Bangladesh closed with USD 24.492 billion worth of RMG exports in the last fiscal year. Out of this USD 14.75 billion went to the European Union including the UK; USD 5.1 billion went to the USA; little over USD 1 billion to Canada and over USD 3.6 billion to the non- traditional markets. During the first quarter of the ongoing fiscal the European Union hosted USD 3.82 billion worth of `made in Bangladesh garmentsï¿½, USA bought USD 1.25 billion – almost 8 percent lower than the same period of the last fiscal; Canada bought USD 230 million – almost 15 percent less than the corresponding period of last year. The non-traditional markets imported USD 932 billion of Bangladeshi apparels, little over than the same period of the last fiscal year. The overall share of the non-traditional markets is increasing over the years. While it used to be around 3 percent in 2006 fiscal, it has reached 15 percent in fiscal 2014, showing a growth of more than 21 percent.
Though the export momentum is going through a topsy-turvy situation this year, the nation is gunning for USD 50 billion apparel exports by 2021, as the country reaches 50 years of its independence. Analysts at home and abroad also believe that Bangladesh can make it, despite multiple challenges like political uncertainty, weak infrastructure, lower productivity, lower price offer and high bank interest rates.
When we go through the memory lane, we get to see that apart from aggressive entrepreneurs, availability of labour force at a competitive price but with respectable work ethics, duty draw back facility, bonded ware house, back to back L/C and export development fund (EDF) helped the industry to reach where it is today. Cash incentives, fiscal support to enter the new markets with new products and lower tax rates also worked well to fast forward this manufacturing sector which has generated highest employment, particularly for women. Officials at National Board of Revenue (NBR), Bangladesh Bank, Finance division and Prime Ministerï¿½s office lent their support whenever the sector was in trouble or crisis.
I remember back to back L/C was in contradiction with the spirit of UCPDC delineated by the international chamber of commerce (ICC). But it was necessary to support the import of fabrics and accessories to manufacture clothes, export and settle import payments upon receipt of the export proceeds. Bangladeshi producers did not have enough money to settle payment at sight or in cash. Bangladesh Bank officials came up with these `Red Clause L/Cï¿½ as back to back L/Cs, exports flourished and more factories emerged over the years. Deferred payment or USANCE L/C also helped the sector immensely, though most of them wanted more extended time for payment.
There was a lot of bad smells around the bonded warehouse facilities; few producers sold duty free imported fabrics and accessories at a higher price in the black market and became rich overnight. However, there were no voices raised against this, because some had access to the ill-gotten money while some overlooked as the sector became a life-line for Bangladesh. No matter what had happened with the bonded warehouse or duty draw-back facilities, the government continued with cash incentives for a long time. When recently this cash incentive scheme was stopped as the industry gained further competitiveness, the government came up with cash incentives for entering new markets with new products and lower tax intervention. Though NBR came up with a plan to gradually raise tax `deducted at sourceï¿½ up to a tolerable level as the industry attains maturity, the government again reduced the source tax by 50 basis points from 0.80 percent in view of the Tazreen fire and particularly the Rana Plaza collapse. Very recently, the government has reintroduced the cash incentives in the context of the RMG rescue package announced in India.
I recall, in order providing comfort to the large fabrics and machinery exporters abroad, Standard Chartered Bank came up with a scheme to discount USANCE L/C at sight at their offshore branches. Though the L/C was opened on an USANCE or deferred payment basis, the payment after shipment was made available at sight in those branch counters. Besides the fabric and accessories exporters in greater China, Korea, Indonesia and partly India, the large exporters in Bangladesh also got a lot of respite with the extended payment period. While they paid interest from acceptance of the payment liability to the payment settlement period, interest rate involved was quite reasonable. Gradually, many other global and local banks followed this practice. Now U-PAS (USANCE but paid at sight) L/C facility through OBU has become a regular phenomenon. Open account trade or export against contract has also gained momentum. This has helped the buyers to reduce their intermediation costs.
