Managing escalation of manufacturing costs

FE Team | Published: May 20, 2024 20:48:36

While exporters of certain finished goods and commodities have rejoiced over the introduction of crawling peg in currency exchange, manufacturers depending overwhelmingly on imports of most of the raw materials do feel the bite. Even the apparel sector comprising readymade garment (RMG) and its allied textile and backward linkage units have to depend on imported raw materials for value addition. The capital machinery for the sector is almost entirely imported. Depreciation of local currency perhaps causes more harm than good to poor and emerging countries with a lower base of industrialisation, only more so in time of a global economic recession. But the contraction of economies in such countries happens at faster and greater rates for several reasons. First, the domestic and international consumptions shrink. Second, production costs go up triggering inflation. Third, the manufacturing sector devoted entirely to export lose competitiveness. As a result, economy turns sluggish and a country's development slows down.
This is exactly what has happened in case of Bangladesh and all the attempts to prop up the economy are proving insufficient. A report carried in the FE on Sunday last has pointed out how the crawling peg has affected the manufacturing sector with particular emphasis on the pharmaceutical industry and the housing and construction sector. Production of mild steel (MS) rod and bar has been adversely impacted because the prices of the items reached an atrocious level ever since the local currency started depreciating from as low as Tk 90-92 against a dollar to Tk 100 plus a couple of years ago. Cement, tiles and other ceramic products followed suit. The real estate business has gone through a crisis period and it is likely to turn worse even if the materials register nominal hikes. Apart from the private sector housing, the government's housing and public works will also bear the brunt of the costlier construction materials. Notably, the government has to purchase these materials from private companies.
Equally, if not more affected will be the pharmaceutical sector because most of the active pharmaceutical ingredients (APIs) are imported for manufacturing medicines. Drug companies produce nearly enough medicines for the country's requirement and some of the manufacturers have already started exporting their products with the approval of the US Food and Drug Administration (FDA). But the industry can legitimately set its eyes on becoming the second or even number one forex earner provided that adequate home works are done. For example, the API park in Munshiganj can be fully operationalised to produce the major portion of APIs the pharmaceutical industry of the country needs. This will lessen dependence on import of APIs and bring down production costs.
True, iron scraps--- the main ingredient of steel sector, unlike pharmaceutical APIs, have no alternative but sources of other materials like silicon manganese can be explored either for import at a cheaper rate or at least for value addition locally. The global recession is likely to prolong further if the Middle East conflicts escalate in that region or beyond. So all kinds of preparations have to be kept ready to obviate the deteriorating situations facing the manufacturing sector. But people of the sectors seem to have bloated the picture somewhat disproportionately. The raised exchange rate of Tk117 looks foreboding but when the official rate was Tk 110 for a dollar, businesses had to buy dollars more or less at the current rate from private sources. It is the unchanged letter of credit (LC) limit and the unavailability of greenback that are likely to cause real problems.