Reform and policy support for capital market By Abu Ahmed

Photo: Star ARCHIVE

Those who say that the Bangladesh capital market has already had enough reforms and also the policy support, they are mainly outsiders; they did not have any stake in the market directly. Their observations are based on the reforms the market has undergone in the last one and a half decades and the policy support the government rendered to it from time to time. But they forget to recall that the Bangladesh capital market started its journey in 1976 from a condition of almost non-existence in an economy dominated by the state sector. To position the Bangladesh economy in a framework of market economy since the 1980's was a daunting task. As the state sector relaxed its grip on the economy, the capital market also started moving. More and more companies went public and more and more investors showed interest to invest in the stocks of listed companies.
Initially, there was no strong regulator for the market - it was the Controller of Capital Issue (CCI), normally a Joint Secretary of the government, who acted as the regulator. The Dhaka Stock Exchange, which was founded in 1956, remained dysfunctional between the period between 1971 and 1976. The Exchange was a brokers-owned and brokers-managed institution and failed to convince the policy makers the need for a vibrant capital market in the economy and the need for giving policy support for its growth and expansion. Of the 250 brokers or exchange members, as per the memorandum of the exchange, only a handful was active. They used to assemble on the exchange floor at noon and finish the trading in stocks within one hour. Only nine or so companies were able to remain listed with the exchange when it started its new journey in 1976, the other companies that were with the exchange's list since the days of Pakistan were nationalised by the Bangladesh government in 1972.

Illustration: Internet

But as time passed and the economy embarked on a road to a market economy the policy makers understood the need for a capital market for the supply of long term capital to the upcoming businesses. Little by little, the policy support started coming, mostly through yearly Finance Bills, making provisions for tax relief for the companies that went public with their share sale and for the investors who invested in the listed companies' stocks. The print media – the only media available then to reach the public, initially showed a cold shoulder to the needs of the market but in later years especially since the 1990's, started covering the issues relating to it. The market saw ups and downs including booms and busts in between the periods.
But the booms and busts were not the result of normal interplay of market forces, but rather were the results of a massive manipulation of stock prices by the scam masters. The stock market saw the first of its stock scams in 1996. The scammasters manipulated the prices of stocks to such a height that ordinary investors got the idea that investing in stocks would only bring profit. The inevitable happened. The market crashed and with the crash thousands of investors were rendered pauper. The stock market scandal of 1996 brought the policy makers on the dock. They were questioned time and again by the investors and public at large for their ineptness in protecting the interest of the investing public. Though a full-fledged security regulator, named SEC, was set up in 1993, it was found to be incompetentant; sometimes looking the other way when scams were taking place.
Investors after being robbed of their money left the market in large numbers and others became inactive. The stock market scam of 1996 opened the eyes and shook the conscious of the policy makers who thereafter started thinking seriously of bringing reforms in the market. In 1998,the Asian Development Bank (ADB) came up with a credit offer to the government. They madethe offer conditional on a package of reforms to be brought in the market and also in the DSE. The reforms included automation in the stocks trading system, separation of trading side from the management side of the DSE, and some other issues relating to the separation of powers in case of conflict of interest, regulations regarding mutual funds, and about the pricing of IPOs. Those reforms both in the regulatory framework of the then SEC (now BSEC) and the operational aspect of the DSE were brought about to restore confidence of the investing public who either had  left the market or remained inactive after being beaten by the scam masters in 1996. At one stage, between the periodof 1997-1999, the stock prices came down to such a low in the face of massive exodus of investors that anybody could purchase stocks by more than two to three times of what he could have purchased in 1996. It took three to four more years to lure back investors to the market. But many of the old investors of 1996 never came back. The stock market created a kind of fear in their psychology. By 2002, the market to an extent regained a semblance of normality and thereafterit moved on forward. But the market moved forward at a faster rate than many other normal stock markets of the world that put it again in a condition of an impending disaster. By 2009, stock prices were built up to such a height that it was in no way sustainable. By October/November 2010, the inevitable happened - the market crashed under its own burden, the stock prices fell up to 70% from their peak prices within a month. The giddy rise of price in 2010 was also the act of manipulation by the scammasters, this time only some new scam masters were added with the old ones of 1996. But style and nature of the scams were the same - robbing the pockets of the innocent retail investors by pushing the stock prices sky high. Small investors in thousands took to the street protesting the scam but nobody cared about their protest. The only thing that was done was the forming of a committee by the government to enquire about how the stock scam happened and what could be done as remedies. The Enquiry Committee unmasked the scammasters by describing how they lay the net of robbing and in turn deplored the incompetence and inaction of the BSEC. But things stopped there. The retail investors who were robbed of their capital got neither compensation nor any other kind of justice.
The issue of the stock market and the investment in it became a scornful matter to the government. They wanted put the issues relating to the stock market under the bed in a resting condition if they could.
However, the government was too eager to availof any credit line from the multinational donor agencies, be it in the name of reforms in the capital market development or otherwise. After the painful stock scam of 2010, the ADB again came forward to help Bangladesh in carrying out the second generation or the remaining reforms in the market. Now the market is undergoing a reforms program directed by the ADB. One much desired and sought after reform is the improvement in the financial reporting carried out by the auditors. The government, though late, promised to get an act passed called the Financial Reporting Act (FRA). Under the Act, a Financial Reporting Council (FRC) will be set up and FRC will be the regulatory watchdog in the auditing industry. But the government's intention was met with opposition from the auditors lobby whose members, till now, went scot free even if they committed serious crimes in the name of auditing.

