Whenever the agenda of growth-drivers is in focus within the context of Bangladesh, the conversation is rarely bereft of the Ready-Made Garments (RMG) Industry.  In terms of employment, The Center for Policy Dialogue (CPD) reported that the sector employs approximately 3.5 million people, of which, approximately 60.8% are women.^[1] The country’s RMG exports make up the majority of its overall exports, standing at 84.21% as of 2018-2019.^[2] In terms of factories, there are approximately 4,621 active Garments Factories in Bangladesh.

The recent growth of the industry seemed to be on an upward trend, registering 0.2% growth, 8.7% growth and 11.49% growth  for 2016-17, 2017-18, and 2018-2019 respectively.^[3]

FIGURE: RMG & Apparel Sector Growth / Source: Export Promotion Bureau (EPB)

The gradual traction achieved over these years in terms of growth may have been achieved due to:

• The growth of exports to non-traditional markets such as Africa.
• A depreciating currency allowing for easier exports.
• The increase in demand of RMG as an effect of the US-China Trade War.

However, it is important to note that there has been a 5.71% downturn in RMG exports for July-January of FY 2019-2020, indicating underlying issues which seem to be constraining the growth of this key industry and slowing down achievement of the goal of USD 50 billion export earnings by 2021.^[4]

One of the major export destinations for the Bangladesh RMG sector is the US. It was thus expected that the US-China Trade war would mean a sustained proliferation in the exports of Bangladesh RMG, however this has not yet yielded sufficient benefits. A global economic slowdown throughout 2019 has meant that demand for Bangladesh RMG products, and derived demand for textiles, have declined. Other countries have gained relatively more in terms of exports growth from the trade war.

An overvalued exchange rate has lowered export competitiveness. The global growth in fast-fashion trends has capitalized on consumer convenience through digitization and captured some of the market previously occupied by Bangladesh apparel exports. Many of the international buyers are also ‘near-shoring’- which means directly purchasing from a country close to the end market.

A recent survey  analysed the data of 36 listed companies in the Textiles sector of Bangladesh for the 2011-2018 period, concluding that there was a plummet in their net profits to BDT 341 crore in 2018 from over BDT 1,252 crore eight years ago.^[6] Given steady annual inflation, this figure is a snapshot of the ailing industry.

Given the fulcrum-like role played by the RMG sector in driving forward the growth of Bangladesh, there is a large incentive to reinvigorate the sector.

LDC Graduation and the Long Road Ahead

Bangladesh is expected to graduate from Least Developed Country (LDC) status by 2024, having met all the required criteria as set in the Committee for Development Policy review of 2018. If able to graduate, it entails the withdrawal of certain International Support Measures which are exclusively provided to LDCs. While some of these measures relate to developmental policy and ease of participation with International bodies such as the UN, the withdrawal with arguably the most consequence would be the revocation of the Generalized System of Preference (GSP) facilities when exporting.

Essentially, this means that export costs are likely to rise as Bangladesh will no longer receive quota-free and duty-free benefits that LDCs generally receive, and will have more stringent rules-of-origin schemes on all its exported products. Given a smooth transition out of LDC status, Bangladesh will continue to remain eligible for preferential tariffs under the Everything But Arms (EBA) scheme in terms of access to the European Union (EU) Market for 3 more years. However, with the expiry of the current regulation of GSP at the end of 2023, it will have to wait until the formulation of the new regulation to assess and cope with the expectedly higher tariffs.^[7]

Bangladesh, as an LDC, also enjoys the benefit of the Single Transformation rule, which states that exported products are subjected to preferential treatment upon fulfilling the criteria of one stage of transformation. This means that raw materials require only one stage of value-addition in the process of being converted to finished goods.  In the case of non-LDCs, at least Double Transformation is necessary. This is especially concerning for RMG products from Bangladesh as it has heavy reliance on imported raw materials– mainly cotton. To put further emphasis on this, it is important to note that Bangladesh has the 2nd largest quantity of imports of cotton worldwide, behind only to China, with a value of USD 6.8 Billion.^[8]

The Center for Policy Dialogue (CPD) estimates that Bangladesh will face an additional 6.7% additional tariff on average, after graduation which translates to loss in approximately  USD 2.7 billion of export, a large constituent of which would be loss in RMG export.^[9]

Bangladesh has the option to acquire the EU’s Special Arrangement for Sustainable Development and Good Governance (GSP+) facility through the fulfillment of certain criteria. This would once again allow for preferential treatment of exports post-LDC graduation. However, the main criteria that Bangladesh will have difficulty in achieving includes strict compliance with the 27 International Human Rights Conventions, and the lowering of export concentration to the EU (which is currently higher than the maximum threshold of the criteria).

The key to securing GSP+ features may lie in:

1) Ensuring that safety standards and workplace regulation set in place by Alliance and Accord continue to be upheld strictly. This is essential to long-term national brading, value addition, as well as securing international support.

2) Pursuing bi-lateral Free Trade Agreements, Bangladesh can ensure better diplomatic relations as well as long-term preferential access to those markets. Preferential access may mean lower tariffs when exporting, similar to GSP that Bangladesh is currently enjoying. Bangladesh however has not established any FTAs to ensure such benefits when exporting to a specific country, despite being a member of regional agreements such as Bay of Bengal Initiative for Multi-Sectoral, Technical and Economic Cooperation (BIMSTEC) and South Asian Free Trade Area (SAFTA).

Negotiations continue in establishing FTAs with India, Sri-Lanka, and Turkey, while negotiations with China and Malaysia continue to remain uncertain.

