The single most important action to revive the economy is to raise the growth of exports to a steady rate of increase in nominal terms of at least 7-9% per annum. In FY24 the economy has grown very slowly, certainly below 4% per annum. Export growth has been stagnant over the past three years.
In FY24, merchandise exports declined by 6% but picked up in the first quarter of FY25 to 5%. [These are balance of payment figures; the first five months of the Export Promotion Bureau report an increase of 11%]. No conclusions can be drawn of any change in the growth trend of exports. Imports fell 11% in FY24. Capital goods and construction material imports fell. This implies that total investment also fell. Government consumption expenditures fell according to the budget data. These figures suggest strongly that the GDP may well have fallen but certainly growing below 4%.
If the GDP growth rate increases imports will grow; to keep the balance of payments in equilibrium, exports must increase. Increasing export growth means faster growth of the RMG sector.
This then becomes the key policy objective -- raising RMG export. Growth will follow without inflationary pressures. Growth of dollar earnings with 7% export growth and 3% growth of remittances will support an economy growing at 5.5-6%. Without growth of export earnings, at this rate, the economy will not be able to grow more than 2-3%. Other exports are unlikely to increase rapidly over the next 5-7 years -- the future of the economy depends on the RMG sector.
These rough estimates indicate that the energy consumption by the RMG sector, transportation of containers, and shipping facilities will have to increase 80% in the next five years. To achieve a reasonable GDP growth rate the dollars earned from exports will have to increase by 7%; most of this is coming from the RMG exports and the physical production must increase at 13% due to the declining prices of RMG products.
The economics of the RMG sector suggest at present wages, exchange rate, interest rate, and inflation, the real return to equity is very low. There is little incentive to invest in greater production capacity. The following three recommendations focus on the RMG sector in the short run and the systematic increase of other exports in the long run.
The future of the Bangladesh economy and social stability rest on the ability of the government to achieve these two objectives:
Depreciate the currency by 20%
The RMG sector cannot compete under present conditions; other exports face similar conditions. The wages of workers will have to increase to compensate for the inflation; the new actions in the banking sector will force the RMG factories to repay their overdue loans.
The thin margins in the RMG sector will be further lowered by these developments. The only solution is to depreciate the currency to increase the earnings of the RMG establishments. There is great opposition to further depreciation. But already, the Real Effective Exchange Rate is appreciating. As noted above the RMG sector return on equity is less than 5%. Other exports are not performing well even after the 40% depreciation.
My conclusion is that a substantial depreciation is needed to encourage expansion of the export industries. With the current returns to equity and growing pressure on wages and loan recovery there is little interest in expanding production capacity without greater earnings.
The eight actions for the RMG sector
All these steps must be of sufficient magnitude to enable the industry to expand handling of increased production of 12-14% per annum in physical products. The most difficult areas are the container freight movements. Managing an 80% increase will be difficult without bold solutions.
Develop programs for export
Products include shrimp, footwear, spare parts for vehicles, cooling apparatus (with a major program for domestic consumption). This requires a careful study of each sector over six months; a project design including implementation over three months; financing over six to 12 months.
Shrimp and footwear should produce prompt results within 5 years; exports are low due topoor government policies. The cooling project is to develop a very large capacity to produce different kinds of cooling equipment for the domestic market and the African market.
For each major sector for export development, implementation should be the responsibility of a small team with a government officer as chief and a number of private sector owners. This group should be strong enough to overcome bureaucratic inertia.
Implementation plans should cover industrial organization, critical environmental and customs problems, financing, and manpower development. The four sectors mentioned here are illustrative and much work is needed to confirm that these have potential, but the government should not undertake more than four.
Prospects for shrimp are very good. There is a great deal of undeveloped land suitable for shrimp production. The development of the sector needs experienced guidance. The different components of the sector nurseries, feed plants, trading system, and processing for exports need development, financing and some regulatory control.
Market development will take time but quality and timely delivery will be strong factors. The shrimp sector as it develops will produce considerable employment opportunities.Shrimp farms should develop into profitable enterprises.
For footwear, the proposed review will identify the kinds of shoes that should be produced: Some cow leather; some with shoes knitted from appropriate yarn; goat leather for high fashion shoes. For leather the tannery facilities need to have improved environmental management. This mismanaged facility has undermined the leather industry.Correction is not difficult. Customs rules have also made footwear production awkward.Again, a PSI program for all imports for the footwear industry would partially resolve customs problems.
For light engineering, there has been much talk over the years of finding ways to enter into the supply chains to become the source of some parts. Preparing a program for this is straightforward, but signing contracts takes persuasion.
For cooling equipment, the world has to produce this to survive. Bangladesh has to greatly improve its capacity to manufacture cooling equipment, establish research centres in universities to work with this industry, and prepare to export to African markets. For Bangladesh, 150-200 million cooling units are needed for the country to survive the rising heat levels. The African market is many times larger. Success must come from design and systems appropriate for conditions and culture.
Forrest Cookson is the Research Advisor to the Centre for Research and Development. In Bangladesh, he led the central bank component of the Financial Sector Reforms; was the Team Leader of the study of Northwest Area Development of Bangladesh; and served as the Statistical Advisor of the Legal and Judicial Capacity Building Project.