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The Act relating to mergers, acquisitions and takeovers also needs to be changed. The demutualisation of the exchanges till now is a half done work. The stock market needs new products like bonds, sukuk (the Islamic bond), futures and options. A small scale commodity trading also warrants a try. New financial products and regulation relating to their trading should go hand and hand. A continuous policy support will put the Bangladesh capital market in its right place in the economy.

The author is a Professor of Economics University of Dhaka, Email: abuahmedecon@yahoo.com

Published: 12:00 am Tuesday, March 10, 2015

In search of strategies for export diversification By Dr. Khondaker G Moazzem and Mehrun Nesa

Source: Star ARCHIVE

The export structure of Bangladesh looks like a 'tadpole'- an early phase of a frog's life cycle where a big upper part of the body is linked with a shallow middle part and a long tail in the lower part. A limited number of 'dynamic' export products at the upper part dominate Bangladesh's export basket. This is followed by a list of 'new' products at the middle which have consistently maintained high growth, and further below a long list of 'surviving' products which have struggled to survive due to fluctuations in export growth. Unfortunately, there has been no sign of change in this 'tadpole' shape of the export structure over the years  into a 'young frog' with a more balanced distribution of new and surviving export products. This high concentration in exports put policy makers under pressure towards achieving export diversification in order to ensure a broader basis fot the export-led growth of the country.
Exporters' ability to export different kinds of products consistently over a long period has been considered as an indicator for success in terms of export diversification. According to Rauch and Watson (2003), trade relationship between exporters (suppliers) and buyers (retailers) evolved in three stages- search, investment (deepening) and rematch (abandon current relationship). Structurally, dynamic products pass these stages and become the country's main source of export earnings. A limited number of new products are able to pass the challenges in the initial stage and enter the stage of deepening in trade relation. But a large number of surviving products are unable to pass the initial stage and struggle to ensure their survival in the international market. According to UNCTAD (2013), 41 percent of LDC products could not survive over a year. The survival rate for Bangladesh is the highest among the LDCs - only 29 percent of Bangladeshi products could not survive a year while the average period for survival is 2.4 years.
The export structure of Bangladesh
Bangladesh exports about 2,000 different types of products out of 6,049 (at HS 6 digit level) and exportable products have increased over time - from 1,565 in 2005 to 1,965 in 2013. It is important to note that the rise in number of products is entirely led by non-apparel products - from 1,364 to 1,770 in the same comparable period. Despite such encouraging growth in the level of products, the export structure is yet to be termed 'diversified'. Analysis of export products reveals that the top five products account for about half of the total export; about160 products each have an export value above USD 10 million, while another 230 products have a total export value between USD 1 million to 10 million each. In other words, less than 20 percent of total export products possess a considerable amount of export value (i.e. over USD 1 million) while the rest 80 percent possess an export value less than USD 1 million. Even more striking is the fact that over 50 percent of these products have been exported at a value less than USD 50,000 (BDT 4 million). Overall, Bangladesh's export basket is full of new and surviving products.
Although an overwhelming share of Bangladesh's export (in terms of value) is targeted towards the markets of the northern region (85 percent of total export value), a higher share of the total number of products is exported to the southern region (52 percent of the total number of products). Dynamic export products are mostly targeted to the northern region (54 percent) while new products are mostly targeted towards the southern region (64 percent). Products with an export value above USD 10 million are largely targeted towards the traditional markets of the northern region (e.g. EU, USA and Canada). On the other hand, products with a lower export value (USD 1 million or less) are largely targeted towards the markets of the southern region (e.g. Brazil, China, India, Malaysia, Russia, South Africa and Turkey).
Challenges for developing export competitiveness of 'new' and 'surviving' products
