Will cuts in export incentive be compensated by cuts in logistics costs?

Since the countdown to graduation from least developed country (LDC) began in 2021, there have been calls for Bangladesh to get ready for tough days when trade preferences will go and businesses have to be in global competition without the handholds of cash benefits and tariff protections.

In the three years since then, export sector players have been pointing out what they need to prepare for the D-Day and, along with analysts, have been making a to-do list for the government. The government has also formed committees to prepare a concrete transition strategy to help businesses cope with life after LDC graduation scheduled for 24 November 2026.

With two years left, the government has now taken implementation of policy steps, unveiling its plan to phase out cash incentives for exports right from this fiscal year.

This is a message for businesses that fiscal stimulus is drawing to an end and they need to survive on their own in a highly-competitive trade world.

The Bangladesh Bank, announcing drastic cuts in cash incentives for exports on Tuesday, cited the WTO Rules that consider cash incentives as Subsidies Contingent upon Export Performance.

According to the Agreement on Subsidies and Countervailing Measures, no subsidy/cash incentives will be allowed after graduation from the LDC status, it says.

Analysts view the decision to reduce cash support for export is right as giving incentives to certain industries from taxpayers' money cannot go forever.

Export sectors caught off-guard

The measure, though not quite unanticipated for the private sector, caught the readymade garment off guard, apparently with the timing. The country's largest export earner has been the most incentivised sector. Now it stands out to be the biggest loser among 43 export items getting the benefit. Garments and textiles account for 65% of the export cash incentives, which amounted to Tk7,825 crore in the last fiscal year.

Five apparel items, which fetched about $26 billion – or 47% of total export proceeds – last year, will now see cash support halved to 0.5% effective from 1 January. All these five items are high value-added and cutting support for them is a disincentive for product diversification, which is key to post-LDC survival, says Fazlee Shamim Ehsan, a leader of the knit sector, which, he points out, is left with no cash incentive at all. "As a result, it would no longer be globally competitive. Most international orders would go to neighbouring countries," he told The Business Standard.

India, Japan and Australia are no longer listed as new export markets. Cash support on exports to these three destinations is now 0.5% as applicable to all traditional markets, instead of 4%. Annual exports to each of these countries crossed well over $1 billion (India $2.13b), in the traditional markets like the Netherlands, Canada or Denmark.

Garment industry leader Faruque Hassan said omitting these three destinations from the category of new markets would put their industry at a huge risk.

"We developed these markets with great difficulty," he said, regretting the decision. Faruque said export incentives were reduced at a time when global orders were falling and dollar shortage persisted, making raw material imports difficult. "We asked that incentives not be reduced. But the government did not agree to this," he said.

Reducing business costs

Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), said that cash incentives are not the sole means of aiding exporters. The government needs to take drastic measures to reduce business costs by checking extortion and bureaucratic hassles, he added.

Tax exemptions Tk2.5 lakh crore in FY20

Export sectors enjoy bonded warehouse facilities for duty-free import of raw materials and capital machinery. The National Board of Revenue (NBR) earlier estimated that tax exemptions given to different sectors amounted to roughly Tk2.5 lakh crore in FY20, of which Tk46,755 crore was exempted for importing raw materials, capital machinery, and other goods. Another Tk1.52 lakh crore was waived against bond facilities for export-oriented industries.

The country's tax-GDP ratio would have been 17.81% instead of 9.9% in the fiscal 2019-20, had the government not provided tax exemptions.

Allegations of misuse of the bond facility are rife. Customs people often found items like fabric and paper, imported duty-free and stored in bonded warehouses for export industries, leaked into the local market. The NBR chairman on various occasions warned that the facility would be restricted. Currently, a total of 8,000 entities in the country have bond licences and some 4,000 are active in utilising the privilege. Most of them are apparel manufacturers followed by plastic, leather and other sector exporters.

Unaddressed concerns

While these facilities should be phased out with the industries gaining maturity, concerns of businesses also need to be addressed.

While Bangladesh's transition into a non-LDC developing country reflects its outstanding achievement, it comes with some bumps to be felt in 2026, or three years later if assurance of an additional period comes true.

Loss of market preferences: Bangladesh enjoys preferential market access under the Generalized System of Preferences (GSP) schemes of the European Union and similar preferences in many developed countries. This preferential access will be lost upon graduation, making Bangladeshi exports less competitive. Bangladesh's export loss due to this could be equivalent to about 14.3% of the country's global exports, as per the CPD.

Increased competition: Bangladesh will face stiffer competition from other developing countries in the global market after graduation. This could lead to pressure on prices and profitability, especially for the garment industry.

Higher borrowing costs: Bangladesh's middle-income graduation has already led to higher borrowing costs. This trend is likely to continue after graduation, making it more expensive for Bangladesh to finance development projects.

Limited access to concessional funding: LDCs receive preferential access to concessional loans and grants from international development agencies. This access will be reduced after graduation, making it more difficult for Bangladesh to finance development projects.

These concerns become multiplied when trade-facilitating institutions are weak, logistics are inefficient, customs and port clearances are cumbersome. All these elements, coupled with persistent shortage of dollars and energy, are adding to the cost and time of businesses, making them less competitive in the global market.

Low industrial base, low skills-endowment, and low productivity are among structural weaknesses standing in the way to smooth transition.

The government also needs to restructure incentives and develop skills-driven competitiveness instead of traditional preference-driven strategy to offset probable losses of zero-tariff market access and other facilities following LDC graduation, trade analyst Prof Mustafizur Rahman had said in a keynote speech two years ago.

He had stressed domestic homework in areas of reforms, institutional strengthening, infrastructure and human capacity building to gear businesses for hard times ahead.

How poor logistics infrastructure makes Bangladesh suffer

A Bangladeshi exporter needs at least 108 days – 35 days for imports of raw material, 30 days for production and 43 days for shipping – to send products to Germany's Hamburg port, while India and Vietnam need only 81 and 64 days, respectively, leather sector leader Syed Nasim Manzur told an event in 2022. 

Both Bangladesh and India need 20 days to receive a Chinese shipment by sea, which is 7 days for Vietnam and Cambodia.

Indian customs clear a consignment by 3-6 days; the Southeast Asian competitors do it in 5-7 days; while Bangladeshi customs on average take 10-15 days.

World Bank's Lead Transport Specialist Dr Charles Kunaka showed how Thailand reduced its average rate of logistics cost to 11% from 19% through its planned programme in a decade.

Agility Emerging Market Logistics Index 2022 ranked Bangladesh 39th among 50 emerging economies with China, India, Vietnam, even Pakistan and Sri Lanka way ahead.

The Global Competitiveness Index (GCI 2019) that ranks countries by infrastructure, ICT adoption, business dynamism, and innovation capacity puts Bangladesh at 105th position, way behind its trade competitors Vietnam, India and China.

Presenting these data, the World Bank and the Business Initiative Leading Development (BUILD), a public-private dialogue platform, at a workshop showed how inefficient logistics raise costs of Bangladesh's exports and make those less competitive.

Export sector leaders told a discussion at TBS in December last year that they were more worried about customs hassles.

If these bottlenecks remain as they are now, withdrawal of incentives will make exporters' life after LDC graduation harder.