Germany, Japan, and Mozambique. Investors have also been looking at locating footwear and textiles factories and some electronics and agricultural machinery assembly operations in Bangladesh. The relocation of footwear production to Bangladesh may be spurred by the recent removal of the US GSP for Vietnam’s footwear manufacturers.

19. Bangladesh performs well on labor and some nonlabor operating costs (Table II.7). Attracting investment, particularly in the manufacturing sector, requires not only low labor costs, but also a competitive overall cost environment, including the costs of getting products to their final markets. While Bangladesh competes well on labor costs, it fares less well on access to affordable and reliable power and on transportation costs.

Table II.7.

Bangladesh: Indicators of Competitiveness

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2007 data.

Sources: Japan External Trade Organization, 2008.

20. The broader business environment is, however, mixed. Bangladesh ranks at 107 out of 178 countries on the World Bank’s cost of doing business index—broadly in the middle of the countries considered in this paper’s analysis, and slightly better than India, but worse than China (Table II.8). It performs very well on protecting shareholders—which, however, has not as yet seen the stock market become a major vehicle for financing investment in exports—but very poorly on securing property rights, particularly on enforcing contracts and registering property (Figure II.5).

Table II.8.

Bangladesh: Overall Doing Business Rankings

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Figure II.5.
Figure II.5.

Bangladesh: Ease of Doing Business Rankings (2008)

Citation: IMF Staff Country Reports 2008, 335; 10.5089/9781451804270.002.A002

21. The quality of governance is a deterrent to investment. Bangladesh scores poorly on the World Bank’s synthesis of indicators of governance, occupying, with Cambodia, the 18th percentile, below the low-income average of the 25th percentile and well below Vietnam (at the 36th percentile). Bangladesh has historically performed particularly badly on political stability and control of corruption (Figure II.6).

Figure II.6.
Figure II.6.

Bangladesh: Indicators of the Quality of Governance

Citation: IMF Staff Country Reports 2008, 335; 10.5089/9781451804270.002.A002

E. Outlook

22. Bangladesh’s export growth is likely to be concentrated in the garments and textiles sector in the short term. Although competition is becoming more intense, Bangladesh’s strong market position does not look likely to diminish in the short term. Despite the recent mixed performance, Bangladesh retained second position after China in global garment trade. There are, though, some risks, particularly related to the changing rules that govern access to the main markets for garments, including the expiry of U.S. and E.U. safeguard measures on China at the end of 2008. Recent years have seen Bangladesh make significant inroads into the closely related footwear and textiles markets that bode well for continued export growth in these areas.

23. Bangladesh has considerable potential to diversify its export base. Small-scale export of products across a wide range of sectors including agriculture, food products, and manufactures indicates an ability to diversify and compete in international markets. A considerable store of excess and low-cost labor represents a comparative advantage that can be leveraged to build new industries. Bangladesh’s proximity to India and good market access are also advantages. Although the distance from East Asia may inhibit substantive participation in that region’s production networks, continued progress in regional integration could see similar networks begin to emerge in South Asia. The authorities recognize the need to diversify their export base—their Export Policy 2006–09 gives the highest priority to expanding exports in six sectors: agro-products, light engineering, footwear and leather, pharmaceuticals, software, and home textiles.

24. Maintaining macroeconomic stability will be critical to promoting investment in all sectors. All investment, and particularly foreign direct investment that is likely to play a crucial role in building new export industries, relies primarily on expectations of a stable macroeconomic environment. Bangladesh’s sound recent record works in its favor, although many of its main competitors have similarly strong records. Maintaining stability, particularly with regard to keeping control of inflation, will be important in prolonging the steady increase in investment seen in recent years and opening the doors for much larger volumes of FDI. The maintenance of a flexible exchange rate regime that allows the real exchange rate to remain in line with economic fundamentals will also be key to maintaining competitiveness. Bangladesh’s REER has stayed broadly stable since 2006, while the other countries studied in this chapter have appreciated (Figure II.7).

