Export competitiveness: The role of financing support

Export is becoming competitive day by day. Financing has been identified as one of the main drawbacks of the export sector. Business Initiative Leading Development (BUILD) has tried to take a stock of funding instruments for the country's export sector.

The country's export target has been fixed, for the year 2019-20, at $45.50 billion, 12.25 per cent up from the previous year's target. The government has set an additional target of $8.50 billion earning from the service sector, which is 34.10 per cent higher than the previous year's target. The target for the readymade garments (RMG) sector alone is $ 38.20 billion.

The BUILD study has identified pre-and-post shipment financing schemes and tried to identify the policy gaps between these schemes for supporting the exporters. Of all the schemes, the Export Development Fund (EDF) is arguably the best one, which was established in 1985, to refinance non-traditional export sector with at least 30 per cent local content. The fund size has been gradually enhanced to $3.5 billion and it increased by $2.5 billion in the last five years.

A recent circular (July 11, 2019) raised the limit for leather and footwear sector from $15 million to $ 20 million. Another circular on May 05, 2019 facilitated export with a wider scope, and allows EDF fund up to $0.5 million for all sectors for their input procurement.

Moreover, the EDF against contract, rather than letter of credit (L/C), is also allowed. These are all very positive support for export competitiveness. It is hoped that with the increase in the export target, the demand for access to EDF will also increase.

In a dialogue where BUILD presented the policy paper, it was mentioned that the Bangladesh Bank (BB) was planning to extend the EDF in Euro alongside US dollars; the policy, if adopted, is believed to be more helpful for exporters. The central bank is also planning to add Chinese Yuan (CNY) and Russian Rouble to the list since these will further increase opportunities for the exporters to have loan in foreign currency for procurement of materials for export.

Another export finance scheme, the Long-Term Financing Facility (LTTF) which was supported by IDA (International Development Association) with assistance of $300 million, was launched in 2015 and continued till 2017-18. Sixty-six projects involving $403.63 million have been provided funding and the money is supposed to be utilised by 2021. However, this fund has been exhausted by this time.

The fund is used for buying capital machineries and meeting expenses related to their installation services for up-gradation, expansion or for newly set up manufacturing industries. This is another attractive financing scheme that supported the private sector and contributed to export enhancement.

ENVIRONMENTAL COMPLIANCE: In order to gain competitive advantages, the export-oriented sectors must look at attaining Sustainable Development Goals (SDGs), to ensure environmental compliance.

The industrial sector is one of the major sources of pollution and inefficient energy utilisation may cause harm to the environment. A BUET (Bangladesh University of Engineering and Technology) study has shown that in the textile sector, about 32 per cent of energy savings is possible if high efficiency motors, drivers, and boilers are used. The same is the case for steel and iron where it is possible to save about 41 per cent energy if improved machineries are used. The study projected 23 per cent energy savings for cement and clinker, 25 per cent for ceramics and glass, 24 per for chemicals and fertilizer, and 18 per cent for agro industries.

For all these sectors, sophisticated machineries are the primary requirement and financing is an urgent need for the purpose.

In 2010, the government adopted the voluntary National 3R (Reduce, Reuse & Recycle) strategy. But since this strategy was not accompanied by a financial incentive framework, its implementation/adoption was limited [Source: Resource Efficient Cleaner Production (RECP), the World Bank, June 2019]. There is a need to integrate the policy with effective financial schemes.

An available funding is Green Transformation (GTF) - a USD-denominated loan for import of capital machineries and accessories for all E/O sectors since June 26, 2019 with revolving fund of $200 million. As many as 19 banks have signed memorandum of understanding (MoU) with the central bank for availing of GTF. It was not being utilised initially but so far an amount of $25.40 million has been utilised and more are in the pipeline through different banks.

For a lack of availability of experts for screening whether the capital machineries are environment-friendly and absence of indicative list of available machineries, the inspection procedures are lengthy. Meeting of the relevant Technical Advisory Committee could not be held for a long time.

