Govt rolls back export incentives as LDC graduation nears
Analysts see the decision as forward-looking, saying the incentives, funded with taxpayers’ money, ultimately benefit Western buyers and consumers.
In a strategic move designed to align with its graduation from Least Developed Country (LDC) status in 2026, Bangladesh has unveiled a plan to cut back on incentives for all export items — a development exporters fear will hurt them fatally.
Analysts see the decision as forward-looking, saying the incentives, funded with taxpayers' money, ultimately benefit Western buyers and consumers.
In a circular issued on Tuesday, the central bank clarified that the government has opted for gradual reduction in export incentives rather than an immediate stop in the ongoing fiscal year 2023-24.
The circular takes effect on 1 January 2024 and is valid until 30 June 2024.
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In the new policy, the special incentive for the readymade garments sector has been scaled down from 1% to 0.5%. Incidentally, garment has been the most incentivised sector in terms of amount in the economy.
The incentive for crust leather has been reduced to 0% from 10%.
Also, incentives for venturing into new markets have witnessed a 1-percentage point reduction to 3%. This reduction extends to various sectors including jute and jute goods, leather and leather products, frozen fish, agro products, and more.
Before the circular came into effect, the highest incentive rate was for agro products, potatoes, and processed meats at 20%, which has now been reduced to 15%.
On the other hand, cash incentives for exports to three major new markets – Australia, India, Japan – was 4%. The new circular placed these three in the Traditional Market, which has a 0.5% cash incentive.
According to the Bangladesh Bank circular, the government has been providing cash incentives against 43 export items.
Finance ministry data show, a substantial 65% of these cash incentives, amounting to nearly Tk5,000 crore, primarily benefit the garments and textiles industry.
Exporters concerned
The move has stirred reactions within the export community, with exporters expressing concern over the impact on their bottom line.
Speaking to The Business Standard, Faruque Hassan, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), said, "At first, the cash incentive rate was reduced in four categories. But finally, highlighting five HS [harmonised system] codes of items, the government said those would not get cash incentives.
"But these five items are a crucial part of readymade garment exports."
The apparels items not allowed to enjoy cash incentives in the new circular are men's or boys' knitted or crocheted shirt, men's or boys' knitted or crocheted briefs and similar articles, knitted or crocheted t-shirts, singlets and other vests, jerseys, pullovers, cardigans and similar articles, and men's or boys' suits, ensembles, jackets, blazers, trousers, etc.
According to data from the BGMEA, the five items deprived of cash incentives contributed $25.95 billion in exports, or 46.71% of the total export figure for the last fiscal year. The figure is 55.22% of the total readymade garment exports.
In regards to the category of new markets, he said the names of India, Australia and Japan were omitted.
"We developed these markets with great difficulty. Such decisions have created a huge risk for our industry."
He said now, after the new circular, only a few goods will get the cash incentive.
Faruque said the circular stated that according to the World Trade Organization guidelines, incentives cannot be kept after 2026. That is why it was reduced.
"We have repeatedly asked them not to reduce the incentives now because then we won't remain competitive in terms of foreign currency. Already international orders are low and there is a dollar crisis in the country," he said.
He also said foreign exchange reserves had reached such a point that there were issues in opening letters of credit.
"Importing raw materials has also become difficult because of this. Thus, we asked that incentives not be reduced. But the government did not agree to this," he said.
Knitwear makers dismayed
Fazlee Shamim Ehsan, vice-president of Bangladesh Knitwear Manufacturers and Exporters Association, said, "On one hand the government is emphasising value-addition to us. On the other hand, it is withdrawing cash incentives for value-added products. This is not acceptable."
He pointed out the reduction of cash incentive on high-value products – suits, blazers, ensembles, etc. – saying that it would be a barrier to product diversification.
"Such complicated conditions would mean the knitwear sector – which makes up the lion's share of apparel export earnings – would not get any cash incentive. As a result, it would no longer be globally competitive. Most international orders would go to neighbouring countries," he said.
Bangladesh is the only country that imports all its core raw material for the garment industry – cotton and petrochemicals – while India, Pakistan and other garment exporter countries produce their own raw materials. The most powerful competitive advantage of Bangladesh is its cheap labour.
What analysts say
Analysts view this decision positively, asserting that these incentives given from taxpayers' money primarily serve the interests of Western buyers and their consumers.
The incentives factored into pricing strategies by Western brands and buyers, are seen as a crucial component influencing competitive pricing in the global market, they said.
Sadiq Ahmed, Vice Chairman of the Policy Research Institute of Bangladesh, noted that discussions about the gradual elimination of export incentives have been ongoing for years, aligning with the WTO's LDC graduation policies.
"Exporters currently benefit significantly from favourable exchange rates, making cash incentives unnecessary at this point," said Ahmed, also a former top official of the World Bank.
Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), has expressed support for the government's decision to phase out export incentives.
He said that cash incentives are not the sole means of aiding exporters. Measures like reducing business costs, mitigating extortion, and minimising bureaucratic hassles are equally effective in fostering business growth.
What BB circular says about WTO rules
The circular mentioned that as per the WTO Rules, these cash incentives are considered as Subsidies Contingent upon Export Performance.
According to the Agreement on Subsidies and Countervailing Measures (ASCM), no subsidy/cash incentives will be allowed after graduation from the LDC status, it says.
