Did cash incentives for exports really work?

The government offers cash incentives in the range of 1% to 20% to a wide range of sectors to diversify export products and markets. This support is intended to encourage entrepreneurs to explore markets for mainly non-conventional items and find new markets for existing products. It is expected that the export sectors enjoying the cash support to offset cost burden and stay competitive in the global market will someday be able to stand on their own. But the reality is that most of the export sectors other than apparels could not demonstrate promising growth despite receiving cash support for years.

While the ready-made garment sector could uphold its share above 86% of total export keeping pace with the growth in volume, shares of frozen fish, agro-products, leather goods and jute goods declined in the last year from the levels seen five years ago. Ceramic, plastic and engineering products have seen a marginal increase in their shares of overall exports.

All these sectors are beneficiaries of cash incentives, with the largest export sector textile – knit, woven and home textile – getting 4% and others between 7% and 20%. Export Promotion Bureau (EPB) data show RMG exports grew from $34.9 billion in the fiscal 2018-19 to $48 billion in FY2022-23, commanding over 86% of total export volume. Among others, only the leather sector could earn over $1 billion a year, with three others – jute, agricultural and engineering products fetching between $500 million and $1 billion.

Agricultural and jute products enjoy the highest 20% of export value as cash incentives, but the sectors could not sustain the $1billion mark achieved at least twice in the last five years.

During the period, proceeds from the leather sector, the second largest exporter, dropped to $912 million in the last fiscal year from over $1 billion.

This is the picture of a selected list of eight major products. Scores of other products, from bicycle and motorcycle to ship, razor blades to software and hardware, are among the 43 categories of products that get cash support.

Still, the country's economy is dependent on a single sector, RMG.

Economists and experts feel that the current export cash incentives policy should be revised if the government wants to make export sectors competitive and strong enough to diversify the export basket.

Exporters also have urged to analyse sector-wise contribution to export earnings while determining cash incentive rates. Instead of giving cash support for decades to some selected sectors, the government should include some struggling industries in its list to strengthen the industry base and develop some new sectors which really have potential in the international market, they suggest.

Talking with The Business Standard, economist Dr Zaidi Sattar, chairman of the local think tank Policy Research Institute (PRI), said, "After analysing export data between 2005 and 2021, we found that about 1,600 items are exported from Bangladesh. Of them, 300-350 items have export value crossing the million-dollar mark, the rest are below that.

Most of these entrepreneurs find the domestic market more profitable than the international market, he said, explaining why new export sectors are not emerging at a desired level despite cash support.

"In some cases the domestic market offers a profit margin of 20% to 30%, which is quite impossible in the export market," Dr Zaidi Sattar pointed out.

Such industries are not willing to grow for international markets as protective tariff measures created a comfort zone for them at home, he observed.

Citing an example, the economist said, "We have been producing biscuits for more than 50 years, but the local industry, protected by a high import duty, does not feel the urgency to improve their quality to international standard despite having the capacity."

Bangladesh Textile Mills Association (BTMA) President Mohammad Ali Khokon said once the government provided a 25% cash incentive for local primary textile to strengthen backward linkage of the apparel industry, now it has come down to 4%.

Though the textile and apparel sector contributed more than 86% of total export earnings and also created the highest employment opportunity, contributions of some other sectors that are enjoying high rates of cash incentive still remain much below what it should have been, he added.

The textile industry leader suggested that the government should conduct an evaluation of its subsidies and incentives to export industries.

"Export sectors with higher contributions may feel discouraged if the government does not rationalise the cash incentives."

Bangladesh's denim, woven apparel and home textile face 14.5% duty in the US market. If the government revises the current policy support, these products will gain more share in the US market, he said.

A leading apparel exporter has also observed that the government should revise cash support policy taking into account global market demand and at present, backward linkage industries for man-made fibres need to be promoted more than the cotton-based industry.

