Further cuts in export incentives, RMG fears rise in costs

Table: TBS

Apparel sector – the single largest export earner, also the biggest beneficiary of generous support – is going to lose the most as incentives for all export items have been reduced for the second time in five months under the government's plan to prepare the private sector for LDC graduation in 2026.

According to a central bank circular issued today (30 June), the special incentive for the readymade garment sector – the most incentivised sector in terms of amount in the economy – has been cut from 0.5% to 0.3%.

Apparel sector does not see the incentive cut as a good decision during the current crisis period, despite having more time before graduation from LDC status. According to them, exports will decrease in the coming days due to the incentive cut in two phases.

The circular, which takes effect from today and will remain valid until 30 June 2025, however raised the incentive for crust leather from 0% to 6%, making it the only product to see an increase in incentive.

A senior central bank official said the government spent around Tk8,000 crore on incentives in the fiscal 2022-23, which is expected to fall in FY24 due to the reduction in the incentive rate.

Additionally, incentives for venturing into new markets have been reduced by 1 percentage point to 2%. This reduction applies to various sectors, including jute and jute goods, leather and leather products, frozen fish, agro products, and more.

Before the circular took effect, the highest incentive rate was for agro products, potatoes, and processed meats at 15%, which has now been reduced to 10%. Previously, a 20% incentive was given on these products before February.

According to the Bangladesh Bank circular, the government has been providing cash incentives for 43 export items.

Finance ministry data show that a substantial 65% of these cash incentives primarily benefit the garments and textiles industry.

Exporters for reconsideration

Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said it is not the time to cut incentives and the decision will hurt domestic spinning mills.

Applying for the 0.3% cash incentive costs more than the incentive itself, he said, adding, "If the incentive is given directly on repatriated export earnings, our harassment would be reduced to some extent."

The BKMEA leader said the cost of imports will now increase because "we are forced to increase import raw materials due to the reduction of incentives".

The incentives could have been reduced in 2025 or 2026 instead of now, he felt.

Fearing that exports will decrease due to the reduction of incentives, he said, "Gas and electricity prices have gone up, workers' wages have increased, and the interest rates on bank loans have also risen. As a result, our costs have increased more than before."

Faruque Hassan, former president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), told TBS that incentives have been massively reduced in the RMG sector.

"Now we will lose export competitiveness. We have taken many orders based on the previous incentive rate, resulting in a loss."

At this time, steps should be taken to increase the amount of export orders, to survive in the market, to remain competitive so that the incentive does not decrease, Hassan said.

Md Shahidullah Azim, director at BGMEA and managing director at Classic Fashion Concept Ltd, told TBS, "Abrupt reduction in incentives without providing alternative support will make survival increasingly difficult for us."

"Incentives are being reduced, but we need to enhance various policy benefits for the garment industry. India, China, and Vietnam offer significant policy benefits from their governments, and we should consider implementing similar measures in our country," he added.

Siddiqur Rahman, former BGMEA president, said, "I do not see the justification for reducing our country's export benefits in such a challenging economic environment."

"We have the opportunity to receive incentives until 2029," he clarified.

Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, suggested that incentives for LDC graduation should be reduced, and businessmen need to acknowledge the reality.

He pointed out that exporters once received Tk86 per dollar of export earnings, which has now increased to up to Tk118.

"I believe exporters have benefited significantly from the devaluation of the taka against the dollar," he commented.

Businessmen must confront the challenges they are facing, Rahman stressed. "Just a year ago, loans were available at 9% interest; now they are at 14%. Overall, traders' costs have risen. However, if the government reduces subsidies, exporters should be supported through other means.

"In many cases, our exporters face high transportation costs for export goods. Moreover, these traders should find it easier to access government services. Simultaneously, efforts should be made to enhance the efficiency and competitiveness of these institutions."

Selim Raihan, executive director of the South Asian Network on Economic Modeling (Sanem), told TBS that traders are in crisis due to the increase in the price of fuel and electricity. "If the incentives on their exports are withdrawn, their crisis will increase," he added.

According to data from the BGMEA, the five items deprived of cash incentives contributed $25.95 billion in exports, or 46.71% of the total export figure for the last fiscal year. The figure is 55.22% of the total readymade garment exports.

The circular mentioned that as per the WTO Rules, these cash incentives are considered as Subsidies Contingent upon Export Performance.

According to the Agreement on Subsidies and Countervailing Measures (ASCM), no subsidy/cash incentives will be allowed after graduation from the LDC status, it says.