As the world’s largest Ready-made Garments exporting country, Bangladesh is bearing all the glory and pride over the decades leading on the board in this sector, together with a few other countries as well. RMG sector is contributing broadly on a continuous basis to the macro sector of Bangladesh, gaining large shares of foreign currencies by exporting products.
Though the world is facing the terrible effect of the Russia-Ukraine war and the post-Covid economic difficulties, the RMG sector in Bangladesh helping the country to stabilize the country’s economic situation. But the current difficulties aroused in opening letter of Credit (LCs) is like a yardstick in the smooth-running of ready-made garments sector.
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Letter of Credit is a document that guarantees a seller to receive his due payments from the buyer’s end on time, either by the buyer or from the bank end in place of the buyer. These LCs are now a burning issue in the international affairs of Bangladesh’s economy, as the authorized body imposed certain restrictions in opening LCs. And for not being able to open LCs on time, exporters are facing problems in exporting goods that are in need of the existing demand of the country.
Again, the raw materials, which are essential for producing final products are not been made available in the production sectors due to not being able to import on time. Statistical data found that about 25% of the raw materials used in the ready-made garments sector of the country depend on imports from other countries. But the lack of opening LCs on time is creating huge barriers in this case.
The report says, last year, international retailers and brands placed 25 percent fewer orders for ready-made garments. As a result, the number of orders in the primary textile sector has decreased significantly. Due to difficulties in opening LCs, in this fiscal year, the import of raw cotton has decreased by 41.64 percent to 1.02 billion dollars. Imports of cotton-based yarn, synthetic fibers, and yarns also declined significantly in the first six months of this fiscal year.
A company that was able to produce about 20 tons of yarn in its normal days is now been able to produce only 7 tons a day. Experts say, if things continue to go like this in case of opening LCs, then the shortage and difficulties in RMG sectors will also continue to become bigger and bigger day by day.
Why dollar Shortage?
The Dollar shortage in Bangladesh actually refers to the unavailability of dollars to buy at a lower amount of taka. Because of the shortage of dollars, people have to spend an increased amount of taka to buy a certain amount of dollars. That means, the value of taka becomes cheaper in exchanging dollar, for which the import becomes expensive, payments become larger than the previous, and ultimately results in inflation, an overall price-rise in the country’s economy, which, if left uncontrolled, turns into macroeconomic instability for the country. The overall economy started to face the horrific view of the price hike all over the market.
But what is the main reason of the dollar shortage, or the increase in dollar price? The first answer that comes out here is the failure to make an optimistic policy, which in short, can be noted as ‘defective’. The floating exchange rate in 2003, followed by a heavy fixing policy of exchange rates later resulted in disruptions in the economy, though the fixing was made due to the political preferences of the country.
The impact of any macroeconomic policy not only impacts the present scenario of the country but rather, it has the ability to lay its seed in long run too. On average, a 2 taka rise of the dollar value against the taka made the present price of the dollar pick at nearly 105 today. So, excessive price to buy dollars is one of the base reasons for the dollar shortage, as we are facing problems buying it on demand.
As for the policy of BB, we have to maintain an inflation rate of 3-5% for the sake of exporters, BOPs, etc. And this case also has thrown us into a large mountain of the dollar exchange rate. But BB has the option to devaluate the taka for a certain period, after seeing the trends of past years, from 2003. And it would have been possible if calculated through econometric systems and depending on math.
In addition to all of these points, the world political turmoil and pandemic situation hit the last to worsen the dollar exchange rate to the highest. And as for the previous assumption mistakes, Bangladesh is one that holds the responsibility to face the burden.
Can Bangladesh solve this problem by getting IMF loans?
Though saying as a precautionary policy, Bangladesh, a country that has been going through several major infrastructural development phases, asked for loans from International Monetary Fund (IMF) to meet the deviational needs of its economic situation. Considering the facts, IMF also approved the application and agreed to provide a 4.7 billion loan to Bangladesh. This loan will certainly be helpful to meet Bangladesh’s several macroeconomic needs.
As the loan is repayable at zero interest rate in 10 years, Bangladesh has the option to find for remedy of the dollar crisis issue and fix it with a portion of the total amount of loans given by IMF. Also, this funding will allow Bangladesh to get back to its emerging position once again. Therefore, the volatile position of Bangladesh’s economy has the chance to hold back its nerve and stabilize.
But getting this loan doesn’t mean Bangladesh can run its economy in whichever it wants, like that of the past. After getting the loan, Bangladesh Bank will have to move to the monetarist system of the economy from its current one, the Keynesian. Monetarist point of view suggests to supply money to solve deviations, allow the market to chase its way, and find the target, meaning a free market, something like leissez-faire, but not as a whole.
But a new question arises here, like can Bangladesh run in a stable position, if money is thought as the only parameter to control the market, and let the market find its own way?
Solving the problem!
In case of seeking a solution, to maintain the IMF’s policy, Bangladesh needs to go on increasing the tax rate to increase revenue, a burden that will become heavier and heavier on the shoulder of the poor people. The garment workers, one of the major working groups of Bangladesh who play a great role in the overall economy, will also face this hazard. If the current raw material shortage is not addressed, the overall production of the industry will fall.
This will result in the lay-off of the workers from the job. Then the excessive tax incorporation for the workless workers will seem heavier, because of not having income to meet the rate. And the country may then face the bitter bite of capitalism with its huge population, mostly of the middle and lower class.