Devaluation of taka may not be a long-lasting solution for the RMG sector to be competitive. Devaluation of taka will make import more expensive, which will ultimately backfire on the RMG sector
Recently, our garment sector has been experiencing a hard time. The total export from this sector has witnessed negative growth since December 2019. A number of policies have been put on the table to adjust and upgrade such declining growth in the coming years.
In the meantime, a lot many things are happening simultaneously around the world. The trade war between the USA and China broke out after the Trump administration took the office of President and everything started to change abruptly. The USA is a big market for China and other countries where they have exported a huge amount of raw, processed and finish goods and grew fast economically. However, the USA imposed an excessive tariff on export items from China and a few other countries, which put them in trouble. To tackle such a situation, China has devalued its currency a few times to adjust it's exports earnings, which raised eyebrows in the international community.
Readymade garment (RMG) is one of the biggest export earning sectors for Bangladesh and the second-largest exporter of RMG after China. Nevertheless, the RMG sector of Bangladesh is in a heavyweight fight with India, Vietnam, Cambodia, and Sri Lanka to retain its stronghold in the international market, for a few years now. RMG export contributes almost 84% of the total export earning of Bangladesh, which shows the single sector dominance of our countries' economy. Such dominance of a sector shows how our country's economy is not balanced and healthy. Recently, different ministries are making an effort to produce diversified exporting products and services that can support and offload some pressure from this giant sector.
The RMG sector in Bangladesh is the most labour-intensive sector that provides direct employment to more than 4.4 million people, of whom 80% workers are women. Moreover, more than 20 million people are directly or indirectly involved in this sector. Foreign buyers prefer Bangladesh for some specific reasons: low unit costs and cheap prices compared to the other countries of the world, acceptable quality, and improved compliance. Then what happened all of a sudden? Why is this superstar sector facing a hard time?
According to statistics of the Bangladesh Export Bureau, the RMG sector earned $2511.31 million in November 2019, while it was $2853.1 million in November 2018. This sector has experienced a 7.74 percent decline in export earnings in the five months until November 2019, than the previous year's export earnings. Many experts and professionals have attributed such decline to the global economic slowdown. But surprisingly, the RMG sector has been gradually growing in Sri Lanka, Cambodia, Vietnam and Pakistan. This is certainly a matter of great concern for the RMG sector in Bangladesh. Moreover, in recent years, garment factories are shutting down at an unprecedented rate for not being sustainable, due to minimum wage hike by government, lack of work order and uncompliance with safety measures, leaving an adverse impact on employment and negative growth in export earnings.
The recent devaluation of the currency in India has also put the Bangladeshi RMG sector at risk of further decline in export earnings in the coming years. Claims have been made that taka has been stable against the US dollar for long and as a result, the RMG sector in Bangladesh has been losing its competitiveness, as other countries are offering a lower price than Bangladesh. Even the President of Bangladesh Garment Manufacturers and Exporters Association (BGMEA), Dr Rubana Huq, has mentioned that it is high time to devalue the taka to be consistent with competitors' currencies. However, while Bangladesh is losing export earning sharply, the Central Bank of Bangladesh is moving tentatively in devaluing the currency to adjust the current account balance. But to make the garments sector more competitive, many experts believe that Bangladesh Bank should devalue taka heavily , which can bring better results than say give cash incentives on remittance earnings.
However, from our point of view, devaluation of taka may not be a long-lasting solution for the RMG sector to be competitive. The devaluation of taka has other implications on the economy. For example, devaluation of taka will make import more expensive, which will ultimately backfire on the RMG sector. The RMG sector of Bangladesh imports yarns, garments accessories like button, zippers etc., dyes and washing chemical, garments machinery, packaging paper and many other items which are necessary to prepare finished products, prices of which will all go up. The garment owners may then be forced to increase prices of their items. Consequently, the sector may again lose its competitiveness over other countries. Devaluation has other implications as well. Inflation in the country will increase further, which may create a demand to increase wages and salaries of workers and employees in the sector and further unrest may erupt, which will cause huge damage to the sector in no time.
Therefore, it is recommended that the central bank think wisely before taking a decision and not just chase after export earnings, because devaluation is a big monetary policy decision that involves national interest.
The BGMEA, BKMEA and all concerned authorities should concentrate on producing medium and high valued items than just producing tier one low priced products.
More and more regional trade agreements should be implemented. For example, bilateral free trade agreements, multilateral trade agreements, agreements to waiver taxes and tariff etc. should be done with different countries to bring more work orders for the RMG sector.
Considering the reality that the garments sector is running up to the saturation level, the government should immediately take measures to find out alternative sources of export earnings. For example, exports of agro-based products, fisheries, processed food, ICT and electronics items, shipbuilding projects and other technology-driven products and services should be encouraged to maximize export of Bangladesh.
Finally, the RMG companies should be given bank loans with minimum interest rate so that this sector can meet up working capital demand cheaply and effectively and can contribute to the national economy.