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Saturday, March 21, 2009

Bailing out Bangladeshi businesses

Abdullah A. Dewan writes

THE Bangladesh Garment Manufacturers and Exporters Association (BGMEA), the country's prime foreign currency earner, has made the following bailout proposals at a press conference on March 16.
• Rescheduling of 3 and 5yrs term loans to 7 and 10yrs term loans;
• Lowering interest rate from 15% to 7%;
• Withdrawing VAT from readymade garment (RMG) sector;
• Subsidizing diesel for RMG, like the farm sector;
• Cash pay-off to stay competitive.

Last Sunday, the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) proposed a Tk 6,000 crore rescue package for the export businesses. It included a Tk 3,300-3,500 crore bailout plan for the RMG exporters. The Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) demanded a 10% cash incentive for knitwear exporters.
The BGMEA chief Salam Murshedy asked for an additional Tk 10 against every dollar of 30% total export value. In addition, he urged the government to ask banks to reschedule BGMEA outstanding loans by at least 10 years and slash the bank interest rate to 7%.
Murshedy pleaded that these measures would help BGMEA members withstand the global recession-driven demand slack culminating in declining exports, which reached 17.58% in February. To justify the demand for bailout, Murshedy said that three major buyers of Bangladesh's RMG products, including UK-based Woolworth, went bankrupt recently. To promote exports in the present global downturn, BGMEA plans to promote RMG products in old markets and some potential export destinations. This seems to be the prudent approach to fight the recession-demand slack. FBCCI, BGMEA, and BKMEA's (the troika) plea for bailout money is no different from tax payers' subsidy to the RMG sector. The US and other governments have already started doing that through tax payers' part ownership of the businesses receiving bailout money until they stand on their own. (For example, 80% of AIG shares are owned by tax payers.) Asking banks to reschedule loan terms may endanger cash and income flow of the banking sector, putting healthy banks at risks of insolvency and requiring them to ask for bailout money later. That's a dangerous route to take. Besides, why should government persuade banks? It is the businesses' that need to make such a move.

Businesses should always discuss with their bank whether additional emergency funding is available. The medium and long-term plans should form part of any dialogue. Timely communication with the bank is important as bank managers and financiers who are aware of the problems are likely to come to their rescue. Following the US example, what the government can do is subsidize some portion of the interest if the banks are willing to lower the interest on existing loans for a limited time period. Since some of the foreign retail clients have gone bankrupt it won't be easy to achieve the previously targeted $14 billion goal of RMG exports. So, in the process, some of the weaker factories won't survive. Hence, proving them bailout money would be tantamount to knowingly buying the failing businesses with tax payers' money.

Reducing VAT is a possible option but that will be equivalent to subsidy because, to make up for the lost tax revenues, the government must resort to deficit financing. Subsidizing gas to the RMG sector is similar to reducing VAT. The worst proposal is "cash incentive," which literally means "print money and give it to us." However, the troika may ask the government to initiate guaranteed financial schemes to help viable businesses with provisional cash flow predicaments.
By any measure of economic rationality, the troika is asking for too much -- in essence, nothing is left out -- which can be interpreted as an attempt to run businesses with tax payers' financing. Just because these businesses earn foreign exchange do not make them any different from other businesses, which also generate domestic employment and income and contribute to GDP.
What about the expatriates who used to remit dollars and now are unemployed, and returned home empty handed and broken hearted? Why not some bailout money for them in the form of unemployment benefits?

In order for the government to inject bailout money or stimulus spending in infrastructure building, it must first take money out of the economy through new taxation or borrowing. Infusion of bailout money has a negative effect on the economy, and the worse if the recipient businesses fail to survive. The inflation created from deficit spending will hurt the poor consumers and the public servants living on fixed incomes. Any bailout money must be distributed in a transparent manner with proper accountability. The criterion must be the viability of the specific RMG factory concerned -- not who owns the factory. The global recession may be used as gambit by many powerful and well connected factory owners, including some lawmakers, to cash in their ailing business with tax payers money.

In the US, businesses and banks that received bailout money have squandered hundreds of millions in paying bonuses and partying in luxury resort hotels in the name of promoting businesses. Why would the business people in Bangladesh be any different?

Dr. Abdullah A. Dewan is Professor of Economics at Eastern Michigan University.

1 comment:

Anonymous said...

if this industry needs so much subsidiary to keep its competitive advantage, better it should think differently.