Major challenges facing the competitiveness of new and diversified products include the lack of comparative advantage in efficient use of available resources, poor capacity to ensure product and market diversification, high trade costs, low level of initial export value, poor physical connectivity and size of the economy of the importing country. In most cases, LDC products fail to attain comparative advantages and find other conditions burdensome; hence, it's likely that their products will survive for a short period of time. Present papers have applied the Revealed Factor Intensity (RFI) method to measure the comparative advantage of major manufacturing industries of Bangladesh.
Industries which are efficient in labour use (considered as an abundant factor) against capital and energy (considered as scarce factors) are found to have a higher share in export; dynamic products are likely to be the output of these industries. In contrast, industries less efficient in resource use have limited share in export; new and surviving products are likely to be the output of these industries. Along with factor use efficiency, a number of other conditions, as mentioned earlier, influence the structure of export of Bangladesh.
Strategies for export diversification
Strategies for export diversification should put more focus on new and surviving products along with dynamic products. Since developing competitiveness starts at the domestic level, measures for improving efficiency in resource use, building capacity to supply large volumes of export orders, higher spending on research, and developing the quality of products should receive greater priority in the strategy for diversification.
Identification of potential industries
Bangladesh's manufacturing industries, which are efficient in using abundant resources, are found to possess a higher share of export out of their total production. These industries include spinning and weaving textiles, wearing apparel, knitted apparel, footwear, non-metallic products, computers and equipment, communication equipment, consumer electronics, electrical equipment, jewellery and medical instruments. Besides these, there are industries which are less efficient in using resources but still possess a high share of export out of total production, such as processing of meat, fish and animal feed, beverages, paper products, batteries, ships, games and toys. Because of their capital-intensive nature, some of these industries are less efficient in resource use. On the other hand, a number of industries, despite having efficiency in resource use, are unable to raise their share of export, such as processed fruits and vegetables, tobacco products, manufacture of trailers, metal furniture and fabricated metal products. These industries possibly have yet to develop their critical minimum level of export capacity in terms of size, quality, initial export value and network.
Identification of diversified markets and diversified products
Identification of suitable products for potential markets is the first step to set strategies for export diversification. The table provides a list of different categories of products for non-traditional markets. Considering recent export growth, a set of non-traditional markets have been identified. These non-traditional markets include Australia, Brazil, China, India, Japan, Malaysia, Russia, South Africa and Turkey. Most of these markets are particularly important for exporting new and surviving products.

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Negotiation for reduction of tariff and non-tariff barriers
Discussion shows that Bangladeshi products face MFN tariff rate in a number of non-traditional markets which makes them less competitive against other countries. Bilateral and regional FTAs of these countries with one or more competing countries further reduce Bangladesh's trade competitiveness. On the other hand, Bangladesh cannot fully enjoy the duty-free market access provided by a number of countries due to stringent RoO. Hence bilateral negotiation with major potential non-traditional markets for lowering tariff on Bangladeshi products is urgently needed. In this case, WTO Provisions and Preferential Market Access for LDCs could be referred to for Bangladeshi products. High technical standards followed in a number of countries related to SPS and TBT are considered to be burdensome by the suppliers of new and surviving products. Bangladesh needs to discuss these issues at bilateral, regional and multilateral forums.
Building network between buyers and exporters Bangladeshi products, particularly new and surviving ones, need to be introduced in non-traditional markets. In connection to this, suppliers should take part in international trade fairs organised in those countries. Buyers of non-traditional markets should welcome international events organised by local trade bodies associated with industries of new and surviving export products. Such mutual exchange between buyers and suppliers would reduce the information gap and bring both sides closer for building a long-term trade relationship. In this context, local trade bodies should play a more proactive role. Existing network of buyers or retailers and suppliers of dynamic export products could be used to introduce new and surviving export products in traditional and non-traditional markets. Easy visa process is a necessary prerequisite towards ensuring flexible movement of buyers and suppliers.

