Towards A New Sophistication

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In a conversation, Dr. Khondaker Golam Moazzem, Research Director, Centre For Policy Dialogue (CPD), divulges the challenges SMEs are facing in Bangladesh, the importance of FDI and the future of our RMG sector.
Most banks have been reluctant to disburse stimulus money to the SME sector. What can be done to incentivize SME funding? How important is the growth of the SME sector in the post-pandemic world for Bangladesh?

One of the major consequences of the pandemic has been the slowdown of consumer demand. The slump has explicitly affected the SME sector, which has forced them to operate under survival mode. The market stagnation will demand credit support as well as other government support for the SME(s). Therefore, the biggest challenge for the sector is to make it through the recovery phase. The situation warrants crucial policy support along with credit incentives. Currently, governments across the world have introduced numerous fiscal measures to support their respective SME sectors, including tax waivers and cash allowance.

Conversely, such measures might have been difficult for the Bangladesh government to replicate because of fiscal constraints. However, the government has facilitated numerous incentives that deserve acknowledgment. SMEs were allowed to defer paying VAT-tax, loan repayment, and utility from March till June (the loan deferment opportunity has been extended till December). These incentives have been crucial for the SMEs in countering the effects of the pandemic. Therefore, government support through fiscal incentives will be more critical for the SMEs in making a recovery than credit incentives.

One of the government’s most significant challenges in implementing such fiscal incentives is the lack of industry-specific entrepreneurs’ data. In this case, associations and financial institutions which provide credit support to SMEs can assist the government with industry-specific data.

We have noticed that the banks have not been keen on providing credit support to the SMEs despite the government initiating a credit guarantee scheme of Tk 2000 cr ensuring a 2% risk coverage. Conversely, the government should work with financial institutions who specialise in SME funding to facilitate greater credit support for the segment. Additionally, loan disbursement can also be increased through specialised organisations like the SME Foundation, Palli Karma-Sahayak Foundation (PKSF) and Palli Sanchay Bank through a partnership with the banks. Banks could provide loans to NGOs which could disburse loans to SMEs.

The SME(s) are a crucial segment for the Bangladesh economy, especially for employment generation. Its contribution has been multidimensional, ranging from poverty alleviation, entrepreneurship development, livelihood support to supporting survival strategy. Concurrently, they are part of the crucial value chain for larger industries. As we move towards industrialization from an agro-based economy, SMEs facilitate the labor force to engage in economic activities in the transition period. However, our SMEs have not made any mark globally and are more inclined to the domestic market.

Conversely, there are immense opportunities to incorporate them into the global supply chain. Therefore, the SME segment must evolve from being survival-oriented and domestic market dependent on becoming a competitor in the global value chain. Most importantly, without adequate assistance, most SMEs will find it challenging to survive and may be forced to shut down. As a result, we might end up losing a lot of promising entrepreneurs who will be forced to seek employment or even get involved in degrading activities in their quest for survival. The SME sector acts as an essential buffer between the agriculture and industrial sector in Bangladesh. Due to the pandemic, their vertical up-gradation will be significantly hampered, and it will require a holistic approach to overcome the challenges.

The flow of foreign direct investment into Bangladesh is plummeting at an alarming rate as the global economy continues to reel from the coronavirus pandemic. What are the reasons behind the depleting rate of investment? What steps are necessary towards making Bangladesh an attractive investment destination?

Inward FDI should be regarded as one of the major streams of private investment in the country. Our inability to continue attracting FDI can be blamed on inadequacies and weaknesses on several fronts. It includes weak policy implementation, operational modality, infrastructural facilities, and market orientation. Despite having one of the most liberal FDI policies in South Asia, Bangladesh only receives only 5-10% of the total FDI flow in the region. Therefore, there are inadequacies in policy implementation. Domestic business groups in Bangladesh are not very keen on welcoming FDI as they consider it a potential competitor. It is impeding the access of foreign direct investment in the domestic market. Also, the private associations have not been very welcoming of FDI in the domestic tariff area. Consequently, only one-fourth of the registered FDI has finally been realized (2015 data).

Concurrently, acquiring hard and soft infrastructure in the country has been extremely difficult for a foreign investor. Although we are now facilitating these services through EPZ and SEZ, they are not available across the domestic tariff area. Recently, the Bangladesh Investment Development Authority (BIDA) has commenced a one-stop service that provides around twenty services among the hundred and twenty-five required by any investors. As a result, there is still a long way to go to make the business process easier. Bangladesh’s investment process has remained time-consuming and logistically challenging, which is keeping investors away. We have to be aware that the neighboring countries like India, Thailand, and Vietnam provide far greater convenience to investors.

Therefore, proper implementation of FDI policy is essential to remain competitive as an FDI destination. Bangladesh has been far too dependent on low-cost labor, preferential market access, and a large domestic market on attracting FDI. As we move towards becoming a middle-income country, the current advantages will have weakened over the next decade. After graduating from the list of LDCs, Bangladesh will lose preferential market access over the next decade. With increasing per capita income, the wage cost is also expected to increase accordingly. Subsequently, it will take several years for our domestic market to operate at a pre-pandemic rate.

