Bangladesh garment makers grapple with evolving challenges

Few industrial units in Bangladesh producing for both local and global markets have shuttered recently and few are in the offing.

According to data from the Industrial Police, 313 factories under their jurisdiction have gone bankrupt from January to mid-August this year, amongst which 80 were garment units – 60 belonging to Bangladesh Garment Manufacturers and Exporters Association (BGMEA), 16 affiliated with the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), 9 being textile mills registered with the Bangladesh Textile Mills Association (BTMA) and 5 being under the aegis of Bangladesh Export Processing Zones Authority (BEPZA).

This unfortunate development cannot be solely attributed to a decline in global demand for apparel. Several underlying factors have contributed to this situation, including banking complexities and Taka devaluation taking a lead even if lack of value addition in garments is also seen as responsible for the debacle.

Over the last one year, Bangladesh has experienced a currency devaluation of Taka 15.05, equivalent to 16 per cent, from Taka 94.45 per dollar a year ago, while in terms of value addition, it is worth noting that almost 80 percent of Bangladesh’s apparel exports come from a limited range of product categories (totalling US $ 46.99 billion in the fiscal year 2022-23), with exports of products like trousers, T-shirts, knitted shirts, sweaters, regular shirts and blouses, etc., accounting for US $ 37.75 billion.

Meanwhile, in its major export strongholds of USA and EU, Bangladesh holds the third position amongst low-cost readymade garment (RMG) exporting nations, when it comes to value added offerings.

In an in-depth analysis, Apparel Online Bangladesh (AOB) explores the pressing concerns currently affecting the garment industry, with a specific emphasis on banking challenges, amongst others as we actively engage with key stakeholders to gain a deeper understanding of things.

Banks hold back!

Banks have historically played a pivotal role in supporting the growth of Bangladesh readymade garment (RMG) sector. They have provided crucial services such as back-to-back letters of credit (LCs), facilitating trade and integrating the country with the global market.

Lately though garment entrepreneurs don’t seem to be very happy with the state of affairs in the banking sector.

“The inability to obtain LCs has resulted in the closure of many factories,” mentioned President of the Bangladesh Textile Mills Association (BTMA), Mohammad Ali Khokon, referring to the recent development even if Executive President of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), Mohammad Hatem lamented how smaller units are struggling to keep afloat in face of financial losses resulting from the exchange-rate gap.

The garment sector heavily relies on imported raw materials, necessitating the opening of back-to-back LCs. However, the growing dollar crisis has led banks to discourage the opening of new LCs until previous LC loans are settled.

“Banks facing a shortage of US dollars have been slow to process LCs, causing delays,” opined Saleudh Zaman Khan, Managing Director of NZ Tex Group.

Banks in Bangladesh have recently faced a situation where more foreign currency has been flowing out than coming in even if this imbalance has primarily been due to the repayment obligations of private sector short-term foreign loans, analysts hold.

The Export Development Fund (EDF), crucial for the export-oriented garment industry, suffered a significant reduction after Bangladesh Bank decreased it from US $ 7 billion to US $ 4.77 billion, with possibility of a further reduction by US $ 2 billion by September

This issue arose following a significant decline in external borrowings by banks after Moody’s downgraded the country’s banking system. “This decline in short-term foreign loans affected various components of borrowing, including deferred payments, back-to-back foreign letters of credit (LCs), short-term trade loans and buyers’ credit,” explained a senior executive from the foreign trade department of a renowned private commercial bank to Apparel Resources (AR).

Since 70-80 per cent of imports in Bangladesh consist of raw materials and capital machinery, Bangladesh economy will feel the impact as decrease in capital machinery imports will force many factories to close down, resulting in increased unemployment.

Md. Bin Qasem, Managing Director of Incredible Fashions, who previously had a career in banking with various international institutions before entering the realm of garment manufacturing, is concerned of the potential impact as such a development is anticipated to have unfavourable consequences for both the prospective and established garment manufacturers.

