Call for cash incentives for ICT exports

Since August 2021, Bangladesh has grappled with two significant challenges. Firstly, the countrys forex reserves dwindled to US$25.09 billion (BPM6 Method: US$19.94 billion) by the end of January 2024, plummeting from a record high of approximately US$48.06 billion previously. This decline was exacerbated by rampant money laundering, with an average of US$8.27 billion illicitly siphoned off annually between 2009 and 2018 through mis-invoicing import-export goods values to evade taxes and illicitly transfer funds across international borders.

Secondly, both overall and food inflation rates surged, with the Bangladeshi economy experiencing rates of 9.93 percent and 12.56 percent, respectively (point-to-point, October 2023). This spike can be attributed to heightened import payments and the relatively limited efficacy of adopted monetary policies, exacerbated by exchange rate instability. The exchange rate witnessed a sharp increase of 29.64 percent, rising from Taka 84.97/US$ in August 2021 to Taka 110.15/US$ by December 2023. Furthermore, the persistent issue of non-performing loans (NPLs) continues to haunt the economy. Despite government efforts to stimulate private sector credit growth, dishonest defaulters and traders appear to be diverting credit funds abroad through illicit channels like hundi, exacerbating NPLs and further straining domestic markets, thus contributing to inflationary pressures.

The country would come out of this tight spot if it could increase its export earnings by 25 percent, net inflow of foreign direct investments (FDI) by 10 percent, and remittances from non-resident Bangladeshis by 15 percent growth every year until 2041- the easiest prescription to that any Economist may give, but, most challenging to achieve, as the future course of merchandise or product-sector export growth amid the post-LDC era of Bangladesh will highly depend on how quick it can launch negotiations related to Free trade Agreement (FTA), Regional Trade Agreement (RTA), Preferential Trade Agreement (PTA) and reaches and enforces the deals.

Nevertheless, it will be a difficult choice to make for Bangladesh, firstly, as these arrangements will require Bangladesh to reciprocate the tariff and other benefits to its trading partners under these agreements, of which, there is still a fear-feeling at different levels that it may, in a way decrease the customs revenue and another way, it may expose several domestic sectoral to international competitors in the home ground, eventually causing local CMSMEs to shut down their businesses.

Secondly, these negotiation talks take longer time to reach an agreement, for instance, on average it takes one and 1.5 years to negotiate an FTA with the United States but over 3.5years to reach the implementation stage. Surprisingly, the duration of trade responses may take up to 10 years to implement, meaning they require a sufficient amount of observed data to permit an estimation of short- and long-run effects.

Meanwhile, the inclusion of Bangladeshin the European Unions Generalized Scheme of Preferences Plus (GSP+) will require to comply with 32 international conventions related to the environment, labour, human rights, and governance principles, seems to be taking much more time for the countrys understanding, preparedness, and delivering commitments on a continuous basis.The enaction of EUs Carbon Border Adjustment Mechanism (CBAM) is also knocking at the door which will also cover broader ranges of countries and exporting sectors of the manufactured products step by step.

In a nutshell, if Bangladesh wants to flourish its export earnings for say from next fiscal year, given the long-term requirements, and upcoming rigid compliance issues of the product sector export growth, a forward-looking approach would be to focus on the solid and immediate development of the service sector, especially, concentrating more on the Software and ITES export front and ICT freelancing-bringing all the well-tuned policies to life laying down more importance on working with the real factors of productivity, innovation, and foreign market exploration.

The CAGR (Compound Annual Growth Rate) of Bangladeshs Software and ITES sector in FY2022-23 compared to FY2017-18 stands at25%, excluding telecommunication services and ICT hardware exports. The ICT sector is surging, but, recent negative growth of 7.42 percent of Bangladeshs ICT export earnings in FY2022-23 implies that we have to transform ourselves from ICT outsourcing to an ICT-product developing country within the next 5 years to remain on a positive growth trajectory, as due to the current global economic turnaround phase, overhiring during COVID-19, with the increasing use of Generative Artificial Intelligence and Machine Learning, tech layoffs in 2024 have hit hard, with over 153,000 employees in the USAalone let go so far, according to Crunchbase.

For instance, for a short period, these layoffs will create opportunities for the tech outsourcers as half of theUSA workforce is expected to be freelance by 2027, meanwhile, 81 percent of respondents from the USA market of a recently conducted survey say freelancers are important to their organization, but only 38 percent say their organization is very effective at managing them. Seeing this opportunity, more companies offering outsourcing services, more IT engineers at individual levels, and more countries trying to become IT hubs will emerge claiming more share of the same pie. Nevertheless, it is believed that, as Generative AI and ML become more mature-- they will start replacing the growing demand for tech outsourcing given the complexity of managing the globally outsourced team.

By 2030, the tech products and services related to the IoT (Internet of Things) are forecasted toreach US$5.5 trillion, Cloud Computing to US$2.1 trillion, Artificial Intelligence to US$2 trillion, Blockchain Tech to US$1.24 trillion, Big Data to US$745 billion, and Cybersecurity to US$538.3 billion. Long ago, realizing the immense market potentiality of coupling ICT products and services together, Viet Nam has emerged to be a leading country in the tech side. In 2022, revenues from Viet Nams ICT sector hit US$148 billion, of which US$136 billion came from hardware and electronic products exports coupled with locally developed software and ICT solutions.

Bangladesh Bank, the central bank of the county issued a circular (FE Circular No: 02, dated 30 January 2024) from its Foreign Exchange Policy Department reducing the export cash incentives on Software and IT/ITES export from 10 percent to 8 percent, ICT Freelancing from 4 percent to 3 percent. First thing first, considering the global tech market shift, and as far as the provisions of the WTO Agreement on SCM (Subsidies and Countervailing Measures) concerned, it appears that this decision had been grossly taken aiming at enabling ICT sector to fare well without cash incentive and remain competitive during the post-LDC time, but, falsely reading, interpreting, and similarizing the provisions of the GATT (General Agreement on Tariffs and Trade) with GATS (General Agreement on Trade in Services). The SCM Agreement is only applicable to trade in goods, its provisions do not apply to services subsidies.

The GATS has no implications for the funding or subsidy of services provided in the exercise of governmental authority. Hence, tearing the ICT Software and ITES plus ICT freelancing from the ICT Hardware exports, the government should consider not just reinstating the previous rate, but, should proactively increase the export cash incentive for Software and ITES to 20 percent and ICT freelancing to 10 percent, as it will not violate any of the provisions and clauses of the WTO even after LDC graduation.

Considering Bangladeshs software and ITES sector plus ICT freelancing to tap short-long run global market potentials, in the pursuit of social, cultural, and developmental objectives for taking the countrys digital economy size to US$50 billion surfing better through the existing forex reserve crisis-- the government should approach immediately to address this matter which will inspire tech entrepreneurs and individual freelancers fetching export earningshome triggering market exploration and innovation activities more-- interpreting the dream of Smart Bangladesh Vision a reality by 2041.

Enamul Hafiz Latifee is a Trade & Policy Economist, Joint Secretary (Research Fellow), Bangladesh Association of Software and Information Services (BASIS) and Md Mominul Islam is a Research Associate, BASIS