Recent political wallop of about a month has created immense bearing on economic activities of the country. A number of business leaders incur an approximate loss of around $10 billion. The crisis has both direct and indirect impact about the country's reputation as a reliable and resilient economy, reminiscent of the setbacks is the worst ever we had faced so far. The RMG sector, the largest export industry, reported incurring losses of about 160 million USD/day. Supply lines and operations in various industries, including the fast-moving consumer goods were severely affected. Already unbearable inflation spiked further making indescribable distress to the marginal people.
Export and remittance are two important sources of foreign exchange earnings. Export fell and remittance also 10-month low, in July 2024 fell to $ 1.90 billion, while in June 2024 it was $ 2.54 billion. Foreign exchange reserve in July 2024-25 was USD 20.39 billion as per BPM6 which was USD 23.37 billion in the corresponding period of last year as per Bangladesh Bank statistics.
Export of almost all products have shown negative growth including apparel sector. Ease of doing business and rising cost of utilities and bureaucratic knots are the main reason for export growth. Exports contribution of non-RMG is unusually low. Countries like Vietnam, India, Malaysia and China have diversified exports.We have not been able to diversify export and even in RMG export is concentrated only 4-5 sectors.
Apparel export is mostly 70% cotton based, products are Shirt, Trouser, Pant and some Jackets. RMG itselfis not diversified.Export of Apparel has been increased 43% in the last five years, a more than four decade old sector, the growth could have been close to China who is in the first position and exporting apparel amount of which is close to USD 160 billion. Agriculture and light engineering sector have shown some improvement, but amount is negligible.
RMG has been enjoying four types subsidies, these are; a) expansion of new markets, 4% subsidies b) for all 1% subsidies, c)for local value added depending on a formula d)SME industries based on a criterion on employment are allowed. Actually, those who are enjoying BWH are not supposed to availcash subsidies, however for some special cases RMG is enjoying cash subsidies along with BWH. As per MC13 graduating LDCs can continue all benefits till 2029, while non- prohibited and non-actionable cashsupports can be continued, at the same time alternativesneeds to be exercised so that export can continue and competitive.
Over capacity of cotton-based apparel is another difficult area, we need to break the concentration within a less number of products soon to regain buyers confidence. Most of the factories are running under capacity and thus profit is not optimum. They are able to export USD 47 billion by utilizing 60-70% capacities of the existing enterprises, if it can be at least 95%, export could have been close to USD 100 billion.
Cotton based apparel is dominant in the country and products are limited to a few, it happens frequently that within the sector buyers have immense scope to bargain and provide lower prices. About 70% of the industries are simply engaged in cutting and sewing with small value added and low profit. The situation needs to be changed through large investment in the sector.
So far, whatever funding is available, interest rate and procedural complexity is too high, inefficiencies in all respects, in getting approval, license, NoC which are supposed to be instant. As per the businesses, they are not starved for cash incentives rather ease of doing business, supply of utilities at a required level with a reasonable prices and sufficient financing could make their life easy to invest more.
Tax is another aspect for low profit on the export value, 1% tax at source on the sales has been deducted reducing profit margin. Regular corporate tax is 12%, tax at source is not adjustable so ultimate tax burden stands at about 25% which is almost close to regular tax burden of 27.5%. At source tax at 1% can be reduced at the earlier stage of 0.50% to give the sector to have some surplus for new investment.
We usually compare Bangladesh case with Vietnam, starting almost from same stage in 1995, export of Vietnam is close to USD 500 billion with a huge, diversified sectors, Bangladesh only targeted to reach USD 110 billion by 2027 as per its new export policy. Export of Vietnam is led by FDI, 90% of FDI is coming from China, they have been able to utilize the benefits of proximity of a large neighbor and established a number of backward and forward linkage industries. China has been able to take the benefits of duty-free access to EU after Vietnam signed FTA with EU, against 9% tax they are now allowed to export at zero duty.
Scale of operation of industries in Bangladesh is much less. In order to upgrade quality at the level of Korea and China, we need huge investment and increase scale of production. Because of low scale of operation marginal cost increases making industries uncompetitive.
Uncertainties because of several reasons throughout world is one of the common phenomena. Recent political upheaval is one of the examples. Exporters need guarantee as like as other countries, such as export credit guarantee scheme for meeting the uncertain situation such as disaster, unrest and similar global and national issues. As an example, Bank of Tanzania has established two Credit Guarantee Schemes (CGS) namely, Export Credit Guarantee Scheme (ECGS) and Small and Medium Enterprises Credit Guarantee Scheme (SME-CGS).The ECGS covers a maximum of 75 percent of the principal amount of the credit facility under different duration.SME-CGSestablished in September 2005 covers up to 50 percent of the principal amount for credit facility.
Bangladesh also needs national export strategy for export promotion and export financing. Export can be a strong vehicle for creating jobs maintaining export-led growth strategy. The strategy should have long, medium and short term goals with an specific objectives followed by strong monitoring. We would need to learn calculate sectoral export target in billions not in millions following by other successful countries.
The writer is Chief Executive Officer, Business Initiative Leading Development (BUILD)