“Work orders have decreased, and the cost of production has risen due to increases in gas and electricity prices. In the given scenario, a reduction in the EDF fund would only exacerbate the industry’s problems” – Shahidullah Azim

Ripple effect of dwindling foreign reserve

If bank officials are to be believed, this adjustment is necessary, more so in light of IMF stipulating a certain foreign reserve threshold, failing to maintain which, Bangladesh would likely not get loans from the global financial institution.

In the days to come, the Government might even cut down on the various incentives enjoyed by the garment makers currently, expressed people in know of things.

This again will be in keeping with the IMF directive, they held, adding a decision to this end was forthcoming.

“Work orders have decreased and the cost of production has risen due to increase in gas and electricity prices. In the given scenario, a reduction in the EDF fund would only exacerbate the industry’s problems,” lamented Shahidullah Azim, Vice-President of the BGMEA.

Debt repayment under pressure too!

The garment industry is grappling with more than one problem; it’s also contending with the pressure of debt repayment.

The central bank has recently declined the requests from garment manufacturers and textile millers for an extension of the loan repayment period.

This decision comes despite various support measures provided by the Bangladesh Bank since the onset of the Covid-19 pandemic in March 2020, including loan moratoriums and deadline extensions, all aimed at averting defaults.

Over the past three years, borrowers have enjoyed several privileges from the banks. However, a circular dated 20th June 2023, introduced a provision stipulating that borrowers would not be classified as defaulters as long as they managed to repay at least 50 per cent of the term loan and the current principal by the end of June.

Nevertheless, apparel manufacturers have urged for an extension of this timeframe until December 2024. The request comes as default loans continue to surge, reaching nearly Taka 1, 31,620 crore in the January-March period, constituting around 8.80 per cent of the total outstanding loans.

“It has thus become even more difficult to pay other debts including term loans,” held Mohammad Ali Khokon. The BTMA is also advocating expansion of the loan moratorium provided through the Export Development Fund (EDF) facility. They have pointed out that the repayment period for EDF loans has been shortened from 270 days to 180 days, which poses significant challenges especially when it typically takes 200-220 days to receive the export proceeds.

Increasing wages complicate things

Adding to the already complicated scenario is the sharp decline of Taka. The result is inflation, which has led to calls for an urgent increase in workers’ wages even as the Government has formed a new wage board to decide on the same.

According to the Bangladesh Bureau of Statistics (BBS), the country has been experiencing the highest inflation in the last decade rising to 9.74 per cent recently while the Consumer Price Index (CPI) has shot up to 9.02 per cent in 2022-23, both of which are the highest in the last 12 years.

This price spiral means food prices are eating up people’s earnings.

“We all know how the commodity prices have risen in the last three years. Workers are not able to run their families even after working 14 hours a day. Salary needs to be increased,” demanded Nazma Akter, President of the Bangladesh Sommilito Garment Sramik Federation amidst rising clamour to set the minimum wage at Taka 24,000.

Backing Nazma, Kalpona Akter (Executive Director of Bangladesh Centre for Workers Solidarity) held garment workers’ salary may have increased marginally (by 5 per cent of the basic pay annually), however commodity prices have gone through the roof literally.

The buyers’ approach in the evolving situation doesn’t seem to be very encouraging as a report published earlier this year maintained how many global biggies were exploiting Bangladesh garment industry workers, with some of them involved in unfair practices and paying the suppliers below the cost of production, thereby adversely impacting suppliers’ employment practices resulting in reduced worker turnover, loss of jobs and lower wages.

With general elections scheduled to be held in January 2024 and the wage board supposed to decide the new minimum wage by December, all eyes are on how the pro-industry Government deals with the emerging situation.

The initial minimum wage board for the Bangladesh RMG was established in 1984, setting the minimum wage at Taka 560. Over the years, wages have undergone six revisions. The most recent minimum wage adjustment, which came into effect in December 2018, stands at Taka 8,000.

