But for the immediate future the main focus should be on the garment sector. This is the only sector where major increases in export earnings are feasible in the next three years and where the growth through the next decade can be increased. The target should be an increase in the growth rate of the RMG sector to 10% by 2030. Ambitious, but essential for returning the economy to 5-6% growth.
RMG prospects
Confidence of buyers comes from performance, but enhancement is possible if small groups of buyers can reach very senior government officials, eg the governor of BB; the finance advisor (who is also commerce advisor). It is useful for such officials to hear from the buyers their problems. Such meetings also give confidence to the buyers that they are being taken very seriously.
BGMEA stays in touch with the buyers, but there is rivalry that distorts a clear assessment of confidence. At present confidence is low. There is uncertainty as to the future political stability. The transport and energy situations are disturbing. Linkages with the rest of the world are weakening. Only successful action will build buyer confidence. Of course they will encourage the Bangladesh factories, but they are looking at expanding purchases from other countries. One should not underestimate the difficulties of building confidence.
BGMEA working with the government could establish links with Western universities that have strong textile and garment management departments
Furthermore one must recognize that a large part of confidence rests with the industry and the society, not the individual manufacturer. If everyone goes their own way then confidence will not rebuild. BGMEA and the Ministry of Commerce must work together. Deeper involvement of the buyers with the government as described above would build confidence.
Energy
The shortage of grid-delivered energy is a very serious problem for the garment sector. The alternative is to purchase diesel and generate for their own standby generators. The best solution is to ensure the grid-supplied power is steady and to lower the cost by better management of the grid. There are almost certainly excess capacity payments to the rental companies as there is no proper verification of the ability of the plant to generate the power claimed. This leads to overcharging of capacity payments.
If one corrects for this, including payments previously made, then capacity payments will be greatly reduced. There may even be cases of excess capacity payments exceeding the value of the plant. In which case the PDB may claim to take ownership of the plant. BGMEA should carefully monitor by survey the actual cost of energy. There are several alternatives as to how energy is provided to the plant. Regular surveys should track the costs and seek ways to reduce this important number.
The issues in the energy sector remain very large. It will be several years before significant progress in cost and quality can be achieved. The increase in generating capacity was achieved with parallel corruption, resulting in high costs and poor quality. The mismanagement of fuel mix results in high cost and risky availability. This also will take many years to correct, but is fully possible. In addition to the cost question, the quality question is important for the industry. Modern technical machinery used in the industry requires stable voltage and frequency. The grid does not supply this, with poor results for RMG machinery.
The failure to develop a sound energy sector leads to serious problems for manufacturing. The authorities failed to realize that imported fuel would be very expensive and refused to develop the fuels within Bangladesh (coal and natural gas).
Technology
For a successful RMG sector there must be a steady increase in productivity. This means purchase of new machinery, training in its use and maintenance, and fitting it into the production lines. BGMEA working with the government could establish links with Western universities that have strong textile and garment management departments. Cooperation would involve training of Bangladesh teachers who would work in the Bangladesh universities bringing up to date technologies to Bangladesh. Hopefully leading engineers in the United States and other countries would come to Bangladesh for knowledge transfer and research. Research on manufacturing is more productive if the research is done close to the manufacturing locations. It is that synergistic relationship that must be reached to keep the sector leading the world.
Over the next decade, the RMG sector will survive only if it increases productivity. That outcome will come only if research focussed on the actual problems of the industry increases; and this requires linkages to existing research centres.
Transportation
There are serious difficulties in the transportation of materials in and out of Bangladesh.
1: Sending samples of garments and materials back and forth between factories and buyers. This depends on the use of air freight. Problems arise as the procedures for air freight going both inward and outward are difficult and often badly executed. Improved freight management is a continuing problem.
It is essential to lease this out to an experienced foreign company. Experience of the past decade has shown that Biman cannot do this. There are no experienced companies. Bangladesh with its customs procedures and the air freight handling is probably one of the slowest countries in the world in supporting the garment sector.
2: Moving containers back and forth between Chittagong and Dhaka. This is largely done on trucks but some go on the railway. The highway is congested, resulting in fairly long times spent on the road. There is also some robbery of trucks. The Chittagong road is usually very congested and waiting to be loaded and to clear customs takes the garment manufacturer about a week, far too long.
3: Outgoing containers are sent to a private container terminal where they are stored until sent to a ship according to their logistics program. Some containers are stuffed at the container terminals with the materials for export sent in cartons.
4: Incoming containers with materials for the factories clear customs and then proceed by truck or train to their destination.
5: Land ports are also used for both export and material imports. This happens as the internal logistics of Bangladesh ports are so badly handled.
Dealing with the transport problem
The biggest problem facing the industry is hold-ups by customs. These hold ups are often resolved by a bribe, rarely by discussion. Nevertheless, all of this takes time. Perhaps with the new regime in Bangladesh there will be an improvement in the way customs handles exports and imports. But now logistics is inefficient resulting in higher costs to the garment sector plus longer times outside the factory. This is a major reduction in competitiveness.
BGMEA should carefully monitor the time that it takes for each step of the transportation process as well as the cost and build a model of how long it takes and what it costs. The monitoring should be regular and accurate. Only clear, accurate data will convince the government of the reality and encourage them to take actions.
Exchange rate and lower prices
Ultimately the success of the industry is based on competitive prices and this is closely connected with the exchange rate. In the past two years the exchange rate has depreciated 40%. This should give the industry considerable power to increase competitiveness. Of course, the costs of raw materials and energy have risen, but the depreciation of the Taka should provide a boost to the industry. It is not clear what the changes in earning took place from this depreciation. But one might have expected lower prices to maintain the competitive position of the sector.
In reaction to the falling Taka and expectation of continuing declines, it appears that some manufacturers are not repatriating their earnings promptly. BB has adequate records to monitor this and enforce the regulations for prompt return of earnings. In FY24 the repatriations less exports came to $1.8 billion. That is in FY24 almost $2bn was not repatriated. However, in FY22 and FY23 combined, repatriation of fewer exports were $2.8bn. Hence over the past three financial years about $1bn was repatriated more than exported.
The depreciation of the Taka is expected by most analysts to continue over the next six months. My estimate is that in six months the exchange rate will reach 145/$ another 20%. This will increase competitiveness significantly. These points apply to all exports.
Finance
Proper financing of the RMG sector and other exports is critical. Improving the financing of RMG should begin with BB receiving a complete inventory of all loans taken by the RMG factories, including the basic details. BB would issue some rules about handling overdue loans in the garment sector. A systematic approach to rescheduling such loans could be followed with adjustments of costs, technology, labour, and management, with the objective of helping the factory to correct their financial position after making hard choices to reduce bad loans.
Without pressure from the lending banks most factories with weak financial conditions will not take any true corrective actions, hoping to push off into the future uncomfortable actions. A systematic program to improve the financial condition of the RMG sector will play a central role in building a strong future.
As part of improving the financial condition of the industry, there needs to be a standard framework for the management of a garment order, recording details of the process up to receiving payment.
This enables both bank and factory to keep track of the progress of an order and enable the central bank to estimate expected earnings and shipments of garments.
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 3.
