The British exit, abbreviated as 'Brexit', refers to the referendum whereby Britons voted to quit the European Union (EU) under Article 50 of the treaty of the EU on June 23, 2016. But this exit does not simply refer to exit; rather 'entering' into an era of uncertainties. The uncertainties are about what the future relationship between the UK and the EU would ultimately be and fiduciary, operational, and strategic perspectives to implement the exit. In the era of globalisation, Brexit and the consequent uncertainties have the propensity to affect the economies which are intertwined or have major trade relationship with either or both the parties.
Bangladesh faces some uncertainties considering the future outlook of exports and imports to the UK and the EU. As the impact can be analysed through various perspectives, it is better to start with the 'Price Effect' and 'Trade Mathematics'. The EU, as a bloc, is the largest importer of Bangladeshi products of which the UK constitutes about 10 per cent as a single country, being the third after the USA and Germany. The total export volume from Bangladesh to the UK during the FY 2015-16 was valued at US$ 3.2 billion. The main export items are knitwear, woven garments, engineering products, frozen food, leather etc. The readymade garments constitute nearly 90 per cent of the total export worth US$ 2.90 billion which is about 12 per cent of global RMG export of Bangladesh. After the Brexit poll, the British pound (GBP) was devalued by 10 per cent which is said to be at its lowest since 1985.
DEVALUATION OF POUND: The devaluation of pound implies that the Bangladeshi exporters are now earning less than what it did previously. Since the major portion of exports is shared by the readymade garment (RMG) sector where prices are set during the placement of orders, the British buyers may start to exert pressure to cut down prices or even to cancel the orders. So, the exporters now have very little to do to adjust the prices. It will put a severe pressure on our exporters as net profit margin has already been squeezed due to increase in operational and compliance costs. The consequences have been so explicit that the Overseas Development Institute (ODI), a London-based think-tank on international development issues, has quoted "a lower value of the pound and lower UK growth will reduce imports in the short-term. As we calculate, the least developed countries (LDCs), as a group, would see their exports decline by 0.6 per cent (or $500 million). The most affected countries will be those that export, in relative terms, a lot to the UK, such as Bangladesh, Kenya, Mauritius and Fiji." Due to this exchange rate loss, the income of our exporters will significantly drop affecting the entire industry. Considering the contribution of RMG sector in our economy and employment, Bangladesh obviously runs a risk. Even though this devaluation of pound becomes minuscule or short-lived, it does not guarantee an immunity to our exporters in the coming two years of implementing Brexit.
On the other hand, the devaluation of pound enables countries to gain from import. The major import items from the UK to Bangladesh include textiles and textile materials, prepared foodstuffs, base metals, machinery and mechanical appliances, electrical equipment, chemical products, etc. But from extensive analysis of the import items and its growth over the time, there are reasons to believe that it serves a very niche market and an import benefit can highly be reaped off. On the contrary, the appreciation of euro against pound has made our imports from countries like Italy, Germany, France, etc. costlier. These are mostly capital machineries.
The remittance income from the UK may see a fall. Out of total wage earners' remittance of US$ 14,931 million in FY 2015-16, US$ 863 million has been generated from the UK which is 6.0 per cent of the total and US$ 51 million higher than that of previous year. Hence the risk of more fall in pound's value exists. It will lead to a lower volume of remittance as the non-resident Bangladeshis (NRBs) will now get less taka per pound remitted.
Another effect is caused by 'inflation' in Britain as in August it hit 0.6 per cent, the highest since November, 2014. Although the rise is reported due to increase in transport and hotel cost but it requires higher input cost for the British firms due to weaker pound. That is likely to push inflation higher in the months ahead. The increase in inflation also affects the real purchasing power of the British consumers. The British citizens can now afford to buy less amount of goods. As our main export products are consumer goods (mainly clothes), the lower buying capacity of the Britons will affect our exports there.
EBA SCHEME: The major threat that comes with uncertainty is whether we will enjoy 'Generalised System of Preference' in the British market or not. As a member-country of EU, the British government allows 'Everything but Arms (EBA)' scheme. EBA grants duty- and quota-free access to all products, except for arms and ammunitions, covering 99 per cent of all tariff lines. As implementation of Brexit by the British and the EU authorities will be in the coming two years, it will determine their tangled trade relations like the single market facility or performance like European Free Trade Association. But if Britain leaves the single market to protect its domestic market and impose duty on its international trade to meet its growing expenditure, it will obviously increase our export cost. Then abolition of 12.5 per cent duty-free facility in the British market will set our RMG sector into a stiff competition with countries like China, India and Vietnam. On the other hand, Britain has many famous brands like Primark, M&S, Asda, Newlook and many more which are importing huge amount of RMG products from Bangladesh and then pushing those back to other European destinations. If Britain exits leaving the single market facility, then these companies will face tariff charges in other European countries, resulting in higher prices and lower demand, eventually leading to lower import from Bangladesh. All these raise the question whether the $5.0 billion garment export target by 2021 in the British market will be possible or not.
FDI INFLOW AND IMMIGRATION: In the long course of economic development, the uncertainty and volatility in the British market is likely to have adverse impact on its investment bound for Bangladesh. The net FDI inflow during January to March, 2016 from the UK was US$ 86.27 million which is 21 per cent of the total of that period. If the British economy shrinks or the government takes any initiative to hold the money within the country, then the amount of FDI will also decline.
For immigration, Brexit does not bring any good sign than the existing EU rules; even it might get tougher. Although ex-British Prime Minister David Cameron promised to keep the net migration within 100,000 each year, the net migration was more than 300,000 in 2015. The new cabinet, headed by Prime Minister Theresa May, has not yet clarified its position on this issue.
PREPAREDNESS AGAINST BREXIT FALLOUT: As the exact outcome of Brexit cannot be assessed right now, we should immediately take some precautionary measures to protect our interest. The government should form a support fund/subsidiary to counter the immediate exchange rate loss of our exporters due to Brexit. Then we should pay attention to bilateral relations as out of the EU, Britain will also look to reform its international relations. As a member of the Commonwealth, it is expected that Bangladesh will be able to keep the relations intact and will be able to gain trade and business advantages from Britain. In this regard, the government may form a committee with the relevant stakeholders like trade bodies, economists, researchers and concerned ministries to monitor the situation closely and take appropriate decisions rather than speculating on anything. It should also consider what will happen if more EU countries want to leave the union following the Brexit.
The high commission of Bangladesh in Britain is now required to play a vigorous role to uphold our trade interests and maintain relations with trade bodies there. As we have a scope to benefit as a Least Developed Country (LDC), the government may appoint lobbyists to ensure a strong economic and trade bonding with Britain. The central bank may also intervene in the market to keep up the value of pound against taka to support the exporters. The exporting companies and their associations should now start to recognise geopolitical risks and formulate their long-term business strategy accordingly. They should also explore diversified markets and different channels. Apart from the main exporting items, agro-based products including fruits and vegetables worth about US$ 0.5 billion are also exported to the UK each year. So, there are ample chances to increase export of these products and the relevant agencies should follow the rules to maintain quality to retain the British market.
The writer is with Prime Bank and the views expressed do not reflect those of the bank.
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