Exports are sales beyond borders, and cost is a critical factor in export trade. Export promotion is not easy. Exporters continue to suffer from a lack of market diversification, while policymakers widely talk about diversification of products and markets. “Experts” frequently suggest diversification of products and markets without focusing on the obstacles involved.
Our success story, RMG exports, depends on input materials from external sources. Thus, imports are initially required, which in turn need financing. Policy support in this regard was extended by the government through customs bond licences, under which imports are executed without payment of duties, and letters of credit (LCs). Back-to-back LCs were allowed for input imports on deferred payment terms. As a result, payment for imports can be settled out of repatriated export proceeds.
Unfortunately, Bangladesh has one of the highest import tax regimes in the world, which is one of the reasons for the increased cost of goods and services in the export market. On the other hand, the RMG sector evolved under a special “free trade enclave” and enjoyed protection from the high tariff regime through the institution of Special Bonded Warehouses (SBW), ensuring duty-free imported inputs and facilitation through back-to-back LCs. It also enjoys a special credit programme of 180 days to make payment of back-to-back LCs under the special foreign currency credit programme of the central bank. The sector enjoys cash subsidies and the lowest possible income tax compared to other sectors, along with priority in port clearance and other administrative processes.
Currently, the NBR is extending special bond facilities for duty-free import of raw materials to the 100 per cent export-oriented RMG sector. The NBR also allows 80 per cent export and 20 per cent local sales to all industrial sectors in free economic zones. In addition, the NBR provides home consumption bond facilities. This bond extends to industries selling their products in the local market. It facilitates the import of raw materials with payment of customs and other duties at the time of delivery of finished products from the warehouse to the local market. This facility has been granted to a few influential and privileged factories.
For export-oriented industries, these two major facilities—customs bonds and back-to-back LCs—would provide significant support for the promotion of export diversification. Without bond facilities, revenue regulations such as advance tax, duties and value added tax apply to the procurement of inputs. As per regulations, local procurement against inland back-to-back LCs is subject to the availability of customs bond licences. Otherwise, local deliveries of raw materials attract VAT and other taxes.
Bangladesh now has various industries selling products in the local market, challenging overseas suppliers and gaining strength to enter export markets. Some products are exported without bond facilities and back-to-back LCs. This means these exporters add value while also paying different taxes, unlike other exporters who enjoy tax-free import of raw materials. These industries would perform better with the support of bonds and back-to-back LCs, and some new products would become competitive in overseas markets.
Traditionally, bonded warehouse benefits have been primarily available to apparel exporters. Partial exporters, who produce for both the domestic and export markets, can utilise a partial bond licence to import duty-free raw materials specifically for export production. This can significantly lower production costs and make exports more competitive. By providing access to bonded warehouse facilities, the government can encourage diversification of Bangladesh’s export basket. For example, pharmaceutical industries have achieved tremendous development in the local market and have scope to expand into export markets. The government is already extending cash incentives for their exports.
A partial bond licence can be a crucial tool for export diversification in Bangladesh. By allowing manufacturers to import duty-free raw materials, it can reduce production costs and increase competitiveness in the international market. This benefits not only 100 per cent export-oriented businesses but also partial exporters, who could use such licences to diversify their product offerings. A transition from the local market to the export market requires a gradual shift with active support through bonds and back-to-back LCs.
The Bangladesh Trade and Tariff Commission has recommended offering partial exporters duty-free raw material import facilities against a 100 per cent bank guarantee as an alternative to duty drawback. This would further streamline the process and ensure that bonded warehouse benefits are accessible to a wider range of exporters. The Commission further recommends that Bangladesh has around 750 exportable products, of which 659 are from partially export-oriented industries in the iron and steel, chemical, electronics and electrical, and furniture sectors. These industries need to import 80 to 90 per cent of their raw materials, paying duties ranging from 25 per cent to 65 per cent, while their local value addition rate is 35 to 70 per cent.
The Import Policy Order states that partial exports are to be facilitated through the release of inputs against bank guarantees. It indicates that industries operating in both domestic and international markets will be excluded from bond facilities. Instead, goods are to be imported against bank guarantees.
The existing policy of cash subsidies and the so-called duty drawback is not sufficient to make export products competitive. Most importantly, the Export Policy also advocates partial bond facilities in clause 7.11.4, the Import Policy Order in clause 21(8), and the National Industrial Policy 2022 in clause 12.2 recommends partial bond facilities for partially export-oriented industries. The Customs Act 2023 also provides for a similar bonded facility for partial exporters. There is no legal obstacle to issuing partial bonds. Unfortunately, these policies and orders have not yet been implemented to facilitate export diversification.
