Slashing incentive rates for export

The recent government decision to slash cash incentive rates for over forty export products might raise concerns, especially in the context of the country's less-than-ideal export performance this year. The central bank this week announced fresh cash incentives for 43 export products for the remaining six months of this fiscal. The move came in the form of a revision of the earlier decision in August 2023 setting the rates of incentive to apply to the products for the entire fiscal (FY 23-24).

The rationale behind continuing with cash incentives-the other name for cash subsidy--has been debated for some time, with some arguing that it doesn't significantly boost exports, although conclusive evidence is lacking due to the absence of comprehensive studies. Nevertheless, it is believed that cash incentives did help certain products, especially new and non-traditional products, in accessing export markets. However, according to WTO rules governing international trade, such incentives are seen as hindering free market principles, and thus, the WTO prohibits this practice for all but the least developed countries (LDCs). While Bangladesh, as an LDC, is exempt from this restriction, it will be obligated to cease offering cash incentives for exports upon its anticipated graduation from the LDC status by the year 2026. Therefore, reducing incentive rates well in advance of this transition aligns with the evolving situation. Newspaper reports, quoting the central bank, have said that the move is part of the gradual phasing out of the incentives which by 2026-the year of the country's graduation-would be prohibitive. That is to say, instead of withdrawing the facility abruptly, the central bank has opted for phased reduction potentially providing exporters with some time to adjust. This approach appears pragmatic.

A closer look at the revised scheme indicates that the reduced rates are not overly severe and should not cause significant shockwaves for exports. The number-one export product, readymade garment (RMG) will get 0.50 per cent cash incentive for the next six months against 1.0 per cent earlier. For product and market diversification, RMG exporters used to get a 4.0 per cent incentive, which has now come down to 3.0 per cent. Other important items which will face cut on rates between 2.0 to 5.0 per cent include agricultural products, jute products, light engineering and plastic. The reduction of the rate in respect of active pharmaceutical ingredients from 20 per cent to 10 per cent appears to be rather steep.

While the country's anticipated graduation from the LDC group to the developing country status by 2026 is undoubtedly commendable, it brings forth a host of changes, notably the loss of certain privileges and preferential treatments enjoyed as an LDC. The cessation of cash incentives is one such, and hence preparing for the future without such government support is indeed prudent and in line with competitive market dynamics.