Strategizing for Resilience: Securing the RMG Sector Against Future Challenges

This letter was originally sent to LightCastle Bimonthly Newsletter subscribers.

As we near the end of the first quarter of the year, there is a collective hope for an economic rebound in the forthcoming months. However, the current economic landscape remains complex, with signs of recovery intertwined with persistent challenges. Despite concerted efforts by policymakers to address structural imbalances, the economy continues to grapple with the aftermath of recent disruptions.

Inflationary pressures persist, posing significant challenges for low-income groups, with little respite expected in 2024. While currency depreciation and challenges in the opening of Letter of Credits (LCs) have had a role to play in fomenting inflation, localized illicit trade cartels are exacerbating efforts to reign in prices of essentials. 

To navigate these challenges effectively, it is imperative for the government to implement firm and consistent governance measures aimed at fostering transparency and competitiveness within market systems. Bangladesh’s balance of payments has seen some improvement in recent months, particularly with measures to regulate LC openings for non-essential products, resulting in a notable reduction in imports. This has resulted in a 35% reduction in imports between FY2022 and the first half of FY2024.

However, these stop-gap solutions will certainly have an impact on our future growth momentum, as many manufacturers suffer from excess capacity due to the paucity of imported raw materials. Alongside this, many local and international conglomerates can’t keep up with their long-term growth plans due to their inability to import capital machinery. Despite all out efforts, the FX reserve is still lingering around the USD20 billion mark. 

On the export front, there has been a positive trajectory over the last few months, offering a glimmer of hope. Export performance has picked up over the last three months, with monthly exports topping at USD 5.72 bn in Jan 2024 and USD 5.19 bn in Feb 2024. This is considered a big relief as exports dipped to USD 3.76 bn in Oct 2023, with a slight recovery experienced from November onward. However, challenges persist, particularly concerning the concentration of the export basket.

The over-dependence on the Ready-Made Garments (RMG) sector poses risks to long-term sustainability, as evidenced by its outpacing of other export sectors. 

Additionally, within the RMG sector itself, there is a concerning level of concentration risk, with a narrow range of products dominating exports. T-shirts, trousers, jackets, shirts, and sweaters contribute 61% of the RMG export, which is quite narrow compared to the number of our direct competitors.

Cotton-based products contribute 80% of our exportable items, while the rest constitute mixed or man-made fiber, which has to reverse if we intend to move upward toward more value-added segments. 

Looking ahead, it is crucial to develop a robust strategy to future-proof the RMG sector, considering its significant contributions to the economy, particularly in terms of employment generation. However, the sector faces looming challenges, including automation and the impacts of climate change. The adoption of sustainable and circular production practices is becoming increasingly vital, given growing consumer awareness and regulatory pressures globally.

Apart from its macroeconomic contributions, RMG contributes heavily to generating employment for 4 million employees directly and four times the number across different segments of the value chain and other ancillary sectors. Women feature heavily in the sector constituting 60% of the direct employment. A change in the gender mix within the sector is a major concern as women’s participation is gradually eroding from nearly 80% to the current level over the last couple of decades. 

The advent of automation and the 4th industrial revolution will possibly alter the production process and may lead to redundancies.  Automation has been happening, albeit at a gradual pace, over the 5 years and has contributed to stagnant employment growth within RMG despite export growth momentum, as evidenced in the latest Bangladesh Labor Force Survey, conducted by the Bangladesh Bureau of Statistics (BBS). 

Globally, the environmental impact of the fashion industry is alarming, contributing to 2-8% of greenhouse gas emissions, generating 20% of global wastewater, and releasing 35% of microplastics into the ocean, according to the Ellen MacArthur Foundation. Global apparel production is expected to surge by 63% within 2030 leading to a 50% increase in greenhouse gas emissions.

Western consumers are becoming more discerning and increasingly aware of the environmental and social implications of their choices. The shift towards ethical consumption is particularly pronounced among Generation Z, whose consumer behavior is anchored in strong ethical considerations. 

International retail brands are not only being forced to adopt sustainable production practices by irate consumers, but governments in the EU have adopted affirmative policies such as the Carbon Border Adjustment mechanism (CBAM), and Due Diligence Laws. The EU’s Green Deal, a comprehensive initiative for climate neutrality, introduces a carbon tax on imports, while the Due Diligence Act (HREDD) encourages responsible business practices.

The CBAM further incentivizes global adoption of robust carbon pricing policies. The aforementioned policies have started weighing in heavily on the international retailers and subsequently on our manufacturers. Failure to adopt sustainable and circular production processes in the near future will lead to disqualifications as suppliers, leading to a shift in orders to more compliant countries. 

Moreover, Bangladesh’s impending graduation from Least Developed Country (LDC) status presents additional challenges for export-led sectors, potentially affecting competitiveness and access to preferential trade benefits.

According to local experts, potential RMG export loss will likely occur to the tune of USD 2-3 billion each year after LDC graduation.  Proactive engagement with key trading partners will be essential to mitigate these impacts and secure favorable bilateral trade benefits. 

In response to these challenges, the Bunon 2030 initiative–spearheaded by LightCastle Partners and funded by the H&M Foundation as part of the Oporajita program–aims to create a platform for collaboration within the RMG ecosystem.

By fostering sector competitiveness and prioritizing the protection of livelihoods, particularly for women workers, the initiative seeks to address key issues and drive sustainable growth. To this end, Bunon 2030 has been hosting a series of dialogue events that address key issues, bringing together industry leaders, policymakers, academics, experts, and innovators to chart a common way forward to future-proof the sector pivotal for our economic growth. 

Stay informed about upcoming dialogue events and access valuable insights by subscribing to the Bunon 2030 newsletter.

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