The full year data on exports and imports in FY22 reveal two important facts. First, fuel import bills had little to do with the dollar crisis. There was manifestly a large contraction in the volume of fuel imports long before the spike in the domestic fuel prices and at a time when all indicators pointed to a growing demand for fuel. Second, the apparently "excessive" garment related imports helped realise the foreign exchange gains from the expansion in global demand for cotton garments as the local spinners and weavers faced a cotton crisis.
Oil import bills declined!
Part of the standard narrative on the dollar and energy shortage is that international price increase caused energy import payment bills to soar. Oddly, it did not. Total oil import bills were $992 million lower in FY22 relative to FY21! Payments on account of crude oil declined by 64% in a year when crude oil prices increased by 50% or more. Payment on account of petroleum products increased only 10.8%, a much smaller percentage than you would expect based on increase in refined petroleum prices. Diesel price in June 2022 was more than double its level in December 2021 while octane price was 74% higher.
Clearly the energy import volume declined. The decision to discontinue LNG purchase from the spot market did not have a lot to do with this decline. The government decided not to import costlier LNG from the spot market in the last quarter of FY22. It last purchased spot LNG cargo for delivery in June. Decline in the volume of diesel imports, which accounts for over two-thirds of total fuel use, had to be the main driver.
This is hard to explain. Domestic price of diesel did not increase until recently and the economy was on a normalisation course in FY22 until macroeconomic stress started biting late in the year. Any explanation based on demand does not hold water because demand in all likelihood increased. Foreign exchange shortages started biting only since April 2022.
The Bangladesh Petroleum Corporation has a monopoly on oil imports. The BPC has been a cash cow until recently when its bottom line turned red. It is hard to believe imports had to be reduced due to financing constraints when the BPC reportedly has Tk22,000 crore in fixed deposits. The whole phenomenon seems to have gone unnoticed throughout the year until we realised there is not enough diesel. There was no significant disruption in the diesel import chain. Something, somewhere fell through the cracks having little to do with international price increases or foreign exchange shortage.
There is a thing or two for us to learn from our largest neighbour about the benefits of having contestable energy supply chains. India's crude oil import bill nearly doubled to $119 billion in the fiscal year ending March 2022. Indian refiners lined up lighter crude imports amid expectations that prices could remain at relatively higher levels in 2022. India was the fifth largest exporter of petroleum products in 2020. Yet India's imports of these products increased to a seven-month high in June 2022. This uncommon upswing was caused by local shortages as private refiners increased their exports to profit from rising global prices. Among the many new sources of economic pains globally, fuel availability has not tormented the Indian economy nationwide.
Bangladesh's growth needs to be supported by energy security and universal access to high quality, reliable electricity. The great strides in reducing electricity system losses and improving system reliability (measured by duration and frequency of outages) made in the last decades are looking fragile. People across Bangladesh are enduring long power cuts. Gas shortage may be a major, but not the only, reason. Ten diesel-based power plants with a capacity of 1,290 megawatts were closed, leading to nationwide daily load-shedding for hours at irregular intervals. These are disrupting factory production, increasing costs, and inhibiting service delivery in health and education. Shopping malls and markets have to close by 8pm. The use of diesel generators increased due to lengthy power cuts.
Was this forced by running out of fuel not adequately stocked in the past even though the official narrative is to save fuel in order to reduce pressure on foreign exchange going forward? There is an enormous difference between the two in terms of how the BPC is performing and the consequences for the economy.
Excessive garment related imports?
Garment exports increased 34.5%, the biggest year-on-year jump in more than a decade, while garment related imports increased 58.2%. Ordinarily, if both export and import prices are stable, the two growth rates would be close when the composition of exports is also the same, as was the case in FY22 with unchanging share of knitwear and woven garments in total garment exports.
