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Dhaka Tribune

Government announces a gradual lowering of export subsidies

The circular notes a reduction in the special incentive for the RMG sector, the country's leading export earner, from 1% to 0.5%

Update : 30 Jan 2024, 09:05 PM

The government has revealed an extensive plan aimed at reducing export subsidies for all goods, marking a significant step towards aligning itself with the impending graduation from Least Developed Country (LDC) status in 2026.

In a circular issued by the Bangladesh Bank on January 30, the government has opted for a gradual phase-out approach for export incentives. 

Specifically, the circular notes a reduction in the special incentive for the readymade garments (RMG) sector, the country's leading export earner, from 1% to 0.5%.

Furthermore, incentives for exploring new markets have been scaled back by one percentage point to 3%, impacting various industries including frozen seafood, agro products, leather and leather products, jute and jute goods, among others.

The incentives for diversified jute products have been decreased to 15% from the existing 20%, while those for leather and leather goods have been adjusted to 12% from the previous 15%.

According to the latest official data from the government, a substantial 65% of these cash incentives, amounting to nearly Tk5,000 crore, primarily benefit the garments and textiles industry.

Dhaka Tribune obtained a copy of the latest circular from the central bank, which specifies that apparel items such as men's or boys’ knitted or crocheted shirts, men's or boys' knitted or crocheted briefs and similar articles, as well as men's or boys' suits, ensembles, jackets, blazers, trousers, etc, are not eligible for cash incentives.

The cash incentives for exports to three major new markets—Australia, India and Japan—were set at 4%, but the new circular has placed these three markets in the Traditional Market category, thereby eliminating the cash incentive.

Furthermore, the circular specifies that five apparel items under the Harmonized System (HS) Codes 6105, 6107, 6109, 6110, and 6203 are not eligible for cash incentives. These items include men's or boys’ knitted or crocheted shirts, men's or boys' knitted or crocheted briefs and similar articles, knitted or crocheted t-shirts, singlets and other vests, jerseys, pullovers, cardigans and similar articles, as well as men's or boys' suits, ensembles, jackets, blazers, trousers, etc. Notably, these items constitute more than 55% of the total Ready-Made Garments (RMG) export items. 

The new circular has been effective from January 1 of this year which said that to boost the country's export trade, the government is providing export incentives/cash assistance against exports in 43 sectors in the current financial year 2023-24.  

As per WTO regulations, the matter is considered a Subsidy Contingent upon Export Performance and as per the Agreement on Subsidies and Countervailing Measures (ASCM), no export incentive or cash assistance can be provided in case of transfer from least developed countries.

Bangladesh is set to transition from being a LDC in 2026 and if the export incentive or cash assistance is completely withdrawn at the time of graduation, the export sector may face tremendous challenges. 

So, the government has decided to gradually increase the rate of cash assistance in various sectors from January 1 of the current year.

As per the said decision, the existing export incentives or cash assistance in 43 sectors in respect of products shipped from January 1, 2024, to June 30, 2024, will be applicable, the circular stated. 

The decision has sparked debate among exporters, who are worried about how it may affect their bottom line.

Manufacturers shocked 

Speaking to Dhaka Tribune, Faruque Hassan, the President of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), expressed concern about the reduction in cash incentive rates across four categories. He emphasized that this timing is inappropriate, given the country's challenges with depleted reserves and diminished remittances.

Highlighting the difficulties faced in 2023, including a severe energy and gas crisis and a significant 178% hike in gas prices, Hassan pointed out the global economic turmoil affecting the West and other major destinations. Despite the crises, he noted that the Ready-Made Garments (RMG) sector is a key player supporting the economy amid the Russia-Ukraine war, the Red Sea Crisis, and constrained foreign reserves.

Expressing shock, Hassan stated that the decreased incentives from major new markets like Japan, Australia, and India felt like a punishment for the industry's success. Regarding the five excluded items, he emphasized their critical role, constituting 55%-80% of total RMG export items.

Hassan also highlighted a discrepancy in the circulars, noting that the previous one mentioned incentives until June 30, 2024, creating shockwaves in the industry when the current circular was issued retroactively. He affirmed their commitment to taking measures for the country's interests, survival, and foreign reserves.

BGMEA Vice-President Shahidullah Azim echoed these concerns, emphasizing that wage hikes and increased interest rates had already strained the industry. He urged the government to engage in discussions with stakeholders before making such impactful decisions.

BKMEA Vice-President Fazlee Shamim Ehsan criticized the withdrawal of cash incentives for value-added products, emphasizing that it contradicted the government's focus on value addition. He specifically raised concerns about reduced incentives for high-value products like suits and blazers, warning that it could hinder product diversification and impact the global competitiveness of the knitwear sector.

Data from the Export Promotion Bureau revealed that the five items without cash incentives contributed significantly to exports, constituting nearly half of the total export figure and over half of the total RMG exports for the last fiscal year. The Bangladesh Bank circular highlighted that the government has been providing cash incentives for 43 export items to encourage their growth.

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