The key to rebuilding Bangladesh

There are two problems in labour with the RMG sector: Wages and unions.

Wages: The last adjustment of wages from the Wage Board for the garment sector was in December 2023. With inflation rising, the real wage of the garment workers is steadily declining. Inflation will come under control but it will take two years.

The price increase since the Wage Board’s latest adjustment until inflation reduces to 6% is estimated at 20-25%. There is a requirement to increase wages 5% per annum. Many factories do not make this change, but if the upgrade is made then it will correct for about half of the price increase. This leaves a minimum of 10% decline in the garment workers real wage. 

Such a correction should be managed by the industry. Wages are about 40% of costs so this is a 4% increase in total costs; earnings should increase by much more from the depreciation of the Taka, that should be at least 10% from December 2023 to June 2026 (this interval is the time assumed for inflation to decline to 6%). So long as the 5% increment is paid, then the factories should have the earnings to pay the workers an additional 10% over the time period that it takes to reduce the inflation to 6%.

Labour unions: There is pressure from the EU and the US to make it easier to register labour unions, to ensure unions truly represent the workers, to allow collective bargaining power, and to ensure that unions can be established in the EPZ and the EZs. 

In addition, there is pressure to amend the labour law and follow the agreed program with the ILO. The Hasina government had made little progress to this end. The garment factory owners were strongly opposed. The government did not take all of this seriously, believing, in the end, the threats were not going to be enforced. That is the situation the interim government faces. The US government has already told the Bangladeshi Chief Adviser how important this is for its support.

The labour situation is a big problem as real wages are falling. The Hasina government maintained an industrial police force that was used for any labour protests. The control of these police battalions has not been discussed publicly. With continuing inflation there is every prospect of labour demonstration for wage increases. But rough estimates suggest that the companies make enough from the depreciation of the Taka to raise the wages to maintain constant real wages. To introduce more unions, there must be a serious training program for union leaders. The expansion of unions must be carried out in parallel with the training of union leaders.

Training program for replacement of foreign workers

The garment industry has a large number of foreign workers, largely from Sri Lanka or India, occupying high-level positions. The amount of money going out through the hundi market is estimated as high as $3 billion. A rough estimate is half of that and as many as 100,000 workers. Eliminating most of these workers would require a major training program over a period of five or six years. This would provide a large number of well-paying jobs. It would increase the remittance flows through the banking system by $1.5bn.

Expansion of the RMG sector

RMG factories are located almost entirely in the eastern part of Bangladesh. With the availability of Mongla port there is the opportunity for new plants to be established in the west. There is plenty of land for plant sites. There will be a need for power for garment plants, but that should be readily fixed. There should be a ready supply of labour. Expansion to the west should enable expansion of production capacity into new areas, enabling easier growth.

Trade policy

There is widespread evidence that trade policy in Bangladesh has a strong anti-export bias. The main actions needed are to reduce import tariffs, particularly on items that have substantial imports. The point here is to avoid encouraging investments in items that can be imported more cheaply. This encourages investment in exportable items.

The Hasina government maintained an industrial police force that was used for any labour protests. The control of these police battalions has not been discussed publicly

Remittances

Remittances are earned by Bangladesh workers around the world and sent to Bangladesh. These result in a large inflow of Taka largely in the hands of poorer households who have sent members abroad. The Bangladeshi worker is paid in a convertible currency. 

Sometimes the foreign exchange is sent through the banking system; sometimes it is sold to someone for Taka. The buyer of the foreign exchange uses it for whatever they choose. In the use of the bank, the bank delivers the Taka to the recipient and the foreign exchange goes into the nation’s pool of foreign exchange. 

In the alternative route, the foreign exchange is given to someone else, who supplies the Taka to the recipient (through the hundi system). The foreign exchange is used for purposes that are not under the control of the central bank. 

For example: under-invoicing of imports; to finance the illegal transfer of earnings of foreigners; and for capital flight. The user of the foreign exchange takes it away for his own purposes.

Table 2 Remittance flows through the banking system (Billion; US dollars) 

Table 2 presents the inflow of remittances through the banking system over the past five financial years. This data shows no trend and the average annual amount is, over the five years, $21.9bn. The author’s analysis is that amounts through the hundi system are about equal to the remittances through the banking system. Hence total remittances are $40-50bn.

Assuming hundi supplies $23bn, what is it used for? Under-invoicing comes to $19bn during FY 22 (largely from China and India; based on reports of the Pre-Shipment Inspection. Although old, one can be confident that when PSI stopped under-invoicing expanded).

The transfers for foreign workers were estimated at $1.5bn. Capital flight, the residual, comes to $2.5bn. There are two other forms of capital flight: Over-invoicing of capital goods and LCs that are paid by bank loans even though no goods ever appear.

How to reduce the size of the Hundi market?

First, hire PSI firms to confirm price, type, and quality of imports; these companies can also check imports of capital goods for over-invoicing. Second, replace foreign workers. This results in the hundi market being focused largely on capital flight. This would raise flow of remittances through the banking system by $20bn. It would also raise government revenues by $6-7bn.

Conclusion

If we think of the position in ten years, we estimate exports will have reached $70bn. This represents a slow start with growth rate at 8% by the end of the decade. Remittances through the banking system should increase to $60bn after ten years. Total earnings of foreign exchange would be $130bn compared to $65bn.

Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics. Part 1. Part 2.