Stimulus for Bangladesh’s export-oriented enterprises

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On March 25, 2020, Prime Minister Sheikh Hasina announced, in her address to the nation, that the federal government would provide an incentive package of Taka 5,000 crore for export-oriented industries. She explicitly mentioned the basic conditions of reference, that the fund could only be utilized to pay the salaries and allowances of personnel and staff. An assumption was that as export orders were possibly cancelled or deferred, entrepreneurs would face a mounting liquidity crisis for meeting the payment of wages and other short-term obligations. Industry stakeholders welcomed this scheme. The Prime Minister also announced some other incentives and measures for mitigating the economic effects of the novel coronavirus (Covid-19) pandemic. It really is true that Covid-19 has disrupted the global apparel value chain. Some global buyers have either cancelled or suspended their export orders. Sourcing recycleables has also proved extremely difficult, as China and other major economies are de facto closed from the rest of the world. After coronavirus infections started out to appear in Bangladesh, the federal government of Bangladesh imposed a voluntary lockdown of its citizens, effectively causing every industry to turn off their production.

A government notification arrived on March 31, 2020 outlining the essential conditions of reference of the incentive package. The regulation stipulates a budgetary allocation will be given to Bangladesh Bank, which would in turn lend to commercial banks at zero interest. The commercial banks would extend the loan facility to exporters at a two percent simple interest rate. A few conditions-like only export-oriented and active industrial units meet the criteria for these loans and that the money could only be utilized for payment of salaries and allowances-are further imposed. Repayment terms are also simple, including a six-month grace period, to be followed by an amortisation of the loan over 18 monthly equal installments.

The inner control mechanism of the scheme is also proactive. Lending banks shall review income sheets of a potential borrower for the 90 days preceding the outbreak of Covid-19 in March 2020. Banks will directly pay to the lender accounts of eligible personnel or by a mobile cash transfer mechanism. No payment to an employee shall exceed the average gross payout during the last three months. Finally, any manufacturer exporting at least 80 percent of produced goods will be eligible under this scheme. It means that the scheme does not discriminate between direct and deemed exporters.

Overall, the incentive scheme announced by Prime Minister Sheikh Hasina is timely, pragmatic and forward thinking. The actual design of it is also reasonably well-articulated. It is not a grant and not a pure subsidy to private entrepreneurs. The only subsidy is the borrowing cost from the sale of government securities used to finance the scheme. A few more considerations would get this to scheme even more sustainable and equitable.

Firstly, an eligible borrowing firm could be charged at least at the lender rate and also a two percent spread in order that the government wouldn't normally be asked to pay the interest amounts. Secondly, every apparel manufacturer might possibly not have a liquidity crisis and would be unwilling to apply for this incentive if using the borrowing cost was steady with the chance costs. Note that apparel exporters demanded short-term liquidity, not subsidies. This means that that the inherent design of the scheme whereby a borrower can borrow free from costs would motivate every exporter to apply for the incentive scheme. This design is flawed and may bring about excess demand for funds. The flawed design may also cause corruption, where exporters who are politically powerful or control bank management will abuse fake income sheets for getting the utmost amount of loans. This probability of corruption could possibly be eliminated just by a straightforward rule-that usage of liquidity is guaranteed at the lender rate and also a two percent spread. It really is noteworthy that the provision of direct payment to the lender account (or bKash account) of a worker will help minimise the chance of corruption in the planned scheme.


Thirdly, this incentive will produce credit risks. Some borrowers will default and become unable to pay back. In its present form, it'll be a cost for the lending bank which is unacceptable. Fourthly, instead of a budgetary allocation via Bangladesh Bank, the financing scheme could possibly be floated by Bangladesh Bank itself beneath the existing Export Development Fund (EDF) or an identical initiative. That could leave the Ministry of Finance with this money to greatly help the most disadvantaged or meet more pressing needs in public areas health.

Finally, any government intervention should be predicated on the principle of neutrality. What will happen to micro, small and medium enterprises (MSMEs) and/or large ones that are not export-oriented but employ an incredible number of workers? What will eventually the self-employed in the agriculture sector? The federal government should offer them windows of usage of finance in these crisis. As of the most recent labour force survey, agriculture alone employs 24.7 million workers. Service industries, including wholesale and retail trade, transportation, construction and others, take into account 27.2 million workers. An astounding number of more than 50 million employees are also facing job loss, income loss and the prospec
Source: https://www.thedailystar.net

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