'Your order has been cancelled': The Coronavirus impact on the RMG sector
The economic impacts of the COVID-19 pandemic is now being witnessed at all levels and the irrevocable financial damage, which may be considered secondary to matters of health and safety, in the near future may prove just as detrimental. The UN estimates the outbreak of this deadly virus could at least cost a trillion dollars and could slowdown the global economy to under 2.0 per cent this year. Bangladesh will also have to share a sizeable part of this loss. As we estimate the percentage of the global loss that we will have to bear, the government should identify the particular sectors that will be affected the most.
When we talk about Bangladesh's association in the world of global business, the first thing that comes to our minds is our ready-made garments (RMG) industry, which is by far the biggest export-earning sector - contributing over 84 per cent to the country's annual export. Evidently this sector has started to witness its share of loss due to the virus outbreak globally. As of last week, 69 member companies of the Bangladesh Garments Manufacturers and Exporters Association (BGMEA) have faced order cancellation amounting to $93 million and up to $7.38 million work orders have been suspended by the top international clothing retailers and brands. As a result, industry insiders are expecting further cancellation and slashing of work orders in the foreseeable future as the world grapples with escalating numbers of infected cases and mortality rates due to the fatal virus.
After China, as Europe has become the new epicentre of the virus outbreak together with surging numbers of infected cases in the US, Bangladesh's RMG sector is now exposed to a much bigger threat since the European Union (EU) and the US are the country's biggest trading partners of textiles and apparels. Due to the rapid outbreak of this deadly virus, governments of the affected nations were forced to take extreme precautionary measures ranging from the introduction of self-isolation to complete lockdown of cities. As a result, consumer spending has plummeted substantially and local stores and malls were forced to shut down, prompting international fashion retailers and apparel brands to cancel and axe their order volumes.
Unfortunately, the cancellation or slashing of orders does not only stop with an immediate impact on the profitability and earnings of the local manufacturers, this could also give rise to devastating economic consequences. Firstly, cancellation of current orders means a loss of resources with an imminent threat to the RMG backward linkage industries. These orders, which were placed by the international clothing retailers and buyers some 3-6 months back, are already produced and made ready for shipment by the local manufactures. Manufacturers have already incurred costs and remain indebted to all other suppliers from whom they have sourced the raw materials. Now provided that these orders are getting cancelled, how and who will pay back these suppliers of raw materials? Essentially this will trigger an alarming situation in the RMG sector together with its backward linkage industries. Secondly, over four million people are employed in this sector and therefore cancellation of orders could potentially create an obstruction in their scheduled wages and in extreme cases may even lead to the termination from their services, should the firm chooses to shut down due to insufficient orders. Learning from past experiences, situations like these could trigger labour unrest which has disastrous economic consequences. Thirdly, there is a threat to the existence of small and medium-sized companies in this industry during this situation. As buyers are already cancelling orders amounting to millions of dollars, this dire state has the potential to persist for a considerable length of time; experts have suggested the economic aftermath of this virus outbreak could at least last a year. As a result, with insufficient volumes of orders, it is highly likely that small and medium-sized firms will be forced to shut down due to the failure of recovering the costs of business.
It is high time the government stepped in before the situation worsens further. Policymakers should sit down with industry stakeholders and device policies that could effectively safeguard the RMG sector. Governments around the world are proposing trillion-dollar stimulus packages for their economies to help fight the coronavirus epidemic. Certainly, the RMG industry, which is the country's major earning sector, is qualified to get a place in the government's top priority list at this time of great peril. Industry insiders have proposed solutions such as support from disaster assistance fund, credit guarantee schemes from the central bank to encourage commercial banks' continued support and amendment in the rules of the back-to-back letters of credit (LCs) to combat the current situation.
Sifat Islam Ishty is Senior Lecturer in the Department of Economics and Social Sciences At Brac University