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6 years ago

Diversifying concentrated export basket in Bangladesh

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Although export has been one of the key growth drivers of Bangladesh, the contribution of export to gross domestic product (GDP) has exhibited a declining trend over the past few years. The export-GDP ratio reached its peak in FY2011-12 at 20.16 per cent, and has been declining since then. The export of goods and services as percentage of GDP was 19.54 per cent in FY2012-13, which declined to 18.99 per cent in FY2013-14, and further to 17.34 per cent in FY2014-15. In the last fiscal year (FY2016-17), export-GDP ratio went down to 15.04 per cent, which was 1.61 per cent lower than that in FY2015-16. This declining trend is expected to continue in the current fiscal year, with a provisional estimate of 14.36 per cent of GDP attributed to export. Although exports continued to grow at an annual average rate of 7 per cent during FY13-17, the gradual decline in the contribution of exports to GDP indicates the weakening of this key driver of growth.

The exports growth of 1.7 per cent in FY2016-17 was the lowest since FY2001-02. However, during the July-May period of current fiscal year, total exports rose to US$33.72 billion, registering a 6.66 per cent growth rate over the same period of the previous fiscal year. In this context, ready-made garment (RMG) exports grew by 9.77 per cent through earning US$28.12 billion, with export of knitwear and woven garments experiencing growth of 11.48 per cent and 8.15 per cent respectively. Also, export earnings of agricultural products were US$609.01 million, which was 18.09 per cent higher than that in the previous fiscal year. Pharmaceuticals, jute & jute goods, and bicycle sectors also exhibited positive growth. On the other hand, export earnings from leather, leather goods and footwear were US$999.07 million, which was 11.08 per cent lower than that of the previous fiscal year. Exports of frozen and live fish stood at US$465.32 million, marking a 1.59 per cent negative growth over this period.

The exports trend in the past few years points to the rising dominance of the RMG in the exports basket of the country, while the exports share of non-RMG products have continued to decline. Lack of export diversification is one of the major challenges for Bangladesh economy. Bangladesh's exports have remained largely concentrated in the labour-intensive garments sector for the past few decades. Before the emergence of the RMG sector, jute and jute products dominated the exports sector occupying around 70 per cent share during the 1970s and early 1980s. With the rapid expansion of RMG exports in the early 1990's, more than 50 per cent of the country's total exports comprised of RMG. Within a decade, by the late 1990's, the percentage share of RMG in total exports rose to more than 75 per cent. This trend continued, and by FY2016-17, the share of RMG in total exports rose to 81.23 per cent. This overwhelming dominance of the RMG sector in the exports basket illustrates its mounting concentration in the basket.

It is also pertinent to mention that the gap between the growth rate of RMG and non-RMG exports has been on the rise over the past decade. Between FY2007-08 and FY2016-17, the annual average growth rate of RMG exports was 11.6 per cent against only 6.5 per cent growth of non-RMG exports, indicating that the export concentration is in fact intensifying.

The major reasons behind the slow growth of non-RMG exports are weak policy support and several supply-side bottlenecks. A study on 'Bangladesh Sectoral Growth Diagnostic' by Raihan et al (2016) suggested that, apart from the RMG sector, the manufacturing sub-sectors having the higher potential for greater export diversification were agro-processing, leather and footwear,  electronics, pharmaceuticals, and ICT. Both the agro-processing and leather sectors have scopes for higher domestic value addition and the potential for generating large-scale employment opportunities. However, problems in market access, inadequate infrastructure, lack of access to finance, lack of skilled labour, institutional inefficiency, lack of supportive government policies, and high costs of doing business act as constraints for expansion of these sectors.

In addition, the slow progress of the relocation of the tanneries from Hazaribagh to Savar, followed by the inability to start production quickly after relocation, have contributed to the sluggish growth of the leather sector. The health and environmental hazards associated with the production of leather and leather goods also appear as one of the major constraints for leather sector's growth. The electronics, pharmaceuticals and ICT sectors also have their own sector-specific challenges.

Appropriate sector specific-policy supports are therefore needed to address the challenges in these potential export-oriented sectors. Moreover, to achieve momentum in export growth, private sector investments need to be increased. Sluggish private sector investments during the past decade at around 21-22 per cent of GDP have also been contributing to the slow growth of the aforementioned sectors. In order to attract higher private sector and foreign direct investments for the growth of export-oriented non-RMG sectors, policy attention is urgently needed for reducing the high costs of doing business.

Iffat Anjum is Senior Research Associate, SANEM.

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