Bangladesh unveils gradual reduction of export incentives ahead of LDC graduation

Last Updated on January 30, 2024 2:05 pm

In a strategic move aimed at aligning with its impending graduation from the Least Developed Country (LDC) status in 2026, Bangladesh has announced a comprehensive plan to curtail incentives across all export items.

The central bank, in a circular issued today (30 January), clarified that the government has opted for a phased approach to gradually reduce export incentives, diverging from an immediate cessation in the ongoing fiscal year 2023-24.

The circular will be effective from 1 January 2024 and will be valid till 30 June 2024.

For example, the special incentive for the readymade garments sector has been scaled down from 1% to 0.5%.

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 no cash incentive.

According to the latest official data from the government, a substantial 65% of these cash incentives, amounting to nearly Tk5,000 crore, primarily benefit the garments and textiles industry.

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,” he said.

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.

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 only a few goods will now get the cash incentive after the new circular.

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. We need to work on bringing more dollars to 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.

In an instant reaction, 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.

According to data from the Export Promotion Bureau, 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.

This also meant it made up 55.22% of the total readymade garments exports.

However, 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.

Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), expressed support for the government’s decision to phase out export incentives.

He said 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.

According to the Bangladesh Bank circular, the government has been providing cash incentives against 43 export items to encourage them.

They also 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.

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