The apparel industry has come a long way, but many issues still need to be addressed
Though the export momentum went through a topsy-turvy situation during the last fiscal, the nation is still gunning for $50 billion apparel exports by 2021, as the country reaches 50 years of independence.
Analysts home and abroad still believe that Bangladesh can make it, despite political uncertainty, weak infrastructure, lower productivity, lower price offer, high financial costs, and other challenges.
What has worked for us, so far
As we walk through memory lane, we see that, apart from aggressive entrepreneurs, the availability of labour force at a competitive price, respectable work ethics, duty draw back facility, bonded ware house, back to back L/C and export development fund (EDF) have helped the industry to reach where it is today (more than $28bn exports).
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 the most employment, particularly for women.
Back-to-back L/C was in contradiction with the spirit of guideline (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/C” 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 many of them wanted more extended time for payment.
There were malicious activities in the bonded warehouse facilities; a 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 them, because some had access to this ill-gotten money, while some looked away as the sector became a lifeline for Bangladesh.
The green incentive
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 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 the NBR came up with a plan to gradually raise taxes “deducted at source” up to an affordable level as the industry attains maturity, the government again reduced the source tax by 50 basis points from 0.80% (now 0.70%) in view of the Tazreen fire and particularly the Rana Plaza collapse.
It is important to dedicate some quality time by the concerned ministries in putting up a forward looking financing package
Recently, the government has reintroduced the cash incentives in the context of the RMG rescue package announced in India.
For providing comfort to the large fabrics and machinery exporters abroad, a few foreign banks 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.
Besides the fabric and accessories, exporters in greater China, Korea, Indonesia, and partly India, 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, the 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 practice. Open account trade or export against contract has also gained momentum. This has helped buyers reduce their intermediation costs.
EDF facility at a very reasonable rate, 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 $1bn, Bangladesh Bank, upon request from BGMEA raised the kitty size to $2bn. However, due to the regulatory constraint, it could not let this facility be used for more than six months or to facilitate import of capital machinery or safety equipments.
A tall order
Bangladesh Bank and the World Bank have now put up another package to support long-term capital machinery and safety equipment imports for apparel plants.
However, when we are talking of doubling our RMG exports in the next six-seven years, the above facilities seem little in view of the huge 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 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 visibility about the establishment of a fully operational “garment palli” 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 clarity 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 though there is a JICA package made available through the central bank.
While some 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 one year to four years — provided the sellers are okay with the scheme. This is in one kind of a limbo now.
For achieving the target of $50bn 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.
A real crisis
Many banks were forced to open accounts with Tk10 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 a financing package based on cost estimates to shift their factories to a safer place.
Many are suffering due to sudden rise in worker salaries, but do not know how to replace the old machines by more efficient ones. With sub-contracting at a halt, many do not even know how to come back to business.
If we are talking of expediting the growth of the apparel sector to reach its projected growth target, we need to engage in mobilising 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, embracing better technology, gaining operational efficiency including expense rationalisation, improving workers’ skill and making factories safer places for the workers.
Mamun Rashid is a leading banker and economic analyst.