How have the Sectors been impacted by this year’s Budget? – Part III

    LightCastle Analytics Wing
    LightCastle Analytics Wing

    Agriculture Sector

    The agriculture sector forms the heart of the Bangladesh economy, accounting for 39% of the total employment in the country [1], In the FY2020-21 budget, the development expenditure of BDT 118.68 billion earmarked towards agriculture marks a 4.59% growth since FY2019-20. With the country reeling from the effects of Cyclone Amphan, it is understandable that the Ministry of Water Resources (BDT 62.69 BN) has received a higher allocation than both the Ministry of Agriculture (BDT 25.4 BN) and the Ministry of Fisheries and Livestock (16.12 BN) combined, given the need to repair and rehabilitate vast agricultural lands that have been affected by the cyclone.

    The agriculture sector has taken on special prominence in a post-Covid world, with global food supply chain crunch and frequent natural disasters putting food production at risk. Thankfully, the government has realized this threat to food security and has announced plans to ramp up procurement to 8 lakh MT of paddy and 11 lakh 50 thousand MT of rice from this year’s Boro harvests, which is twice that of the previous year’s target – in order to help stabilize market prices and to help ensure farmers do not abandon production.

    Agricultural subsidies worth BDT 95 billion, which will go towards incentives for farm mechanization, incentives for irrigation and seeds and rehabilitation of agriculture, and subsidies for fertilizers are also welcome. However, a massive BDT 5,000 allocation towards the Agriculture Refinancing Scheme through Bangladesh Bank raises some questions regarding its efficacy, since the procedures involve disbursement through commercial banks (who are generally averse to lending to micro and small clients) whereas smallholder farmers, who form the vast majority of farmers in Bangladesh do not generally have access to the formal financial system. The additional BDT 2,000 crore earmarked for low-interest credit line to farmers, repatriated overseas workers and unemployed youth to invest in agricultural production and small and medium agro-based industries through the Palli Sanchay Bank, Probashi Kallyan Bank, Karmasangsthan Bank and PKSF also raises doubts whether equity and access can be ensured for those who need it the most.

    While the tremendous growth of the fisheries sector and the livestock sector have been cited in the budget speech, with particular emphasis on extraction of deep-sea fisheries, the speech lacked elaboration as to how they will be implemented. Neither was there any prominent mention of the fledgling agro-processing sector (particularly the frozen foods segment), which holds growing local consumption and export potential that can greatly enhance the country’s export diversification efforts.

    Leather Sector 

    The national budget for FY2020-21 has identified ‘employment generation’ as one of the priority areas for the FY2021 in respect to the Covid-19 outbreak. During the budget speech, it has been highlighted that the leather and leather goods sector of Bangladesh provides employment directly to .6 million people and indirectly for another .3 million people while being a principal source for export earning for Bangladesh. [2]

    The leather sector of Bangladesh has established itself over the years by satisfying the domestic demand and actively participating in the global market securing the 8th position in the world in footwear exports. [3] However, over the past 3 years, the country witnessed a steady decline in exports of Leather, Leather products & Footwear. In the FY 2019 Bangladesh exported USD 164.6 million of leather and USD 855.2 million worth of leather products and footwear down from USD 1,001.4 million (leather products & footwear) and USD 232.6 (leather) in FY2017. [4]

    With the aim to achieve productive capacity and also enhance its exports, the Ministry of Industries framed a Guideline for Development of Leather and Leather goods Products 2019. Additionally, an Export Guideline for the Leather Sector is currently under formulation as mentioned during the budget speech.  Furthermore, to promote business and investment, augmenting exports and creating employment, it has been proposed to extend the tax holiday of the leather and leather goods sector which has been ongoing on the basis of geographical locations at different rates for different period of time and will be expiring on the 30th of June this year. Furthermore, import duty, regulatory duty, supplementary duty and Value Added Tax has been revised in order to develop and protect the local players in this sector. 

    Leather goods and footwear exporters witnessed an order cancellation of USD 200 million due to Covid-19, while the crushed leather exporters experienced another USD 53 million worth of cancellation. Among all the tanneries operating in the Industrial park at Savar, only 10 to 12 players are considered large and have sufficient capacity to store the stock lots formed due to the order cancellation while others are lacking adequate storage facilities. This in turn is imperiling the sustainability of SMEs involved in this sector. According to the Bangladesh Tanners Association (BTA), the sector counted losses to the tune of about BDT 450 crore (USD 53 million) as of March, 2020. [4] In order for the sector to sustain, and overcome the cash crunch, the sector is in dire need of an emergency stimulus package along with a reduction in source tax of raw materials. From the previously announced BDT 5,000 crore stimulus package by the government, the manufacturers and exporters were able to pay wages to their workers up till the month of June. However, owing to strict conditions, majority of the tanners could not avail themselves of the funds from the package. Moreover, the work order for leather goods and footwear products plummeted 62 percent [5] in June from last year forming a severe crisis in the sector. The government needs to provide proper policy level attention along with financial supports such as stimulus package, collateral-free loan, reduction of Tax at source in order for the sector to survive.

    Author: Saif Nazrul, Senior Business Consultant and Dipa Sultana, Business Analyst, LightCastle Partners Ltd.

    As part of LightCastle’s budget analysis, we look into the direct and indirect impacts of this year’s budget on different sectors. While some of the sectors have received significant policy assistance, others have been cast aside in the government’s attempt to salvage additional revenues for financing the budget. The economic contribution and perceived importance of the sector were key considerations while deciding whether the sector will be eligible for policy support. In this write-up, we look into the immediate term impacts of the budget on the Agriculture and Leather sectors.

    References

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    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.