Beruflich Dokumente
Kultur Dokumente
On
Effect of
Recession on
RMG sector in
Bangladesh and
its future
i
Submitted to:
Submitted by:
3. Md. Firuzzaman
ID # 082-E-037-52
MBA in APM
BGMEA Institute of Fashion and Technology (BIFT)
ii
LETTER OF TRANSMITTAL
To,
Md. Abbas Uddin
Assistant Professor
Guest Faculty
BGMEA Institute of Fashion and Technology (BIFT)
Dear Sir,
We are pleased to provide you this term paper with necessary notes, reference and we
shall be available for any clarification, if required.
Sincerely,
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Table of Contents
Particulars Page
02. Executive Summary v
03. Introduction vi
04. Background of RMG vi
05. Contribution to GDP vii
06. Causes of global recession viii
07. Recession effect on GDP along with RMG ix
08. Present situation of RMG x
09. Recommendation xii
10. Conclusion xiv
11 Reference xiv
iv
EXECUTIVE SUMMARY
v
Introduction:
According to the National Bureau of Economic Research (NBER), recession is
defined as a significant decline in economic activity spread across the economy,
lasting more than a few months, normally visible in real gross domestic product
(GDP), real income, employment, industrial production and wholesale-retail sales.
More specially, recession is defined as when business cease to expand, the GDP
diminishes for two consecutive quarters, the rate of unemployment rises and housing
prices decline. And it affects every country that is the US and hence in a chain effect,
almost every other country in the world is affected. Since we, Bangladesh, are one of
the leading readymade garments exporters in the world we are in effect as well, in a
big scale.
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markets. It also fuelled growth in non-traditional financial products, such as financial
derivatives and complex structured products. The complexity of these products made
assessing risk and providing oversight more and more difficult, outstripping the ability
of regulators and credit rating agencies to keep pace with developments. The
traditional regulatory framework was structured to address conventional retail
banking, not the new providers of credit: investment banks, hedge funds, pension
funds and other non-retail bank entities.
As with all financial bubbles, it was only a matter of time before events triggered a
correction. That occurred when a rebalancing of monetary policy led to tighter credit
conditions in late 2005 and early 2006. As a result, U.S. house prices peaked in 2006
and U.K. prices shortly after. However, it was only in mid 2007 that the true financial
consequences began to be recognized. The resulting financial losses significantly
impaired the balance sheets of many financial institutions, as assets were marked
down but liabilities remained unchanged. This led to a shift in cash hoarding and the
unwillingness to lend between financial firms. The combination of these
developments caused credit to become less available and more costly. The value of
stocks fell dramatically around the world, household wealth declined and in many
industrialized countries and many advanced economies fell into recession. Central
banks and governments responded aggressively by lowering interest rates, providing
assistance to financial institutions, increasing public expenditures and reducing taxes.
These policy actions should eventually restore stability to the financial system and
spur economic growth.
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• Rumors are thick and they fly, resulting into even more fear amongst the
households about their savings and hard earned income.
• Economic problem of 2008 is of gigantic proportions.
Foremost among them is, complacent regulatory norms in USA. USA has enjoyed
sustainable economic development with cushion of low inflation rates over last two
decades. This resulted into complete ignorance of essential business cycle of economy.
The first signs of this problem were visible 20 months ago when America was
struggling with excess liquidity in the market. That was an ample sign of coming of
real estate bubble and asset price inflation.
Third responsible factor is size of investment banks. Many of them witnessed huge
growth when economy was on the rise. They made huge profits based on their high
risk propensity ventures. These FIs (financial institutions) also contributed heavily to
US corporate profits.
Another important reason was failure of top echelons of management to provide sense
of direction to their deal makers. Greed took over and the rest is history. However,
USA has started taking serious policy decisions to control the worsening situation.
The $ 700 billion bailout package was first step in helping the doomed institutions.
Apart from that, taking over of AIG, orchestrating Bear Stearns' merger with JP
Morgan, taking control of Fannie Mae and Freddie Mac, merging Merrill Lynch with
Bank of America are other crucial steps. Though, all these steps won't prove to be of
much help in the short term. It is being said that, it will take another one year to
stabilize the market and credit flow.
