Weathering the recessionary storm in the RMG Sector
Sunday, 22 March 2009
Barrister I U Ahmad Asif
It has been said time and again that the worldwide recession that has affected so many countries so deeply will not affect the Bangladesh ready made garments (RMG) sector. The RMG sector recorded US$ 6.05 billion in export earnings during the first half of the current fiscal year (2008-09), registering a 24.18% growth. Even the chief of the Export Promotion Bureau (EPB) also ruled out any fallout from the global credit crunch on Bangladesh garments exports after its two main items, woven and knitwear, registered 44.66% growth in the first quarter of the current fiscal year.
The rosy picture that these figures portray can be misleading. We cannot get away from the fact that the world is going through the biggest recession since the 1920s. Nine thousand jobs per day were cut worldwide on an average in January 2009 alone. The US Federal Reserve has predicted that the US unemployment will rise to a staggering 8.8% --- the highest in the last 16 years and the US economy will continue to deteriorate throughout 2009 with the economy contracting this year between 0.5% to 1.3%. In the UK, unemployment rate has also hit a record 6.3% with the economy predicted to shrink by 6.0% over a 12 month period. In a bid to revive the UK economy, the Bank of England has cut its key lending rate to 1.0% - the lowest level in the Bank's 315-year history. Given the prevailing situation and the fact that the US and UK markets are our biggest export markets, the question arises how can we expect rising exports?
The simple fact is Bangladesh is experiencing 'the Walmart effect' i.e. as consumers have less income they are trading down to cheaper clothes and since Bangladesh has built up a reputation for producing cheap products, the buyers are simply placing more and more orders to Bangladesh. On the surface, these seems beneficial for the RMG sector but a careful study of the issues involved will demonstrate a complete contrary picture.
The buyers who are placing large volumes of orders are now asking for cheaper prices as well as trade discounts. With the devaluation of Indian and Pakistani rupees, Bangladesh simply is not price competitive and factories are having to provide discounts ranging from 5.0% to 15% as well as to reduce the quoted price. At times, this is leading the factories to accept orders at cost or even below the cost of production simply to keep the factories running. The fact is a factory owner who has already made his investment cannot afford to refuse orders and have his factory running at lower capacity. He will first accept cheaper prices, then will cut production, shed jobs and fail in paying bank instalments, and as the situation worsens, inevitably shut down the factory.
The RMG exporters in Bangladesh face numerous hurdles. Firstly, since the country doesn't have sufficient bankward linkage, most of the raw materials (fabric and accessories) are imported from China and Taiwan which may amount to 75% of an order value. Accordingly, when a factory owner is paying up to 75% for raw materials, there is little allowance for other costs such as wages, bank instalments, factory rents etc. It then follows that any reduction or discounting of prices means lack of fund for making payments on those heads of accounts.
Moreover, we possibly face the highest bank interest rate in the world. This issue has been discussed by so many people on so many occasions; it seems like that the Bangladesh Bank, the regulatory body for the commercial banks, is unable to do anything to bring down the rates of interest to an acceptable level. As I understand as long as the call rate fluctuates between 8.0% and 12%, there is no possibility of having a reasonable and acceptable industrial lending rate, even though the most commercial banks continue to declare sizeable profit and dividend every year.
The president of Bangladesh Garments Manufacturers & Exporters Association (BGMEA) recently demanded a bail-out package from the government, in view of the severity of the present situation pointing out that our competitors in India, Pakistan and China have all introduced some financial package to assist their respective apparel sector. Though our government is new in power, but unfortunately it does not have the luxury of time and so decisions must be taken promptly without hesitation. Decisions even effective ones, if taken too late, will be meaningless. The government has already taken too long to take decisions regarding the dumping of lower quality yarn from India which resulted in the closing down of a great number of spinning mills faced with yarn stock amounting to Taka 300 billion (30000 crore).
Different countries have introduced different bail-out packages for the apparel sector. Our government must formulate a multi-faceted policy in the context of the present economic situation. A number of proposals have been put forward. The representatives of Bangladesh Textile Mills Association (BTMA) have demanded 15% incentives for the textile sector and this will definitely allow the factories to become more price competitive. However, whether the government actually has sufficient funds, like those in the USA and UK, to provide such incentives, that has to be seen. What must be understood is that in countries such as ours it is the commercial banks and not so much the government who can assist the industries to stay afloat in this hard time.
Accordingly, a temporary option that is available for the Bangladesh Bank to demand that the commercial banks introduce a concept of interest-only loan for the period of the recession. Under this scheme, instead of recovering principal and interest against the monies lent, banks will only recover interest from their clients and suspend the recovery of principal for a 12-month period. This is a not a novel phenomenon as the concept of interest-only mortgage is common and in the UK this has been used to ease the financial pressure on the home-owners during the period of recession. Similarly, given the exceptional circumstances, the banks and other financial institutions can simply charge interest during the recession period. This will reduce the likelihood of loan default amongst the lenders and give them a rest-bite during this uncertain time. On the other hand, if we continue to talk and no action is taken by the government or the banks, we must be prepared for increasing loan defaults, worker unrest and factory closures.
The effects of global recession are already being felt by the entrepreneurs and a combination of measures are required instantly to protect the apparel sector in this turbulent time. The government and the commercial banks must realise that much of the local industry is directly or indirectly, dependant upon the income of the workers of RMG sectors. It is imperative that the government and the commercial banks to implement a bail-out package immediately to help avoid the dire consequences for the economy.
