Keep cash incentives until 2026 to cushion exports

Rollback of export incentives prompts businesses to rush to the finance minister with an appeal for retaining the cash stimulus until Bangladesh's graduation to middle-income status in 2026.

Apex trade chambers fear some 200 export-oriented spinning mills that spin out fabrics for local value addition to garments-the country's cardinal export-earner-may be imperilled sans this support.

They have urged reinstating the cash incentives as before, even considering the widening of the scope, if needed, as the exporters are facing several challenges. The odds they mention include upward adjustment of interest rates on loan that triggered manufacturing-cost escalation, slashing allocations under the Export Development Fund (EDF), and the halving of exporter's retention quota.

The plea came following a recent circular issued by Bangladesh Bank (BB) curtailing cash incentives for some export-oriented sectors, incidentally, in the wake financial concerns.

In the circular the central bank has clarified that the government has opted for gradual reduction in export incentives rather than suspending it from the current fiscal year.

The order takes retrospective effect from January 1, 2024 and is valid until 30 June 2024.

According to the circular, the government has been providing cash incentives against 43 export items.

Of the sectors, many are supposed to continue to stay on the cash handout until June 2024 and make investment plan confirming orders from the international buyers on the basis of that support.

"We don't think it is a realistic decision to slash cash incentives in the current challenging situation," wrote Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) president Mahbubul Alam to Finance Minister Abul Hassan Mahmood Ali on February 3, 2024.

Talking to the FE, Mr Alam said exporters from almost all sectors, including apparel, jute and furniture, raised their concern over the cut in cash incentives.

"We know the country's exporters need to get prepared for graduation challenges but such decisions on cutting the benefits could be taken after discussing with the stakeholders," he said.

Many of the middle-income countries have adopted policy to incentivize their local industry indirectly for the sake of its survival, he points out.

"Without adopting alternatives, such sudden changes and withdrawal of cash incentives would affect both the industry and the economy," says the apex-chamber chief about possible repercussions.

He suggests paying attention to enhancing capacity of ports, trade-facilitation activities, business-friendly tax policy and so.

The FBCCI president urges the government to cut cost of doing business, logistics and other charges of customs to offset the impact of cash incentives cuts.

He also suggests dividing customs into three wings for delivering servicers for export, import and port activities.

As the government has the scope to provide cash incentives until 2026, it must continue it and take logical decision exploring alternatives after 2026, the FBCCI letter reads.

On January 30, 2024, the BB pared down incentives in almost all exporting sectors, including readymade garments, crust leather, jute and jute goods, furniture, farm products, potatoes, and processed meats.

Professor Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue (CPD), sees scope for reducing the incentives gradually until the country graduates from the LDC club.

The economist, however, thinks the exporters' challenges may not be that much difficult to bear with as they have "gained higher profits due to devaluation of the local currency against the dollar".

Export-oriented spinning mills' owners say they are struggling to cope with multifarious challenges, including gas and dollar crises, and such cut comes as a fresh blow.

Earlier last month, the government, alongside reducing the rate of cash incentives against exports, also excluded readymade garment products under five HS headings from the export subsidy which, according to BTMA, constitutes some 55.22 per cent of knitwear exports.

According to Bangladesh Textile Mills Association (BTMA), spinning mills are currently running their facilities up to 40 per cent amid severe gas and US dollar crises while work orders fell drastically.

Mohammad Ali Khokon, president of BTMA, in a letter on February 03 to the finance minister made the observations.

And the government's latest measure cutting incentives would erode their competitiveness and encourage apparel exporters to import yarn and fabrics---major raw materials for clothing-thus increasing the lead time, the letter reads.

Additional incentives for the products made with local yarns and fabrics have been reduced to 3.0 per cent from 4.0 per cent and additional 2.0-percent cash incentives on exports to Eurozone have been reduced to 1.0 per cent.

The 4.0-percent cash incentives for the small and medium industries of the textile sector, however, remained unchanged.

The trade body for primary textile mills requests the government to rescind the decision and re-fix the rate at previous level.

It also demands providing alternative supports before phasing out incentive benefits.

"Textile spinning mills, on average, cannot use more than 40 per cent of their production capacity mainly because of severe gas and US dollar crises," the BTMA president said in the letter.

Moreover, financial costs have also gone up due to irregular export-development funding with its high interest rate, high cost of raw-material imports followed by rise in dollar exchange rate and bank interest rate and hike in wages, he has explained.

Besides, despite the hike in gas prices, uninterrupted gas supply has yet to be ensured, he said, adding that some 200 export-oriented spinning mills meet 85 per cent of yarn requirement of knitwear exporters.

Local spinning mills with an investment of Tk 1.88 trillion play an important role in preserving foreign currency that would be spent for import.

He believes that knitwear subsector sustains its growth mainly because of the local supply of yarn and fabrics.

Agreeing on withdrawal of incentives phase by phase, Mr Khokon said it was required to take alternative measures beforehand.

"It was illogical to exclude those items and make the decision effective from January 01 this year," he said, airing fears that such decision would put the textile and garment sector in further disastrous situation with loss of millions of jobs.

He explains that in the name of producing such items, duty-free imports of all kinds of yarn will increase significantly that would put the local spinners in tough competition-and they might not survive.

As a result, the county again would be dependent on imported yarn and fabrics, he said, demanding inclusion of the items under five HS codes in the cash-incentive supports and keeping the previous incentive rates uncut.

The BTMA leader also urges the government to come up with alternative policy supports to substitute the cash incentives to navigate pre-graduation headwinds.

Talking to the FE, president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) Faruque Hassan said they purchase yarn from the local market despite a price difference ranging from 20 cent to 40 cent.

"Local spinners will be the most sufferers as we can't buy yarn at such a high rate. The government is not encouraging but forcing us to go for imported yarn and fabrics," he notes.

The BGMEA president echoed the BTMA leader's views that they have already received work orders until June and the decision would affect the sector negatively.

Apparel exports to non-traditional markets sustained double-digit growth while to major markets witnessed negative growth, he said, adding that excluding the potential markets in not 'wise'.

The BGMEA and Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) leaders in a meeting with the finance minister also demanded withdrawing the provisions from the central bank circular which kept RMG products out of cash incentives and excluded India, Japan and Australia from the list of non-traditional markets.

Jute goods manufacturer and exporter Rashedul Karim Munna says the government could focus on ensuring compliance through evaluation or auditing of the cash-incentive recipients to make them accountable.

"Incentives could be offered to the exporters having facilities of research, innovation as such issues including compliance requirements would make export-oriented industries growth- sustainable after graduation," says Mr Munna, Managing Director of Creation Private,

Special incentives for the readymade garment sector have been scaled down from 1.0 to 0.5 per cent, withdrawn on crust leather from 10 per cent, diversified jute goods to 15 per cent from 20 per cent, traditional jute goods to 10 per cent from 12 per cent, jute yarn to 5.0 per cent from 7.0 per cent. Cash incentives for venturing into new markets have witnessed a 1.0-percentage- point reduction to 3.0 per cent.

Incentives for agro products, potatoes, and processed meats have been reduced to 15 per cent from 20 per cent. Cash+ incentives have been slashed to 10 per cent from earlier 15 per cent.

The cash perks for new markets--- Australia, India, Japan--- have been cut to 0.5 per cent akin to traditional market.

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