EDF facility at a very reasonable charge, provided by Bangladesh Bank and supported by the World Bank helped the industry to grow fast. This has in fact worked as a game changer. Initially, though the size of the facility was equivalent to USD 1 billion, Bangladesh Bank, upon request from BGMEA raised the kitty size to USD 2 billion. However, due to the regulatory constraint, it could not let this facility to be used for more than 6 months or to facilitate import of capital machinery or safety equipments. Various sources close to Bangladesh Bank and the World Bank confirmed that the duo is contemplating to put up another package to support long term capital machinery and safety equipment imports. The size of the package could be around USD 700 million and the interest rate all inclusive not exceeding 4 to 4.5 percent.
However, when we are talking of doubling our RMG exports in the next 6-7 years, the above facilities seemed to be quite small to take the sector forward., This is too little in view of the humongous investment required for shifting a lot of factories from the shared or dilapidated buildings to a cluster or apparel village, replacing low productive machineries by high productive ones, and ensuring availability of adequate fire fighting or disaster management equipments. Resources are also required to manage a transition from the lower end of the market to the high street garment sellers or fashion retailers in advanced countries, and most importantly to train develop and motivate the workers with higher pay packages and benefits.
We are yet to gain a clear visibility about the establishment of a fully operational `Garment palliï¿½ or RMG cluster. There were some talks about a Chinese agency to come forward with possible financing. BGMEA is not sure yet whether the RMG cluster is going to be in Munshiganj or in Gazipur. We do not have clear understanding about ownership, equity structure or debt architecture of the project. Small and medium producers are not sure how they are going to finance the remediation of factories. While few large factory owners ended up with low cost overseas borrowing, most of their peers do not have any financing solution in hand. BGMEA has taken up a plea to extend the deferred payment period from 1 year to 4 years provided the sellers are okay with the scheme. They made this request to the central bank; central bank referred this to the investment approval agency. Now this is in kind of a limbo.
In order for achieving the target of USD 50 billion RMG exports by 2021, it is important to dedicate some quality time by the concerned ministries, the central bank and the revenue collecting agency in putting up a workable and forward looking financing package. Many banks were forced to open accounts with Taka 10 for the garment workers. Most of these accounts are non-operational currently. Mobile Money has helped domestic money transfer by the workers but did not help the garment owners to find out a financing package based on cost estimates to shift their factories to a safer place. Many are suffering due to sudden rise in workersï¿½ salaries, but do not know how to replace the old machines by more diligent ones. With sub-contracting stopped many even do not know how to come back to business.
If we are talking of expediting the growth of the apparel sector to reach its projected target, we need to engage in mobilizing resources from various sources. The forerunners of the apparel sector need to be much more proactive about reducing the cost of fund, availing newer financing programs, introducing more productive machines, launching better design, improving workersï¿½ skill and making factories more safer places for the workers. Financing of these activities has to follow a multi-pronged approach as the demand is huge. In addition to various government and private sector support schemes, we also have some resources from a few donors to improve factory conditions. In addition to these sources, we also have to take advantage of various global supports for trade expansion. For example, Aid for Trade (AfT) program of the World Trade Organization (WTO) is a potential source of support for the RMG sector of Bangladesh. Till today we have not developed any significant project for bringing resources from AfT package that could contribute to the development of the sector. Such global resources can be utilized for meeting up various compliance requirements in the factory, improvement of workersï¿½ skills, development of high quality products and diversification of markets. Huge infrastructural gap, due to which the industrial sector suffers, can also be improved by utilizing such support. However, we are yet to learn about these facilities. There is probably lack of awareness despite the common understanding by all that better financing plan along with integrated solution is the key for advancing the sector. As we set our journey towards acquiring a larger share in the global apparel market in the coming days, the need for charting out a resource plan for supporting the overall development of the sector is unprecedented. Our efforts should be guided towards that direction.
Mamun Rashid – Banker and Economic Analyst.
Source: The article was published in the official souvenir of Dhaka Apparel Summit, organized by BGMEA held on 7th ï¿½ 9th December, 2014.