What CEOs think about inflation
Inflation has made everything more expensive. In addition to that, the strong dollar rate has made imports costlier than ever before. In exclusive interviews with The Business Standard, five Bangladeshi top executives share their thoughts on the issue.
The world is reeling from two consecutive crises. As soon as we thought that we would recover from a once-in-a-century pandemic, war came to the forefront ravaging the world economy. The dual blow of the Covid-19 pandemic and the Russia-Ukraine war has also deeply affected Bangladesh too.
Inflation has made everything more expensive. In addition to that, the strong dollar rate has made imports costlier than ever before. In exclusive interviews with The Business Standard, five Bangladeshi top executives share their thoughts on the issue.
'Bangladesh should continue to focus on fulfilling the demand of low-price, big-volume customers'
— Kyaw Sein Thay Dolly, Managing Director, Cloths "R" US Limited
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The Garment industry in Bangladesh is passing through unprecedented challenging years. Soon after recovering from the economic challenges of a pandemic, the industry faces challenges of currency inflation, devaluation of local currency, shortage of electricity within the country, shortage of gas supply in customer's destinations and high inflation in western countries.
The industry predicts that all these challenges will impact Winter 2022 sales. Spring/Summer 2023 will have 10% fewer sales orders than Spring/Summer 2022. This is because of the inflation in the US (9.1%), UK (9.4%) and Europe (8.6%). As a manufacturing nation of cotton products, Bangladesh always enjoys higher sales turnover during spring/summer sales.
The gas supply shortage to European countries due to the Russia-Ukraine War also impacts consumers' purchasing habits. For an average European household, the priority for Winter 2022 would be food on the table and gas to heat their houses; buying new clothes may not be on their priority lists.
The brands are also anticipating fewer sales during the Christmas season.
Also, the Euro hit parity with the US dollar for the first time since 2002. Customers usually purchase from Bangladesh in dollars but sell in euros. The currency parity will have a negative impact on the sales price they pay to Bangladesh factories by 5-10%.
Amid all the challenges, the good thing is that the Bangladesh RMG industry is a strong player in the low-price market category. As the economy will be facing more challenges putting pressure on customers' purchasing power, the discounters and low-price retailers will get momentum in sales eventually.
Bangladesh may witness fewer business placements in SS23 compared to SS22. But as a manufacturing hub, Bangladesh should continue to focus on fulfilling the demand of low-price, big-volume customers till 2023.
With strong leadership, BGMEA is trying its best to uplift the image of the Bangladesh RMG industry. Bangladesh is nowadays known as a "good quality" and "competitive price" garment manufacturing nation worldwide.
'Work orders will decrease, but it won't be a complete landslide'
— Salauddin Chowdhury, Chairman, Stylish Garments Limited
Given the Russia-Ukraine war, prices of all raw materials have gone very high. The flow of work orders from foreign buyers has slowed down.
Big ventures or mother factories still have regular work orders. However, many small factories are now seeking new orders under sub-contracts because their ongoing contracts will expire by September.
Due to the global crisis, retail buyers in Europe and the US are not purchasing much. The normalisation of the pandemic situation somehow helped us regain the US-based market; still, the pockets in Europe remained closed. This is indeed a big concern for the RMG exporters.
Fortunately, Bangladesh escaped the pandemic-induced economic crisis as the European nations had experienced. Even in China, many small-scale industries closed down forever. Some factories in Bangladesh also were closed during the pandemic but only for a temporary period.
Bangladeshi RMG exporters, except a few big ones, mainly produce cheap, basic products. The demand for basic products persists despite whatever the global crisis is. Maybe the rate of work orders will decrease, but it will not be a complete landslide.
Notably, the International Monetary Fund has apprehended a drastic fall in GDP growth in all major economies. So, this is not merely a national crisis in Bangladesh.
The European countries where we receive most of the work orders are dealing with record-breaking inflation. Comparatively, we are in a better situation than the crisis-hit Europeans.
I would like to thank the Bangladesh Government for taking some timely policies which will be helpful for the business communities to keep the economy moving.
For example, Bangladesh Bank has instructed the scheduled banks to encash 50% of the total balance held in exporters' retention quota (ERQ) accounts. This system ensures our international payments and preserves the foreign exchange in this crisis moment when the flow of remittance has decreased.
Another supporting policy is that the Bangladesh Bank has restructured its loan rescheduling policy by widening the repayment period and reducing down payments to facilitate loan defaulters to keep their accounts regularly. Critics have taken this policy wrongly.
