Cash incentives for export competitiveness

Export subsidy or cash incentive is one the main supports given to the exporters to encourage or help them become competitive in export markets. The government facilitates exporters by providing service subsidy and cash subsidy.  Services are to facilitate exporters to sustain competition which include availability of all related logistics, research, information, infrastructural support etc. Basically, it is an indirect mechanism of support. On the other hand, cash subsidy can be direct or indirect. Direct subsidy is in the form of support through cash incentives, while subsidies in the form of duty draw back, bonded ware house facilities and tax benefits assume the form of indirect support.

In the FY 2014-15, the government provided BDT 35billion in the form of cash incentive to 14 export items, which rose to BDT 45bn for 27 export items in the FY 2017-18. The government is aiming to continue this incentive to 35 export items in 2018-19 as per a recent circular published by the Bangladesh Bank. 

Cash incentives are provided following clearly spelt out policies and conditionalities but there is no impact analysis about the real contribution of this support for enhancing export competitiveness and diversification. Research and study, information analysis, compliance requirement, quality assurance and running an effluent treatment plant for environmental support are not recognised to qualify for financial support.

The government mostly encourages non-traditional export to new markets where initial risk is believed to be high. In the recent Bangladesh Bank circular, it has been noticed that some products which are not even tested so far in the international markets are also included in the list. For example, razor and blades will enjoy 10 per cent cash incentive but value addition would need to be at least 40 per cent. Similarly, manufacturing motor cycle other than in the EPZ and EZ will be entitled to 10 per cent cash subsidy in 2018-19 fiscal year. Export incentive was also announced for export of photovoltaic module in the present fiscal at the rate of 10 per cent which will also not be applicable for those producing at EPZ or EZ. Some products are included afresh, and some have got extension, while for some products cash incentive has been reduced. But in all cases, these benefits will be enjoyed under certain conditions and specific rules and regulations while those enjoying bonded ware house facilities, duty draw back will not be able to enjoy these benefits, with the only exception of RMG, which is enjoying bonded ware house and other facilities while cash incentives are also allowed for exporting to new markets.

After analysing the export subsidy/cash incentives and export earnings of the selected export items from FY 2014-15 to 2017-18, it has been found that export of jute goods, furniture and agricultural products and processed agro products experienced an upward trend in exporting during the period. Also, leather goods, light engineering products and ship manufacturing demonstrated some progress, but in   FY 2017-18, their export earnings fell sharply. Export earnings of frozen shrimp and other fishes have had an overall declining trend since FY 2014-15 through 2017-18, though 2-10 per cent support as export subsidy/cash incentives was in place.

This shows that cash incentive does not always facilitate exports. There are many externalities that often come in the way of exporting. So, in order to sustain export growth, external factors must be targeted and addressed carefully. The government may take initiative to find out the reason behind the fall of export earnings of the aforementioned sectors. Cost-benefit analysis before providing cash incentive to a specific sector can be an added criterion. Input-output measurement needs to be analysed to select an export item for cash incentive.

The value addition criterion to avail cash incentive for new industrial products at 30-40 per cent is included in the Export Policy 2015-18, but in respect of  established/existing export items, it is  not specified. A rational criterion for value addition needs to be developed.

It has been found that except for two-five products, the tax structure of the rest of the export items eligible for cash incentives is 25-100 per cent. Local value addition of the imported products is 30 per cent. The net gain from the export of products will be very low if the government provides 10-15 per cent cash incentive to these export items. Thus fixing the range of cash incentives also invites detailed study to provide practical benefits to the exporters.

Presently, some trade associations certify their members to qualify for cash incentives. Bangladesh Bank and NBR  maintains information from "True Single Source" to ensure the authenticity of  bill of lading and proceeds realisation certificate and other related export documents to allow  cash incentive. Export firms which are members of such Associations get the certificate from EPB within 2/3 hours. But those that are not members find it difficult and sometimes they reportedly resort to misdeclaration. There is thus the need to streamline the process.

In the post-graduation stage as a developing country by the year 2024, Bangladesh's exports will be more exposed to competition, especially in the absence of cash incentives by the government. Till that time, the government should rationalise its cash support scheme for exporters so that by availing the state benefit, export products can have access to overseas markets in a desired manner.

Ferdaus Ara Begum is Chief Executive Officer of Business Initiative Leading

Development (BUILD).

[email protected]