Bangladesh weans garment industry off subsidies for new-look economy

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A garment factory in Gazipur, Bangladesh. The country has sustained companies with cash incentives on their exports, but it is dialing them back.   © Reuters

Just weeks after a controversial “one-sided” election in which Prime Minister Sheikh Hasina secured a new five-year term, the central bank at the end of January announced it was cutting export incentives, specifically targeting the country’s main export earner — the ready-made garment (RMG) sector. According to the bank’s circular, the step was taken in compliance with the World Trade Organisation’s regulations, which prohibit such incentives once a country transitions out of the least-developed group.

The shift highlights the delicate balancing act the nation of about 170 million faces as it attempts to reposition and repurpose its economy.

Bangladesh had been giving cash incentives ranging from 1% to 20% of the value of exports of 43 products. But the incentive for ready-made garments has been reduced to 0.5% from 1%, while that for leather products — the No. 2 export earner — has been slashed to zero from 10%.

Now the overall range of incentives is 0.5% to 15%. In addition, support for exploring new markets such as jute, frozen fish and agricultural products has been cut from 4% to 3%.

The change comes at a challenging time for garment producers, which are grappling with wage hikes, weakening international orders and volatile currencies. Siddiqur Rahman, a former president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) — the main apparel trade body — stressed that the government did not need to do this now.

“The government could have continued [the full incentives] for at least one more year,” Rahman said. “Incentive cuts during this tough time are very harmful for us,” he added, noting the companies have consistently communicated their concerns.

Rahman pointed out that in January, garment factories already implemented a mandated 56% wage increase for their workers. On top of slowing exports, he said, “now the freight costs have increased by many times because of the Red Sea conflict. How could we remain competitive in the global market if there is an incentive cut now?”

Data from the government’s Export Promotion Bureau (EPB) shows apparel products accounted for the lion’s share of cash incentives — nearly 65%, or roughly $750 million — in the last fiscal year, which runs from July to June.

BGMEA President Faruque Hasasn told a media briefing that the incentive cut could “severely” impact competitiveness in the global market, with a large chunk of orders going to rivals like Vietnam and India. Without the benefits, the companies could need to charge more to stay profitable, handing competitors an edge.

Likewise, leather exporters have complained of a big blow. “The government repeatedly pushed us for increased export so that they could cut their dependency on one product,” said Shaheen Ahmed, president of the Bangladesh Tanners Association (BTA), referring to ready-made garments. “But now they have completely cut incentives on leather. It’s baffling.”

The government has a different perspective.

A.H.M. Ahsan, vice chairman of the Export Promotion Bureau, told Nikkei Asia that the government’s hands will be tied once Bangladesh loses its LDC status — a United Nations classification that exempts the poorest nations from tariffs on exports to developed countries. Bangladesh has already met the criteria for graduating.

“Graduation is just a little more than two years away,” Ahsan said. “So, instead of snatching the incentives overnight, we are preparing the exporters gradually.”

He also pledged that the government would look to help exporters through alternative means even after the LDC graduation. “The Commerce Ministry has been studying how other developing countries, like Vietnam, subsidize their export sectors to shape future support strategies.”

An official of the Export Promotion Bureau explained that “instead of snatching the incentives overnight, we are preparing the exporters gradually.” (Photo by Faisal Mahmud)

Despite the protests from garment makers, analysts view the incentive cut as a necessary shift away from taxpayer-funded subsidies, which they say serve Western buyers and consumers more than Bangladesh’s own development.

“I believe this is a step in the right direction,” said Zahid Hussain, former lead economist at the World Bank’s Dhaka office. “Following graduation in 2026, Bangladesh will lose the special and differential treatment as an LDC that allowed subsidization of exports. It is therefore important to start unwinding the subsidies.”

Hussain said exporters have benefited from the large depreciation of the taka, the local currency, during the last two years even though adjustments in the official rate have not caught up to the market rate. “The subsidy regime needed rationalization anyway because it fell short of achieving the objective of diversifying exports,” he said.

Akhter Mahmood, a Washington-based economist, said he is not surprised that Bangladeshi businesses are complaining about the incentive cuts. “Who does not want subsidies, especially if these come with no performance discipline attached?” he said.

He said he has long argued that such support should be conditional on performance — and should be provided to bring about desirable change, not just maintain the status quo.

“By change I mean productivity improvement, innovation, product development, diversifying exports both in terms of new markets and new products, and introduction of good social and environmental practices,” he said, suggesting the government should define indicators to measure such progress.

Over the long term, he was hopeful that the “withdrawal of subsidies may generate the incentive for firms to be more efficient and innovative.”

“Being more efficient and innovative will be the best way to compete in a post-graduation world,” Mahmood said. “So the withdrawal of subsidies will actually be good. It may also weed out some inefficient firms.”