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Dhaka Tribune

Export diversification and input imports

Expanding our network of export and import destinations can only be beneficial

Update : 27 Sep 2023, 09:33 AM

Export diversification is a term frequently coined along that of new market exploration and it can be achieved by adopting different initiatives. 

In Bangladesh, there are now new market exploration opportunities in the export of textile goods. These new facilities allow for exporting to other destinations outside of the US, Canada, EU, and UK. Still, the major destination of exporting ready-made garments remains to be Europe and North America.

Jute and tea were once the country’s main export items. Ready-made garments became a major player in the 80s, where Bangladesh would provide manufacturing activities as an offshore location, executing orders of a third-party country. 

Ready-made garments depend on input materials from external sources. Thus, imports are initially required, which in turn needs financing. Policy support in this regard was extended by the government through customs bond licenses -- under which imports are executed without payment of duties -- and letters of credit (LCs) -- back to back LCs were allowed for input imports on deferred payments terms. As a result, payment for input imports can be settled out of repatriated export proceeds.

These two facilities -- customs bond and back to back LCs -- would support a lot for promotion of readymade garment exports. 

Backward linkage industries can facilitate front line industries like ready-made garments through supplies of inputs like cotton, fabrics, etc. In this respect, other support structures were introduced in the form of cash incentives, in lieu of customs bond and duty drawback facilities for exports of textiles goods using cotton produced in Bangladesh. Around 43 items/sectors, including textiles goods, now operate within the criteria of cash incentives. Despite this, export is still concentrated on ready-made garments. 

Many studies have been conducted on diversifying our export basket, but with no visible result. The problem needs to be identified. 

As we know that customs bond facilities are focused on export oriented industries. And back to back LC facilities are linked to bond licenses. Without bond facilities, revenue regulations like advance tax, duties, value added tax, are applicable for procurement of inputs. As per regulations, local procurements against inland back to back LCs are subject to availability of customs bond licenses. Otherwise, local deliveries need to be grossed up with value added tax. 

On the other hand, imports become costly due to imposition of different duties which need to be paid upfront before repatriation of export proceeds. There is a mechanism under which exporters get refund of duties, value added tax, etc, on completion of exports. But the refund policy is not popular due to different bottlenecks. 

Exports are sales beyond borders. It is not easy to promote. There are different talks regarding diversification of products and markets. In this context, access to markets under a duty free, quota free framework is well cited for which bilateral, regional, and multilateral trade agreements get priority. These arrangements are a support, but it cannot promote exports. 

Street vendors are to sell vegetables, but we do not know producers of these items and pathways at our reach. Like channeling of manufactured products in the domestic market from production facilities to retailers or e-traders, there are different paths required to pass through to promote products in international markets. Duty free market access is not everything; rather there are different parameters to diversify products and markets for exports.

A costly factor

Cost is a factor in export trade. As said earlier, market access is focused on duty free, quota free entry of products to destination markets. But the production process needs to be free from duties, taxes, and different levies in the home country to make products competitive in price for international markets. These issues remain neglected in most of the cases.

It is true that readymade garments are sold abroad, so no local sales are made. And export oriented industries are under a policy support net, like bond facilities, back to back LC facilities, etc. It is questioned why all exports are in need of customs bond facilities if they dont require input imports. Maybe it is possible to operate without a customs bond. 

Problem is that exporters need to bear value added tax for procurement of input contents locally. But export price does not include value added tax to be realized from importers abroad. Such exports without a streamlined refund system cannot be sustained in the global market due to a lack of price competitiveness. Domestic regulation needs to be fine tuned to promote exports. 

There are some products operating in both markets -- domestic and international. It is observed that these products are not benefited under revenue regulations of the country for sales to global markets. But the policy for cash incentive requires maintaining specified value addition with the condition that customs bond facilities and duty drawback support are not utilized. This is certainly a type of support, but it is indicative of no support applicable with regards to duties, value added tax, etc. 

Importing employment

Export is said to be an importer of employment. Sales of finished goods abroad mean the destination countries import goods, and export employment. It is also true the other way around when we import finished goods. Considering the population of the country, generating employment is of the highest priority, for which the import of employment is necessary. Mass employment is only possible through exports of goods.

The international trade of the country is guided by Import Policy Order and Export Policy. Transactions with destination countries are executed by foreign exchange regulations. There are other regulations requiring customs formalities. No duty is assessed for payment against exports. But import is subject to payment of different duties, taxes, and levies. Value added tax is also applicable for local procurements, as said earlier. 

Import Policy Order states that partial export is to be facilitated with release of inputs against bank guarantees. It indicates that industries having dual markets -- domestic and international -- will be kept out of bond facilities. In its place, goods are to be imported against bank guarantees. 

It raises a question whether a bank guarantee is an easy path. It is not so easy, rather it is a non-funded facility extended by banks on commission. Banks follow credit norms to issue such guarantees. As such, release of goods against bank guarantees is not a cost free procedure. 

Bangladesh began developing the manufacturing industries in this century. But the starting point of the development path was export. Manufacturing industries are focused on the domestic market, but they have scope to penetrate global markets also. 

As an easy example, pharmaceutical industries have found tremendous development in the local market and they have the scope to promote export markets. The government is extending cash incentives against their exports. This is definitely a facility provided by the government, but it cannot allow export prices to be set at a competitive level considering a reasonable margin, and product cost free from regulatory levies. 

There are many other sectors which can go beyond borders for which policy support on procurements without extra cost needs to be introduced. 

Promotion of new markets is not an easy task. Export trade with Europe and North America is going only smoothly because of the existing strong banking systems. But markets for Central Asia, South America, and Africa are not found at developing levels. Same issue comes as a problem -- banking. But it is not easy to resolve the problem. Rather we need to bypass the problem by initiating countertrade arrangements with these destinations. 

Export brings foreign currencies and employment. The sector needs to be promoted with product diversification and market expansion for the sustainability of the economy. Alternative policy support with regards to imports and local procurements by industries without imposition of levies, working for domestic and international markets, to expand the product basket are necessary. 

Countertrade needs to be in place for exploration of new export destinations.

Mehdi Rahman works in the development sector.

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