Financing Trade with Bangladesh Essay

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Bangladesh has made considerable progress in economic reform and growth, making the country a fairly attractive destination for international trade. In the 2015 economic freedom index, Bangladesh scored 53.9 points and was ranked the 131st freest economy in the world (Heritage, 2017). Though Bangladesh’s economy has moved from “repressed” status, significant deficiencies in the progress of reform remain. The country is still characterised by corruption, an inefficient judicial system, weak governance structures, an underdeveloped financial sector, and considerable government interference (The Financial Express, 2012; GlobalTrade.net, 2014; Heritage, 2017). These factors continue to hinder development as well as the achievement and sustenance of open markets. For American companies wishing to export goods to Bangladesh, these obstacles present significant risks. This paper highlights these risks and ways of minimising the risks. Recommendations are also provided.

Risks and Concerns in Financing Foreign Trade with Bangladesh

Trade plays a moderately important role in the economy of Bangladesh. Exports and imports combined account for approximately 42% of the country’s total GDP (Heritage, 2017). Nonetheless, high custom duties are a major obstacle to foreign trade (GlobalTrade.net, 2014). The government is addressing this challenge by implementing concessional tariffs, a customs reform plan, and export processing zones. Even so, the high custom duties present a major concern for American companies that want to finance foreign trade with Bangladesh. Bureaucratic barriers and the interference of the government in the financial sector are also major hindrances to foreign trade. Considerable government intervention in the financial sector is a particularly important concern for American companies that want to finance foreign trade with Bangladesh. Government interference means that export companies have to grapple with a great deal of bureaucracy before payments or transfers of money are completed. These bureaucracies could increase transactions costs, making exports to Bangladesh a daunting and expensive undertaking.

The challenge of government interference in the financial sector is further compounded by the country’s underdeveloped financial system. An efficient financial system is a vital enabler of foreign trade. Such a system is characterised by aspects such as stable interest rates, absence of interest rate ceilings, numerous financial products, minimal credit risk, adequate bank capital, as well as strong monetary management and financial regulation. Bangladesh has made some progress, but inefficiencies in the financial sector still exist (International Monetary Fund [IMF], 2010).

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Without an efficient financial system, American companies intending to export to Bangladesh could face substantial challenges given that foreign trade is heavily reliant on the financial system.

An underdeveloped financial system creates bank risk – bank instability. Importers and exporters have to consider the origin of financing documents used in foreign trade (Boland, 2012). For instance, when doing business with Bangladesh, American companies will consider the bank that issued a given backing document – whether a documentary credit or a guarantee. They will consider how stable the bank is. This usually involves considering the bank’s history of rejecting or accepting documents as well as behaviour in terms of delaying or reneging payments. It also entails considering foreign exchange restrictions and the overall risk in the bank’s country of origin. This information is crucial for determining the level of risk involved in dealing with a certain bank. With Bangladesh having considerable government interference in the financial sector, bank risk could be a major concern for American companies.

The above country characteristics often influence how fast a country honours its payment commitments (Boland, 2012). Bangladesh is characterised by a considerable degree of protectionism and economic controls. This means that it may take a while before importers in the country honour financial commitments. Accordingly, financing foreign trade with Bangladesh could be costly and risky.

Another risk emanates from foreign exchange rates. Trade between American companies and Bangladesh would certainly involve foreign currency. This presents a risk in itself given the volatile nature of foreign exchange rates (Boland, 2012). Unfavourable movements in exchange rates could negatively affect both the exporter and the importer. For instance, appreciation of the Bangladeshi currency against the U.S. currency could result in losses on the part of American companies doing business with Bangladesh.

Fraud should also be a concern for American companies financing foreign trade with Bangladesh. Common forms of fraud involved in foreign trade include counterpart fraud, cargo theft, documentary fraud, insurance rip-offs, as well as piracy and scuttling (Boland, 2012). The risk of fraud is particularly worth considering if the country in question has….....

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