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Background of RMG:
In the 1950s, labors in the Western World became highly organized; forming trade
unions. This and other changes provided workers greater rights including higher pay;
which resulted in higher cost of production. Retailers started searching for places
where the cost of production was cheaper. Developing economies like Hong Kong,
Taiwan and South Korea presented themselves as good destinations for relocations
because they had open economic policies and had non-unionized and highly
disciplined labor force that could produce high quality products at much cheaper
costs.
In order to control the level of imported RMG products from developing countries
into developed countries, Multi Fiber Agreement (MFA) was made in 1974. The MFA
agreement imposed an export rate 6 percent increase every year from a developing
country to a developed country. It also allowed developed countries to impose quotas
on countries that exported at a higher rate than the bilateral agreements. In the face of
such restrictions, producers started searching for countries that were outside the
umbrella of quotas and had cheap labor. This is when Bangladesh started receiving
investment in the RMG sector. In the early 1980s, some Bangladeshis received free
training from Korean Daewoo Company. After these workers came back to
Bangladesh, many of them broke ties with the factory they were working for and
started their own factories.
Contribution to GDP:
In the 1980s, there were only 50 factories employing only a few thousand people.
Currently, there are 4490 manufacturing units. The RMG sector contributes around 75
percent to the total export earnings. In 2007 it earned $9.35 billion. This sector also
contributes around 13 percent to the GDP, which was only around 3 percent in 1991.
Of the estimated 2 million people employed in this sector, about 70 percent of them
are women from rural areas. USA is the largest importer of Bangladeshi RMG (98%)
products, followed by Germany, U.K, France and other E.U countries.
Garment sector is the largest employer of women in Bangladesh about 3.5 million.
The garment sector has provided employment opportunities to women from the rural
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areas that previously did not have any opportunity to be part of the formal workforce.
This has given women the chance to be financially independent and have a voice in
the family because now they contribute financially. RMG export performance for the
Month of July-June, 2008-09.
Figure: US million $
Products recorded growth over last year’s performance & also over target
Products recorded growth over last year’s performance but not over target
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financial/economic problems due to the recession led to canceling of ongoing
production and other reacts. This resulted in stacking up of stocks worth of millions of
US dollars in the local factories, many of which to be closed down or trimmed to fit
the demand meanwhile the Chinese government prepared packages to keep the prices
from going over the top as they were facing circumstances similar to us, and the price
from going over the top as they were facing circumstances similar to us and by now
they have been able to control the prices, hence the buyers are now going back to
china. The companies in Bangladesh, who have been lucky enough to see through the
first blow, now have other problems to take care of such as buyers becoming more
aggressive and unsettling, as they are also frightened of being wiped out of existence.
So they are becoming very aggressive with prices, quality and time of delivery. The
quality which was sought for even six months ago has become unacceptable to some
of the buyers and which has caused companies to ship the orders at discount prices
and short shipments, causing the companies huge losses. Hence many cannot pay off
their loans to the Banks in time or the LC is not being respected, either by the buyer or
supplier which is happening for many reasons. These instances altogether has a
knockdown effect on the Bank’s mentality for which they are not ready to help out a
lot of business in this sector, which are in dire need of loans with low or no interest.
The RMG sector is the leading foreign exchange earner, one of the leading employers
and one of the trainers of unskilled workers of Bangladesh, if the govt. does not
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provide a bailout soon, it will be hard to survive in these conditions, as it is becoming
harder day by day to meet the coasts of the factories. In the next few months
circumstances will become even worse as many top buyers have already have already
slowed down and are delaying order bookings. The very existence of the RMG sector
now hangs in the balance of receiving help from the Government to be able to see this
downturn through. Most of the renowned companies in Bangladesh have stopped or
postponed their investments due to the current situation, with the help from the govt.
