Export sector in Bangladesh is vulnerable since exporters are exporting consumer goods at buyer's dictation
With the involvement of export oriented readymade garment industry, a merchandiser is facilitating export valuing around $15 million in a year.
In the first decade of the current century, he started his career in the ready-made garment (RMG) sector.
He was astonished to see the price tag showing the retail price of a shirt which was higher compared to taka equivalent to the monthly salary of a worker of the industry.
But presently he is not astonished at the price tag since this is not an export price.
The price at which Bangladesh is exporting is not even fair since the price of such products sold in Dhaka is higher.
Does it mean exporters are exporting at under-invoicing?
Frequently such blame is thrown to exporters by different quarters.
These are comments by a merchandiser working in the RMG industry.
Despite non-availability of duty free access to the USA, Bangladesh's RMG is in good strength in this market.
The age of this industry in Bangladesh is around 40 years but it is not yet well off stage to graduate to mid value product from low value/basic product, price of which is below the level of fair value.
The strength of this sector is still price, product is sold at buyer’s dictated prices.
It is the reality for countries graduating from LDC status through export-led growth models like East Asian emerging economies.
RMG is a manufacturing industry having direct backward linkage industries. It supports service sectors like banking and transportation which are, to a great extent, dependent on this sector.
It is reported that around 40 million people are directly employed in this sector.
It is said that around 80% of proceeds from RMG export is used to offload liability in foreign currency for imports and local procurements by LCs.
The rest is converted into taka for different payments including staff salary and utilities.
Entrepreneurs take risks in investment for profit motive.
So, investment and their excessive involvement in day to day activities deserve handsome profit.
The export price currently may fetch profit not more than desired level. What is earned does not directly go to the pockets of entrepreneurs since repayment of bank loans, in addition to tax payment, is settled out of profit.
As stated earlier around 80% of export proceeds are used for settlement of foreign currency liability at home and abroad.
A big chunk of the remainder is used by service providers: banks (bank charges, LC commission and so on), transport operators, shipping agents, etc.
The service providers are depending on the RMG sector but they are earning more than what this sector earns.
Export sector in Bangladesh is vulnerable since exporters are exporting consumer goods at buyer's dictation.
Exporting goods at under value can only create huge employment without white collar jobs with standard benefits.
As such, the sector suffers inefficient management at mid levels which are the backbone of the industries.
All talk about the sector but educated people are not found working herein.
Financial sectors are lucrative for job seekers like MBAs due to high pay.
With regards to money, the financial industry including their regulator has power to create money by mouse click (out of thin air).
Banking industry to a great extent depends on the export sector including RMG industries from trade financing to non-funded facilities.
It is reported that employees of financial sectors enjoy low cost loans such as car loans, home loans, etc.
Same handsome facilities are available to other white color sectors also.
It is known that business loans and consumer/individual loans are not the same. Money dies in case of business loans but individual/employee loans by banks may not die even at their service-end.
Fractional reserve banking system allows banks to create money by accounting entries.
Such autonomous benefits are not available to the export sector since the export industry cannot create money out of thin air.
Whether low priced loans to employees fuel inflation or not is a question.
Policy support in the form of exchange rate benefit is needed to support the sector.
RMG is exported generally in US dollars.
Buyers do not bother with the exchange rate in Bangladesh but exporters bother.
In the immediate fiscal year, this sector has earned more than $32 billion.
Of the total amount, payment, 80% is for settlement in foreign currency.
Net external settlement is around 50% which is $16.
If the exchange rate is Tk87 instead of Tk85, for example, around Tk32 billion goes to direct and deemed exporters as an extra benefit. Definitely entrepreneurs have rare scope to hide the benefits without distribution to the different beneficiaries including employees.
There comes a question whether enhancement in exchange rate will create inflation. If it happens, why and how?
It is claimed that depreciation in local currency will lead import prices high. The RMG sector captures orders as per conditions imposed by importing countries.
Exporters are to operate in the buyer's market since they need to follow buyers’ dictation.
Same should happen for our imports. The situation definitely may lead foreign suppliers to adjust prices for their business-sake in accordance with exchange rate movement.
On the other hand, relation of inflation with currency depreciation is academic as no answer is found regarding impact of low cost staff loans, as noted earlier.
Currently the sector is being supported by fiscal benefits such as cash incentive and customs bond; refinancing for input procurements by the central bank.
For graduation from LDC status, exchange rate may be one of the best alternatives to cash incentives available for the sector.
This may create space to attract professionals at mid level management of RMG sector.
It is noted here that under a low pay structure with high workload, an employee cannot sustain; rather vitality of life ends before maturity.
Such beneficiaries can never lead to sustaining the sector.
As such, sustainability of this sector depends in the coming days on people to work in the sector with professional excellence.
It is observed that the sector creates entrepreneurs.
History shows that many industrialists of this sector were at their earlier age as employees in this sector.
Domestic value addition from export is used for local consumption and savings.
Savings ultimately turn into investment.
It is said that the poor have need without means and the rich have means without need.
Poor earnings support only subsistence living which cannot create sufficient demand in the economy.
Without demand due to lack of purchasing power, the domestic economy cannot move to a desired level.
Economy would excel if the poor could come up to market with purchasing power.
Hence the export sector, especially RMG, can play a major role in overall economic development provided arrangements for handsome income can be made for its operators - sewing sisters.
It is observed that foreign loans in foreign currency are cheaper compared to taka loans.
Present export trade payment models, export proceeds are easily encashable by way of bill discounting or early payment from external financing companies.
Despite month-end time is crucial for exporters since there is a time mismatch between payment needs and cash flows.
During this time, they need finance for salary and utilities at lower rates. Such financing is only possible if allowed in foreign currency like buyer’s credit.
This can save them huge, including waiver of unrest in the industries.
Export sector needs to be supported so that it can grow with sustainability.
In a simple way, they can be supported with exchange rate management and low cost working capital financing in foreign currency.
At the stage of graduation from LDC status, authorities concerned should come out of its conservative cloak and play proactive roles to support export sectors in all ways including exchange rate benefits and low cost working capital financing in foreign currency as an alternative to cash support under fiscal policy.
Sufficient space may, on meeting operational costs, attract professionals to work in the sector for its continued sustainability.
The author works in the development sector and can be reached at [email protected]