What is holding back Bangladesh from export diversification?

To sustain the upward trajectory of exports, expanding the range of products in our export basket is essential. The country's foreign exchange reserves are under significant pressure due to inconsistencies in export earnings, which have a ripple effect on import payments and broader macroeconomic factors. 

Over the years, leading economists, think tanks, and industry experts have consistently emphasised the need for export diversification to ensure sustainable international trade. However, little progress has been made on this much-discussed issue. The reasons behind the lack of diversification are well-known, and I have attempted to clarify them based on my practical experiences.

Dependency on a single sector

Bangladesh's export trade is heavily dependent on the apparel sector, which contributes 84% of the country's export earnings. This sector receives substantial support from the government, including cash incentives, bonded warehouse facilities, easy bank financing, and policy interventions during times of difficulty. 

The ready-made garments (RMG) sector benefits from lower production costs and large-scale employment, creating a disincentive for exploring and developing other sectors. 

Export destinations vulnerability

The United States and the European Union are the two primary export destinations for Bangladeshi products. Collectively, the EU represents the largest export market, followed by the USA as the second largest. These two destinations account for 44% and 17% of Bangladesh's total exports, respectively, while the rest of the world makes up 39.02%. 

Bangladesh's excessive dependence on the USA and EU makes its exports highly vulnerable. To reduce this over-reliance, it is crucial to explore and expand into new markets, such as Southeast Asia, the Middle East, Africa, Eastern Europe, Latin America, and other regions of North America. 

Potential sectors not receiving the same support as RMG

Other potential sectors, such as leather and leather goods, jute and jute goods, agricultural and processed products, handicrafts, pharmaceuticals, ICT and ICT-enabled services, and light engineering products, do not receive the same level of support as the RMG sector. 

These issues have been discussed on numerous occasions but have received little attention in terms of actionable progress. Sector-specific policy papers are needed to evaluate the pros and cons of their impact on the economy while also considering the approaches of competing countries. 

Policy-induced anti-export bias 

Domestic manufacturers enjoy government-imposed protectionism through higher import duties, which diminishes the competitiveness of local industries against foreign products. Due to the domestic market's convenience, manufacturers are often disincentivised to export as they avoid the compliance and standards required for the global market. Dependency on import tariffs for revenue collection is another crucial factor hindering export diversification.

Bangladesh is scheduled to graduate in November 2026 to a middle-income country, so to keep the growth and expanding export destinations, Bangladesh is set to graduate to middle-income country status in November 2026. 

To sustain growth and expand export destinations, Bangladesh must liberalise its international trade by considering the signing of Economic Partnership Agreements (EPA) or Free Trade Agreements (FTA) with potential countries and economic blocs.

Low technological advancement 

Limited technological know-how and poor integration of technology hinder the growth of high-tech industries. Bangladesh's reliance on labour-intensive manufacturing restricts its ability to compete in technology-driven sectors, such as electronics or advanced machinery. 

To diversify exports into the high-tech industry, Bangladesh must invest in ICT (bridging the digital divide), skill upgrading, STEM (Science, Technology, Engineering, and Mathematics) education, innovation hubs, and intellectual property protection. A prompt action plan should be formulated by relevant authorities, with a focus on timely implementation to maximise benefits. 

Inconsistent trade policies 

Trade policies are often inconsistent and overly complex, creating a challenging environment for businesses to invest in new sectors. Delays in implementing reforms and a lack of long-term policy support for non-RMG sectors discourage investment. But things are changing rapidly and attracting foreign direct investment in the non-RMG sectors. 

The authorities entrusted with the responsibility of attracting investment, BIDA (Bangladesh Investment Development Authority), are emphasising the industry like man-made fiber, leather, jute, plastic, agro-processing, semiconductor sector, etc. 

Environmental and compliance issues 

Sustainable production and compliance with global environmental standards are becoming increasingly important, especially in sectors like textiles, leather, and agriculture products. The lack of compliance with these standards makes it harder for Bangladesh to tap into eco-friendly markets or export to countries with strict regulations. 