It may be mentioned here that Bangladesh has one of the cheapest labour costs. Bangladesh’s minimum salary for labour stands at US $ 68 compared to China’s US $ 155, Cambodia’s US $ 140, India’s US $ 137 and Vietnam’s US $ 107 (as per University of Delaware, USA).

Already battling the increased input costs and overheads along with other problems, the wage increase will add to the apparel exporters’ misery.

Up until H1 ’23, the industry imported raw materials worth US $ 9 billion from overseas countries (amount excluding raw material purchase domestically), while exports during the same period amounted to nearly US $ 24 billion. Against which the industry imported input material worth US $ 8 billion as against US $ 22 billion exports, showing an increase of 6.76 per cent in the input cost.

Standing at the threshold of LDC graduation, garment makers are a harried lot today and understandably so as the much-awaited transition will come with its own share of challenges.

Connotations of LDC graduation and of ‘ineffective’ trade pacts

Bangladesh has been proactively engaging in trade agreements as a key element of its strategy to bolster exports, fortify trade partnerships and stimulate economic development. Although the country has entered into five bilateral and regional trade agreements with these objectives in mind, the outcomes have been mixed, with substantial export gains stemming primarily from a couple odd agreements.

One notable success story in this regard is the South Asian Free Trade Area (SAFTA). Within the framework of SAFTA, Bangladesh has witnessed a significant upswing in exports, particularly to its neighbour India (export to India was close to US $ 1 billion mark in July-May period of the fiscal 2022-23 with 46.44 per cent growth, compared to only US $ 647.27 million in the same period of the previous fiscal year).

As a matter of fact, Bangladesh has registered a 32.74 per cent year-on-year increase in apparel exports to the non-traditional markets in the time period under consideration including Korea, Japan, Australia and China.

Likewise, the Organization of Islamic Cooperation (OIC) has emerged as a favourable market for Bangladeshi exports, primarily due to the Trade Preferential System (TPS).

Saudi Arabia (where apparel exports increased by 40 per cent between July 2021-June 2022) and Gulf (21 per cent increase) in particular, need special mention.

However, a couple odd success stories apart, the overall export growth to countries covered by various other trading deals has been modest, especially in the traditional strongholds even as the apparel shipment growth in non-traditional markets can be largely attributed to Bangladesh’s LDC status, felt the industry insiders.

Apparel export from Bangladesh to the European Union declined by 12.69 per cent in value during the January-June 2023 period to US $ 9.06 billion from US $ 10.37 billion in January-June 2022.

“Bangladesh is mainly benefiting as an LDC,” agreed Khondaker Golam Moazzem, the Research Director of the Centre for Policy Dialogue, who felt the role of the regional trading agreements has not been significant.

Ominous it may sound; the country will not get duty-free benefits in the SAFTA and APTA member countries after the LDC graduation in 2026.

Thankfully, the silver lining is that Canada along with UK and Australia are the countries where Bangladesh is set to retain its preferential trade treatment after the LDC graduation.

“We have a very flexible production platform and our production team also has the required skills and expertise to successfully manage smaller MOQs.” – Wasim Zakariah

“Fulfilling the conditions regarding the environment and labour rights for getting the trade benefit under Canada’s new trade scheme will not be a problem for local garment exporters,” felt BGMEA President Faruque Hassan, underlining how Bangladesh is working towards overcoming the so-called shortcoming to optimally leverage the opportunities that are on offer.

The BGMEA chair further advocated other countries and trade blocs, such as the European Union, to consider offering similar opportunities to graduating LDCs like Bangladesh.

“While Bangladesh enjoys duty-free access to major markets including the European Union, it faces persistent challenges. Complex rules of origin requirements often hinder the country’s ability to tap into preferential trade terms fully. Additionally, intense competition from other low-cost manufacturing nations and so-called concerns over worker safety and labour rights have limited its ability to maximise trade advantages,” opined a renowned economist.

