How Bangladesh govt plans to help exporters post-LDC

TBS Infographics

The government is set to bring substantial changes to the upcoming export policy, aiming to bolster the country's exporters and promote export-driven industries in the post-LDC era, as several benefits such as duty-free export, direct cash assistance, and currency retention schemes are set to expire.

In the draft Export Policy 2024-27, seen by The Business Standard, the commerce ministry has proposed a 5%-10% rebate on electricity bills for industrial establishments that produce major export products as an alternative to cash incentives.

The ministry also proposes eliminating all licensing fees for exporting firms and exempting customs duties, with only 1% duty retained on imports of capital and retail equipment. This would significantly reduce business costs for exporters.

Export policies, typically formulated every three years, rarely see such revisions to the support package offered to exporters. The latest draft policy is likely to be approved by the end of this fiscal year.

Mostafa Abid Khan, a former member of the Bangladesh Trade and Tariff Commission and senior fellow at the Policy Research Institute (PRI), told TBS that the country's post-LDC export situation hinges on the government's policy.

"It is not prudent to outline extensively the alternatives to cash assistance post-LDC graduation in the export policy. There is uncertainty regarding the feasibility of providing electricity bill rebates as per the World Trade Organisation norms," he said.

The trade analyst mentioned that the US has lodged a complaint against India at the WTO over the diverse export benefits India provides. Now, India is contemplating withdrawing several of these benefits.

While the LDC graduation in 2026 represents a milestone in Bangladesh's development journey, it also poses challenges. The export sector may face challenges such as loss of preferential trade agreements and increased competition in global markets.

Mostafa Abid said Bangladesh will retain duty-free export privileges in both the European Union and the United Kingdom until 2029, and approximately 60% of the current exports will remain unaffected.

Around 73% of Bangladesh's overall exports are conducted under preferential terms, mainly to the EU and the UK. If an Economic Partnership Agreement (EPA) can be established with Japan, similar duty-free facilities would be accessible there as well, he added.

According to a study by the Planning Division, Bangladesh is anticipated to encounter export setbacks estimated at $7 billion due to the cessation of duty-free benefits upon its LDC graduation.

However, despite this challenge, the government is set to aim for a $110 billion target in exports of goods and services by 2027, a goal considered ambitious by numerous exporters.

Mohammad Hatem, executive president of Bangladesh Knitwear Manufacturers and Exporters Association, told TBS that India provides electricity to its industries at Rs5, and to export-oriented industries at Rs3. In Bangladesh, per unit electricity costs Tk13, and a 10% or Tk1.3 rebate will be insignificant. It will not help exporters much.

"The government has the option to offer rebates on both electricity and gas bills. Additionally, the current advance income tax (AIT) imposed on exporters, currently at 1%, could potentially be lowered to 0.5%," he said.

"The Indian government provides exporters with a bond worth Rs11 against the export of 1kg yarn, fabric, or ready-made garments. If a trader exports 100,000 kilograms of these products, they can subsequently utilise Rs11 lakh from the bond to cover gas and electricity bills," said Hatem, calling for implementing a similar facility in Bangladesh.

What's in the new policy?

As outlined in the draft policy, current incentives within the export sector encompass a range of provisions, including the duty drawback scheme, interest rate subsidy, special bonded warehouse privileges, back-to-back letter of credit (LC) arrangements, export processing zone (EPZ) benefits, machinery imports for export-oriented industries, cash incentives, income tax rebates, currency retention schemes, export credit guarantee schemes, export development funds, VAT exemption on exports, and VAT refunds for exporters.

According to the proposed policy, export incentives, income tax concessions, and currency retention schemes may not be extended if the recipient country is classified as a developing nation. However, provisions such as duty drawback, VAT exemption on imported and exported production inputs, VAT refunds for exporters, EPZ facilities, back-to-back LC facilities, special bonded warehouses, and duty drawback schemes can be retained.

Currently, merchandise exporters are entitled to a foreign exchange retention quota of 60% of repatriated freight on board (FOB) value of their exports.

The viability of the export credit guarantee scheme hinges on the inclusion of long-term operational expenses following LDC graduation. The interest rate for loans from the Export Development Fund (EDF) cannot dip below the rate prevailing in the international capital market.

As per the draft export policy, the EDF will offer low-interest bank loans to establish green energy units in export-oriented industries requiring continuous power supply. Loans will also be provided for building effluent treatment plants (ETP) and environmentally friendly factories.

Regarding the expansion of bond facilities for export industries, the draft policy suggests gradually decreasing duty rates on imported raw materials for export goods. Additionally, the National Board of Revenue will evaluate the feasibility of establishing a central bonded warehouse for small and medium industries, taking appropriate measures accordingly.

Efforts will be made to mitigate production costs by enhancing logistics capacity through the formulation of a National Logistics Policy. Additionally, the policy aims to foster the development and export of innovative, higher-value-added products tailored to meet customer demands through research and development (R&D) initiatives.

With governmental backing, the establishment of an international-grade laboratory is slated to verify the quality of export goods, ensuring their acceptance in global markets. Measures will also be implemented to provide technical support to exporters, enhance product branding, and improve quality standards.

The policy underscores the importance of consultancy services, software implementation, data processing, databases, and IT and IT-enabled services to boost exports in both the manufacturing and service sectors.

For cross-border service exports, a 2% incentive will be provided if the export income is repatriated through the banking channel. Similarly, bringing income back home through the banking channel after providing service abroad will entitle the exporter to receive an incentive matching the rate of remittance incentive. If goods under back-to-back LCs are transported by Bangladeshi ships, the shipping company will receive a 2% incentive based on the freight charge.

The government will ensure uninterrupted internet connection at affordable prices throughout the country to increase the export of services. Effective measures will be taken to increase exports through e-commerce.

According to the draft policy, the Bangladesh Bank will undertake essential steps to implement an independent, efficient, and globally recognised payment system for collecting foreign exchange earnings related to exports through e-commerce. It will permit Bangladeshi service providers to establish offices, branches, or subsidiaries overseas to export services.

The process of obtaining tourist visas in Bangladesh will be streamlined. Enhanced accommodation and security measures will also be implemented to attract foreign students to universities in Bangladesh.

To enhance the quality of exported manpower, training institutes will be established at the district and upazila levels. Additionally, efforts will be made to promote the teaching of commercially significant languages such as English, Chinese Mandarin, French, Spanish, Arabic, and Japanese in language education institutions. Incentives will be provided to encourage the establishment of private language education institutes, according to the proposed export policy.

Ambitious export target

In the existing export policy 2021-24, the commerce ministry set a target of increasing the export income of the country to $80 billion. 

Ministry officials, however, said achieving this target is not feasible amid the global economic downturn spurred by the pandemic and the Ukraine conflict.

According to the Export Promotion Bureau, Bangladesh earned $63 billion from goods and services exports in the fiscal 2022-23, with goods accounting for $55.55 billion.

The commerce ministry has set a target of $72 billion in export earnings by the end of June in the current fiscal year.