Tackling Market and Product Diversification

An important problem to be addressed for the long term, is Bangladesh’s export earnings being concentrated to a small number of countries.

The key to long-term export sustainability lies in diversifying trade destinations so as to lower dependence on markets such as the U.S and the U.K who have moved towards near-shoring their products at competitive, if not lower prices owing to their adoption of automation and availing of economies of scale (See: SewBot Technology).^[10] With the rise of fast-fashion and low global price of synthetic fibers, Bangladesh RMG faces rigorous competition.

The upside to this tale is that the share of exports to non-traditional markets has grown significantly over the last few years and it is an encouraging sign for Bangladesh to continue market diversification.

This market diversification comes compounded with the need to expand the product range for RMG into higher-valued and/or diversified products.

BGMEA data showed that about 73 percent of the country’s total USD 34.13 billion RMG export earnings in the last fiscal year came from five items: T-shirts, Sweaters, Trousers, Jackets and Shirts. However, it has now identified 51 new products with high export potential which can be used to break further into non-traditional markets.^[4] The focus for the next five years is currently on 31 of these products which have an estimated market size of USD 132 billion. Historically, these have generated USD 7.16 billion in export revenue in FY18-19.

Another prospect for moving up the global value chain of RMG-based products, is focus on Green RMG—which refers to the modification of the entire supply chain process for apparel products, starting from the Primary Textiles Sector, to ensure resource-efficient and sustainable practices.

Bangladesh currently leads the world in the number of LEED (Leadership in Energy and Environmental Design) certified green garment factories in Bangladesh, with 91 certified factories in 2019.^[11]  This may be lucrative in adding value to apparel through national branding. The opportunity is further apparent, given the growing market of ethically concerned consumers worldwide, and the high environmental cost of fast fashion.

The Future: Transforming the Supply Side

McKinsey states that among its surveyed respondents for a report, Bangladesh held the top spot as a source for affordable and high quality apparel products.^[12] It is imperative that along with the attempts to diversify markets and the product range, there should also be focus given on the gradual adoption of automation and the upskilling of RMG middle-management and labor.

This will not only improve productivity and bring down costs, but will also improve compliance with the standards set by Alliance and Accord which are necessary for long-term sustainability and better international relations.

Sartaz Zahir, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

The post The Bangladesh RMG Sector: The Path to Revitalization by LightCastle Partners appeared first on LightCastle Partners.

Ready-Made Garments (RMG) Industry of Bangladesh is an extremely important growth-driver and has been since it began to thrive in the 1970s as a consequence of the International Multi-Fiber Agreement. The country’s RMG exports make up the majority of its overall exports, standing at 84.21% as of 2018-2019. The Sector also employs approximately 3.5 million people.^[1]

The RMG sector, despite its place in the limelight in driving export-oriented growth in the country, shares a direct, symbiotic relationship with the Textiles Industry of Bangladesh. Textiles directly links to RMG by supplying Work-in-Progress products forward for further processing.

The Primary Textiles Sector (PTS) has over USD 6 billion investment, and generates approximately 13% of GDP.  Around 85-90% of demand for knit RMG and 35-40% of demand for woven RMG is met by the PTS.^[2]

From Textiles to RMG

Serving as the first line of value-addition for the production process, the Textiles Industry, which is sometimes called the Primary Textiles Sector (PTS), is heavily reliant on the import of its raw materials consisting primarily of cotton.

Cotton, upon procurement, is spun into yarn and subsequently converted to gray fabric through a chosen technique from a plethora of available techniques (knitting, weaving, crocheting etc.). Finally, gray fabric is dyed, and printed to create the finished fabric which is then sent forward to the RMG factory for further processing and eventual export.

The process is highly labor intensive, and thus serves as a means to make further value addition and cost competitiveness for the RMG and Textile sector.

Textile production in Bangladesh is also extremely water-intensive, using 200-250 litres per kilogram of fabric produced, whereas the global standard is 60-70 litres.^[4] This leaves room for efficiency in resource management.

Cotton Price Instability and Yarn-Dumping

The Primary Textiles Sector in Bangladesh is heavily reliant on the import of raw materials which are then further processed. Evidently, the most important of these is cotton.

The countries which produce the largest volume of cotton across the world, are India, China, The United States, Pakistan, and Brazil.

The following shows cotton distribution across the major producers, and the rest of the world, along with projections until 2028.

Locally, Bangladesh is unable to produce a substantial amount of locally-grown cotton required for its export demand.

The textiles industry has lately suffered an increase in competition as a result of cheap imports of yarn and fabrics from India, China, and Pakistan. These countries are likely incentivised by their respective governments for such trade. China, for example, provides between 15-20% cash return to their exporters when exporting to countries such as Bangladesh.

Yarn-dumping at prices quoted to be up to 30% lower than local production costs by India and China, makes it very difficult for local textiles to compete.^[6]  Many textile companies are thus driven out of the market as they are unable to sustain profits. This problem is exacerbated by local RMG businesses through high-quantity imports via bonded warehouses (facing zero-tariff).

Stronger anti-dumping policies will need to be implemented by the government to protect the PTS. In addition to this, there must be greater regulation to prevent cases of smuggling in of yarn and improper Utilization Declaration (UD) Certification in the case of RMG.

While low yarn prices may be seen as a boon for the apparel exporting sector, it creates a problem of not being able to generate sufficient added-value in the case of the final product.

While global consumption for cotton continues to be on an upward trend, there has not been any significant rise in the global production or yield in recent years. World cotton prices are expected to fall over the coming years as a result of the mounting competition from its close substitute in the form of synthetic fibers.