Another credit line is Tk 2.0 million (2009) for providing refinancing for investment in 52 products under eight (8) categories. To date, 39 banks and 19 financial institutions signed a participation agreement with the BB. The tenure is 4-10 years with 3-12 months of grace period, depending on products/initiatives.

In the past six (6) years (2013-18), some projects such as Biogas, Solar Assembly Plant, SHS, HHK Technology in Brick Klin, and Effluent Treatment Plant have been doing good, while the green industry has received Tk 900 million from the scheme since 2017. The utilisation of this scheme is good because of its nature of financing which is different from the ones meant for importing capital machineries.

SHARIAH-BASED REFINANCING: The BB had in 2014 introduced in 2014 Shariah-based practice for banks and non-bank financial institutions (NBFIs) with an aim to encourage investors in the renewable energy and environment-friendly initiatives to facilitate Shariah-based financing. Mudaraba Savings Rate or Bank Rate which is lower is considered as the base rate for determining the profit rate at the beneficiary end.

No significant amount of the Islamic refinancing fund was utilised because of fixed interest rate (I/R) as per usual practice, which does not match with the Shariah principle. In a meeting on April 21, 2019, the BUILD requested the BB that Shariah-based refinancing could be made popular maintaining the policy based on yearly account utilisation profit. A fine-tuning can be done by mentioning the word 'provisional' about the interest rate in the circular to expedite utilisation of the Shariah-based refinancing schemes.

Packing credit (PC) is another popular scheme for exporters or sellers to finance procurement of goods before shipment PC is allowed to an exporter having trade license and valid ERC limit. It is allowed either on case-to-case basis or under certain limit (mostly covering 80-90 per cent of export/purchase order) with a timeframe of 90-180 days. It has a revolving limit of one year but is renewable. Interest rate is 7 per cent (Announced interest rate chart of the scheduled banks, determined by the BB).

This finance generally covers cost of packing, transportation from godown to the port for shipment, warehousing and insurance. According to the private sector, privately owned commercial banks are reluctant to provide PC because of less attractive interest rate. So, it has been a less utilised scheme for exporters. This funding can be made available with some alternative measures and can be disbursed through NBFI.

FACTORING SERVICES FOR FINANCING THE EXPORT SECTOR: In the Export Policy 2018-21 (Page no. - 25832) there is a mention of factoring services for financing the export sector. Factoring, at the domestic level, can be encouraged for the small and medium enterprises (SMEs). There is a guideline for international factoring and a similar one can be prepared for domestic factoring. Familiarity of working under open account/without L/C will be required for international factoring.

All these funds are available but utilisation is not clear. Of the ADB fund of $50 million, only $22.75 million has been disbursed. Joint Credit Mechanism (JCM) is supposed to be implemented properly.

There are alternative financing arrangements practised in the world, such as Mezzanine Structures (hybrid of debt and equity financing), special funds (bond, stock, cash equivalent fund, convertible loans), ESCO contracts (venture funds for energy efficiencies or renewable energy), impact funds, and subordinated bonds (outstanding loan repaid only after settling all other debts).

Banks are the main suppliers of financing only in Bangladesh, where interest rate is high, but where favourable schemes and foreign currency-denominated funds are helpful for exporters.

SUGGESTIONS: In some cases, the process of approval of export financing and availing of it is lengthy. The EDF is the only exception and its utilisation is also good. Packing credit is depleting gradually because of low interest rate. Banks are more interested in offering overdraft or export cash credit to charge relatively higher interest rate. UPAS L/C is regarded as an effective export financing tool for exporters in the country and has been utilised properly.

Information about the available export funding facilities should promptly reach the exporters. More studies and awareness programmes need to be conducted for the under-utilised financing schemes. A technical assistance component needs to be included for non-traditional export finance and green financing schemes. Expertise of bank officials regarding these funds' scope and utilisation needs to be developed.

The BB needs to consult with the private sector, assess the needs of the exporters and identify the sectors that will best suit the need of the exporters. The central bank may organise multi-stakeholder meetings with participation from banking officials, the private sector through dialogue platforms to understand the needs of the exporters.

Ferdaus Ara Begum

Chief Executive Officer

Business Initiative Leading Development (BUILD)