As the new government settles down after the tempestuous election and its aftermath, leaving the economy in tatters and the country’s fate riddled with grave uncertainty, questions abound as to how long the economy can withstand this grinding political impasse. Despite widespread political turmoil, exports have grown by 19% (21% growth for RMG), which has surprised almost everyone
The RMG sector remains a crucial cogwheel to the Bangladeshi economic engine, constituting 82% of the country’s export and employing almost 3 million people, mostly women. Due to the lack of diversification, the success of the sector remains central to Bangladesh’s dreams of achieving middle-income status.
While RMG export growth has doubled over the past three years, the sector has been facing increasing pressure, both locally and internationally, leading to possible repercussions in the future. The Tazreen Fashions accident followed by the Rana Plaza tragedy has brought to fore the sector’s vulnerability on compliance issues.
These incidents have drawn widespread international news coverage resulting in condemnation from buyers and the international community. The EU, which constitutes of 65% of Bangladeshi exports, has warned of stripping the GSP facility, and the US has already done the same (although RMG falls outside US’s GSP facility).
Amid widespread pressure in the international front, workers started agitating for wage rises which further disrupted production, leading to a significant hike in the minimum wage, to the tune of approximately 70% from January 14 onwards. Furthermore, the opposition-led violent agitations had further complicated issues, disrupting the supply chain and increasing buyer scepticism on placing orders from our RMG manufacturers.
The political impasse has forced many manufacturers to air ship their produce, which significantly eroded profitability. Alongside, transportation costs have tripled due to arson attacks leading to higher costs and disruption in production. RMG owners are predicting a steep fall in exports (in value) in the first quarter of 2014, as the payment for the fourth quarter of 2013 will come in then.
Questions remain on the legitimacy and acceptability of the new government to the international community, which will have significant ramifications on the economy in general and RMG sector in particular. A possible cancellation of the GSP from the EU may prove fatal for the sector’s growth, and may diminish our cost competitiveness over rivals.
With competitor Pakistan gaining GSP facility from 2014, the question of latching on to the benefit has never been felt more. Even with the GSP, Bangladesh may face steep competition from the likes of Pakistan as they have strong backward linkages. A cheap rupee has already made Indian RMGs cheap, and some orders previously destined for Bangladesh are steadily moving to India.
If the political unrest sustains for a longer period, Myanmar may stand out as a cost-effective alternative, as their labour cost is much less than that of Bangladesh. Just as the Bangladesh RMG sector gained from Sri Lanka’s civil war in the 1980s, Myanmar may also get a lucky break in RMG at Bangladesh’s expense.
International buyers are getting increasingly jittery owing to their continued reliance on Bangladesh as a sourcing destination under their “China plus one” policy. Many are reconsidering their sourcing strategy by looking at similar alternatives including India, Vietnam, Cambodia, and Pakistan. While major orders may not shift in the short run, industry experts are predicting a flight of orders within 6 months, if the political situation does not stabilise.
The government must ensure security and peace at whatever cost, and look for ways to re-engage with the opposition to dissuade them from engaging in violent protests. The economy is unlikely to gain momentum if the RMG export growth is halted, and may result in a decline in GDP growth. Alongside, with stemming of remittance growth rate, RMG exports may prove to be more crucial for maintaining the balance of payments and foreign currency reserve.
On the international front, the government must engage with the international community, especially the EU, to convince them on retaining GSP facility. At the same time, they must work with trade organisations to instill confidence among buyers and international investors.
The government’s efforts for holding the 11th parliamentary election should be sincere, by taking the opposition into confidence for holding a free and fair election within a year. This will significantly aid in stabilising political unrest, securing the trust of the international community, and providing breathing space for the private sector to forge ahead. The opposition must also understand that violence and vandalism hamper economic activity, and ultimately benefit no one.
In this crucial juncture, all stakeholders must rally around the RMG sector, our golden goose, for securing its survival and growth. The fate of the country’s economy now rests on this sector.
Originally published in Dhaka Tribune: http://www.dhakatribune.com/op-ed/2014/jan/18/staying-competitive
Zahedul Amin is the Co-founder and Director of Finance at LightCastle Partners, an emerging market specialized business planning and intelligence firm. Earlier, he worked as the Assistant Vice President, Risk Analysis Unit, in HSBC. He completed his E-MBA at the Institute of Business Administration (IBA), University of Dhaka, and completed his undergraduate degree from the same institute. He can be reached at [email protected], Twitter: @amin_zahed