However, 2018 data from the Cotlook A Index showed that prices for cotton on the global market were about USD 1960/tonne while prices for synthetic fibers varied between USD 1,200 and USD 1,700/tonne, giving the latter the benefit of lower price globally.^[7] If Bangladesh continues to rely too heavily on the import of yarn, it would mean that it is left vulnerable to such shifts in demand or volatility of prices. This in turn would make it difficult to reliably achieve the growth in exports that it is aiming for in the long run.

With the combination of the shift in focus towards synthetic fibers and the high import cost of cotton, Textiles in Bangladesh struggle to keep costs down.

However, there is a significant scope for Bangladesh to gain from the US-China Trade War.  During the January- July period of 2019, Bangladesh’s apparel exports to the US have seen an 11.53% rise to USD 3.57 billion.^[1] Besides the creation of the market opportunity, it is predicted that cotton prices will fall globally as a result of the supply glut. Domestically, PTS can benefit from lower priced imports.

In the long run, Bangladesh can benefit from diversifying its sources for such a crucial raw material so as to protect itself from any sudden exogenous shocks in supply.

Sourcing from Africa shows considerable promise and establishing trade agreements for future import of cotton from Africa may work to Bangladesh’s favor and help distribute the large shares held by India and the U.S.

Labor Productivity, Safety Standards Compliance, and Automation

Over the years, the Textiles and RMG Industries have seen several wage hikes for workers. The minimum wage now stands at BDT 8,000, implemented at the end of 2018.^[8] Such hikes raise production cost significantly.

The unprecedented industrial disasters in the forms of the Tazrin Fashion Fire of 2012 and the Rana Plaza collapse in 2013 had sparked global outrage and resulted in the formulation of several programmes to ensure and regulate workplace safety and due diligence, and train labor on safe practices while educating them on their rights.

The most notable included “The Accord for Fire and Building Safety” and “The Alliance for Bangladesh Worker Safety”, both regulated by large international brands and trade unions. These programmes have repeatedly imposed mandatory remediation for factories unable to meet required safety standards and have enforced greater budgetary allocations on compliance with safe practices and ethical operation.

A logical step for an industry with a key focus in physical value addition is gradual automation. This is expected to improve worker productivity and raise the value of the work-in-progress stock going forward to the next stage. Bangladesh currently has low worker productivity in comparison to its main competitors in Textiles and RMG.^[9]

In the wake of the 4th Industrial Revolution, Sewbot technology is being adopted by the main players in the apparel market such as China and India.^[10] This new technology has allowed for much greater rate of production, autonomous fabric mapping, sewing, and has opened an opportunity to benefit from economies of scale, lowering labor-intensity significantly for associated industries.

Chinese manufacturers such as Tianyuan Garments Company and Raymond in India have commenced operations using SewBot already, bringing down their costs to rival even the cheapest international markets.

According to a Centre for Policy Dialogue (CPD) study, only 21.25% of sampled enterprises in Bangladesh were found to have advanced technology levels in their factories. Each production line of SewBot technology requires approximately 4 people to supervise and operate it, however their skillsets are more versatile than the average individual employed in Bangladeshi Textiles. Bangladesh has a difficult challenge ahead of it if it is to upskill labor and adopt such technology.

There is also a legitimate cause for concern as to how automation may adversely affect worker employment in the sector. A CPD study showed that female worker participation in the Textiles and RMG sector combined, fell to 60.8 percent in 2016 from 64 percent in 2015.^[11]

The main reasoning behind this according to the sample was that women were perceived by employers to be less capable of handling machinery. Furthermore, it was observed through the same study that automation investment increased after the Rana Plaza tragedy in response to Alliance and Accord’s enforcement of safety regulations. This was perhaps deemed to be an alternative to raising costs through remediating labor issues.

As a crucial component of the RMG & Apparel sector as a whole, The Textiles Industry has sufficient room for productivity gains through stabilizing supply for raw materials, gradually improving worker productivity and embracing automation. These benefits are sure to carry forward to the RMG sector and help proliferate economic growth in the future.

Sartaz Zahir, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

References

• 1. BGMEA Trade Information – BGMEA
• 2. Bangladesh Cotton and Products Annual Report – (USDA)
• 3. LightCastle Primary Data
• 4. WasteWater Management in Textiles- Bangladesh – Water Integrity Network
• 5. Agri-Outlook Data – FAO/OECD
• 6. Yarn Fabric Dumping Pushing Local Millers to the Brink of the Cliff  – Textile Today
• 7. Cotlook A Index
• 8. Tk 8,000 a month – The Daily Star
• 9. APO Productivity Databook 2018 – Asian Productivity Organization
• 10. Sewbots Transforming The Textile Industry – Robotics Tomorrow
  (SewBot)
• 11. Ongoing Upgradation in RMG Enterprises – CPD

The post The Ails of Textiles in Bangladesh: Challenges and Possible Amelioration appeared first on LightCastle Partners.

When a new phone was launched in the market last month and you rushed to buy it, what did you do with your old one? What happened to your old computer which you replaced with a high-end laptop last year? The disposal of these discarded or obsolete electronic products or electrical materials is referred to as electronic waste or e-waste.

E-waste is broadly classified into six categories, namely- (i) Temperature exchange equipment (air conditioners, freezers), (ii) Screens, monitors (TV, laptop), (iii) Lamps (LED lamps), (iv) Large equipment (washing machines, electric stoves), (v) Small equipment (microwave, electric trimmer), and (vi) Small IT and telecommunication equipment (mobile, printer) etc.

