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Tax rebate hike in China troubles domestic RMG sector

13
Aug '08

The recent move of the Chinese Government to raise tax rebate from 11 to 13 percent is likely to throw greater challenges for the readymade garment (RMG) sector of Bangladesh, although experts are of the opinion that it was only taken as a measure to off-set the appreciation of yuan against dollar.

Being the largest apparel exporter, China was severely affected in terms of profit margins which shrunk badly in the wake of a strong currency (yuan traded at 6.8532 against dollar).

The hike in rebate which was introduced from August 1 this year, was essentially to help textile exporters cope with the crisis of stronger yuan, weakening demand and rising cost of production.

However, this remedial measure would have a direct effect on the exports of RMG from Bangladesh because as Bangladesh Garment Manufacturer and Exporters Association (BGMEA) rightly pointed out, China will gain more competing power in the international market making it more difficult for domestic exporters to compete with them.

In response to this, the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) has decided to hold a press conference, urging the Government to increase cash incentives for the domestic RMG exporters.

This is has become virtually imperative because China monopolizes with a share of about 40 percent in the global RMG market while Bangladesh has a petty 2 percent market share. Additionally, since both the countries compete in common markets like EU and the US, it will be close to impossible for the latter to survive and sustain its business in the region without any protective strategies.

In fact, other competing countries like India, Pakistan and Vietnam have also provided additional incentives to their industries for nullifying driving out the effects of rising cost of production.

Although, Bangladesh did dole out Tk 7000 million last fiscal as cash incentives on exports of RMG products, greater support is required to give a lift to the sector. Government has plans to disburse Tk12,700 million as incentive in this fiscal which will include arrears for RMG exports.

A survey of the past six years shows that cash incentives for Bangladesh garment exports have followed a down trend, reducing from 25 percent to only 5 percent currently. To add to this there have been a host of problems faced by the industry. For instance, cost of production increased by around 15 percent last year but due to intense competition, producers failed to pass on this hike to the consumers.

On the other hand, the overall output of the RMG sector has also entered a sluggish phase due to shortage of skilled labor and frequent outages of power and gas. Besides, while domestic exporters pay upto 20 percent interest rates for bank loans, their Chinese counterparts have to pay only 3 percent. Moreover, delay in making timely export deliveries also stands as one of the major hurdle in the way.

Keeping all of the above in mind, it is difficult to see how Bangladeshi exporters would secure a thriving business unless the Government lends its support by means of incentives and subsidiaries.

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