Figure II.7.
Figure II.7.

Bangladesh: Real effective exchange rate (2000=100)

Citation: IMF Staff Country Reports 2008, 335; 10.5089/9781451804270.002.A002

25. A return to political stability and continued improvements in the quality of governance will also be important. A clearer political environment, which should hopefully be in place following the December 2008 elections, should assist the business environment. Continued progress on improving the quality of governance, particularly with regard to controlling corruption, will also be an important element in attracting high-quality investment.

26. Continued progress in structural reforms that reduce the overall cost of doing business will be critical in maintaining competitiveness. The agenda is huge and is wide-ranging in the Poverty Reduction Strategy Paper (PRSP) and the export policy documents. Special mention should be given, however, to a few key areas:

  • Power and infrastructure: Access to reliable and affordable power regularly appears at the top of the list of constraints to doing business in Bangladesh. Making improvements in this area is critical to promoting industrial growth and needs to be supported by improvements in other infrastructure, notably roads and port facilities.

  • Trade policy: Despite substantial progress in liberalization of the trade policy environment in the 1990s, Bangladesh still has one of the most restrictive trade regimes in the world. It ranks at 113 out of 125 countries on the World Bank’s trade restrictiveness index. Further effort to liberalize the tariff system is needed, particularly by reducing or eliminating supplementary duties that significantly increase protection on a large range of products.

  • Trade facilitation: Building on recent progress in port performance, particularly by improving the efficiency of customs, will be important to encourage trade further.

  • Financial sector: Improving banking sector efficiency and providing the environment for broader use of the stock and bond markets for corporate financing would encourage inward investment and development of the domestic private sector.

  • Labor force productivity: Labor force skill levels need to be improved to enhance productivity. Continued attention to education and training is an essential part of maintaining long-run competitiveness.


  • Ando, M. and Kimura, F., 2003 “The Formation of International Production and Distribution Networks in East Asia,” NBER Working Paper 10167. (Cambridge, Massachusetts: National Bureau of Economic Research)

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  • Baldwin, R., 2006, “Globalization: the great unbundling(s),” Graduate Institute of International Studies.

  • Hausmann, R. and Rodrik, D., 2003, “Economic Development as Self Discovery,” Journal of Development Economics Vol. 72.

  • Imbs, J. and Warcziarg, R. 2003: “Stages of Diversification,” American Economic Review Vol 93(1).

  • IMF (2007): “The Evolution of Trade in Emerging Asia” in Regional Economic Outlook, Asia and Pacific Department, (Washington: International Monetary Fund) October.

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  • Klinger, B. and Lederman, D., 2006, “Innovations and Export Portfolios,” World Bank Policy Research Working Paper 3983.

  • Rahman, M., Bhattacharya, D., and Moazzem K.G., 2008, “Bangladesh Apparel Sector in Post MFA Era: A Study on the Ongoing Restructuring Process,” Center for Policy Dialogue.

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Prepared by Matt Davies and Jonathan Dunn (both APD).


For a fuller discussion of the structure and characteristics of the garment industry and of its export performance through 2006 see IMF Country Report No. 07/230.


The substantially higher domestic value added for knitwear and the rapidly rising share of knitwear in total exports is raising Bangladesh’s retained export earnings from the garment sector as the cost of imported inputs is falling relative to the value of total garment exports.


The paper uses SITC (revision 3) data from the UN’s World Integrated Trade Statistics Database (WITS).


Export similarity indices show the extent of overlap of exports. They are defined as Σi MIN(Xi1Xi2) where X is the share of a commodity in exports, i is the four-digit export, and 1 and 2 are the two countries being compared.


The three measures used were: share in value terms of the top 10 and 20 products and the Hirschmann-Herfindahl index, which is defined as the square root of the sum of the squares of export share of each product—a higher value indicates greater concentration.


A new product is defined as a product that was not in the export mix in 1990, but appeared in exports at least once in the following years.

Bangladesh: Selected Issues
Author: International Monetary Fund