The writer is the Deputy Managing Director of AlItex Industries Ltd. He may be contacted at
e-mail: iuahmad@alltexbd.com
It has been said time and again that the worldwide recession that has affected so many countries so deeply will not affect the Bangladesh ready made garments (RMG) sector. The RMG sector recorded US$ 6.05 billion in export earnings during the first half of the current fiscal year (2008-09), registering a 24.18% growth. Even the chief of the Export Promotion Bureau (EPB) also ruled out any fallout from the global credit crunch on Bangladesh garments exports after its two main items, woven and knitwear, registered 44.66% growth in the first quarter of the current fiscal year.
The rosy picture that these figures portray can be misleading. We cannot get away from the fact that the world is going through the biggest recession since the 1920s. Nine thousand jobs per day were cut worldwide on an average in January 2009 alone. The US Federal Reserve has predicted that the US unemployment will rise to a staggering 8.8% --- the highest in the last 16 years and the US economy will continue to deteriorate throughout 2009 with the economy contracting this year between 0.5% to 1.3%. In the UK, unemployment rate has also hit a record 6.3% with the economy predicted to shrink by 6.0% over a 12 month period. In a bid to revive the UK economy, the Bank of England has cut its key lending rate to 1.0% - the lowest level in the Bank's 315-year history. Given the prevailing situation and the fact that the US and UK markets are our biggest export markets, the question arises how can we expect rising exports?
The simple fact is Bangladesh is experiencing 'the Walmart effect' i.e. as consumers have less income they are trading down to cheaper clothes and since Bangladesh has built up a reputation for producing cheap products, the buyers are simply placing more and more orders to Bangladesh. On the surface, these seems beneficial for the RMG sector but a careful study of the issues involved will demonstrate a complete contrary picture.
The buyers who are placing large volumes of orders are now asking for cheaper prices as well as trade discounts. With the devaluation of Indian and Pakistani rupees, Bangladesh simply is not price competitive and factories are having to provide discounts ranging from 5.0% to 15% as well as to reduce the quoted price. At times, this is leading the factories to accept orders at cost or even below the cost of production simply to keep the factories running. The fact is a factory owner who has already made his investment cannot afford to refuse orders and have his factory running at lower capacity. He will first accept cheaper prices, then will cut production, shed jobs and fail in paying bank instalments, and as the situation worsens, inevitably shut down the factory.
The RMG exporters in Bangladesh face numerous hurdles. Firstly, since the country doesn't have sufficient bankward linkage, most of the raw materials (fabric and accessories) are imported from China and Taiwan which may amount to 75% of an order value. Accordingly, when a factory owner is paying up to 75% for raw materials, there is little allowance for other costs such as wages, bank instalments, factory rents etc. It then follows that any reduction or discounting of prices means lack of fund for making payments on those heads of accounts.
Moreover, we possibly face the highest bank interest rate in the world. This issue has been discussed by so many people on so many occasions; it seems like that the Bangladesh Bank, the regulatory body for the commercial banks, is unable to do anything to bring down the rates of interest to an acceptable level. As I understand as long as the call rate fluctuates between 8.0% and 12%, there is no possibility of having a reasonable and acceptable industrial lending rate, even though the most commercial banks continue to declare sizeable profit and dividend every year.
The president of Bangladesh Garments Manufacturers & Exporters Association (BGMEA) recently demanded a bail-out package from the government, in view of the severity of the present situation pointing out that our competitors in India, Pakistan and China have all introduced some financial package to assist their respective apparel sector. Though our government is new in power, but unfortunately it does not have the luxury of time and so decisions must be taken promptly without hesitation. Decisions even effective ones, if taken too late, will be meaningless. The government has already taken too long to take decisions regarding the dumping of lower quality yarn from India which resulted in the closing down of a great number of spinning mills faced with yarn stock amounting to Taka 300 billion (30000 crore).
Different countries have introduced different bail-out packages for the apparel sector. Our government must formulate a multi-faceted policy in the context of the present economic situation. A number of proposals have been put forward. The representatives of Bangladesh Textile Mills Association (BTMA) have demanded 15% incentives for the textile sector and this will definitely allow the factories to become more price competitive. However, whether the government actually has sufficient funds, like those in the USA and UK, to provide such incentives, that has to be seen. What must be understood is that in countries such as ours it is the commercial banks and not so much the government who can assist the industries to stay afloat in this hard time.
Accordingly, a temporary option that is available for the Bangladesh Bank to demand that the commercial banks introduce a concept of interest-only loan for the period of the recession. Under this scheme, instead of recovering principal and interest against the monies lent, banks will only recover interest from their clients and suspend the recovery of principal for a 12-month period. This is a not a novel phenomenon as the concept of interest-only mortgage is common and in the UK this has been used to ease the financial pressure on the home-owners during the period of recession. Similarly, given the exceptional circumstances, the banks and other financial institutions can simply charge interest during the recession period. This will reduce the likelihood of loan default amongst the lenders and give them a rest-bite during this uncertain time. On the other hand, if we continue to talk and no action is taken by the government or the banks, we must be prepared for increasing loan defaults, worker unrest and factory closures.
The effects of global recession are already being felt by the entrepreneurs and a combination of measures are required instantly to protect the apparel sector in this turbulent time. The government and the commercial banks must realise that much of the local industry is directly or indirectly, dependant upon the income of the workers of RMG sectors. It is imperative that the government and the commercial banks to implement a bail-out package immediately to help avoid the dire consequences for the economy.
The writer is the Deputy Managing Director of AlItex Industries Ltd. He may be contacted at
e-mail: iuahmad@alltexbd.com