Should we continue with cash incentives for exporters?
The trend of providing cash assistance to the export sector is increasing almost every year. However, it is not clear we are benefitting from this
Cash assistance is a form of incentive provided by the government to boost the export sector. To put it simply, cash assistance provides exporters with Tk10 from the government, if they are able to export products worth Tk100.
Due to the high production cost in Bangladesh, the government has to chip in to keep the export sector competitive. As the export target has been set at $60 billion by 2021, the cash subsidy has to be increased. But this support comes with a set of problems of its own, which needs to be considered carefully before formulating any policy.
The reality of cash assistance
In FY 2018-19, the subsidy allocation for the export sector was Tk4,500 crore, which increased to Tk6,000 crore the next year. For FY 2021-22, Tk8,350 crore has been allotted for export assistance, which is close to the allotment during the previous financial year (Tk8,626 crore).
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Even though it may seem very helpful, cash assistance can make exporters become reliant on the subsidy as a source of revenue. Many sectors are not sustainable even after receiving cash assistance year after year. Products like readymade garments, which are supposed to be quite established in the international market, require special benefits to remain viable.
The trend of providing cash assistance to the export sector is increasing almost every year to encourage exports. However, I do not think that the country's export sector is improving with this incentive.
On the contrary, the over-reliance of the entrepreneurs on financial support of the government is increasing. As a result, the entrepreneur's innovative ability to deal with risks regarding expansion, diversification and quality improvement is not being tested.
In this context, economists and trade analysts are concerned about the creation of a sustainable export sector in the country. In their eyes, cash assistance is not a sustainable export model at all.
In a free economy, businesses need to be strong enough to stand up on their own and maintain profitability. Long term cash assistance can reduce the incentive of entrepreneurs to come up with creative and productive solutions that increase their profit. It also undermines the aims and objectives of the government.
According to the Vice Chairman of the Export Promotion Bureau (EPB), the export sectors considered for cash assistance are rescheduled every year. At the same time the percentage of incentives is also redistributed.
In FY 2020-21, 24 products have been newly identified. Of these, 14 are new and did not receive any incentives before. In addition, the rate of incentives is being reduced every year for some sectors, which have been receiving incentives for many years.
Rethinking cash assistance
Trade experts believe that the cash assistance is responsible for the anti-dumping duty imposed by India on jute exports to Bangladesh. In addition, if a country subsidises the export of goods, the importing country can impose countervailing duty as a precautionary measure.
It is evident that cash assistance will not be able to make the export sector sustainable in the long run. Accomplishing that will require export-friendly tariff policy and favourable exchange rate.
Some companies are availing cash assistance by faking exports, instead of actually exporting products. Many others are claiming to export higher rate products by actually exporting lower or exporting non-cash assistance products instead.
Such manipulation has been caught in Chattogram, Dhaka and other customs houses lately. Chattogram Customs House has instructed officials to be more careful in the goods consignment test to prevent such manipulation.
In particular, the Chattogram Custom House Authority has directed officials to verify the accuracy of shipments of goods involving additional cash assistance and physical examination of relatively risky goods.
No specific research has been conducted in Bangladesh so far on the impact of government-funded cash assistance to exporters on the economy, but it needs to be done.
As a potential developing economy, Bangladesh can soon be deprived of the benefits it has enjoyed under WTO. Exporters can also face anti-dumping and countervailing bans if cash assistance continues.
Cash assistance is understandably crucial for industries still in their cribs. But it will do far more harm than good in the long run. We have to make more thoughtful policy decisions to help continue the rise of our economy for the decades to come.
Md Raihan Ubaidullah is the Deputy Chief of Bangladesh Trade and Tariff Commission.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
