Extending stimulus repayment moratorium could be a respite for RMG

The ready-made garment sector has been going through a state of ups and downs during the pandemic. Being a prime export sector of Bangladesh, the government has given utmost importance to the recovery of this sector by providing stimulus credit support, and as a result the sector showed a recovery in the first quarter of FY21.

However, uncertainties loom large in the context of the second wave of the coronavirus spread in the lead markets, such as the USA and the EU.

The BGMEA has been requesting the government to extend the moratorium period of repayment of stimulus credit (principal and interest) for one more year, that is up to the end of 2021. Since vaccines started rolling out in the USA and the EU and other RMG markets, we expect that the RMG sector would be able to revive again in the middle of 2021.

From this point of view, I think that a moratorium on interest payment and partial principal payment could be extended until June 2021, which would provide them with a respite in their business.

However, I am not very supportive of their demand for further devaluation of the exchange rate given that the exchange rate is in a pressure of appreciation in the context of the low level of import and higher remittance earning, and that the exchange rate is already in a devalued spectrum to some extent.

One of their (RMG sector and some others) arguments is that Vietnamese RMG products are more competitive than Bangladeshi RMG because of the exchange rate.

I don't think that exchange rate would work as a panacea of all problems of the RMG sector. There is a REER index that takes into account inflation and trade weights of our competitors. I am sure that the Bangladesh Bank has been observing the REER and in my view the REER should be the guideline for exchange rate management, at least partially.

Devaluing slightly would not improve the efficiency of the RMG sector which is a long-standing concern for the sector. Devaluation would rather give a short-term respite, which cannot be the long-term solution.

Moreover, comparing with Vietnam in terms of price competitiveness is not also the right policy to pursue.

We need to answer the following questions in the first place.

Are we competing on the same line of products? I am sure, not. Product quality and efficiency in the sector should be the prime concern.

How much diversification did we make within the RMG sector? Why do some of our RMG firms bid for underpricing? What is the actual profitability of the firms?

The answers of these questions are not known because the RMG sector does not truthfully report it. Even the sector is poorly placed in terms of automation defying the government's digital Bangladesh vision; widespread automation is expected because it would bring the sector in a more accountable and transparent position, which will help them receive government support and better international exposure.

As we are expected to move out from the LDC status by 2024, the RMG sector needs to prepare themselves to face the competition ahead.

Government support is important; however, the sector should not solely and always focus on support or incentives. Having 30 years of experience in the market, our expectation is that the sector will be able to penetrate with their own ability of competitive edge.

My final say is that macroeconomic stability should be taken into consideration before making any decision on exchange rate devaluation or adjustment taking cognisance of the demand from the RMG sector.

We should not forget that exchange rate is also a determining factor for interest rates and inflation, which are already in conundrum.

Dr Monzur Hossain is Research Director at Bangladesh Institute of Development Studies (BIDS). He can be reached at [email protected]