The proposed budget for the FY24 has kept almost all policy measures and tax rate unchanged for the export oriented sectors, but this is not enough to retain growth amid the ongoing economic headwinds.
Highlighting that the budget lacks policies for making exports sustainable and diverse, experts said the government’s existing trade and tariff policies are not enough to promote export-oriented industries.
As these policies protect the domestic industries, foreign and local investors are highly interested in investing only in those, they added.
For this reason, the share of export earnings from non-readymade garment (RMG) items is dwindling, which has created high levels of dependency on RMG. But as the RMG sector has not been performing well over the past few years, overall export earnings have fluctuated, which created a huge trade gap and current account deficit.
Finance Minister AHM Mustafa Kamal placed the budget proposal for the 2023-24 fiscal year on June 1. This came at a time when the country’s export sector is failing to perform as per expectations due to the ongoing global economic crisis. Almost all non-RMG sectors saw negative earnings during the first 11 months of FY23.
Former lead economist of the World Bank’s Dhaka office Zahid Hussain told The Business Post, “I think the proposed budget could not do anything for the export sector, especially for non-RMG items, though export diversification is our key target.”
The prominent economist said only the RMG sector got more priority previously and all export sectors have been enjoying unified tax rates since FY23.
“Besides, for a couple of decades, all export sectors have been enjoying cash incentives of up to 20 per cent to boost earnings. But the incentives failed to boost the sector properly,” he said.
The RMG sector is performing well because it has huge demand in the global market and Bangladesh also has cheap labour, Zahid said. “The non-RMG sector is still unchanged and even seeing negative performances in some cases.”
What finance minister said
In the FY23 budget proposal, the finance minister proposed a unified 12 per cent corporate tax for all export-oriented industries and 10 per cent for green certified factories. He also proposed a 1 per cent source tax for all export sectors as well as kept the cash incentive policy unchanged.
In his FY24 budget proposal, he kept all facilities unchanged but said as the country will graduate from the least developed country (LDC) status in 2026 and incentives have to be withdrawn then, the government will gradually reduce the facility as part of its preparations.
But the government will keep supporting exporters in other ways to remain competitive in the global market, he said.
Kamal said the export sector is not performing well currently and the financial account has also turned negative due to the slow implementation of foreign-aided projects and sluggish export earnings repatriation.
The twin deficits in the current account and financial account worsen the balance of payment situation. Foreign exchange reserves decreased from $46.39 billion in June 2021 to $29.97 billion this June. At the same time, Taka depreciated against per dollar from Tk 93.5 in June 2022 to Tk 108.1 on May 24 this year, the minister said.
“Concurrently, we are carrying out export promotional activities to augment our export income. To promote the diversification of exports, we are encouraging the establishment of diversified industries that are information technology-driven and environment-friendly,” he said.
The minister also expected that when the 100 specialised economic zones will come into full-fledged operation, there will be additional exports worth $40 billion.
Bangladesh Garment Manufacturers and Exporters Association (BGMEA) President Faruque Hassan said, “The finance minister is expecting export earnings will turn around, but he did not mention how it will happen amid the global economic crisis.”
He said the BGMEA demanded a reduction in source tax from 1 per cent to 0.5 per cent for all export-oriented industries due to low export earnings and orders and a 10 per cent cash incentive for non-cotton garment exports. “But he [the finance minister] did not consider our proposal.”
Bangladesh Jute Goods Exporters Association Director Esrat Jahan Chowdhury said, “If the incentive was enough for export diversification, the jute and handicraft sectors could earn billions of USD every year. This is because these sectors are enjoying one of the highest amounts of incentives.”
“There are not enough international fairs and research to promote non-RMG exports. Most micro and cottage entrepreneurs do not know how they will grab the export market. How will the government achieve the export diversification goal amid this?” Esart, also the chief executive officer of Tulika Eco, added.
Reforms needed in trade, import policies
Economists think Bangladesh’s tariff rate, especially for imports, is one of the highest in the world. There are huge restrictions on imports while the government is facilitating the domestic industries.
As a result, most investors come for doing business only in the domestic market as Bangladesh has a big consumer market, they said.
The World Bank’s Zahid said, “Our trade and tariff policies are providing high protection for the domestic sector, and that is why everyone is showing interest in that. Some also invested in export-oriented items, but those are limited to RMG only.”
“But what is our goal? We will definitely earn more from the export sector through diversification, but we failed there because of the lack of policy protection,” he said.
Zahid also said the government should reduce domestic sector protection and provide more of that for exports. “This will attract investors to export-related industries, enabling the country to earn more foreign currency from multiple angles.”
Economists further said import restrictions, high tariffs, and controlled exchange rates are key barriers to boosting exports while the finance minister has kept almost all policies in this regard unchanged in the proposed budget.
Moreover, they said the government has taken non-traditional routes to ease the ongoing economic crisis and cure high inflation while the proposed budget reflects that. That is why more challenges are likely to arise in the upcoming days.
Research and Policy Integration for Development (RAPID) Chairman Mohammad Abdur Razzaque said the government should reform the trade and tariff policies.
The international trade expert said imports will increase when restrictions will be lifted and tariffs will be reduced, which is likely to create more pressure on forex reserves and reduce revenue earnings amid low reserves.
“But we have to know why forex reserves declined. It happened due to the huge trade balance deficit. We need to earn more from exports to fill the gap,” he said.
Razzaque also said if import tariffs are reduced, the country will bring in more goods, which will also increase the government’s revenue earnings. “On the other hand, investors will focus on the export sector, which will help earn more foreign currency.”
He further said the government expects the country will earn more foreign currency when the economic zones will run at full pace but the reality is that most global brands are setting up factories in Bangladesh to cash in on the big domestic market, not exports.
“When we talk about market-based forex exchange rates and withdrawing import restrictions, the question of how we will solve the inflation problem will arise. The most traditional and reliable method to reduce inflation is to increase interest rates, but we are not following that.
“This means the government has blocked all the methods of tackling the ongoing economic crisis. When the government will reform the trade and tariff policies, some pressure will come. But to achieve long-term benefits from exports, there is no alternative,” Razzaque added.