these investments could go through and employ and train more unskilled workers,
contributing to the employment rate of the country. These businesses in Bangladesh
are very scared now, of what is going to happen as there is no net to protect them, the
orders are falling through short shipments and discount prices as they are being
retracted, but the expenses are getting higher. In the last 3 years we have had a 30%
rise in overheads (i.e. wages, expenses, prices etc), but the income has stayed the
same, as for the last 5 years the dollar rate has pretty much stayed the same hence the
RMG sector’s incomes are the same but coasts are a lot higher, as prices of raw
materials are getting higher. So the business rights now are running on thin ice, which
will not hold for long, as incomes are becoming smaller every day. Electricity load
shedding is another contributing factor of the RMG sector’s rising overheads as load
shedding is occurring 4 to 5 times everyday which costs each factory about tk.10000
to tk.30000 everyday on generator oil alone. Leaders of BGMEA apprehend 15 or 30
percent fall in orders and face unending pressure to cut prices. If this goes on for any
longer it will become very hard for factories to function efficiently, the govt. should be
pressed to come out with a solution as soon as possible, as this a huge force working
against the development of the Bangladesh
The RMG sector is enraged and de-motivated by another grave threat, in the from of
the recent demands from the RMG worker’s organization, to almost triple their
minimum wages which would definitely close down 90% of the wages and other
benefits are already making choice very hard for the factories and business, let alone
their demand. If no solution is provided very shortly a lot of business will not see the
day of new budget, where allegedly a package will be present for the RMG sector.
Recently the govt. has decided not to provide any bailout for the RMG sector. As the
govt. seem to be more concerned about the other sectors. This could be the result of
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the common misconception of the govt. and some important people, that the garment
factories are able to be as big as they are, because they are very lucrative. But they do
not bother to go in detail and actually find out that most of it exists due to huge loans
from the banks. And the garment factories have to have certain facilities which might
look like stature symbol to the people out side are in fact there for the workers to meet
international compliance requirements put forward by the buyers who otherwise will
not place orders with those factories. Because of this misconception there is a lack of
concern for this sector.
Nearly about half of Bangladesh’s population is connected to The RMG sector either
directly or indirectly, and this sector has been built in the last two decades based on
trust, confidence and personal relationships with the foreign companies/ buyers. If
there is any disruption to the RMG sector the chain breakdown would be massive and
almost impossible to fix. The economic state of the country will be in a mess GDP
will fall and inflation will rise. A move back from those circumstances to even the
state we are now will be almost impossible.
The US and UK are already closing down several hundred clothing stores which will
have a knockdown effect on the RMG sector of Bangladesh is a few months as there a
lag before the balance. The other European buyers are also showing sings of slowing
down sales which will be in full effect in a few months time. So presumably the orders
will become scarce for our RMG sector and many more factories and organizations
will take a fall. The next one year will be vital for business all over the world and
governments around the world are preparing packages and bailouts, this should be a
queue for government to do the same in order to survive and replenish the economy.
Recommendation:
• BGMEA lobbying must be more directive and effective and with facts and
figures
• In the last 3 years there has been huge investments in this sector the total figure
should be collected and passed on to the government. So that the government
can have a clearer picture of the situation. Out of the whole investment at last
70% is bank loans and rest is entrepreneur’s earnings from the last 10 years.
This 70% of the bank loan is supposed to be paid back to the banks in the next
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10 years or so. But for the current situation and receiving no bailout from the
government, it will be impossible to repay the banks resulting in entrepreneurs
filling bankruptcy.
• Also these investments would provide the population of this country with more
job opportunities which will also fade away with the current job opportunities.
We have in this sector. These facts along with export opportunity that will be
missed if these investments were to stop should be collected and documented to
the government to stress the matter further.
• BGMEA should also prepare a data sheet for the total number of people
working in this sector. With an additional data sheet to show the number of
supporting business/factories involved with this sector and the total number of
people employed
• BGMEA should prepare a fact sheet to point how many small businesses
became bigger as direct result of garments factory workers buying power such
as cheap cosmetics sarees, clothing etc.
• There should be a fact sheet containing the total number of insurance
companies and banks involved with this sector which will not be able to
survive outside competition without the RMG sector
• Also a fact sheet showing, the rise of business such as transport, C&F agents
etc because of the RMG sector and the total number of people working in this
business.
• We should also collect the total amount of income tax paid by RMG sector to
the government each year
• And we should also highlight a few points such as Bangladesh’s recognition all
over the world is owed to the RMG sector. The top hotels in Bangladesh are
occupied mostly by business delegates coming to this country for the RMG
sector all year around. In turn these facts earned Bangladesh foreign currency,
world recognition and foreign investments. A data sheet should be arranged
containing detail of the foreign investments made in the last ten years in this
sector.
• Govt. to allow private power plants for bulk consumers.
• NBR not to levy tax at source during recession.
