Bangladesh’s LDC Graduation: Challenges and Opportunities for the RMG industry

In its 50 years of journey, Bangladesh has positioned itself as one of the emerging economies in the world. In recognition of Bangladesh's rapid development, the UN General Assembly (UNGA), in its 76th session, adopted a resolution to allow Bangladesh to graduate from the Least Developed Countries (LDC) category, after 45 years of inclusion. 

Undoubtedly, this graduation brings great pride for all of us. However, we should also keep in mind that there will be several changes particularly related to our market access and financial incentive programmes once the transition period is over and it's high time we prepared ourselves to sustain the growth momentum we have achieved to ensure smooth graduation. 

Bangladesh's graduation to a middle-income country may cause a major shift in the sourcing pattern of global apparel buyers. Currently, around 73% of Bangladesh's RMG export is enjoying duty-free market access being an LDC. 

Once graduated, Bangladesh will face significant preference erosion in the EU market since other major exporting countries like China, Indonesia, India, Cambodia and Vietnam's tariff regime will remain unchanged. 

Secondly, we currently enjoy single transformation rules of origin under the Everything but Arms (EBA) scheme of EU GSP, with the graduation will have to follow 'double transformation' rules of origin, which would make it difficult to fully utilise the GSP benefit. 

Based on the current capacity of the local backward linkage industries, it may be estimated that around 40%-45% of our RMG exports to the EU (mostly woven garments) will trigger 9%-10% duty making our products less competitive. 

The EU is the biggest market for our apparel importing 64% of our RMG export and the duty-free market access has been crucial for us to achieve growth there. 

Thirdly, Bangladesh's export competitiveness will also be affected since the current subsidy programmes of the Government of Bangladesh would not be allowed to continue in the post LDC era. The end of the subsidy programme will bring a major blow to the industry's competitiveness since there will be no gain in the price of the products. 

So, the subsidy programmes will have to be re-arranged and repurposed so that it fits into the post-LDC market access criteria and also ensure industrial competitiveness and excellence in the country. 

The challenges associated with LDC graduation will be further amplified if we consider the impact of Covid-19. The pandemic has introduced an unprecedented situation before all of us and multiple challenges have unfolded due to this pandemic. 

The first wave of the pandemic swamped the industry through the cancellation of orders, deferred payments/ discounts by buyers, cash crunch hitting the backbone of the industry to maintain regular operations of the industry. 

Thanks to the gracious and visionary steps taken by the Honourable Prime Minister, the industry was able to stay afloat during the peak hour of Covid-19. 

Extension of wage assistance loan and other vital stimulus packages for this industry, especially the easing off and enhancement of the export development fund, the retention of foreign currency in a single pool for Back to Back import payments, extending the tenure of realisation of export proceeds, and most importantly suspension of loan classification enabled us to withstand the effect of the first wave. 

However, the second and third waves and the emergence of new variants have further challenged the industry with the changing habits of buyers, such as nearshoring, ordering in small batches and delayed payment. 

The assistance from the government and our development partners, the resilient mindset of our entrepreneurs and most importantly, the unyielding dedication of our workers have allowed us to touch the milestone of $4 billion worth of export earnings in one single month. However, we have to be very cautious about the future. 

Regarding the export markets, diversification has always been limited and our exports are mostly concentrated to North America and the European market, which takes up around 83.34% share of our total RMG exports to the world. 

Over the last few years, the export market of Bangladesh's apparel has started being diversified and tremendous progress has been achieved in terms of new market exploration. The percentage of Bangladesh's apparel exports to non-traditional markets during the 2008-09 fiscal year was only 6.4%, which reached 16.66% in the 2018-19 fiscal year amounting to an export turnover of $5.66 billion. 

Yet, there are huge untapped potentials for Bangladesh's apparels sector both in traditional and non-traditional markets. While diversification is a priority and the LDC graduation is knocking at the door, economic diplomacy could not be more important than now. 

We should prepare to follow the new global trend and continue seeking market access under the various bilateral and regional trade and investment arrangements. Considering the economic vulnerability of Bangladesh because of its overdependence on the RMG sector, the government should immediately engage with the EU for Extended EBA Negotiation at least for 7-10 years. 

Although the European Union has removed the 7.4% vulnerability threshold required for the GSP Plus scheme, the EBA extension will give us enough time to be prepared for jumping to the next level of growth. 

To be able to comply with double transformation rules of origin from 2028, there is no alternative but to focus on the backward linkage from now on as Bangladesh has a severe lacking in both the forward and backward linkage. 

In terms of value addition, our manufacturers add up to 80% local value to the final products which are as low as 30%-40% when it comes to woven garments. Since this is extremely capital intensive, foreign direct investment particularly in the backward linkage will yield a better result for us. 

Along with that, if the government announces any kind of special incentive or tax rebate benefits for investing in the backward linkage, that will inspire the manufacturers and the sector will be prepared for the long run. 

Our presence in the area of non-cotton, man-made fibre and high-end products like jackets, outerwear, and functional wear should also be increased as the global demand share for non-cotton products has reached almost 70% along with growing eco-consciousness among the customers. 

Another area of importance is that, since the current subsidy programmes by the Government of Bangladesh will come to an end with the effect of the LDC graduation, the industry has to be prepared to absorb this financial shock. 

An alternative subsidy mechanism in line with the WTO rules has to be prepared in consultation with intra-industry manufacturers and the government. 

Last but not least, we have to change the perception about Bangladesh and brand ourselves across the globe. Year after year, we are manufacturing products for all the world-class brands with top-notch quality and timely delivery, however, we have not yet been able to mark our footsteps as a brand manufacturer. 

Changing the perception and ensuring our presence in the online marketplace arena will not only help us to tackle the challenges associated with LDC graduation, but also it will help us to leapfrog to the next level of growth and prosperity.

Md Shahidullah Azim is the vice president of BGMEA

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.