What makes e-waste different from general waste is that e-waste comprises a multitude of components carrying toxic substances. Of the solid waste streams, e-waste can represent 70% of the hazardous waste that ends up in landfills as these contain toxic substances like zinc, lead, cadmium, chromium etc.^[1]

According to the World Economic Forum, the e-waste stream has reached 50 million tons in 2018, becoming the fastest-growing waste stream in the world as people are regularly upgrading their electrical devices at an alarming rate.^[1] Only 20% of this e-waste is properly recycled globally mostly in China, Nigeria, Japan, Taiwan etc and the remaining 80% is dumped in landfills or informally traded resulting in a loss of a lot of economic value from extractable materials from e-waste and placing a threat to the environment. Therefore, it is imperative for the e-waste generating countries to build a circular economy for extracting the lost value from e-waste.

Global E-waste Generation

In 2016, Asia produced the highest amount of e-waste, about 18.2 million metric tons, followed by Europe with 12.3 million metric tons.^[2] Even though the region remains the highest overall producer of e-waste, the per capita production of e-waste is highest in the European countries. In 2017, China and the United States produced the highest amount of e-waste, 7.2 million metric tons and 6.3 million metric tons respectively.^[3]

However, compared with countries with similar living standards, China produces less per capita e-waste. China’s per capita e-waste production is 5.2 kg per capita while Norway, the UK, Denmark, Netherlands etc are the highest per capita e-waste producing countries.^[1]

According to the United Nations Environment Programme, e-waste are informally traded from the developed countries to developing or less developed countries due to lack of strong national regulations and enforcement. To prevent this process of transferring hazardous waste, an international treaty, Basel Convention was developed. Even though 187 countries have ratified the treaty, large amounts of e-waste continue to be shipped illegally, mostly in Asia, earning this region the ignoble tag of the world’s junked electronics dumping ground.^[1]

E-waste Generation in Bangladesh

Rapid urbanization and continuous economic progress are causing the unstoppable growth of e-waste in developing countries including Bangladesh. In 2018, Bangladesh produced around 0.4 million metric tons of e-waste with about 20% growth rate per year.^[4]

Another critical issue behind the e-waste generation all over the world is planned obsolescence, a strategy of designing a product with an artificially shorter useful life to make it go obsolete after a certain period of time. From light bulbs to laptops, producers reduce the service life of almost every consumer electronics product for generating sales by increasing repeated consumption, giving rise to e-waste generation.

The per capita e-waste generation in Bangladesh is 0.9 kg per capita which might be less than other sub continental countries for now, but it’s just a matter of time for things to go upended for Bangladesh, considering the rapid growth of e-waste piles.^[2] The following are the key issues behind the mounting e-waste generation in Bangladesh.

Shipbreaking Industry: The shipbreaking industry of Bangladesh secured the top position by dismantling 47.2% ships of the world in 2018.^[5] The industry alone generates various types of e-waste as the steel of scrapped ships is coated with paint containing toxic substances such as lead, cadmium, chromium, zinc, arsenic etc.

Consumer Electronics Industry: The consumer electronics market size stands at USD 1.37 billion with a growth of 15%.^[6] The products primarily include refrigerator, television, air conditioner etc. Furthermore, among the 160 million population, there are more than 150 million mobile users in Bangladesh and the number is spiralling up. Eventually, all of these electronic products will lose their lifespan and will contribute to the exponential growth of e-waste production.

ICT Development: Recognizing the immense potential of the ICT sector, the Government of Bangladesh has taken a good number of initiatives to help the outsourcing sector flourish. The vision 2021 of becoming “Digital Bangladesh” predicates the extensive usage of electrical and electronic products throughout the country.

Illegal Trade: As one of the developing countries in Asia, Bangladesh is also a recipient of e-waste from Europe, North America and other developed nations through illegal trade routes, adding to the existing pile.

E-waste Recycling: Turning Trash into Treasure

Besides toxic substances, e-waste also contains precious metals such as gold, copper, silver, iron, aluminum etc. In fact, each ton of e-waste comprises a hundred times more than a ton of gold ore which are recoverable through recycling e-waste. The globally generated e-waste per year is worth more than USD 62.5 billion which can be regained through proper implementation of e-waste management and recycling systems.^[1]

In 2019, the global e-waste recycling market was valued at USD 40.3 billion with an estimated growth at a CAGR of 15.5%.^[7] In Bangladesh, a few e-waste recycling companies have recently started to function but failing to run at their full capacity due to a shortage of e-waste.

The recyclers are getting only 3% of the total generated waste, while the rest is dumped into landfills. The enlisted recycling companies are Azizu Trading Co., Yousuf Enterprise, Green Bangla Corporation, JR Enterprise, Zaman Enterprise, Techno Fair, NH Enterprise etc.^[8] The lack of e-waste regulation remains a crucial obstructing factor in the growth of the e-waste recycling industry.

Lack of Formalization of E-waste Disposal

Currently, Bangladesh has no specific environmental policies or guidelines for the e-waste management problem. While a draft regulation on ‘E-waste management laws’ was established and amended in 2011 and 2017 respectively, under the Environment Conservation Act 1995, no progress in the adoption and enforcement of rules has been evident.^[9]

Bangladesh is still lagging behind compared with other South Asian countries such as India, Pakistan, Sri Lanka and Nepal as all these countries have already established effective laws and regulations on e-waste management. This leads to indiscriminate dumping of e-waste which is frightening for the environment due to the associated risk of toxic exposure.

Unplugging the E-waste Crisis

As the amount of e-waste production is projected to be 4.6 million metric tons by 2035, the e-waste management industry has huge potential to become a billion-dollar industry within a regulatory framework.^[4] To make this happen, immense policy support remains a precondition.