Selim Raihan, Executive Director of the South Asian Network on Economic Modeling hence suggests Bangladesh to make a departure from its LDC mindset and work towards fostering reciprocal agreements.

Simultaneously, despite its repute and standing as the second biggest apparel exporter globally, Bangladesh is also facing an issue or two on the manufacturing front too, especially when it comes to smaller runs, an emerging trend in the fashion retail sector globally.

MOQs pose a few questions for apparel makers?

Thanks to changing consumer demand and fashion trends, buyers are going for smaller order quantities now even as Rafee Mahmood, Deputy Managing Director of Mahmud Group, emphasised as more people shift to online shopping, buyers are adopting a strategy of reducing long and stagnant inventories with focus on selling first before initiating fresh production based on confirmed orders from the end consumers.

A case study on PVH’s sourcing authored by Sheng Lu (Associate Professor in the Department of Fashion and Apparel Studies at the University of Delaware) too found that China still continues to be the preferred destination for Western buyers when it comes to smaller order quantities.

“Banks have historically played a pivotal role in supporting the growth of Bangladesh readymade garment (RMG) sector. Lately though, garment entrepreneurs don’t seem very happy with the state of affairs in the banking sector.

Even though Bangladesh has started to take in some of those, it’s far from the desired level, underlined industry insiders who identified long lead-time and manufacturing mindset as the Achilles heels for Bangladesh.

“We have a very flexible production platform and our production team also has the required skills and expertise to successfully manage smaller MOQs,” nevertheless claimed Wasim Zakariah, Director of Posh Garments, who underlined price points continue to be the stumbling block in transitioning towards smaller MOQs.

Meanwhile, keeping with the changing buyers’ demand, MBM Group has also converted a portion of production lines to modular to ensure small orders don’t go abegging even as many other garment makers are working towards building the necessary flexibilities to cater to small order quantities.

Such an approach will definitely help the garment makers, who seem to be waiting still when it comes to moving up the value chain.

“One of the main reasons Vietnam, despite having half the number of apparel factories and workers as us, has seen growth in apparel exports even during the pandemic, is due to innovation even if its product basket continues to be more diverse than ours,” held Managing Director of Team Group, Abdullah Hil Rakib who has taken up manufacturing uniforms for the Belgian Army and the police of Kosovo to move up the value chain and beat the price blues.

Today uniforms account for nearly 2 per cent of Team Group’s total apparel exports.

Similarly, Snowtex Group, an outerwear exporter with four manufacturing units—Snowtex Outerwear Limited, Snowtex Sportswear Limited, Snowtex Apparels Limited and Cut and Sew Limited—is also gaining recognition for its value-added offerings.

According to Industrial Police data, 313 factories under their jurisdiction have gone bankrupt from January to midAugust. Amongst these, 80 were garment units- 60 belonging to BGMEA, 16 affiliated with BKMEA, nine were textile mills registered with BTMA, and five were under the aegis of BEPZA

“Our factories are making investments to enhance productivity while focusing on the production of high-value garments. This transformation is expected to be completed within the next 5 to 10 years, ultimately leading to an increase in the export of high-end clothing items,” held SM Khaled, the Managing Director of Snowtex Group even as names like Universal Menswear Limited, Energypac Fashions Limited, East West Fashion Garments Ltd., Chittagong-based Thianis Apparels Ltd., continue to excel in suit making while players like KC Lingerie, HAMS Group, Victoria Intimate Ltd., Chorka Textile Ltd. (CTL), Kaixi Fashion Bangladesh Co. Ltd., continue manufacturing lingerie to move up the value chain, not to mention many new players in sports and outerwear.

Enjoying a history of high export revenue and lower profit margins, leveraging on cost competitiveness, abundant and cost-effective workforce so far, Bangladesh today stands at a critical juncture that calls for urgent steps to resolve the existing bottlenecks as the garment makers continue to diversify their offerings, while also moving up the value chain to maintain their relevance for the global buyers.