Tracking subsidy trail-1

RMG grabs the lion’s share of incentives

Jasim Uddin Haroon | Wednesday, 13 February 2019

The country's export-oriented apparel units are bagging the most part of the government's cash incentives, directly and indirectly.
The local export-oriented textile industries receive around 40 per cent of the cash incentives. However, a large portion of it is indirectly enjoyed by the readymade garment (RMG) sub-sector.
The RMG also receives cash incentives at around 8.0 per cent on their exports to non-traditional markets beyond the North American and European destinations, according to the central bank data.
The small and medium enterprise (SME) segment of the textiles sector gets subsidy, at the rate of 3.0 per cent, in the form of an 'additional facility.'
But the RMG sub-sector does also accrue benefit out of that segment, as it uses mostly the local textile products.
The clothing sector consisting of woven and knit wear accounted for more than 83 per cent of the export basket, as the total exports fetched US$ 36.7 billion in the fiscal year (FY) 2017-18.
The subsidy, a benefit either given in cash or in the form of tax reduction, is meant for the exporters so that they have the competitive edge in the global markets.
The government disbursed a total of Tk 44.81 billion (4,481 crore) in subsidy to about 19 export revenue earning sectors covering 26 products in the last fiscal year ended on June 30, suggest the data prepared by the accounts and budgeting department of the Bangladesh Bank (BB).
In the current fiscal year, nine products have been added to the list of items entitled to subsidies, raising the total number to 35.
The other major sectors incentivised are jute and jute goods, leather, furniture, paper and paper products, frozen fish, agro-processing products and other agricultural goods.
Apart from the incentive amounts from the state coffer, the apparel makers also get other forms of support from the government.
They include a facility from the Duty Exemption and Drawback Office (DEDO), bonded warehousing, and funding from the central bank's Export Development Fund (EDF).
Under the Customs' bonded warehouse facility, industries get the benefit of tax-free import or local purchase of the raw materials for use in manufacturing exportable goods.
Under the duty exemption and drawback system, the exporters can claim from the DEDO the same amount of money as paid in VAT and other taxes.
On the other hand, the Export Development Fund (EDF), a revolving fund now amounting to US$ 3.0 billion, was founded in 1989. It is very much popular among the RMG makers as it is easily available at an interest rate of LIBOR plus 2.5 per cent.
It is intended to facilitate exporters' access to financing in foreign exchanges for input procurement.
The cash incentive regime ranges from 2.0 per cent to 20 per cent depending on the nature of the exportable products and their markets.
Experts and economists familiar with the matter are divided over the existing incentive schemes.
Some believe these are helping the country raise the volume of exports while some others suggest rationalisation of the incentive regime.
Dr Zaidi Sattar, chairman of the Policy Research Institute of Bangladesh (PRI), a private think-tank in the country, told the FE: "Actually there is no simple yes or no to the question about the cash incentives."
The RMG does not get cash subsidies -- rightly so -- except when they export to new destinations like Japan, China and Australia (4.0 per cent), he said.
Dr Sattar said export subsidies, limited as they are, will not lead to any breakthrough in non-RMG exports, i.e. export diversification.
"What is needed is creating the conditions similar to RMG exports for other sectors," Dr Sattar pointed out, talking about the bonded warehouse facility and others being enjoyed by the RMG sector.
Terming Bangladesh's economy "highly tariff-protected," Dr Sattar said that out of the 3,000 firms that exported 1,373 HS-6 digit products in FY2018, barely 200 will have enjoyed the bonded facility.
"There is scope for malfeasance in such cash subsidies. If there are about 1200-1400 non-RMG export products, how do you justify giving various subsidy rates?"
He suggested one change, a flat rate of subsidy.
Dr Zahid Hussain, lead economist at the Dhaka office of the World Bank (WB), has viewed that as long as the country's tariff policy favours sales in the domestic market more than exports, the cash subsidies on exports are needed to counteract this anti-export bias.
"Obviously, this is a convoluted way of designing a policy regime intended to promote exports," Dr Hussain noted.
He went on: "We need a thorough review of the existing tariff structure with the objective of reducing the effective rate of protection in the domestic market."
"There is a need to reform the tax regimes, including supplementary duties, to increase competitiveness of non-RMG industries," Dr Hussain added.
Dr Nazneen Ahmed, a senior research fellow at the Bangladesh Institute of Development Studies (BIDS), a government-run think-tank, told the FE: "We now need to rationalise the subsidy regime."
"Some big firms actually don't need subsidy support now, and this is high time to nurse the small-sized textile units," Dr Ahmed, who has a number of studies to her credit on the country's apparel sector, told the FE.
On the other hand, people in the textile and RMG sectors say these supports are very much necessary for them to remain competitive in the global clothing market.
They argue that the prices often fall and the competition in the international market stiffens. This decline in prices then, coupled with poor infrastructure, dampens profits and competitiveness.
They also argue that the country is one of the worst performers in the 'Ease of Doing Business' index. So, in such a situation such facilities need to be expanded.
A Matin Chowdhury, former president of Bangladesh Textiles Mills Association (BTMA), told the FE that Bangladesh imports all the raw materials required for manufacturing of clothing and the way they import involves huge costs.
"When we import cotton, it involves transport costs, higher port costs and others which make our imports expensive and in such a situation we need subsidy to be competitive."
Mr Chowdhury, also managing director of the Rahim Textiles Mills, says exploration of new export markets is associated with a number of risk factors.
"Suppose, Russia and Bangladesh have no direct banking transaction, so there is a risk while making shipment," he says. "Considering all these factors, the government provides us cash incentives."
Siddiqur Rahman, president of the apex clothing organisation, told the FE that the cash subsidy was intended to expand the exports.
"Definitely, the incentive is something aimed at helping expansion of the local clothing sector and exports," said the chief of Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
Mentioning the harassment of the beneficiaries, Mr Rahman said: "Actually this needs to be simplified."

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