Govt cuts cash incentive in export at a critical time

Export earningsFile photo

Although it is highly necessary to increase the export of goods during the period of dollar crisis, the export of goods is not increasing.

Amid such a critical situation, the government has decided to phase out cash incentives or subsidies to the export of goods.

Sector-wise cash assistance will be reduced by up to 10 per cent in the first phase. As a result, the exporters fear there will be a decline in their capacity to compete in the export of products.

Apparel and textiles sectors are the biggest beneficiary of cash assistance. However, if the cash assistance is cut now, at least half of the ready-made garment industry’s exports will not receive any incentives.

Apart from this, cash assistance is decreasing in leading export sectors including leather, jute products, processed agricultural products, furniture, plastics and several other products.

Exporters say that the global economy is going through a strain due to the coronavirus pandemic, followed by the Russia-Ukraine war and the Hamas-Israel war. Demand for various products, including ready-made garments, has decreased.

The size of the Export Development Fund (EDF) was reduced last year at this difficult time. Business costs are increasing constantly. The gas crisis is also persisting. But the dollar price has been kept under control. In such a context, the country’s export sector will come under significant pressure due to the sudden decision to cut cash assistance.

The economists, however, say export incentives or subsidies cannot last forever. The government should take steps to improve the existing inefficiencies and infrastructural weaknesses in doing business.

Bangladesh Bank announced the decision to reduce cash assistance in the export sector through a notification Tuesday. It said that this decision will be effective from 1 January.

The central bank’s announcement on reducing cash assistance states that Bangladesh will be graduated into a developing country in 2026 from the Least Developed Country (LDC) status. According to the World Trade Organisation (WTO) regulations, no country can provide export incentives or cash assistance if it transitions from the LDCs.

However, the export sector may face a challenge if the cash assistance is suddenly withdrawn after transition from LDCs. That is why the government has decided to phase out the cash assistance, starting from this year.

Prothom Alo talked to four leaders of Bangladesh Garment Manufacturers and Exporters Association (BGMEA), Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) and Bangladesh Textile Mills Association (BTMA) on Tuesday night regarding the Bangladesh Bank’s notification. All of them said that there was no discussion or meeting with them regarding the reduction of cash assistance.

It has been learned that the decision this time has been taken following a different method than any previous time regarding increasing or decreasing the cash assistance. The commerce ministry suddenly sent a letter to the Bangladesh Bank Tuesday. Then the foreign exchange policy department of the central bank hastily issued a notification.

According to the Export Promotion Bureau (EPB), the country exported products worth $55.56 billion in the fiscal 2022-23, which was 6.67 per cent higher than the previous fiscal. However, the pace of growth has slowed down in the first half of the current financial year. Goods worth USD 27.54 billion dollars have been exported in the first six months of this fiscal. The growth has been 0.84 per cent.

The government had earmarked Tk 90.25 billion as export incentives in the last fiscal year. However, several businesspersons said that the government has not yet paid nearly Tk 60 billion of the incentive.

Fallout on RMG sector to be greater

RMG goods constitute nearly 84 per cent of the country’s total export, consequently the entrepreneurs of this sector receive the highest amount of the cash incentive. But due to this decision of the government, there would be no cash assistance for nearly 56 per cent of the apparel exports, said the BGMEA and BKMEA leaders.

They stated that the rate for products is fixed by slashing the subsidy amount while taking orders from foreign buyers. As a result, the traders in the sector will incur a big amount of loss due to the government’s sudden announcement of withdrawing the assistance without any earlier announcement.

The BB circular said there will be no cash assistance for exporting five HS code clothing. The products are - knit clothes t-shirt, shirt, trousers, and jackets and blazers made of woven clothes. These are the top apparel products that the country exports for a long time.

Speaking about this, BGMEA vice president Shahid Ullah Azim told Prothom Alo, “Last year, 56 per cent of our exports came from the five HS code clothing that have been excluded from the cash assistance. Gas and power tariffs have been raised, the rate of interest and wages of workers have also been raised. In this context, such a decision to cut cash assistance will hit our exporters hard.”

BKMEA vice-president Shamim Ehsan said four of the five HS code products are from the knit sector. As a result, 70-80 per cent of the knit apparels won’t get the cash assistance. Currently, the export sector has been going through tough times at home and abroad. The cash incentive could have helped the sector afloat.

He further said the decision will obstruct extension of exports to the potential markets like India, Australia and Japan.

Other sectors

Leather and leather products constitute the second highest exports following apparel products. Bangladesh earned USD 1.25 billion dollars from exporting the products in the last fiscal year, which was 1.75 per cent lower than the previous fiscal. The export has slumped by 18 per cent this fiscal. Despite this, the decision has been taken to cut cash incentives in the leather sector too.

The BB circular said there will be no incentive in export of crust leather products while the amount has been brought down to 7 per cent from existing 10 per cent for the finished leather products. Besides, the cash assistance will be 12 per cent instead of the previous 15 per cent for other leather goods.

Processed agri products have appeared as potential export items. The country earned USD 1.16 billion dollars from this sector in the 2021-22 fiscal year. Though the export slumped by 27 per cent last fiscal, it has spiked this fiscal again.

According to the BB circular, the cash assistance has been brought down to 15 per cent from the existing 20 per cent for agro products and processed agro products.

Jute and jute made products are also export items for the country but the income from this has been gradually shrinking for the last few years. Despite this, the cash incentives have been slashed by 2-5 per cent for different jute products.

Likewise, the assistance has been cut for light engineering products, for raw materials of medicine, 100 per cent halal meat, frozen shrimp, motorcycle, razor and razor blade, consumer electronic products, pet bottle flakes, shipping, plastic and various types of handmade products and so on.

Speaking about this, Centre for Policy Dialogue (CPD) distinguished fellow Mostafizur Rahman told Prothom Alo the government’s decision to phase out cash assistance is quite all right. The exporters will face a bit of shock initially. But overall the export sector is at an advantageous situation due to the spike in dollar exchange rate. As a result, I don’t think there will be significant economic fallout in the sector.

The government, however, will have to take steps to improve the business climate and ways to decrease costs in doing business so that the traders can settle their financial losses because of the step, he observed.