Formalizing E-waste Disposal: As e-waste is different from general waste, a formal collection system should be modeled to handle e-waste separately from municipal solid waste. A supply chain channel creation is imperative to collect e-waste from the remotest part of the country and help in checking indiscriminate dumping.

Incentivizing E-waste Recyclers: To increase the number of recycling companies and incentivize existing recyclers tax holidays to build a well-regulated e-waste recycling industry.

Introducing EPR Policy: EPR (Extended Producer Responsibility), a policy which holds electronic goods manufacturers fully or partially responsible for disposal of their marketed products, should be introduced.

Monitoring Ship-breaking Industry: Due to inadequate legal bindings, highly polluted scrap ships are imported in Bangladesh. Legal regulations should be strictly enforced to monitor imports. Central Effluent Plan should be established for managing the e-waste produced throughout the ship-breaking process.

Regulating ICT Industry: As the establishment of high-tech parks is an ongoing project to turn Bangladesh into ‘Digital Economy’, it should be ensured that these parks have a proper e-waste management system from the very beginning.

Alongside recycling the e-waste, reducing the repeated consumption of consumer electronics through creating awareness needs to be emphasized. In an era where technology is advancing at an unprecedented rate, the swelling e-waste should be given the similar level of attention as one of the most pressing environmental issues like plastic pollution through the development of a formal e-waste management system.

Ishrat Jahan Holy, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

References

• 1. A New Circular Vision for Electronics -World Economic Forum
• 2. The Global E-waste Monitor 2017 –  The Global E-waste Statistics Partnership
• 3. Chart: These Countries Generate the Most Electronic Waste – Statista
• 4. E-waste may stand at 4.62m tonnes in Bangladesh by 2035 – The Financial Express
• 5. Bangladesh retains top spot in global ship breaking trade – Dhaka Tribune
• 6. Consumer Electronics Industry of Bangladesh – DATABD.CO
• 7. E-Waste Management 2019 Market – Market Watch
• 8. E-Waste Management Policy in Bangladesh – BTRC
• 9. Time to formalise informal e-waste management in Bangladesh – The Daily Star

The post E-Waste Management: Time for a Reboot appeared first on LightCastle Partners.

The budget deficit has been a worrying issue for the economy of Bangladesh for quite some time now with it reaching an 11-year high in 2019. The government has been looking to decrease this deficit but has seen little improvement in recent years.

The biggest source of revenue for the Government of Bangladesh is tax revenue. This is where the informal sector can contribute. The informal sector of an economy is the part which is not taxed or legally monitored by the government. With almost 87% of the labour force being enforced in the informal sector, the Government of Bangladesh is missing out on a huge amount of tax revenue.^[1] If even a portion of this can be formalized, the Government of Bangladesh can find a solution to its budget deficit problem.

The Unstoppable Rise of the Informal Sector

More than 60% of the total employed people in the world are in the informal economy with 93% of them coming from emerging or developing countries.^[2] Thus, it is not surprising that Bangladesh has been seeing a surge in the labour force participation in the informal sector of its economy.

However, even by standards of countries in the same region and with similar economic growth, the labour participation in the informal sector has reached an alarming rate. World Bank data indicates/demonstrates participation in Bangladesh’s informal economy being significantly higher than that of neighbouring economies.^[3]

Two notable trends in the informal sector show that the participation in the informal sector is higher in rural areas with women being more likely to participate in the sector.^[4] While women employment increasing is a good sign for Bangladesh, the majority of them not being a part of the formal economy is a concern since they might not get legal protection in case of workplace harassment from employers

Percentage distribution of Informal employment by sex and area

The agricultural sector has the highest portion of workers in the informal sector while the service sector has the highest portion of workers in the formal sector. This might be due to the fact that agricultural employment is mostly seasonal and irregular.  Moreover, this is also the major reason behind rural areas contributing more to the informal economy than the urban areas.

Percentage distribution of Informal employment by broad economic sector

The Budget Deficit: Can Formalizing the Informal Economy Help?

The increasing budget deficit is embedded in low-revenue collection growth (11.2%), and high- expenditure growth (21.4%), driven by Annual Development Programme (ADP) expenditure.^[5] The 11 undergoing megaprojects which would cost around Tk 4.75 trillion is a noteworthy contributor to the increasing deficit.

The revenue collection from both tax revenue (8.8% growth vs. the annual target of 57.4%) and non-tax revenue (31.5% growth vs the annual target of 50.1%) have missed their targets in the first half of FY19.^[5] The Centre For Policy Dialogue (CPD) predicts that the possible revenue shortfall in FY19 to be around Tk. 85,000 crore.

It is evident that Bangladesh has been especially lagging behind increasing its tax revenue. This is not a recent phenomenon but has been an issue in the Bangladesh economy for quite a while. Bangladesh has one of the lowest tax to GDP ratio in the world and is the lowest in South Asia. This makes it evident that Bangladesh is failing to capitalize on its biggest source of revenue.

The figure clearly illustrates that a lower portion of the workforce in the informal economy leads to larger tax revenue. 

Curbing the Deficit and Beyond

While it is true that an increase in a formalized workforce will lead to more tax revenues, the importance of formalizing informal workers goes beyond that. A few steps which can facilitate in the formalizing of this sector have been identified:

Incentivizing Formalization: According to the United Nations Conference on Trade and Development (UNCTAD), it is necessary to make formalization desirable to the workers currently in the informal sector.^[6] The workforce being asked to join the formal economy should be educated that this opportunity comes with a lot of benefits. Being a part of the formal workforce means these workers shall be legally protected by the government. This shall help them from being mistreated by their employers and ensure they get their due for their work. Since a higher portion of the female workforce are in the informal sector, they are at a higher risk of being abused and exploited. Bringing them in the formal sector should be prioritized to ensure their wellbeing.