Dr. Khondaker G Moazzem is an Additional Research Director at Centre for Policy Dialogue (CPD). Meherun Nesa is a Research Associate at CPD.

Published: 12:00 am Tuesday, March 10, 2015

The future of RMG tradeBy David R. Hasanat

Source: Star ARCHIVE

Bangladesh's garment exports increased from USD 6.8 billion in 2005 to USD 19.9 billion in 2012, recording a compounded annual growth rate (CAGR) of 16.6 percent. The remarkable success of readymade garment exports from Bangladesh over the last 15 years has, despite varied domestic and global challenges, not only surpassed the most optimistic forecast, it has also made us confident to think of big gains in the future. Today apparel export stands at USD 24 billion and it seems this labour-intensive industry is set to exceed the USD 50 billion mark within the next 7 years.
The overall impact of readymade garment exports is certainly one of the most significant social and economic developments in contemporary Bangladesh.  With over five million workers (60 percent women) employed in semi-skilled and skilled jobs in producing garments for exports, the development of the apparel export industry has had far-reaching implications for the society and economy. Its contribution to women empowerment is well recognised globally and is the subject of numerous studies. Micro-credit initiatives and larger participation of women in readymade garments manufacturing are two major contributing factors in this success for economic and social empowerment of poor women.

Opportunities and challenges
As China loses its competitiveness further, Bangladesh will emerge as the next RMG hot spot. With Bangladesh having developed a strong position among European and US buyers, many companies are already eager to evaluate the future potential. However, the lure of competitive prices, available capacities, and supplier capabilities offered are being cautiously weighed against a prevailing concern for political stability, infrastructure constraints and compliance standards.
I strongly believe that we have massive opportunities to be a global leader in the export of garments. This can in turn lead to significant development and production of textile and ancillary support industries. Given the track record along with the CAGR growth rate of 14 percent, Bangladesh has the potential to far exceed the target of USD 50 billion by 2021. Though somewhat puzzling, Bangladesh's growth potential has been recognised by many reputed analysts across the globe. Goldman Sachs includes Bangladesh in the "Next 11" emerging countries to watch for along with the BRIC countries (Brazil, Russia, India, and China) and JP Morgan lists Bangladesh among its "Frontier Five" emerging economies worth investing in.
The recently published case study by McKinsey & Company, "Bangladesh's ready-made garments landscape: The challenge of growth," eloquently sums up Bangladesh's RMG growth formula which builds on the country's strong starting position and the increasing demand of international buyers. This report provides an overview of the rapid growth seen in Bangladesh's RMG industry and then describes the main hurdles that exist for buyers when it comes to sourcing in Bangladesh. The final section of the report details what the three core stakeholders - government, suppliers, and buyers - can do to overcome the challenges of growth in Bangladesh's sourcing market. It is a report that I would encourage all the actors in the industry to deliberate and reach consensus on to drive the growth agenda.

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To highlight a few extracts from the case study and recommendations, the following are worth pondering over
* Volatility of raw materials prices has spurred a decline in gross margins and created a general environment of insecurity among buyers.
* Costs in China and other key sourcing markets have increased significantly. This is leading buyers to question their current sourcing strategies, resulting in expansion of global direct sourcing and footprint revisions being the current key strategic focus areas.
* Although the European and US apparel markets have regained much of their sales following the slump brought on by the most recent global financial downturn, market saturation, consumer price sensitivity, and ongoing economic insecurity continue to put pressure on top-line results.
* While European and US buyers dominated by brand players will continue to govern the emergence of regional markets, players will emerge as a force to reckon with and will provide a level playing field traditional exporters.
* Bangladesh will benefit in the battle for capacities that is on the horizon.
Hitherto, Bangladeshi exporters have focused on growth based on their two most important advantages - price and capacity.  They remained content being providers of satisfactory quality levels especially in value and entry level mid-market products. Overall though, they still lag in acceptable speed to market, compliance standards and a professional management pool.
Availability of large pool of cheap labour and entrepreneurial spirits of Bangladeshi businessmen are two main components of providing large capacity and price competitive offerings to international sourcing market. Of late, buyers have shown increasing discomfort regarding Bangladesh's labour relationships and have threatened to shift to competing sourcing markets. However, Bangladesh is a very homogenous society and as such, ethnic tensions within the labour force are un-heard off, whereas, most of our competitors' labour force is made of multi-cultural segments and fraught with ethnic tensions. This is a major challenge and is the source of labour tensions and production disruptions.
As we all know the future is all about the knowledge economy and despite the highly labour intensive nature of garments industry the desired efficiencies can't be achieved without a large pool of professional management staff. As a matter of fact, our skilled and semi-skilled workers have achieved a great degree of productivity and efficiency compared to what the management staffs were expected to achieve. For a long time, the entrepreneurs have accepted untold pains and financial losses but they have miserably failed to develop a long- term solution. For instance, a quick fix was to hire expatriates to do the job. Unfortunately the quick fix has turned out to be a major drain to earning retention for the nation. It is estimated that the industry remits USD 4 billion a year to expatriates out of a total export earnings of USD 30 billion while the promoters retain a total of USD 1.5 billion. While it's a big disadvantage to exporter profitability, in my opinion, it is also a low hanging fruit as we do produce a large number of business and engineering graduates. All that we need to do is create an enabling environment for them to be trained, motivated and grow to be an inspirational leadership within the industry. Compensation is generally the least of our problems as demonstrated by the quantum of expat payment that the industry makes each year.

