Bangladesh may lose huge duty benefits

Bangladesh runs the risk of losing duty benefits on its annual exports of more than $3 billion to the UK, as Britons voted to leave the European Union sending shocks across the world in a stunning turn of events.

Apart from exports to the UK, the third largest export destination for Bangladesh, remittance income from the European country may come under strain as an impact of its departure from the EU.

In the long run, Bangladesh's economy might take a hit if the current uncertainty in the global economy persists further.

“It is bad news for the global economy. It is not good news for Bangladesh at all, as we are dependent on the global economy, and the UK is a major market for us,” said Zahid Hussain, lead economist of the World Bank in Dhaka.

There had already been uncertainty in the global economy and Brexit exacerbated it further, he said.

According to Zahid, the devaluation of the pound may have an immediate impact on Bangladesh's exports and remittance.

He, however, said the devaluation resulted from an overreaction which would cool down soon.

The UK is Bangladesh's third largest export destination after the US and Germany, and the second largest in Europe.

Bangladesh exported goods worth $3.23 billion to the UK in 2014-15, registering a 21.28 percent growth from the previous year, according to the Export Promotion Bureau. Garments make up nearly 90 percent of the export figure.

As Britain chose to leave the EU, economists and exporters said it would be a major challenge for Bangladesh to retain duty-free trade privilege of its goods to the UK.

Because of Brexit, the whole EU as well as the UK would face an economic crisis. As a result, people would buy less and the exporting countries would feel the pinch, said Faruque Hassan, vice president of Bangladesh Garment Manufacturers and Exporters Association.

He said once the UK leaves the EU, it would no longer depend on the EU for crucial decisions. In such a case, the trade privilege may be reduced, as there would be no partner to oppose the decisions.

The UK is not only an export destination. Many international companies are headquartered there. “This country is very important to us. The UK matters greatly in the future plan for expansion of our export basket in terms of value and volume,” added Hassan.

Among western economies, the UK is the second biggest source of remittance for Bangladesh after the US. Migrant workers living in the UK send $1 billion in remittance every year, contributing greatly to Bangladesh's remittance income of more than $15 billion.

Because of the plunge in the pound, migrant workers and non-resident Bangladeshis may postpone sending money back home until the currency revives, said Zahid.

The plunge may hit Bangladeshi exporters, as purchase of goods or services by the UK from other countries will be more expensive.

Yesterday, the pound fell dramatically as the referendum outcome emerged. At one stage, it hit $1.3236, a fall of more than 10 percent and a low not seen since 1985.

Zahid said Brexit could be contagious and provoke other EU countries to leave the bloc. And if that happened, Europe would be weakened further.

Brexit could spur a “tariff war” among countries as they may seek to raise customs and other duties to protect their domestic industries. If all countries impose import tariffs, the global trade would squeeze. “If the global trade squeezes, it will affect our economy,” he said.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said that as a way forward, the Bangladesh government should start lobbying with the British government to retain the duty benefit Bangladesh enjoys from the EU.

He said Bangladesh's export to the UK would continue to grow because of the big number of non-resident Bangladeshis. “But we have to ensure duty-free market access.”

His comments were backed by Zahid of the World Bank.

Exporters said if the UK continues to give Bangladesh duty-free benefit even after its exit from the EU, Bangladesh wouldn't face any challenge in terms of export.

Being a least developed country, Bangladesh has been enjoying the zero-duty benefit since 1971 under Everything But Arms scheme of the EU, a trade bloc of 28 European nations.

The EU is the largest export trade bloc for Bangladesh.

Bangladesh was able to reach its current position of the second largest apparel exporter worldwide due to EU's generous trade benefits since 1971.

Bangladesh now enjoys a 12.5 percent duty benefit, which means Bangladeshi exporters don't have to pay any duty on export to this trade bloc.

“But if the UK discontinues the benefit, Bangladesh will lose its competitiveness to other competitors,” said Ahsan.

The UK is a good destination not only for apparel, but also for fresh vegetables and agro-products because of the significant number of Bangladeshis residing in the UK.

Export of jackfruits and mangoes has risen recently. Other items high in demand are carrot, tomato, potato, eggplant, spinach, cauliflower, papaya, pumpkin, bottle gourd, cabbage, coriander leaf, okra, cucumber, bitter gourd, bean, jute leaf, drumstick, radish, fish and meat. Local companies also export agro-processed food to the UK.

Bangladesh exports fruits and vegetables worth more than Tk 400 crore to the UK a year. Nearly 40 percent of the country's total export of vegetables, fruits and allied products a year is destined for the UK.

Garment shipments to the EU increased by 4.11 percent year-on-year to $15.37 billion last fiscal year, according to the EPB.

At present, the 28-nation economic union accounts for 60.28 percent of the country's garment exports a year.

In Europe, Germany was the prime destination, as in previous years, accounting for $4.33 billion of the $15.37 billion export receipts.

The UK came in next, importing garment items worth $2.9 billion from Bangladesh.

According to a note by London-based research firm Capital Economics, Brexit would cause at most a GDP drop of 0.2 percent across Asia.

The finding is based on a worst-case scenario estimate by London-based think tank National Institute of Economic and Social Research, which said Brexit would reduce British imports by 25 percent worldwide within two years.

Exports to the UK presently account for only 0.7 percent of Asian countries' GDP, said Capital Economics.

According to experts, it will take the UK at least two years -- if not more -- to sort out the historic exit from the 28-country bloc.