It is imperative to ensure investors have access to the necessary facilities and provide a competent supply chain to remain a competitive FDI destination over the next decade.

On the bright side, numerous SEZ, High Tech Parks, EPZ, and dedicated industrial zones are now being built at a record pace, facilitating better services for foreign investors. If we can remain competitive by providing the necessary services efficiently, there is immense opportunity to gain FDI for Bangladesh. However, as long as the pandemic completely recovers, foreign investors may shy away from committing large investments. It provides us with an excellent opportunity to assess the constraints and work towards making Bangladesh an attractive FDI destination.

Our economy relies heavily on the RMG sector. How do you see the industry evolving over the next decade?

I believe there is an immense opportunity for the sector in the future to overcome the impending challenges. We are witnessing some major shifts in global geopolitics where businesses are dramatically leaving China. Bangladesh has been unable to utilize this opportunity due to capacity related, logistical and infrastructural constraints. Our limitation in producing high-end garment products has proven to impede the further expansion of the sector. Consequently, the high-end customers are shifting to more competent producers in Vietnam and Indonesia. Subsequently, we are facing stiff competition in the low-end market from countries like Cambodia and Myanmar. Therefore, we are unable to utilize the opportunities created by shifting global geopolitics due to capacity constraints.

Our capacity constraints can be segmented between lack of product up-gradation and lack of diversity in the use of raw materials. We have been unable to expand our production of non-cotton products. It would have enabled us to explore markets like Japan and Russia. RMG producers in Bangladesh are not very keen to go out of their comfort zone in producing non-cotton products. We need to improvise to expand our markets beyond the traditional countries. Incentivizing foreign investors to produce non-cotton products may pave the way for the segment to flourish in Bangladesh. It will encourage the local producers towards innovation and specialization. Concurrently, the government needs to push the local RMG producers to move towards producing high-end products.

We (CPD) have suggested a few initiatives that will enable the government to catalyze the process. It includes revising the current incentive structure, which rewards based on export volume. Instead, the government should encourage diversification and innovation by introducing product-specific incentives. Also, the government can promote joint-venture by providing extended tax breaks. Subsequently, foreign investment in the sector should continue to be encouraged through Special Economic Zones (SEZs). The RMG sector has been and will continue to be an integral part of our economy; however, how we innovate towards accommodating the shifting dynamics of the global demand will determine the success of our future endeavors.

Are the Special Economic Zones in Bangladesh serving their intended purpose of advancing the industrial sector in Bangladesh? What are the challenges that need to be addressed promptly?

Yes, we believe Special Economic Zones (SEZs) are helping in advancing industrialization in Bangladesh. Due to a lack of a proper zoning system, the agricultural sector was under pressure due to unplanned industrialization. Industrial zoning was necessary and will prove pivotal for the long term sustainability of our economic aspirations. The private economic zones which obtained licenses from Bangladesh Export Processing Zones Authority (BEPZA) have already commenced operations. Among the government ones, Mirershorai and Srihatta are being developed at a rapid pace.

I believe the government should focus on completing at least one or two zones with all kinds of logistical, utilities, waste management and housing facilities instead of undertaking new zones for construction. It will help to attract foreign investors and enhance confidence in the entire initiative. The government should use the global economic slowdown as an opportunity to address the infrastructural and logistical constraints and work on establishing Bangladesh as a lucrative investment destination. Subsequently, they must also ensure special zoning facilities for the SMEs, allowing them to become an integral part of the global supply chain.

One of the biggest challenges would be to overcome the transition period. We are gradually moving towards the more sophisticated manufacturing market, which would require adaptability and competency. We need massive infrastructural revamping, ensuring high-quality interrupted electricity, uninterrupted port facilities, and skilled professionals. Therefore, it is imperative to improve the efficiency of hard and soft infrastructure to facilitate the competency required to move to the next industrialization stage.

Most importantly, it cannot be achieved solely through domestic investment; there should be an adequate opportunity and incentive for FDI. It will enable us to produce high-value consumer goods and facilitate connection with the global value chain. Finally, we need to rebrand Bangladesh as a higher-tech diversified manufacturing destination.

What are the biggest challenges for our economy in the post-pandemic world?

The biggest challenges for our economy is likely to delay in revamping domestic demand. This would have a consequent adverse impact on all economic activities. Slow rise in demand would reduce demand for goods and services which would force enterprises to operate below the capacity usually operated during the pre-COVID period. As a result, enterprises would face the trouble to maintain their income which would force them to use less work force, reduced workers’ wages, partial close down and in extreme cases permanent close down.

Addressing such challenges usually require support which help these enterprises to survive this critical period till domestic demand revives at the pre-COVID level. This period of recovery would depend on how the pandemic continues affecting normal movement of people and normal business activities. The stimulus package needs to be designed in accordance with the types of recovery challenges confronted by the enterprises and period of recovery for the enterprises and sector as a whole.

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