The entrepreneur, who wanted not to be named, however, found no justification to provide incentives to a 40-year-old industry on a wholesale basis. "Such support for a long period has rather turned the sector handicapped instead of making it efficient and competitive," he commented, sharing his own view that an industry should not be given a lifelong "baby walker" to help it learn to walk on its own.

SQUARE Textiles Operations Director Taslimul Hoque, said they have invested on man-made fibre-based technology since 2005, now their cotton yarn and synthetic-blended yarn capacity ratio is 30% and 70% respectively.

He mentioned that man-made fabrics cost much less in China than in Bangladesh and synthetic yarn and fabric producers here need policy support from the government to lower production cost and stay competitive in the global market.

"If the government provides policy support Bangladeshi entrepreneurs will be able to compete globally through vertical setup of textile and apparel," he added.

Bangladesh Garment Manufacturers and Exporters Association (BGMEA) President Faruque Hassan sought 10% cash incentive to increase market share of MMF apparel, as it now dominates about 70% of the global market.

Sector wise growth in export

Only Apparel sector exports saw a moderate growth over the last decade in FY 2011 in earnings was $22.9 billion and it stood at $55.6 billion in FY23. On an average it added about $3 billion every year to the country's merchandise export.

On the other hand, the home textile sector became the second largest export earner during the pandemic in FY22 with $1.62 billion from less than $ 400 million from FY11 till FY20.

Exporters mentioned how the post-pandemic export recovery was being affected by the Russia-Ukraine war resulting in worldwide inflation and slump in demand for exports. Prudent policy support would help the industry become more efficient and productive to sustain the global competition, they felt.

Noman Group Executive Director Md Shahidullah Chowdhury said home textile exporters are not able to compete with Pakistan, China and Indian exporters as they have their own raw materials and competitive advantage because of proximity to deep-sea ports with faster routes to major global markets.

Pakistan also got advantage from currency devaluation advantage, he added.

"On the other hand Bangladeshi exporters are facing many challenges – hikes in utility prices, high rate of bank interest, dollar crisis making imports of raw materials difficult and some policy barriers such as slashing of export development (ED) fund," he said, listing the current problems faced by the country's export industries.

Despite having 100% local raw materials and 15% cash incentive facilities, the leather and leather goods export are facing obstacles to explore the export market due to lack of environmental compliance in Savar leather industrial park, as its central effluent treatment plant (CETP) is still working only partially, industry insiders said.

Md Shaheen Ahamed, chairman of Bangladesh Tanners Association, told TBS that compliance is the main challenge for the leather sector's export growth. "Besides, the Russia-Ukraine war also badly hit customers' buying capacity."

Once billion-dollar-earner jute and jute goods sector also fell from its short-lived glory despite enjoying 7% to 20% cash incentives.

Entrepreneurs mentioned that lack of value addition and raw jut hoarders affected this sector's growth.

Earlier, Akij Group Chairman Sheikh Mohammed Nasir Uddin said, "In the just concluded fiscal year, the jute sector went through a bad period, and it was expected as local jute trader-syndicates hiked raw jute prices irrationally over the past years. Some of our buyers have moved to alternative fibres, as a consequence."

"This year, Bangladesh jute farmers saw bumper yields in cultivation, which will naturally stabilise the market," he hoped.

Agriculture products export crossed the $1 billion dollar export mark for the first time in FY21, after another fiscal this sector export earnings also nosedived due to the global inflation and supply chain disruptions.

Pran RFL group Marketing Director Kamruzzaman Kamal said, due to inflation Agriculture products orders sharply fell down at global market.

On the other hand, exporters are becoming uncompetitive due to overhead cost hike by utility and raw materials prices hike.

Though often cited as Bangladesh's key competitor in the global market, Vietnam is far ahead in terms of export diversification with eight times higher exports than Bangladesh. As the import-export gap in Bangladesh keeps growing, inward remittance appears to be a saviour, which is now in stress. Since export growth remains the only option to maintain external fiscal balance, Bangladesh needs to revisit its policies of export incentives and make sure only promising sectors get due attention.