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BGMEA spells out 8 point stimulus for overcoming from recession which are given
below
• 10 taka add up in dollar retaining exchange rate
• Special exchange rate
• Less than 7 pc bank interest rate
• Reschedule of term-loans payment with 3-year extension
• Removal of VAT on textile industries
• Subsidized diesel for generators
• Captive power plants
• Implementation of rationing system for workers
Conclusion:
All these above data should be collected and presented to the government as soon as
possible. The govt. previously did not pay attention to the notion of the RMG sector’s
clash with the recession. But now it is absolutely vital that the govt. lends out a
helping hand in all the areas we touched in the article to help us survive and prosper to
a better future for the RMG sector and of Bangladesh. These are very harsh times and
if we do not act quickly and efficiently we might face a very different future.
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Reference:
Bangladesh’s Current Export Debacle in the Context of the Ongoing Global
Recession by Dr. Mustafizur Rahman
Professor, Department of Accounting, Dhaka University and
Research Director, Centre for Policy Dialogue
The world economy is currently passing through yet another phase of recession.
Though there is sharp difference of opinion as regards the beginning of the recession,
its depth and severity, contributing factors, and projections about its end, most
analysts agree that the recession has by now crossed the critical threshold of eleven
months which has been the average period of longevity for the six major post-war
recessions. In the beginning it was hard for many to accept that there was at all a
downturn in the global economy - after all following the last global recession of the
early 1990s the world economy has been performing rather well for almost a decade
and, as a matter of fact, has attained its highest growth rate for over a decade in the
year 2000. However, the world economy started to experience a sharp downturn in the
last quarter of 2000 which subsequently continued, sustained and deepened in 2001.
Some experts were hoping that there would be an upturn in the global economy by the
beginning of the last quarter of 2001. This, however, was shattered by the September
11 terrorist attacks in the USA. US growth forecast by the IMF for 2002 has now been
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revised from 2.2% to a lowly 0.7%. The projections of growth of the world economy
for 2002 was cut back from 2.4% to 1.5%. It is to be noted here that such a low
growth rate would make 2002 the second consecutive year when economic growth
would fail to keep pace with the expansion of the world population. An obvious
consequence of this is that the world per capita GDP would continue to remain static
in 2002. OECD growth forecast for 2002 for the 30 member countries, at 1%, is the
most gloomy since 1982. Investments have come down significantly and OECD
manufacturing production index has already declined by 2%.
The recession in the global economy could not but have severe negative implications
for the world trade, a consequence which have had important consequences for
Bangladesh’s export sector performance in recent months. World trade, which
registered a robust growth of 12.5% in 2000, began to slow down in tandem as
recession strengthened its grip on the economies of the major trading blocs and
countries. Overall growth rate of world trade in 2001 was a paltry 0.8% and though
the UN forecast for 2002 is somewhat higher, at 3%, it is still far off the trend line.
Following the September 11 attacks the growth in world trade during the last quarter
was almost zero. The combined impact of the recession and the September 11 terrorist
attack on the US economy which is the singlemost important export destination of
Bangladesh, has been specially severe. The US economy is expected to grow by only
0.7% in 2002; nationally the unemployment rate was 5.8% in December 2001; more
than 1.2 million jobs were lost because of the recession. Total unemployment figure in
USA has reached 7.0 million and it is to be noted that this exclude millions of workers
who lost part time jobs. The state of the economy obviously had a dampening impact
on consumer confidence - consumer expenditure index in the USA is down by 1.8%,
the fastest drop since the late 1980s and all time low since the early 1990s. A report
prepared by the WTO projects that the strong slowdown in consumer demand in
Western Europe will continue in 2002. Evidence suggests that the current stagnation in
imports to the US have deepened further during the fourth quarter of 2001 (October-
December, 2001).
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As was mentioned earlier, the recession which was officially recognized to have
started in March 2001, has now been there for almost 11 months, the average period of
post-World War II recession. If the downturn continues in the coming months, the
recession is likely to get more severe, with attendant negative consequences and
implications for exports of countries such as Bangladesh.
It is now widely recognized that, as far as developing countries and LDCs such as
Bangladesh are concerned, global integration has both its opportunities and risks.
Policy makers, therefore, can not afford to ignore this new reality in the governance of
the country, both in terms of preparedness to address the attendant risks, and taking
initiatives to access the emerging opportunities. As global experience shows, increased
global integration does not necessarily mean strengthened global integration and it is
in times of recessions such as the current one that this dichotomy exposes the inherent
challenges for a globalising developing economy such as ours. It also perhaps
provides an opportunity to take on, with due urgency, the task of designing the short
and medium to long-term policy initiatives and reforms to address the attendant risk
factors in order to make globalisation work for the economy and the people of the
country.
