Export Trade: Values between Shipment and Realization

 

Export trade is executed within specified fundamental regulatory framework. In accordance with cross border payment regulations, exporters need to make declaration to customs authorities, export payments are required to be realized within four months from the date of shipment, title documents to cargo should be issued in favor of exporters’ designated banks, foreign agent commission at 5% is permissible, usance export bills can be realized before maturity at the annual cost of capped rate. In addition, exporters need to bear some bonafide charges. The fundamental view indicates that export of 100 US dollar can, depending on different costs, bring net payments of around 90 US dollar or less. As a result, there is a difference between declared value and realized value.

Exporters declare export information with realization of export proceeds within four months from the date of shipments in a format known as EXP Form. Major export of the country is readymade garment.  Insider information indicates that garment exports are executed at fair price, not at competitive price. It means that pricing is determined on the basis of product cost plus CMT (cutting, making, and trimming) charges. The price is topped up with agent commission which is payable to foreign agents or buying offices. Exporters receive only product cost plus CMT charges. As per trade rule, agent commission exceeding 5 percent is subject to prior approval from central bank. Central bank’s permission seems to be immaterial if FOB value, net of commission whatever it is, qualifies domestic value addition requirements. However, export containing commission at 10 percent with approval from central bank will reflect misleading value considering export proceeds to be realized. The underlying reason is that exporters declare 100 US dollar, say, in EXP Form. But repatriation value will be 90 US dollar, net of commission. As such, such export, value of which say 40 billion US dollar, will bring 36 billion US dollar.

Bangladesh’s export trade patter has been changed. Earlier in last century, export was executed on sight terms under which export proceeds were supposed to be realized by a month from the date of shipment. In spite of consumer goods in export basket, export is executed in present days on credit terms meaning that importers will pay after a certain period from the date of shipment. But input contents are imported on sight terms either through refinancing support from central bank or external borrowing under buyer’s credit. For settlement of import liabilities, exporters need to realize export proceeds before maturity through supply chain finance from external sources. If the cost of financing is 5 percent, exporters can repatriate export proceeds of 8.50 US dollar out of export value after deduction of agent commission, say, at 10 percent. Interesting point is that exporters need to bear interest cost for import on sight basis. On the other hand, they need to bear extra cost to repatriate export proceeds at sight against usance export bills. In both cases, exporters are in disadvantageous position.

Exporters face fundamental problems in playing export games. As per export policy and import policy order of the country, export can be executed on sales contracts and raw materials can be imported under sales-purchases contracts. But what the reality exporters face is different. Exporters export goods under sales contracts. On the other hand, they cannot import inputs under the same way; rather import letters of credit (LCs) are required even for imports from suppliers nominated by importers. In addition to foreign imports, local procurement cannot be made under sales contracts. To have fiscal benefits like waiver of different levies under bonded warehouse system, inland back to back LCs denominated in foreign currency are mandatory. LCs are themselves a cost. In the aspect of costs, exporters face to absorb the cost of interest for imports under buyer’s credit, commission for LCs, cost of supply chain finance to repatriate export proceeds before maturity, and different bank charges incurred on account of relative exports while repatriation of export proceeds. Exporters deserve salute for taking such financial pains in executing export transactions.

Cross border trade is executed in goods and services. The later is transferred to importers abroad in non-physical form. Since services are transmitted invisibly, service exporters need not to face customs formalities. They are not required to declare service exports on EXP Form in the same way of trade in goods. Since they do not declare on EXP Form, there is a question what to happen if service payments are not repatriated within the statutory period. In reality, exporters of goods face all types of issues ranging from regulations to financial costs at different points.

There are two information windows which publish export information - Export Promotion Bureau and Bangladesh Bank. Information is reported to contain discrepancies. For every cross border transaction, banks are a part. In respect of export trade, banks facilitate to execute transactions. It is reported that there are different stages for reporting - exporters inform banks regarding export orders which are posted to online reporting system of central bank. The information is shared electronically with customs authorities. Exporters are to make electronic declaration which goes to customs authorities through commercial banks and central bank. But declaration is not execution of export unless the goods are shipped on board. Foreign exchange regulations require exporters to inform central bank regarding shipment of goods within prescribed time from the date of departure of goods. Based on the information, export data are processed to ascertain total exports of a particular period. Execution of export does not indicate that repatriation of export proceeds. Statutory period to repatriate export proceeds is four months, as said earlier, from the date of shipment from Bangladesh.

In addition to commercial export for which EXP form issued, there are many goods departed from Bangladesh such as trade samples, gift items, return of goods imported on re-export terms, etc. These generate movement of goods but do not bring payments. What is to happen if such items are included in export basket? It is a question. On the other hand, there is another factor of misinformation if export information before shipment onboard is compiled as exports. Export information is reported to be mismatched between two agencies. Such reports are frequently published. Goods moved with declaration in EXP Form which is to bring inward remittances as repatriation of export proceeds need to be treated as commercial exports. Other outbound goods permissible as per prevailing regulations may be treated as exports but these should not be qualified as commercial exports since these do not bring payments. Central bank database contains commercial exports having declaration in EXP Form. But commercial and non-commercial goods are included in customs database. Hence, customs database needs to be fine-tuned to identify commercial exports.

Central bank calculates balance of payments which contains trade in goods and services, factor and transfer payments. Inflows and outflows of these items bring current account position. There is another account known as financial accounts which consider movement of equity, loans, etc. As noted earlier, export payments are subject to adjustment of different deductions such as agent commission, financing cost, bank charges, etc. These changes should be accounted for as non-trade expenses. But disclosure of export realization after adjustments of necessary deductions can misguide the information with indication that export proceeds remain unrepatriated. This also carries negative sense to the effect that exporters retain money abroad. Alternatively, EXP Form needs to be redesigned in such a way so that exporters can declare net export value with disclosure of necessary deductions. The proposition as noted herein may be reviewed to avoid misconceptions regarding repatriation of export proceeds.


Mehdi Rahman works in the development sector.