Moreover, being the part of the formal sector means a large portion of the unbanked population shall be able to use the financial services provided by different financial organizations. This shall help in a more financially-inclusive country and will lead to more entrepreneurial activities across the country.

Easing Formalization: The possibility of having to deal with bureaucracy might deter people from going through the trouble of joining the formal sector. Thus it is important to make the process as less complicated as possible. A great example is the Tax Fair organized by the National Board of Revenue which has made giving taxes a lot simpler than the usual process and has gotten a largely positive response.

Design New Legal Frameworks To Facilitate the Informal Workforce: The concept of having to give income taxes might discourage people from joining the formal sector. New regulations and policies can be designed to make the formal sector more appealing for the workers. These might include a more simplified taxation system, tax-cuts for workers under a specific income etc.

Legal Enforcement: While this is not the most preferable process, legal force should also be used for ensuring the transformation of the informal sector to the formal sector. However, to appease the informal workers, the legal repercussions should be faced by the employers of informal workers and not the employees.

While formalizing the informal sector could be a solution to solving the current pressing issue of budget deficit, it is also inevitable if Bangladesh intends to move up the ladder in world economy and eventually convert to a developed country. This process has to be prioritized to accelerate Bangladesh’s transformation to a developed economy.

Kidwa Arif, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

References

• 1. Informal economy in Bangladesh – International Labour Organization (ILO)
• 2. More than 60 per cent of the world’s employed population are in the informal economy – International Labour Organization (ILO)
• 3. Informal employment (% of total non-agricultural employment) – World Bank
• 4. Labour and Employment – Bangladesh Bureau of Statistics (BBS)
• 5. State of the Bangladesh Economy and the Budget Challenges – Centre for Policy Dialogue
• 6. How to Formalize the Informal Sector: Make Formalization Easy and Desirable – United Nations Conference on Trade and Development (UNCTAD)

The post Formalizing the Informal Economy: Key to Solving the Budget Deficit Problem? appeared first on LightCastle Partners.

Bangladesh, despite claiming that it has achieved self-sufficiency in food grain production, has not, yet, been able to ensure food security for its citizens. This has been reflected in the Global Food Security Index where Bangladesh ranks 83rd among 113 countries.^[2] Food and Agricultural Organization (FAO) defines Food Security as the physical and economical accessibility to sufficient, safe and nutritious food that meets the dietary needs and food preferences for an active and healthy life of the population”.^[1] This poor ranking can be attributed to the lack of sufficient nutrition among the citizens of the country.

Nutrition: A Cause For Concern?

The Global Food Security Index is based on three core issues which are, Affordability, Availability and Quality & Safety of food. Among these three, Bangladesh has comparatively ranked worst in Quality & Safety of food at 107 out of 113 countries.^[3] A comparison of the average global and regional scores in different indicators in the Quality and Safety issue with the scores of Bangladesh paint an appropriate picture of the current scenario of Bangladesh.

It is evident that a major concern of Bangladesh is the unavailability of micronutrients (Vitamin A, Iron and Zinc) and the poor quality of protein in the general diet. Few of the major concerns regarding nutrition in Bangladesh have been identified.

Undernourished Children:The stunting (underdevelopment) rate, in Bangladesh among children under 5 have been decreasing at a lower rate since 2014 with 39 out of 64 districts having a stunting rate higher than the World Health Organization (WHO) threshold.^[4] This indicates that Bangladesh had been making significant improvements in decreasing stunting the early 2010s, it has ceased in the recent years.

Nutrition During Pregnancies: Undernourished pregnancies are rooted in child marriage which eventually lead to undernourished children or maternal death. According to global data, adolescents aged between 15 and 19 are twice as likely to die during pregnancy than women aged more than 20. This has contributed in 38% of all babies being born to be of low birth weight.^[5] Moreover, 39.9% of women in their reproductive ages have anaemia.^[6]

Infant and young child feeding: Bangladesh is also lagging behind in providing appropriate nutrients to infants and young children. To ensure proper development of a child, they should be given breast milk in the first six months and then other nutrients should be included in their diet for proper growth. The feeding of only breastmilk in the first six months is called Exclusive Breastfeeding while breastfeeding combined with other solid foods is known as Continued Breastfeeding. These are known as complimentary food and only one-third of the children are given these in a timely fashion. In fact, only 23% of children are fed according to infant and young child feeding practices.^[7] Moreover, continued breastfeeding has dropped 3.77% from 2013 to 2019. All the issues regarding infant and young child feeding mainly arise from the lack of education and awareness among the parents.

Unbalanced Diet: The diet consumed in Bangladesh, especially in the rural areas, are often devoid of the necessary nutritional requirements. This is evident in Bangladesh’s abysmal score in the dietary diversity in the Food Security index (Figure 1). According to the Food and Agricultural Organization (FAO) nearly two-thirds of the regular diet includes mostly rice, some vegetables, a little amount of pulses and small quantities of fish if and when available.^[9] Meat consumption in Bangladesh is especially low and is mostly consumed in urban areas. Despite a per capita requirement of 43.25 kg meat, Bangladesh only has an availability of 9.12 kg. The meat available is not distributed evenly due to income disparity which has led the per capita meat consumption to be only around 4 kg.^[10]

Rise in Obesity The triple burden of nutrition consists of undernutrition (underweight, stunting and wasting), overweight & obesity and micronutrient deficiencies. While undernutrition and micronutrient deficiencies have historically plagued Bangladesh, overweight & obesity have also been on the rise which have resulted in an increase in diseases like diabetes, hypertension etc.