Hurdles
Bangladesh faces many hurdles in growing its garments industry. Unfortunately, many of them are peculiar to global standards. On the other hand, it has evolved to be extremely resilient to peculiarities such as longterm political violence, shutdown of transport network and businesses creating havoc in the entire supply chain.
There were uncertainties after the tragic Rana Plaza disaster. No one knew how the international buyers would respond. Gloomy predictions of large scale exodus of orders to alternative sourcing markets were made by many pundits and industry players. Bangladesh's poor workplace safety was the only news coming out of Bangladesh. Bangladeshi garment exporters were facing uncertain times. After the obvious dip in export post-Rana Plaza, the export rebounded to its normal growth trajectory. The Bangladesh Garment Buying House Association has reported that orders from "compliant" factories are rising by 15-20 percent. The US Fashion Industry Association has just released a survey of brands and retailers detailing that 76.9 percent of those surveyed currently source from Bangladesh, with 60 percent anticipating that they will "somewhat increase" from Bangladesh in the "next two years." It's another proof of how resilient the industry has turned out to be.
Another noteworthy development has been the positive attitude of factory owners in cooperating with various government agencies, international organisations and buyer-led initiatives to provide better oversight, governance and compliance on workplace safety and labour matters. Between the Accord on Fire and Building Safety in Bangladesh, the Alliance for Bangladesh Worker Safety and the EU-ILO-Bangladesh Global Sustainability Compact, there is now significant focus on factory safety conditions, including structural integrity and fire safety protections than ever before in the past. It seems Bangladesh is set to make the best of a bad situation.

Future
Looking forward, I am confident that Bangladesh will exceed the target of USD 50 billion with its current momentum. However, what I hope is that it can stand up to tap the potential for the quantum leap for USD 100 billion. Needless to say, it will require the continued investment in the sector both by the entrepreneurs of large and medium exporters as well as the financial sector. Creation of enabling infrastructural facilities will be an absolute necessity. As mentioned earlier, the key will be development of management staff for leadership and innovation.  Few of the transformational changes that the industry would have to make to sustain growth and take an increasing market share are :
*    Move from transactional relationships with buyers to more strategic partnership. RMG manufacturers increasingly will be required to take on more activities of the supply chain.
*    Development and production of textiles and apparel, combined with intelligent logistic and service concepts will be key to global leadership. It can reverse the current commoditisation trends by offering high value solutions to buyers.
*    A radical move towards rapid customised manufacturing in one of the most demand-volatile sectors through flexibility and integration of cost effective and sustainable processes from fabric processing through to customer delivery. the customer ultimately is only interested in total solution.
*    Overall integration and organisation of all individual processes and technologies into a highly efficient and flexible manufacturing shop floor.
*    Working conditions and benefits must improve as the industry matures.  In the long-run, this would be the best defence against unionised labour unrest.  Investment in worker training, motivational tools and in improved work place conditions and bonus schemes would increasingly be the tools used for enhance productivity.

The writer is the managing director of the Viyellatex Group

Published: 12:00 am Tuesday, March 10, 2015