The Financial Express

LDC graduation and sustainability

| Updated: September 30, 2020 21:26:17

LDC graduation and sustainability

There are different types of country classifications in the world. According to the United Nations, countries are classified as LDCs, developing and developed. On the other hand, the World Bank classifies countries differently as lower income, lower middle income, upper middle income and high income. Bangladesh is going to be graduated soon to an upper stage from LDC/lower income bracketed country.

It is said that there are some bottlenecks in graduating to an upper level. One of them is trade related benefits. These among others include preferential and deferential treatment for access to developed markets. Moreover, at the developing stage, subsidy to export sectors may be restricted.

 Trade is basically a growth engine for a country like ours. Export trade sells goods aboard and it brings employment too. Import substitution industries can do the same provided they are given protection from foreign goods. But tariff wall does not work always since competing countries boost their exports through different policy measures ranging from undervalued currency to funded factories.

Bangladesh is increasingly becoming dependent on export. But her export is confined to few items. Most of the export earnings come from readymade garments (RMG) comprising more than 85 per cent of total exports. With regards to preferential access to markets, Bangladesh is in GSP bracket of European Union. On the other hand, our RMG is not a beneficiary of US GSP or duty free scheme, meaning that US buyers need to pay import duty against their exports from Bangladesh. Despite this, exports from Bangladesh to the USA is well-founded. The reason is simple enough. Our exporters offer quality products at reasonable prices which is beneficial to US buyers compared to prices of other countries having duty-free access to the US.

It is said that there is a vast market for Bangladesh from Central Asia to Russia. For some basic products like cotton and minerals, we depend on these countries, but our export to these destinations are very insignificant. Our exporters are reportedly reluctant to export to these countries. Why?

Exporters work in buyers' market. They need to comply with what buyers want. Our exporters export goods under sales contracts to Europe and US on credit terms, for which they need to wait till the maturity date for payment. So, how they manage working capital needs is a question. Do local banks extend such huge finances including for input imports? Surely not. If so, how does the export sector survive.

In business, financial management is a major factor. If smooth financing is not available, market access does not help. It is the reality. As  noted earlier, Bangladeshi exporters are selling goods to US market on credit terms under sales contracts at lower prices compared to competing  countries.  But the great advantage available to the exporters is financing arrangement from external sources at reasonable cost before maturity of export payments.

As regards exporting to Central Asian countries, it is possible for exporters to export at higher prices on credit terms but they will not take credit risk from buyers there since foreign financing institutions do not extend early payment commitments before maturity of export bills. Local banks also avoid these buyers on board. Export in such cases becomes a risky game which is not possible to be played by all payers. There is the need of hedging tools to minimise risk. Export credit guarantee scheme may be an option. But this is not available locally. It is practically not possible for local export credit guarantee agencies to extend insurance coverage depending on importers abroad. It is possible only when the risk can be shifted to insurance agencies abroad. With regards to exporting to Europe and North America, our exporters are in a good position, as mentioned earlier, being able to have early payment against export on credit under sales contracts. The facilities enable them to sell goods at prices offered by buyers. That is why, we are in a good position in US market despite non-availability of duty free market access. In Europe, exporters are in good position also with buyers, established under long term business ties. The ties will continue in case of phase-out of GSP facilities after graduation from LDC status, with early payment from European banks against their exports on credit terms.

In the light of the prevailing situation, exporters will not face problems with their existing export destinations. Rather buyers will face problems if they need to pay higher import duties. They will arrange negotiation with their governments for their own purposes since none will be able to export to them at such depressed prices as our exporters do.

The government is extending cash subsidies since long to different sectors and products. Graduation to developing stage will phase out the programmes after the grace periods. We are exporting basic RMG goods at lower prices, these are not produced by buyers' countries. Benefits from subsidies to exporters are basically shifted to importers and to foreign input suppliers. As such, continuation of export subsidies will not face countervailing and antidumping measures from importing countries.

It is said that WTO and other non-state organisations are toothless watchdogs. They can prescribe but cannot implement. Even it is reported that the decisions from their dispute settlement board are not complied by the countries to which it has been imposed. There is another non-state organisation known as Bretton Woods baby-- IMF which claims itself as the defacto central bank of the world. It is said that non-compliance with IMF prescription results in non-availability of concessional/soft loans from international agencies like IDA, ADB, JICA and many other agencies.  But the reality is that IMF itself is a lending agency which looks for crises of member countries. The crises are their opportunities to extend loans in the name of supports for balance of payment. Other agencies as noted earlier are lending institutions promoting their loan products in the name of different development projects. On being graduated, Bangladesh will be under the operations of IBRD, World Bank. It is said that their loan price is higher compared to IDA. Do we really need loans from them? We should depend on trade to support foreign currency needs, sufficient support of which will lessen dependency on such lending agencies.

During the transition to becoming a developing country, Bangladesh may face different problems for which continuation of existing facilities such as preferential treatment for trade, official development assistance, soft loans may be advocated by some quarters. If such facilities continue, we should focus on export trade without depending on so called duty free access to markets. We need to support exports by way of (a) import financing and working capital supports at affordable costs, (b) development of banking relations with untapped countries like Central Asia, Russia, Africa, South America so that our exporters can get payment guarantees and early payment therefrom, (c) currency swap arrangements among central banks to trade with countries having settlement problems in international currencies, (d) promotion of private trade payment settlement arrangement between traders of home and host countries with option to settle the  residuals through entrepôt trade from other countries or by way of exchange houses. In the context of soft loans, special purchase vehicles need to be established through which forex reserve of the country can be used as an alternative to easy access to finance.




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