Increase in overweight or obesity also leads to an increase in relevant Noncommunicable diseases (NCDs). For example, diabetes has seen significant increase over the years.

Endeavours to Improve Nutrition in Bangladesh

It cannot be denied that Bangladesh has made some noticeable strides in this sector. The malnutrition indicators for children under 5 show that Bangladesh has seen improvements in most sectors.

This improvement in the status of children under five has been reflected in the decrease in their mortality rate.

The change in breast feeding patterns on children have contributed to this improvement with an increase of 10.99% in exclusive breastfeeding between the years 2013 to 2019.^[13]

These achievements are the results of hard work by numerous government, non-government and international organizations. These include the primary school feeding programs by the government and non government organizations, the launch of Shokti Doi by Grameen Denon, programs to increase awareness among new parents, implementation of different plans and policies by the government and international organizations, etc.

Innovative Solutions for Nutrition

With the needs of the growing population, Bangladesh needs innovative solutions to tackle nutrition deficiency. Different organizations, both public and private are trying to come up with such solutions. Some of them have been identified.

“Bangladesh NutriStar: Nutrition Innovation Challenge”: Arranged with the collaboration of the Ministry of Industries,  Global Alliance for Improved Nutrition (GAIN) and World Food Programme (WFP), this programme connects businesses with innovative solutions to producing or supplying affordable nutritious food to investors. Its purpose is to kickstart businesses which will assist in coming up with innovative solutions to solve the nutrition problem of Bangladesh.^[11]

Rice Fortification: Rice fortification is the practice of increasing the content of essential micronutrients in rice and to improve the nutritional quality of the rice.^[12] A major issue with the regular diet of Bangladeshi people is the lack of micronutrients in it. Since a major portion of the diet consists of rice, fortification of rice can be a revolutionary solution in dealing with micronutrient deficiency. The Bangladesh Government has plans to introduce Fortified Rice in the Open Market Sale (OMS) to introduce it to the general populace. Currently, Abdul Monem Ltd. produces fortified rice but it has a huge potential in the rice production industry.

Paving the Path for A Nutritious Future

It might seem like Bangladesh is plagued with problems related to malnutrition but most of them could be traced to one core issue: unbalanced diet. Thus, if this can be solved, it is safe to say that a nutritious and healthy population can be ensured. A few propositions regarding how this issue can be resolved has been discussed.

Incentivize Businesses Working With Nutrition: Majority of the organizations working with nutrition currently are non-profit organizations. However, it is also necessary for businesses to join this endeavour. For example, despite the introduction of Fortified Rice, it is not yet popular among the general households due to a lack of proper branding. If business organizations are encouraged to work with such innovative solutions, they can help these reach the general populace by proper marketing.

Sensitize the general population: People nowadays are highly concerned about the quality of food they consume and how it affects their health. But outside of the urban population centres, the general population are highly price-sensitive and still do not value nutrition as a key factor when making food choices. Mass awareness and sensitization campaigns should be undertaken to educate the public on nutrition.

Look for Alternative Protein Sources: Protein deficiency has been one of the major drawbacks in the Bangladeshi diet. However, meat has often been out of the reach of the lower income people. This problem can be solved by finding and funding alternative protein sources like mushrooms, nuts, different lentils, etc. The Bangladesh Agricultural Development Corporation (BADC) can encourage and incentivize farmers to produce such alternative protein sources.

Encouraging Vertical Gardening Throughout the Country: Cultivable land in the country is shrinking rapidly in Bangladesh. Vertical farming can be done in small spaces, even in urban areas. Farming vegetables with micronutrients can help Bangladesh eradicate the micronutrient  deficiency in the diet of Bangladeshi people. Moreover, this will also assist in solving the pollution problem and can help increase household incomes.

Bangladesh has made notable strides in solving the nutrition problem after the independence. Both government and non-government organizations have been doing commendable work in this sector. With proper policies and collaboration from private organizations, this problem can be solved completely within a short time.

Kidwa Arif, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

References

• 1. Food Security – Food and Agricultural Organization (FAO)
• 2. Rankings and trends – Global Food Security Index
• 3. Bangladesh – Global Food Security Index
• 4. Maximising the growth of children: Speeding up the work to reduce stunting – UNICEF
• 5. Nutrition during pregnancy – UNICEF
• 6. Bangladesh | Health– Trading Economics
• 7. Infant and young child feeding – UNICEF
• 8.  Bangladesh – Adolescent Fertility Rate – Trading Economics
• 9.  Food-Based Nutrition Strategies In Bangladesh – Food and Agricultural Organization (FAO)
• 10. This is how you get your red meat – Dhaka Tribune
• 11. Bangladesh NutriStar: Nutrition Innovation Challenge – Scaling Up Nutrition
• 12. Fortified Rice – Abdul Monem Limited
• 13. Bangladesh – Multiple Indicator Cluster Survey (MICS) 2019, BBS and UNICEF

The post A Nutritious Bangladesh to Ensure a Sustainable Future appeared first on LightCastle Partners.

Bangladesh has been working relentlessly to establish “Digital Bangladesh”, an integral part of the government’s Vision 2021. IT companies in Bangladesh started exporting software around two decades ago, joining the business process outsourcing (BPO) bandwagon. Bangladesh Association of Software and Information Services (BASIS), which started its journey with 17 companies in 1997, now stands at 1200+ companies involved in software development and providing IT services. ICT exports by 250+ companies, in 60+ countries around the world, accounted for USD 800 Million in   which was 2.2 percent of the total export value^[1]. According to USAID, North America is the country’s main export destination. Bangladeshi IT and ITES firms generate almost 35% of its export revenue from US buyers, 15% from the UK, followed by a number of EU countries such as Denmark and the Netherlands. A number of local enterprises also export IT-ITES services to UAE, Saudi Arabia, South Africa, Malaysia and Singapore. This is the hard work of the 1 Million people who are working directly in the ICT industry. The government had set an export target of total USD 5 Billion by 2021.