RMG related imports in FY22 look excessive when compared with its 44% to 47% shares in RMG exports during FY18-21. It jumped from 45% in FY21 to 52% in FY22. The "excess" in FY22 at 45% share is about $3.2 billion. Of these, about $3 billion came from yarn (66%), textile articles (32%) and raw cotton (2%). Garment manufacturers even imported knitted fabrics from China.
Cotton price escalation, variable supplies of cotton, and gas shortage adversely impacted the capabilities of local spinners and weavers. Normally, local spinners supply 85% of the raw materials needed for the knitwear and 40% to the woven exporters. Cotton prices reached an 11-year high in March 2022 after increasing in 20 of the preceding 23 months, according to the World Bank. The cotton price hike affected the entire industrial chain of domestic producers of yarn and fabric. Cotton deliveries faced delays due to container shortage globally. Gas shortage strained textile millers' ability to produce yarn and fabrics in full swing.
The exporters demanded removal of the existing logistical barriers to imports to cope with the uncertainties of local supplies. RMG exporters procure yarn and fabric mainly from India, China, Vietnam, Indonesia, and Pakistan, using a duty-free bonded warehouse privilege. They can also import under a duty draw back incentive. Currently, cotton, yarn, fabrics, and others are imported through Benapole while partial imports are allowed only in Chattogram port. The exporters urged the government to allow these imports, including partial shipments, through all the land ports for retaining their global competitiveness.
Apprehensive of the erosion of protection to the local weavers and spinners, the Bangladesh Textile Mills Association opposed these demands. Bonded warehouse "leakage", improper utilisation declaration, false product specification, and smuggling from India were already enabling imported yarn and fabric to enter the domestic market bypassing import duties of 91.4% and 38.5% respectively. The BTMA suggested forming a permanent monitoring committee to look into yarn imports through the land ports and allowing duty-free import of all types of fibres.
Unreliability of supplies and policy easing tilted the balance in favour of imports. The BTMA acknowledged that since just-in-time supply from local mills, critical for compliance with export orders, was not assured, the exporters should import to meet their demand for the time being. The exporters managed to get the commerce ministry to increase the maximum wastage rate from 16% to 29% for basic knitwear and 32% for special items and from 4% to 16% for sweaters and socks in FY22. The wastage rate defines the permissible amount of leftover of these imported materials. Note that raw cotton is not imported under a bonded warehouse facility. Higher wastage rate therefore encouraged apparel manufacturers to import more yarn and fabric as opposed to raw cotton.
"Excess" imports augmented foreign exchange supply!
The absolute size of domestic value addition over imports increased from $17.4 billion in FY21 to $20.4 billion in FY22. The buyers did not allow price readjustment reflecting fully the materials cost increase. The exporters apparently missed pricing the yarn price increases while negotiating work orders with global buyers. Yet the total value added increased because the volume effect outweighed the terms of trade loss. At the end of the day, it is the size of the value added over imports, not the share of value added, which matters for net foreign exchange earnings. Imports filled the void created by capability erosion in the domestic backward linkage supply chain, thus allowing the delivery of increased export orders.
Bangladesh's pre-existing weakness – reliance on cotton garment exports which constitute a small part of international garment trade – turned into a strength in the aftermath of the pandemic, albeit temporarily. As consumer trends shifted from "a business look to comfort", artificial fibres began losing to natural fibre. People demanded more clothes made primarily of spun cotton. The scarcity of cotton could have cold watered the ability to deliver the elevated demand had cotton yarn and fabric imports not been enabled. A large part of what appears "excessive" garment related imports replaced what could not be domestically supplied.
Openness to imports enabled cashing the emerging opportunities without which the foreign exchange crisis would have been worse than it currently is. Could we have done better? Sure, if we could negotiate better to pass on the increased imported input prices to export prices without materially affecting the volume of export orders. We could also have done better in many other areas by paying serious attention to fuel procurement, electricity infrastructure, and the unease of doing business relating to licences, rules, taxes, and regulatory compliance.
Zahid Hussain is former lead economist of the World Bank Dhaka office