Bottlenecks facing Bangladesh’s export sector

Bottlenecks facing Bangladesh’s export sector

Export-led growth in Bangladesh has been largely fuelled by an abundant supply of low-cost labour and duty-free access to the EU and US markets. Although merchandise exports have grown rapidly over the years, the country has failed to diversify its export basket and export destinations. The country is highly dependent on readymade garments for export earnings. Bangladesh’s heavy reliance on the apparel sector for attaining target growth rates exposes the country to a number of external shocks. Therefore, price hikes of cotton may affect exports adversely thus making it hard to compete globally. The readymade garments sector may also be affected by automation since the fourth industrial revolution is underway. Since the export basket as well as export destinations are highly concentrated there is a pressing need for diversification of both the export basket and export destinations.

The US-China trade war may play a significant role in boosting the growth of the Bangladesh ready-made garments exports. Amidst the economic conflict between the two mammoth economies, Bangladesh was able to reap benefits from the war. Due to increase in tariffs which resulted in rising production costs, global buyers moved work orders from China to Bangladesh. Therefore, due to the US-China trade war, Bangladesh’s exports to the US market increased significantly. If the trade tariff spat between China and the United States continues Bangladesh may benefit. However, if Bangladesh wants to take advantage of the escalating international trade conflicts between China and the United States, it needs to opt for the next level of automation and engage in production of value added goods to accelerate export earnings. Furthermore, the lion’s share of Bangladesh’s exports is limited to the apparel sector—almost 80 percent. This signals the need for diversification. Apart from RMG, crude vegetable oil specially soy bean, cotton and steel are potential products for the export sector. However, Bangladesh is not in the race alone. Vietnam, Cambodia and Chile are also competing to take advantage of the changing geopolitical relationship between the US and China. There is a dire need for context specific policies, favourable business environment, legal enforcement and most importantly, a strong diplomatic negotiation is critical if Bangladesh wants to seize this opportunity and become the next hotspot.

Speaking of diversification, the footwear industry can also be a target for Bangladesh. With USD 626.57 million export performance, footwear was one of the top export sectors of Bangladesh in 2018-19 fiscal year. As nearly 90 percent of raw materials needed for footwear sector are available locally, the sector has the potential to be the next “Thrust Sector” after RMG. Low production cost is one of the driving factors that has been an advantage for the footwear industries since inception. Japan and Germany are the leading export destinations for this sector, Bangladesh also supplies leather goods and footwear to China, Italy, USA, UK, Sweden and Taiwan. Nevertheless, adoption of new and improved technologies, automation, skilled labour force, advancement of port facilities, maintaining compliance and quality, more emphasis on R&D should be taken if Bangladesh wants to reduce the overwhelming dependency on RMG sector.

On the downside the country has failed to get hold off higher-value exports such as electronics. Bangladesh mainly exports consumer electronics; for instance, parts of television, air conditioner, refrigerator, washing machine, electro-mechanical domestic appliance and battery. Nepal may be a potential export destination for Bangladeshi electronics goods. Being highly dominated by Indian goods, currently Nepal is looking for alternatives. If compulsory export-friendly policies can be operated, Bangladesh has a brilliant opportunity to compete with Indian goods in Nepali market in terms of bilateral trade.

It is high time Bangladesh explored new destinations for exports. According to Export Promotion Bureau (EPB) data, in the fiscal year 2018-19, Bangladesh earned USD 40.53 billion, of which USD 28.89 billion or 71.27 percent of the total exports was limited to 10 countries: USA, Germany, United Kingdom, Spain, France, Italy, Canada, Japan, Netherlands and Poland. In order to stimulate the search for potential export destinations, Bangladesh government needs to take necessary steps. Higher incentives need to be provided in order to explore new export destinations. From export performance over the past few years, it is observed that Bangladesh has started exploring countries like Japan, Russia, New Zealand, and South Africa. The Association of South-East Asian Nations (ASEAN) may also be a potential export destination for Bangladesh.

Another major challenge facing the export sector is the export to GDP ratio is well below the bar. After reaching its pinnacle in FY 2012 at 20.16 percent of GDP, Export-GDP ratio has been shrinking ever since. One of the main reasons behind this is an increasing reliance on RMG sector over the last few decades. In order to diversify the export basket with frozen goods, agro, pharmaceuticals or jute products, private sector investment will play a significant role.

As a means of addressing the concerns in the export sector, Bangladesh government is establishing 100 Special Economic Zones with one-stop service across the country under the adoption of “Open Door Policy”. Twelve of the zones are already functioning. Economic zones help attract Foreign Direct Investment along with local investment, which in the long run play a noteworthy role in expansion of overseas trade. In addition, economic zones assist in income generation and job creation. For exports to attain healthy growth the numerous bottlenecks facing the export sector need to be overcome. If we want to move our value chain from apparel and footwear sector, Bangladesh has no other option other than equipping the workforce with skills to move out from low-end manufacturing and also ensure the working environment meets global standards. In addition, the special facilities enjoyed by RMG sector such as bonded warehouse, letter of credit or tax holiday etc. should be redistributed among other emerging sectors to help expand the concentrated export basket.

 

Sunera Saba Khan is a research economist at SANEM. Email: suneraecondu@gmail.com

Source: The Daily Star.

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