On the contrary, I think this policy is for the betterment of the business communities, not to shield the loan defaulters. If businesses don't get this relaxation, pandemic-hit industries will die. We know better that only a functional industry can ensure employment.
'We are reducing expenditure in some sectors'
— Abdullah Hil Rakib, Managing Director, Team Group
We are struggling to understand the nature of the inflation. Our customer order forecasts are reducing. The inflation crisis has led us to a position that we have to be magicians [to sort out the crisis]. But we don't know how many of us can be magicians. In total, this is an unpredictable situation.
In terms of international payments, the customers – who themselves are in challenging situations – are delaying payments for necessary reasons. The inventory went high for some, which is why they are buying fewer products.
On the other hand, some are trying to get discounts by showing nonsense excuses. Everyone is trying to get money from others' pockets.
While the expenses are increasing, revenues are falling hand in hand with reduced customer affordability both in the local and the international market.
Before Eid-ul-Adha, businesses in the local market – be it pharmaceuticals or retailers – had a similar situation. They couldn't sell because people's purchasing capacity has reduced.
At this point, employee management in terms of increments is dependent on the cost of living adjustment (COLA) and an employee's performance. However, given the state of inflation at present, the company doesn't have the capacity to give a raise.
As the costs of power and everything else have increased, the business is struggling with [profit] margin. We are reducing expenditure in some sectors, branding for example.
However, there is a grey area in sales in the September-November period. If the Ukraine situation improves in the meantime, the business may revive by December. According to recent data, almost 11% of businesses have dropped. If that business recovers, the economy will recover.
But at this point in time, everyone is suffering because of the increasing costs.
'We should brand Bangladesh as an affordable tech destination'
— Mir Shahrukh Islam, MD and CEO, Bondstein Technologies
Inflation is like diabetes for business. If it isn't in control, it'll create more complications.
The technology industry largely depends on hardware like laptops, desktops, servers etc. We have seen nearly a 60% rise in the cost of hardware in the last few months. Computing resources like AWS, Google Cloud, and Microsoft Azure have become more expensive. This impacts the cost of service we are offering our customers. International payments have become complicated and unstable, which resulted in volatile commercials with our clients.
Emerging tech companies are facing even more challenges. Imports of electronic components are marked as non-essentials, and banks provide no margin on imports of these components. This will hinder the adoption of the fourth industrial revolution in the country. Every IoT (internet of things) company has seen growth slow down, and is actively trying to pivot.
Most of the global tech giants have slowed down their recruitments. This is going to affect the quality of locally available resources. But adjusting CTC (cost to company) with inflation is impractical for most companies.
We understand that it is a global problem. But problems also open opportunities. At this time of economic crisis, we should take the opportunity to brand Bangladesh as an affordable tech destination. The technology industry should be given special attention because it has the potential to give future dividends.
There is a gap in resources in the global market. We should aggressively move to capture that. Government should help with subsidies, incentives and most importantly, ease of doing business for tech entrepreneurs. If we miss this train of technology, it will impact the country in the long term.
'Examining product sales of Sindabad, we can see that the customers are being careful'
— Asif Zahir, MD, Sindabad and Director, Ananta Group
The main problem with inflation is that there are a lot of uncertainties. Imports have become expensive. Prices of everything have gone up. From fuel to raw materials – everything costs higher.
We will receive the payment for the orders we are taking now in six months' time. There are uncertainties about what will happen in six months. This is a difficulty for any business.
Besides, there is load shedding, product shortages, and some imported products have stopped coming. These are also hampering the operation.
However, we are hoping this is a short-term crisis. The situation will improve in 2-3 months.
Besides, another big cost is our interest rate. In the garment's industry, we do things through dollar financing both long-term and short term – but interest rate has gone up. The LIBOR (the benchmark interest rate at which major global banks lend to one another in the international interbank market) that once was almost zero has gone up to 3.5. Our interest cost has increased by 3.50%.
When it comes to loans in the local market, the 9% cap that is in place may be removed by the government in future.
Examining the day-to-day product sales of Sindabad group products, we can see that the customers are being careful. The consumption of rice, oil, pulses and sugar has declined significantly.
We are being conservative in dealing with these situations. The US and Europe are our main markets for garment products. These Western buyers are more careful now. They are cautiously observing inflation. The orders have decreased significantly, and some are postponed. So, the overall situation is very unpredictable.
We are being very careful. So the immediate expansion plans have been postponed for the next three to six months, and we are trying to curtail the expenses as much as possible. We are devising plans to sustain in case of a 10-20% reduction in orders.
