Incentives for service proceeds as draft policy targets $110b exports

The government will offer a 2% incentive on service exports, but this rate increases to 2.5% – equivalent to that for remittance – for services produced directly in the destination country, provided that the proceeds are repatriated through banking channels in both cases.

The commerce ministry has drafted the "Export Policy 2024-27" with a provision to also provide a 2% incentive of the total freight charge to shipping companies if the goods imported to Bangladesh through back-to-back letters of credit (LCs) are transported by a Bangladeshi-flagged vessel.

In the draft policy, the government has set a target of increasing export earnings to $110 billion by June 2027, a goal that exporters view as ambitious.

To achieve this ambitious target, the draft aims to capitalise on the opportunities arising post-LDC graduation in 2026 and address the challenges stemming from the loss of existing duty-free benefits in the export sector. This will be accomplished by providing alternative support mechanisms in lieu of export incentives, ensuring tariff benefits, and offering non-monetary incentives to diversify export-oriented goods and services.

The commerce ministry has published the draft export policy on its website and has invited stakeholders to provide their views by 2 March. The draft policy emphasises the importance of determining appropriate measures in response to the loss of duty-free export facilities following Bangladesh's graduation from the LDC bloc.

The draft policy specifies that a high-level committee, chaired by the prime minister, will be tasked with implementing the new export policy mandate.

Under the existing policy order for 2021-24, the commerce ministry had aimed to raise the country's export earnings to $80 billion. However, officials within the ministry are of the opinion that achieving this target may not be feasible amidst the global economic slowdown caused by the Covid pandemic and the Ukraine-Russia war.

According to the Export Promotion Bureau, Bangladesh earned $63 billion from the export of goods and services in fiscal 2022-23, with goods alone fetching $55.55 billion.

The commerce ministry has set a target of $72 billion for the export income of goods and services for the current financial year.

As of July 2023, Bangladesh has a total of 97 flag ships. Among them, only six are container ships capable of carrying back-to-back LC cargo. Karnaphuli Limited, Dhaka, owns these container ships. The remaining ships consist of bulkers and oil tankers, which are not suitable for transporting goods under back-to-back LC arrangements, according to the shipping companies.

A number of industrial groups have shown interest in purchasing oceangoing vessels following the enactment of the Bangladesh Flag Vessels (Protection) Act 2019. This act includes VAT exemption, preferential berthing of ships at the country's sea ports, an obligation to transport 50% of goods in import-export trade by local vessels, and hassle-free ship registration.

Bangladesh currently pays $900 million in freight charges annually for the import and export of goods. Previously, only 8-10% of this freight trade could be handled by local ocean-going vessels, but this has now increased to 20%. Businessmen and officials of the Mercantile Marine Office anticipate a possibility of creating $200 million in annual income.

When contacted, Ahsanul Haque Chowdhury, former president of the Bangladesh Shipping Agents Association, said, "We welcome such a decision. It will certainly help boost the transportation of goods by Bangladesh-flagged carriers, but all shipping companies must come forward cordially with competitive freight rates similar to those of foreign-flagged carriers."

However, Syed Mohammad Arif, the incumbent president of the association, declined to comment without a detailed study on how the new policy will facilitate the use of Bangladesh flag carrier vessels.

Sarwar Jahan, deputy managing director of SR Shipping Ltd, Bangladesh's largest company of oceangoing vessels, told TBS, "It is a positive step by the government to encourage shipping lines to transport goods using Bangladesh flag carrier vessels. This will encourage Bangladeshi flag vessels to bring more remittances to our country and use it as a prime spot for cargo movement."

Meanwhile, Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association, the largest export sector in the country, believes that increasing the country's export income to $110 billion within the next three years will be very difficult.

"The biggest obstacle is that the gas crisis will not be overcome by 2026. Besides, the way the government is raising gas prices, Bangladesh will lose competitiveness in exports after losing GSP benefits in the post-LDC transition. Achieving this ambitious target will be very difficult in the face of so many challenges," he expressed doubt.

Shahidullah Azim, vice president of the Bangladesh Garment Manufacturers and Exporters Association, told TBS that the export target is ambitious given the current reality.

"The condition of our export destinations globally has not improved. It seems that this will continue for some time. As a result, it will not be easy to achieve the target in one jump in three and a half years," he added.

However, he noted that if the ease of doing business improves and the cost of doing business decreases, even if the target is not achieved, significant progress can still be made.

"But we are lagging far behind here. Our cost has increased. Now I hear that the price of electricity will increase in March. Again, there are various problems, including HS code, when exporting or importing goods at the port. We cannot move forward unless all parties make a concerted effort," he continued.

The draft of the new export policy calls for avoiding excessive protectionism of domestic industries, rationalising tax rates, and reducing the government's reliance on import duties to create a competitive trade and investment environment.

Additionally, emphasis has been placed on making the exchange rate more flexible and competitive, and reforming the investment environment to attract foreign investment in manufacturing.

To achieve high growth in export trade, there is a call to increase the capacity of the trade system, forge trade agreements with larger economies, enhance productivity in the industrial sector, improve the quality of agricultural products, and prioritise the ICT sector.

Following graduation from LDC status, Bangladesh's access to duty-free export facilities, as well as access to TRIPS (the Agreement on Trade-Related Aspects of Intellectual Property Rights) and the Enhanced Integrated Framework (EIF), will be limited. Additionally, Bangladesh will lose the facility of obtaining long-term loans from international financial institutions on favourable terms.

According to the draft policy, Bangladesh will lose the comparative advantage of low-skilled labour-intensive production processes due to the recent availability of advanced technologies such as artificial intelligence, robotics, the Internet of Things, big data, 3D printing, genetic engineering, and quantum computing, stemming from the fourth industrial revolution.

In response to international buyer demands, including those from Europe and America, there is a call to increase the application of circularity principles in the production cycle as part of the adoption of sustainable technology in the garment industry. There is also an emphasis on increasing the participation of women entrepreneurs in the export sector and providing increased assistance to small and medium industrial entrepreneurs.

Furthermore, there is a proposal to provide venture capital facilities to agricultural farms with a minimum of five acres of land to boost the production and export of agricultural products.