This fiscal year has mostly been a good year for the readymade garments (RMG) industry. Proving skeptics wrong, the industry enjoyed a flurry of activities and overall export earnings grew approximately 3.27 per cent during July-October, raking in US$3.67 billion. Orders however have slowed down since October and any such reduction will have a corresponding effect on all the sub-sectors. The accessories and packaging industry’s profit or loss is tied to the rise and fall of readymade garments (RMG) export. It is feeling the pinch as orders have declined. On top of all this, the economy is facing a foreign exchange and local currency crunch.
Since the accessories industry meets 90 per cent of RMG sector, it has to deal with delayed payment since RMG exports are being held back. That leads to deferred shipments and if these were not enough, the banks are reportedly facing a liquidity crisis. According to a report published in this paper, RMG exporters claim that work orders have fallen by as much 40 per cent. As pointed out by a former president of BGAPMEA (Bangladesh Garment Accessories and Packaging Manufacturers and Exporters Association), “If we received a work order for 0.1 million pieces earlier, it now has come down to 35,000-40,000 pieces.”
Again, BGMEA leaders state that foreign buyers are asking RMG companies to delay shipments of finished goods because they are faced with a fall in demand in their domestic markets, ending up with large unsold inventories. The dual effect of high inflation in the West and increased logistical costs due to the volatility of fuel price (a spillover effect from the Russo-Ukrainian war) has thrown the entire supply chain of RMG into chaos. As RMG companies see their business fall, accessories industries that supply various items which constitute a finished fabric, are also facing deferred payment for finished goods delivered.
According to the BGAPMEA, there are approximately 1,800 accessories and packaging companies associated with it, producing more than 25 items needed by the RMG sector. This sub-sector contributed $7.25 billion in the last fiscal, a threefold increase from FY2010-11. As the government is targeting $100 billion export from RMG by 2030, the needs of this industry can hardly be neglected. The association has come up with some suggestions to stave off the worst. It wants a fixed exchange rate of Tk106 against US$1.0 and a reduction of interest on EDF (export development fund) loans. The central bank has already eased the pressure on exporters by introducing a three-installment repayment scheme to repay EDF loan. Given the extraordinary pressure being faced by the accessories and packaging industry, the central bank may ease the financial pressure by redefining repayment term and interest charged.
Looking beyond what the government can do to shore up the RMG sector, why is it that foreign buyers hold so much sway on the payment side of contracts with RMG companies? This is not the first time that the sector has faced problems. The time has surely arrived when we go back to the drawing board in terms of contract management because something isn’t right here. We are talking about billions of dollars’ worth of finished goods ready for shipment. And yet, orders can be cancelled or delayed without any kind of compensation? The industry needs to get out of this quandary because no one can predict how long the present crisis will last. Even if things get better in the next quarter, the basic premise of not paying / deferred payment has to be addressed. A failure to do so opens up a Pandora’s Box of uncertainty for the RMG sector. If RMG companies suffer, so does every other link in the supply chain.
Yes, the government should certainly ease terms of payment on loans during this crisis and extend policy support measures that will ease the cost of doing business. But it cannot become the modus operandi to give the bulk of cash incentives to RMG alone. There are other sectors that deserve attention too. If the current crisis has taught us anything, the country sorely needs to diversify its export basket. Export earnings show particularly strong growth from the footwear industry which has been posting double digit growth consistently over the last five years. Then there is the ship building industry that has started exporting in a steady manner. These are examples of industry that are coming up strongly in export. The bottom line is that the export basket should have different products. Like RMG, they will require fiscal incentives to grow.