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three times the real GDP growth rate during this period. Even during FY 1990 and FY
1991, a period which coincided with the last major global recession, Bangladesh’s
export sector posted robust growth rates of 17.9% and 12.7% respectively. The
structure of export was different, though, at the time. Raw jute, jute goods and leather
were some of the major export commodities in the early 1990s, their combined share
being equal to the share of RMG in total exports of Bangladesh. A relatively
diversified base and market provided some sort of a cushion against sudden
fluctuations of the global market. As was mentioned, the context of the current
recession contrasts significantly when compared to the period of the earlier recession.
Bangladesh economy at present is more globally integrated than at any time in the
past. At the same time the export base has also become increasingly concentrated,
both market wise and product wise – for example, share of RMG export is now about
eight times high compared to the combined contribution of abovementioned three
products; markets have also become more concentrated with the USA and EU
accounting for about four-fifths of Bangladesh’s total exports. Bangladesh does not
have a captive market; she has to compete in an increasingly competitive global
environment. On the other hand, as was pointed out in a recent study conducted by the
CPD, Bangladesh’s exports are, in general, more income elastic, rather than price
elastic. This would mean that exports remain highly susceptible to fluctuations in the
income levels in the major developed market economies. Consequently, any recession
is likely to have, and in future will continue to have, increasingly negative
consequence for Bangladesh’s export sector.
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period, export was still somewhat higher in 2001 ($3084 million) compared to 2000
($3007); export sector was feeling the burden of the emerging pressure emanating
from the onslaught of recession, but continued to show some resilience. However,
with the deepening of global recession there was significant deceleration during the
next four months – exports during July-October, 2001 was only $2005 million, down
from $2230 million registered over the corresponding period of 2000. Exports of all
major items suffered a setback: woven and knit-RMG, principal exports of the
country, posted growth rates of –9.5% and –3.3% respectively; exports of shrimp
came down by 32.8%. What is also of interest to note here is that if the growth rate of
–10.06% during the first four months is decomposed, it is seen that most of it
originated from a decline in the volume of export (-9.74%), rather than fall in unit
price of export (-0.32%), underscoring the importance of the income effect in the
deceleration of the export earnings. It is to be noted here that L/C opening figures for
imports of fabrics under b/b L/Cs during July-November, 2001 is also showing a
negative growth of - 5.5%. This would indicate a fall in export orders which would
mature during the first quarter of 2002 with consequent expected fall in earnings from
export of RMG over the corresponding period.
As was mentioned earlier, the forecast for the growth of world trade in 2002 is rather
bleak and obviously Bangladesh is not the only country whose export sector has
suffered a setback. Pakistan had to revise downward by about 10% its export target of
$10.1 bln for 2002; India’s export of some of the major items in FY 2002 (April-
October) is also showing negative growth trends. Consequently, India’s growth
projection for the current year was scaled down from 6.4% to 5.2%; China, which
registered a significantly high export growth rate of 29.8% in 2000 was able to attain
only a 3% growth in 2001.
Thus, there is hardly any cushion available to Bangladesh to mitigate the adverse
impact of the ongoing recession. The purpose of this write up, however, is not to come
up with policy suggestions for addressing the current debacle. This would call for a
separate and serious professional exercise. As a matter of fact, a number of areas
requiring policy interventions towards raising the competitiveness of domestic export-
oriented sector and enhancing trade related capacity building have already been
identified and put on the table. The task now is to seriously get on with the business of
implementing the agendas. The upshot of the above discussion is to reemphasise that
in the coming months and years Bangladesh’s increasingly globalised economy will,
of necessity, have to be adequately prepared to face the consequences of the
fluctuating fortunes of the global economy. The current debacle suffered by
Bangladesh’s export sector should transmit appropriate signals to the country’s policy
makers to the effect that it is only from strengthened global integration that
Bangladesh stands to benefit in the context of her increasingly globalised economy;
failing this, the price to be paid will rise in direct proportion to the degree of the
country’s lack of preparedness. The ongoing global recession should thus serve
Bangladesh both as a wake-up call, and as an warning bell.
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