What is driving the robust growth of RMG exports from Bangladesh?
It is indeed encouraging to note that Bangladesh’s export sector has rebounded in recent months and export revenue (equivalent to approximately USD 24.69 billion) recorded very impressive growth in the first half (July- December) of the 2021-22 financial year. year. Exports registered an increase of 28.4% during this period compared to the corresponding period of FY 2020-21 (when total exports amounted to approximately USD 19.2 billion). For comparison, export growth in the first half of FY2020-21 compared to the corresponding period of FY2019-20 was negative (-)0.4%. While the low base effect of FY 2020-21 should be kept in mind, the solid export performance of FY 2021-22 is undoubtedly very encouraging.
It should also be noted that exports have picked up and seen sustained momentum, especially in the most recent months (the period September-December 2021). The growth rate in the first half of the 2021-22 financial year exceeded the strategic growth objective set for the financial year by more than 15.0%.
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As expected, the strong export growth was, for the most part, rooted in the most impressive revenue growth in the country’s export-oriented ready-to-wear (RMG) sector. Apparel production exports increased by 28.0% in the July-December period of FY2021-22 compared to the corresponding period of FY2020-21. It should also be noted that the growth of non-RMG export revenue was also an impressive 30.1% during this period, which was indeed higher than the growth of RMG export revenue.
The RMG sector, in line with past trends, continued to dominate Bangladesh’s export structure in the early months of FY 2021-22. Indeed, RMG (with exports of USD 19.90 billion) accounted for approximately 80.6% of total export revenue in the first half of FY 2021-22. In line with trends, more than three-quarters of additional export earnings have been generated by this sector, signaling its continued dominance in the country’s export basket and the growing concentration of exports in favor of the garment sector in recent years. years.
A breakdown of RMG exports shows that the growth rate of knitted RMG (with its relatively higher domestic value added of around 55-60% of gross export earnings) was higher than that of woven RMG (with a relatively lower national added value of around 35-40 percent). Growth in hosiery exports was 30.9%, compared to 24.5% for woven-RMG. This is a good sign pointing to higher growth in RMG’s net export revenue, as opposed to RMG’s gross export growth, supported by higher domestic revenue retention of knitwear exports relative to that of woven garments.
However, RMG’s robust export growth hides a worrying underlying message: RMG’s export revenue growth comes from the combined contributions of the “price effect” and the “volume effect”. It is important to dive deep to understand what is driving the growth of Bangladeshi garment exports – is it a price effect or is it a volume effect, or is it a mixture of both factors and, if so , what is the relative contribution of these two factors. to export growth.
An analysis of the contributing factors indicates that, in the US market, the growth in apparel export revenue (USD 3.16 billion) in the July-November period of FY2021-22 of around 30, 6%, compared to the first five months of fiscal 2020 -21 – was mainly driven by volume growth. Indeed, the volume of exports (in dozens) increased by 26.0% over the corresponding period. By contrast, the price increase for clothing (per dozen) was only about 2.9%. In the case of woven-RMG – the predominant export to the US market, accounting for approximately 61.0% of total exports – export earnings increased by 20.8%. The increase in volume was 17.4%, while the increase in price (per dozen) was only about 3.7%. In the case of knitting-RMG, the trend is the same: export earnings increased by 49.1%, the volume increasing by 32.0% and the average price by 10.0%.
The emerging scenario of volume-led export growth is also supported by our export performance in the EU market, Bangladesh’s most important market for RMG. (Exports amounted to USD 6.43 billion during the period July-November 2021) Here, the average growth in export earnings is mainly explained by the increase in volume rather than that of prices. In the first five months of the 2021-22 financial year (July-November 2021, compared to the corresponding months of 2020), export earnings from the EU market increased by 18.1%, in the context an increase in volume (in kg) of 15.3%. against a price increase (per kg) of an insignificant 2.4 percent. Export growth of RMG knitwear, which accounted for 67.0% of total RMG exports to the EU, was 23.6%, with volume and price (per kg) growth of 18.3% respectively. and 4.4%. In the case of woven RMG, export growth was 8.3%, with volume increasing by 8.7% and price (per kg) actually falling by 0.4%.
Of note, these two markets (US and EU) account for more than 70.0% of global RMG exports from Bangladesh.
The above analysis shows that in the case of both markets, the volume-driven growth trend is more important for woven RMG than for knitted RMG. In the case of unit price, however, unit price growth was higher for knitted RMG than for woven RMG. It should be concluded that when the domestic value added is higher (as in the case of knitting-RMG), the competitive position and bargaining power of exporters tends to be stronger.
It is relevant to recall here that the price of cotton on the world market has increased considerably in recent times. This was, on average, USD 2.5 (per kg) over the July-December 2021 period, compared to an average of USD 1.6 (per kg) over the corresponding period of 2020. As expected, This sharp 50.3% rise in cotton prices also had a knock-on effect in the form of higher yarn and fabric prices.
The above results for trends in export revenue, export volume and average unit price indicate that brands and buyers have only marginally absorbed the rising cost of producing garments (due to rising the price of cotton, the key input —as well as yarns and fabrics). The burden of the resulting increase in production costs was transferred, and had to be borne, primarily and almost exclusively by RMG contractors in Bangladesh. To what extent does this reflect the weak bargaining power of Bangladeshi garment exporters, and/or to what extent does this stem from prices being negotiated with brands and buyers earlier (before key input prices rose ), needs further investigation.
However, the fact remains that the robust growth in export earnings was mainly driven by volumes and not by prices. This was likely to have a number of implications, including lower profit margins for contractors. If input prices have increased at such a high rate and finished product prices have increased only insignificantly, it would mean that the profit margins of RMG contractors in Bangladesh have decreased quite significantly. Profit is made primarily on scale and volume, not price. It also likely has implications for workers who must meet higher production targets.
So, although Bangladesh’s apparel sector has recently consolidated and strengthened its competitive position in the global market, this has mainly been achieved through higher production volume, not higher prices. Indeed, the higher number of orders currently placed in Bangladesh by brands and buyers is underpinned, and also explained, by this emerging reality. This also has important implications for future wage negotiations and wage setting as well as for the capacity of entrepreneurs in this regard.
The above analysis once again reveals the predominant pricing power of brands and buyers in the buyer-driven value chain of the global apparel market. Given this, it is estimated that entrepreneurs in Bangladesh will need to plan strategically to enter the advanced segment of the apparel value chain, developing their own brands and investing in retail in key markets across India. export. This will reduce reliance on various middlemen and help them negotiate better prices, enhance their competitiveness, increase their profit margins, and increase their ability to pay workers better wages.
It will also increase the domestic value retention component (net exports) in the gross earnings of apparel exports. The exporter associations, BGMEA and BKMEA, should also think strategically about how to strengthen the bargaining power of domestic exporters vis-à-vis big brands and buyers. Policymakers in Bangladesh should start thinking about incentivizing garment exporters and entrepreneurs who want to venture into the forward link segment of the RMG global value chain.
Prof Mustafizur Rahman is Distinguished Fellow at the Center for Policy Dialogue (CPD), Dhaka.