Why industries urgently need long-term policies over short-term incentives

In February last year, the government's decision to substantially increase gas prices, from Tk16 to Tk30 per cubic metre for captive power plants, triggered a cascade effect. Textile millers, grappling with a staggering 78% surge in electricity costs per kg of yarn to Tk31.20, found themselves squarely in the line of fire.

A year later, on 27 February this year, the government again raised gas prices by 75 paisa per unit for power generation. This led to a 5.36% increase for government, independent power producers (IPPs), and rental power plants, and a 2.50% rise for captive power plants, further burdening textile millers' production costs.

This surge in gas prices is just one aspect of a broader confluence of challenges. Manufacturers and exporters are contending with obstacles, including interrupted energy supply, currency volatility intensified by a 30% depreciation of the taka against the US dollar since mid-2022, dollar crisis, import restrictions, hiked interest rates, and wage increases. These factors are swiftly eroding the competitive edge that once allowed them to undercut global rivals.

The prospect of Bangladesh's LDC graduation in 2026 also looms large, warning of the loss of duty-free access to Western markets and a gradual phasing out of cash incentives. For manufacturers reliant on international sales, this represents a potentially devastating blow.

Unpredictable and unstable policies the worst

Amid the uncertainty, manufacturers and exporters assert that a pathway exists to weather these challenges. Paramount among these are the predictable and stable policies spanning a decade or more. The absence of such measures, they argue, inflicts greater harm than even sudden energy price hikes and incentive reductions.

Take, for instance, the case of the Chattogram-based Well Group. In 2017-18, it boldly invested Tk400 crore in establishing a composite textile mill and expanding its food business, buoyed by the anticipation of seamless energy provision following the government's completion of LNG infrastructure for industrial use.

But the onset of Covid-19 abruptly halted factory operations. Just as recovery seemed promising when the Covid factor started to wane, the eruption of the Russia-Ukraine conflict triggered a surge in commodity prices – of food to energy and raw materials – exerting immense pressure on Bangladesh's foreign exchange reserves and currency exchange rates with the taka depreciating roughly 30% against the dollar.

In the fiscal 2021-22, Well Group imported raw materials through deferred LCs at Tk86/87 per dollar, aligning product pricing accordingly. But a year later, upon settling payments against the deferred LCs, the group encountered a steep increase, with the dollar demanding Tk110/115, resulting in significant losses.

The challenges extend beyond currency fluctuations. A massive hike in gas prices to Tk30 per unit from Tk12 in 2023 caught businesses off guard. "We had no clue that gas prices would escalate to such heights when we made investment decisions," said Nurul Islam, managing director of Well Group.

He stressed the critical need for policy consistency, spanning electricity and gas tariffs to tax rates, essential for sound investment planning and cost analysis.

Well Group's plight reflects a broader business trend, with textile and other millers grappling with similar predicaments rooted in policy unpredictability.

"We're not seeking incentives; rather, we require a stable, long-term policy spanning 10 to 15 years. This would provide clarity on our tax rates and utility tariffs," said Md Fazlul Hoque, managing director of Israq Textile Mills and Vice President of the Bangladesh Textile Mills Association (BTMA).

"Guided by such a policy, entrepreneurs can determine whether to proceed with new investments," said Fazlul Hoque, who invested over Tk600 crore in establishing a new textile mill three years ago. Currently, he faces the consequences as the mill remains inactive due to sluggish demand for yarn and soaring gas prices, all while the accumulating burden of bank interest adds to his challenges.

It's not just Fazlul Hoque experiencing the repercussions of disruptions in gas supply and price hikes. According to the BTMA vice president, most of the new investments totalling around Tk7,000 crore made in the textile sector in 2021-22, along with half of the older mills, are struggling with losses.

A glaring instance of policy unpredictability in Bangladesh was seen with the imposition of a 20% tax on the interest of foreign loans in May 2023. This abrupt change starkly contrasts with the previous policy established by the National Board of Revenue (NBR), which had waived the tax on interest for foreign loans through a circular issued back in 1976.

"Implementing such a decision was not at all a good idea, especially considering it was made during a period of acute foreign currency shortages," remarked MA Jabbar, managing director of DBL Group, one of the country's largest garment exporters.

DBL Group, with diversified interests spanning textiles, garments, ceramics, and pharmaceuticals, experienced significant expansion over the past decade, largely facilitated by low-cost foreign loans obtained from institutions such as the International Finance Corporation (IFC), British International Investment, and German lenders.

The group secured $96 million in loans from international development finance institutions in 2022 and after imposing a tax on interest it told TBS that it would be hesitant to continue taking such loans due to the imposition of the tax.
Later, the NBR extended tax exemptions on the interest income of foreign lenders from February to 31 December 2024.

Clear and long-term policies needed for survival

Jabbar explained why industries now require a long-term policy more than ever. Previously, businesses benefited from certain competitive advantages such as inexpensive labour, comparatively low energy tariffs, and incentives, which helped them navigate sudden policy shifts such as tax and energy price hikes, he elaborated.

"But those advantages are diminishing as labour and energy costs continue to rise. Also, after our LDC graduation in 2026, we will lose duty-free market access to many markets. It's imperative now that we have clear information and long-term policies – whether it's regarding tax rates or utility prices – for both our survival and for attracting new investments," Jabbar told TBS.

Prof Selim Raihan, executive director of South Asian Network on Economic Modeling (Sanem), a think-tank, said Bangladesh has a high level of deficiency in terms of regulations. "It's [policy] not predictable, be it tax rates or service charges," he told TBS on Tuesday.

"Foreign investors also say Bangladesh's business environment is not predictable," said Prof Raihan who also teaches economics at Dhaka University.

He went on to say it is not possible to develop further by suppressing wages. All industries, rather than just a select few, require a comprehensive policy framework to plan their investment strategies effectively, he said.

"Policy predictability is of utmost importance now in the wake of the country's LDC graduation as Bangladesh needs to diversify its export baskets from only garments for further growth and employment," he said.

Drawing a comparison with Vietnam, Prof Raihan highlighted the remarkable growth achieved through consistent policies. He pointed out Vietnam's substantial increase in merchandise exports to over $300 billion and an annual inflow of FDI of around $30 billion, contrasting Bangladesh's lagging progress due to policy inconsistency.