Despite its significant potential, the leather sector in Bangladesh faces challenges hindering its growth. The CETP in the Saver Leather Industrial Park is not operating effectively, hindering environmental sustainability. LWG certification, essential for attracting reputable buyers, is difficult to obtain due to the park's environmental issues.

Sourcing rawhide from slaughterhouses is another challenge, as the skin is often handled by unskilled or semiskilled butchers. The plastics sector also struggles to meet global standards for recycled processing.

Despite its vast potential, it faces limitations in capturing a substantial share of the world market. Similarly, due to compliance challenges, the agriculture and textile sectors encounter obstacles in tapping into international markets. We must collaborate between the public and private sectors to address these challenges proactively.

Skill shortages 

Diversifying exports requires a workforce with specialised skills in various industries. Leather, jute, handicrafts, home décor, cosmetics, light engineering, and ICT sectors need skills and expertise in which we are struggling. Investing in training and development programs is crucial to equipping the workforce with the necessary skills. 

In this case, I would like to cite a practical example to make you all understand the necessity of sector-specific skilled manpower. 

A couple of months ago, I visited Remark HB Limited, a beauty and homecare brand located in Munshigonj, about 45-50 minutes from the city if traffic isn't an issue. This sector has immense potential in the global market, and I was impressed by the company's compliance standards. 

During my discussions with the senior management about the current challenges facing the industry, they highlighted a shortage of adequately skilled and trained manpower.

Workers from Thailand and the Philippines are being hired to operate the beauty product section, as no such specialised workforce is available in Bangladesh. This is largely due to the absence of cosmetics-related departments in engineering or technical institutes and universities, making it difficult to develop local talent for this industry. 

Similarly, other industries like light engineering, high-tech, and semiconductors are also struggling to find skilled and trained local manpower. It is crucial to address these issues at the national level and implement appropriate policies to overcome these challenges. 

Limited innovation and research and development 

There is a limited focus on R&D, which is crucial for product and process innovation in non-traditional export sectors. Investment in innovation is low, and there is little collaboration between the private sector, academic institutions, and government bodies, which needs to be enhanced. 

The high-tech industry needs research and development with the utmost priority. To overcome these challenges, Bangladesh must increase investment in R&D, fortify intellectual property protection, invest in human capital development, streamline regulatory processes, and improve market access. 

This limitation has been discussed on several occasions in seminars, talk shows, and workshops, but no effective action has been taken so far. By fostering a more supportive environment for innovation, Bangladesh can diversify its exports and become a more competitive player in the global economy. 

Lack of logistics

Insufficient facilities across the three types of ports—air, sea, and land—are lagging compared to other competing countries. Ports in Bangladesh face issues such as inefficient cargo handling, insufficient Explosive Detection Scanners (EDS), fluctuating spot air freight prices, inadequate warehouse and cargo village facilities, and a shortage of skilled and semi-skilled manpower. As a result, exporters are unable to fully capitalise on opportunities to diversify their exports.

Global competition

Bangladesh faces stiff competition from countries like Vietnam, India, and Cambodia in diversified sectors such as electronics, leather goods, and IT services. Low brand recognition and a lack of quality standards make it hard for Bangladeshi products to penetrate new international markets. 

In addition, after graduating from a middle-income country in 2026, Bangladesh will no longer be able to utilise unilateral preferential market access facilities, which will further weaken our competitiveness.

Limited access to finance small and medium-sized enterprises

SMEs are facing enormous problems in accessing finance, which is essential for diversification, and often face difficulties in accessing affordable credit. High interest rates and a lack of collateral discourage entrepreneurs from expanding into new sectors. As the lifeblood of the economy, SMEs must be prioritised if Bangladesh is determined to diversify its export basket. In this case, Japan's lesson/success story can be followed by Bangladesh. 

Export diversification cannot happen overnight, and there is no shortcut to achieving it. Long-term strategies, sector-specific policies, business-friendly customs procedures, and efficient logistics must be ensured to diversify our export sector. 

Abu Mukhles Alamgir Hossain is the Director (Policy and Planning) of the Export Promotion Bureau (EPB).  

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.