What is driving the robust growth of Bangladesh’s RMG exports?

It is indeed encouraging to note that the export sector of Bangladesh has rebounded in recent months, and earnings from exports (equivalent to about USD 24.69 billion) have registered highly impressive growth during the first half (July-December) of the 2021-22 fiscal year. Exports have posted an increase of 28.4 percent in this period compared to the corresponding period of FY2020-21 (when total export stood at about USD 19.2 billion). To compare, export growth in the first half of FY2020-21 over the corresponding period of FY2019-20 had been a negative (-) 0.4 percent. While the low base effect of FY2020-21 ought to be kept in mind, the robust export performance in FY2021-22 is no doubt very encouraging.

Also, to note, exports have picked up and experienced sustained momentum particularly during the more recent months (the September-December period of 2021). The growth rate in the first half of FY2021-22 has indeed surpassed the strategic growth target set for the fiscal year by more than 15.0 percent. 

As expected, the high growth of exports was, for the most part, anchored in the most-impressive growth of earnings by the export-oriented ready-made garments (RMG) sector of the country. Export of apparel production rose by 28.0 percent during the July-December period of FY2021-22 compared to the corresponding period of FY2020-21. It is also worth noting that growth of non-RMG export earnings was also an impressive 30.1 percent in this period, which was indeed higher than growth of earnings from the export of RMG.

The RMG sector, in keeping with past trends, has continued to dominate Bangladesh's export structure in the early months of FY2021-22. Indeed, RMG (with export of USD 19.90 billion) accounted for about 80.6 percent of total export earnings in the first half of FY2021-22. In line with the trends, more than three-fourths of the incremental export earnings was generated on account of this sector, signalling the continuation of its dominance in the country's export basket and the rising export concentration favouring the apparel sector in recent years.

A breakdown of RMG exports shows that the growth rate of knit-RMG (with its relatively higher domestic value addition of about 55-60 percent of gross export earnings) was higher compared to the woven-RMG (with relatively lower domestic value addition of about 35-40 percent). Export growth of knitwear was 30.9 percent, as against 24.5 percent for the woven-RMG. This is a good sign indicating higher growth of net export earnings from the RMG sector, as opposed to the growth of gross RMG exports, underwritten by higher domestic retention of earnings from exports of knitwear compared to that of woven wear.

The robust growth of RMG exports, however, conceals a disquieting underlying message: that the growth of RMG export earnings originates from the combined contributions of "price effect" and "volume effect". It is important to dive deep to understand what is driving the export growth of Bangladeshi apparels—is it price effect or is it volume effect, or is it a blend of both factors and, if it is, what is the relative contribution of these two to the export growth.

An analysis of the contributing factors indicates that, in the US market, the growth in export earnings from apparels (USD 3.16 billion) during the July-November period of FY2021-22—by about 30.6 percent, compared to the first five months of FY2020-21—was mostly driven by growth of volume. Indeed, export volume (in dozen) rose by 26.0 percent over the corresponding period. By contrast, the rise in apparels price (per dozen) was by only about 2.9 percent. In case of the woven-RMG—the predominant export to the US market, accounting for about 61.0 percent of total exports—export earnings rose by 20.8 percent. The rise in volume was by 17.4 percent while the rise in (per dozen) price was by only about 3.7 percent. In case of knit-RMG, the trend is the same: export earnings rose by a significant 49.1 percent, with the volume rising by 32.0 percent and the average price by 10.0 percent.

The emerging scenario of volume-driven export growth is also corroborated by our export performance in the EU market, Bangladesh's most important market for RMG. (Export was USD 6.43 billion during the July-November period of 2021) Here, the average growth of export earnings was mostly accounted for by the rise in volume rather than price. In the first five months of FY2021-22 (July-November 2021, compared to the corresponding months of 2020), export earnings from the EU market rose by 18.1 percent, against the backdrop of a rise in volume (in kgs) of 15.3 percent as against a rise in price (per kg) of an insignificant 2.4 percent. The export growth of knit-RMG, which accounted for 67.0 percent of total RMG exports to the EU, was 23.6 percent, with the rise in volume and price (per kg) being 18.3 percent and 4.4 percent respectively. In case of woven-RMG, the export growth was 8.3 percent, with the volume rising by 8.7 percent and price (per kg) actually falling by 0.4 percent.

To note, these two markets (US and EU) account for more than 70.0 percent of the global RMG exports of Bangladesh.

The above analysis shows that in case of both markets, the trend of volume-driven growth is more prominent for the woven-RMG compared to the knit-RMG. In case of unit price, however, growth in per unit price was higher for knit-RMG compared to woven-RMG. It will be appropriate to draw the conclusion that where domestic value addition is higher (as in case of knit-RMG), the competitive position and bargaining power of exporters tend to be stronger.

It is pertinent to recall here that the price of cotton in the global market has increased considerably in recent times. This was, on average, USD 2.5 (per kg) in the July-December period of 2021 compared to the average of USD 1.6 (per kg) over the corresponding period of 2020. As would be expected, this sharp rise of 50.3 percent in cotton prices had a knock-on effect in the form of higher prices of yarn and fabrics as well.

The above results pertaining to the trends in export earnings, volume of export and average unit-price indicate that brands and buyers had only marginally absorbed the rise in the cost of apparel production (on account of the rise in price of cotton—the key input—as also of yarn and fabrics). The burden of the consequent increase in production costs was shifted to, and had to be borne by, primarily and almost exclusively Bangladesh's RMG entrepreneurs. To what extent this reflects the weak bargaining capacity of Bangladesh's exporters of apparels, and/or to what extent this originated from prices having been negotiated with the brands and buyers earlier (prior to the hike in prices of key inputs), needs to be investigated further.

However, the fact remains that the robust growth of export earnings was primarily volume-driven, not price-driven. This was likely to have a number of implications including falling profit margins for the entrepreneurs. If input prices have risen at such a high pace, and prices of finished items have risen only insignificantly, this would mean that the profit margins for Bangladesh's RMG entrepreneurs have come down quite significantly. Profit is being made primarily on scale and volume, not in prices. This is also likely having implications for workers who are having to meet higher production targets.

Thus, although Bangladesh's apparel sector in recent times has further consolidated and strengthened its competitive position in the global market, this has primarily been achieved through higher volume of production, not higher prices. Indeed, the higher amount of orders being currently placed in Bangladesh by brands and buyers is underpinned, and also explained, by this emergent reality. This also has important implications for future wage negotiations and wage fixation as well as the capacity of entrepreneurs in this connection.

The above analysis once again reveals the predominant power of brands and buyers in terms of price setting in the buyer-driven value chain of the global market for apparels. In view of this, it is reckoned that Bangladesh's entrepreneurs will need to plan strategically to get into the forward segment of the apparels value chain, through development of their own brands and investing in retail business in major export markets. This will reduce the dependence on various intermediate agents, and help them negotiate better price, enhance competitive strength, increase profit margins and raise capacity to pay better wages to the workers.

This will also increase domestic value retention component (net exports) in the gross earnings from exports of apparels. The exporters' associations, BGMEA and BKMEA, should also think strategically as to how to enhance the bargaining capacity of domestic exporters vis-à-vis major brands and buyers. Bangladesh's policymakers should start to think of incentivising exporters and entrepreneurs of apparels who want to venture into the forward linkage segment of the RMG global value chain.

Prof Mustafizur Rahman is Distinguished Fellow at the Centre for Policy Dialogue (CPD), Dhaka.