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Knit garment exporters ready for quota-free era

Industrial term loans see a 62pc rise in QI mainly to help RMG exporters prepare for MFA phaseout

Rejaul Karim Byron
Industrial term loans soared by a staggering 62 percent in the first quarter of the current fiscal year,' with the garment sector drawing the bulk of the lending to set up backward linkage and export-oriented units to face the quota-free regime.
Banking sources say in the con-
text of the post-MFA quota-free era that demands Bangladesh invest more in the export-oriented garment sector, garment exporters have drawn the vast bulk of this Tk 2,212 crore lending in July-September, keeping up with the up-trendoftheprevious fiscal year.
In FY2003-04, industrial term loans marked a massive 68 percent
jump from the previous year to standatTk6,675 crore.
Based on the lending trend, a top banker says the knitting sector has 'all-out preparations' to face the post-MFA (multi-fibre agreement) era, but the woven sector may be in forsomeproblcms.
"Investors have taken this loan [of Tk 2,212 crore) mainly to install
backward linkage industries to tackle the post-MFA situation," notes Janata Bank Managing Director SMAminur Rahman.
"Banks have provided maximum loans to help set up backward linkage industries in the knitting sector. We believe the knitting sector will not face any difficulty in the post-
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MFAsituation," headds.
"But we did not see many investors trying to set up independent backward linkage industries in the woven sector. Investors who have forward linkage or garment industries have come up, but not independent investors." Rahman points out. "This means the woven sector may face some difficulties."
Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) President Fazlul Haq says, "Our preparation to meet the post-MFA challenges is complete. Wb have been preparing for this for the last few years. We will not faceanyproblcmafter2005.”
Former president of Bangladesh Garments Manufacturers and Exporters Association (BGMEA) Quazi Moniruzzaman, on the other hand, observes that investment in the woven sector for setting up backward linkage and packaging and printing factories has been rising slowly. This will eventually reduce the lead-time forexporters.
Explaining the situation, he says. "Compared to the knittingsector, the woven sector’s backward linkage needs bigger investment. For instance, setting up a spinning mill needs an investment of around Tk 100 crore. In addition, the interest rate is also very high. So, investment inthissectorissoslow."
Effective from this January, the removal of MFA dictated by World Trade Organisation (WTO) is likely to affect the competitiveness of Bangladesh's garment export sector that has evolved mainly on cheap local labour and imported fabrics. The sector last year earned nearly S5.6 billion, or almost 80 pettent of the country's total export earnings.
Although the reflection of this rising industrial term lending is yet to
be seen, bankers are confident that its impact can be felt from the next year. Besides, a rising volume of capital machinery import has supplemented the industrial term loans.
According to Bangladesh Bank statistics, in July to October, letters of credit (ICs) worth Tk 398 crore were opened for capital machinery import, marking a 36 percent rise. Of them, the LCs for garment-related machinery increased by 44 percent alone.
Bangladesh Institute of Development Studies (BIDS) Research Fellow Zaid Bakht observes, "It shows that our entrepreneurs are taking preparations to face the post-MFA situation. We will see the results of the increased lending In the next year and the year after."
" But we should not be too excited about it. as our export base is very narrow. And our domestic industries are not strong enough. If the world economic situation shakes up for some reason or the garment sector faces some a sudden crisis, we don't have an alternative export item to take the blow," he warns.
Bakht. an economist specialising in industrial sector, emphasises export diversification. "Although there has been a rise in industrial term loans for the last two years, we see very little reflection in the industrial output so far," he points out
According to the quantum index ofsomeselected industrial commodities of the Bangladesh Bureau of Statistics (BBS), the industrial output in July-August stands at 9.51 percent, as compared to 8.61 percent In the corresponding period last yean This does not reflect the 60-plus percent growth in the tcrmloans.
Both bankers and economists maintain, however, that the results of any industrial loan typically are not visible before 20 months.