Export Diversification and Input Imports

 

Export diversification is frequently said, along with new market exploration. Different initiatives are said to be adopted to diversify exports. New market exploration benefits are available to textiles goods exports. The facilities are applicable for exports to destinations other than US, Canada, EU, UK. Despite, export is concentrated to a single product - readymade garments. Major destinations are Europe and North America still.

Once upon a time, jute and tea were main items in export basket. Readymade garments came into existence in eighties for which Bangladesh would facilitate manufacturing activities as an offshore location to execute export orders of a third country. The journey started then and it is continuing. Readymade garments depend on input contents from external sources. As such, imports are required at first stage. These need financing facilities. Policy supports in this regard were extended by the Government. These are customs bond licenses under which imports are executed without payment of duties. Based on export letters of credit (LCs), back to back LCs were allowed for input imports on deferred payments terms. As a result, payment for input imports can be settled out of repatriated export proceeds. These two facilities - customs bond and back to back LCs - would support a lot for promotion of readymade garment exports. 

Readymade garments are front line industries which produce outputs using inputs. Backward linkage industries can facilitate to support front line industries through supplies of inputs like cotton, fabrics, etc. In this respect, another supports were introduced in the name of cash incentives in lieu of customs bond and duty draw back facilities for exports of textiles goods using cotton produced in Bangladesh. Including exports of textiles goods, 43 items/sectors are now within the facilities of cash incentives. Despite, export is still in concentration of readymade garments.

Many studies are reported to have been conducted to diversify export basket. But no result is visible positively. What is the problem is a question. This needs to be identified. As we know that customs bond facilitates are focused on export oriented industries. Back to back LC facilities are linked to bond licenses also. Without bond facilities, revenue regulations like advance tax, duties, value added tax are applicable for procurement of inputs. As per regulations, local procurements against inland back to back LCs are subject to availability of customs bond licenses. Otherwise, local deliveries need to be grossed up with value added tax. On the other hand, imports become costly due to imposition of different duties which need to be paid upfront before repatriation of export proceeds. There is a mechanism under which exporters get refund of duties, value added tax, etc. on completion of exports. But the refund policy is not popular, as per business insiders, due to different bottlenecks.

Exports are sales beyond borders. It is not easy to promote. There are different talks regarding diversification of products and markets. In this context, access to market under duty free quota free framework is well cited for which bilateral, regional, multilateral trade arrangements get priority. These arrangements are a support but it cannot promote exports. Street vendors are to sell vegetables, but we do not know producers of these items and pathways at our reach. Like channeling of manufactured products in domestic market from production facilities to retailers or e-traders, there are different paths required to pass through to promote products in international markets. Duty free market access is not all; rather there are different parameters to diversify products and markets for exports.

Cost is a factor in export trade. As said earlier, market access is focused on duty free quota free entry of products to destination markets. But production process needs to be free from duties, taxes, and different levies in home country to make products competitive in price for international markets. These issues remain neglected in most of the cases which are merely addressed and given appropriate attention.

It is true that readymade garments are sold abroad, no local sales are made. Export oriented industries are under policy support net, like bond facilities, back to back LC facilities, etc. It is said why all exports are in need of customs bond facilities in case of no requirement of input imports. Maybe it is possible to operate without customs bond. Problem is that exporters need to bear value added tax for procurement of input contents locally. But export price does not include valued added tax to be realized from importers abroad. Such exports without smooth refund framework cannot sustain in the global markets due to lack of price competitiveness. It is a question whether domestic regulatory needs to be fine tuned to promote exports.

There are many products having both markets - domestic and international. It is observed that these products are not benefitted under revenue regulations of the country for sales to global markets. Of the total export items enjoying cash incentives, there are many items traded in both markets. But policy for cash incentive requires maintaining specified value addition with condition that customs bond facilities and duty drawback supports are not availed. This is a support definitely but it is indicative of no supports applicable with regards to duties, value added tax, etc.

Export is said to be importer of employment. Sales of finished goods abroad mean destination countries import goods, and export employment. It is also true in our case when we import finished goods. Considering the population of the country, generating employment is inevitable for which import of employment is highly needed. Mass employment is only possible through exports of goods.

International trade of the country is guided by Import Policy Order and Export Policy. Transactions with destination countries are executed by foreign exchange regulations. There are other regulations requiring customs formalities. No duty is assessed for payment against exports. But import is subject to payment of different duties, taxes, and levies. Value added tax is also applicable for local procurements, as said earlier. Import Policy Order in force states that partial export is to be facilitated with release of inputs against bank guarantees. It indicates that industries having dual markets - domestic and international - will be kept out of bond facilities. In its place, goods are to be imported against bank guarantees. It raises a question whether bank guarantee is an easy path. It is not so easy, rather it is a non-funded facility extended by banks on commission. Banks follow credit norms to issue such guarantees. As such, release of goods against bank guarantees is not a cost free procedure.

Bangladesh achieved development in manufacturing industries during the current century. But starting point of the development path was export. Manufacturing industries are focusing on domestic market; they have scope to penetrate global markets also. As an easy example, pharmaceutical industries are found tremendous development in local market. They have scope to promote export markets. Government is extending cash incentives against their exports. This is a facility definitely. But it cannot make export price to set at competitive level by considering a reasonable margin, and product cost free from regulatory levies. There are many other sectors which can go beyond borders for which policy supports on procurements without extra cost need to be introduced.

Promotion of new markets is not an easy task. Export trade with Europe and North America is going only smoothly because of existence of strong banking systems. But markets for Central Asia, South American and Africa are not found at developing levels. Same issue comes as a problem - banking. But it is not easy to resolve the problem. Rather we need to bypass the problem with initiating countertrade arrangements with these destinations.

Export brings foreign currencies and employment. The sector needs to be promoted with product diversification and market expansion for sustainability of the economy. In this context, there need alternative policy supports with regards to imports and local procurements by industries without imposition of levies, working for domestic and international markets, to expand product basket. Countertrade needs to be in place for exploration of new export destinations.

 
Mehdi Rahman works in the
development sector.