The sector has been declared as a thrust sector by the government assessing the ability and interests of the youth segment of the country. In Bangladesh, there are more than 100 software houses, 35 data entry centers, thousands of formal and informal IT Training centers and numerous computer workshops. Additionally, Bangladesh Hi-Tech Park Authority (BHTPA) was formed with the vision to ensure sustainable development and proliferation of IT/Hi-Tech Industry in Bangladesh. Given the potential of the ICT sector in Bangladesh, it can work as a major economic driver.

The digital e-commerce and e-service industry is growing in pace with ICT

Similarly, during the late ‘90s, the e-commerce industry started its journey in Bangladesh, however, did not witness any growth up until the last decade. The development of banking facilities logistics communication and electronic payment methods has created opportunities for the e-commerce sector of Bangladesh to grow. Over the past years, the country’s shopping behavior has shifted dramatically with the change in the living standard of the population. The emerging population is now more acquainted with making transactions of products and services online.

As of 2019, according to a   research firm, published in a Bangladesh daily^[2],  the e-commerce market of Bangladesh is stated to be USD 1.6 billion and is expected to double to USD 3 billion by the year 2023. Bangladesh’s government imposed a 7.5 percent VAT on this sector that may adversely affect the ongoing digitization agenda of the government and hamper the employment rate in this sector according to industry insiders. In terms of revenue from e-commerce, Bangladesh ranked 46^th position globally. Growing smartphone penetration and popularity of 4G networks along with the increasing purchasing power of consumers are driving the e-commerce industry across the world including this south Asian country, Bangladesh. With the advent of COVID-19, the e-commerce industry is witnessing an unnatural upsurge globally and with the world heading into an inevitable global recession, the growth of the industry is bound to slow down.

IT companies in Bangladesh are tackling similar challenges to those faced by  in India

The COVID-19 impact possesses an unique challenge for the IT industry as it is only in its growth stage in Bangladesh. Industry insiders expect the overall revenue for the 2020 year to decrease by 20-25 percent due to the pandemic. Companies that deal with BPO of medical and legislative data for North American companies, such as Therap, Augmedix are somewhat stable in terms of their business given the heightened respiration of the medical industry. However, the industry players that mainly focus on outsourcing of software development, are at a disadvantage. India serves 16 percent of the global market^[3] and they’re already predicting a lower growth rate than the previously estimated 7.5 percent for this year (Nasscom).^[4]

Although the industry technically has the capacity to operate remotely by its nature, the impact of the pandemic is still felt due to stuttering business orders from  end clients. Since Bangladesh ICT export is mainly dependent on business from North American and European companies, there has been a general fall in outsourcing given the spread of the virus in these regions. As most global tech companies are now shuttered with employees working from home, the impact of business growth has been stagnated and the ripple has been felt in the local outsourcing industry. Other than a few large tech companies in Bangladesh, most companies do not operate on a retainer basis and are dependent on project basis business generation. Due to the cancellation or postponing of projects in such an unexpected event, business continuity is in serious trouble, resulting in local companies facing cash crunches. This is applicable at least for those that do not have a force majeure provision in their contracts than works in their favor.

Maintaining steady cash flow is the biggest challenge during this time

Software companies than serve the local market mostly are facing more challenges compared to those that are focused more on outsourcing. Due to the economic halt, local clients are stalling payment leading to cash flow challenges for these companies. Companies in north American and Europe are having to source locally for the time being, especially on security monitoring, disaster recovery etc. as delivery of work from offshore services, especially China has come to a screeching halt.   Kabir, Co-Founder and CEO of BrainStation-23 says that there’s also potential here for growth – if companies are agile and are willing to pivot fast. According to him, video streaming, machine learning and online learning are strong business vertices to explore now. They have seen a strong upsurge in demand for Moodle, an open source Learning Platform or course management system (CMS), from clients in the education sector due to the sudden increase in online classrooms. Government contracts where foreign governments are seeking software solutions in relation to the pandemic crisis are also a potential target growth area for the industry.

Infrastructure level challenges such as data protection and access to internet are major challenges of working from home

Layoffs are yet to happen in the industry but smaller companies with limited cash-flows might have to rely on pay cuts to survive if the pandemic persists long-term. On a micro level, since tech companies operate on an agile methodology of delivering work in a predetermined deliverable schedule, accountability due to remote work has disrupted the delivery cycles. Als0, most companies are having issues with remote work as loss and delivery of data over unprotected internet connections is a big challenge. Large companies operate through their own protected servers and systems in their office and data sharing and assurance of protection of said data on an open system is a big challenge for most. In India, some companies have begun installing corporate desktop computers at their employee homes but this is hard to sustain and implement in an industry wide scale^[5]. Another systemic challenge reported by the industry is the lack of internet bandwidth when operating from home. Due to sudden upsurge of demand for home internet consumption, the infrastructure is strained and its impact is also felt in the IT industry. The only silver lining in such a grim situation is that outsourced service desks are having to support huge volumes of end-users trying to access systems remotely but it also comes with the challenge of engineers having to facilitate overwhelming demand often with technology stacks with which they have no training or familiarity.

Some e-services are faring better than others due to the pandemic

In a time such as this, the e-commerce and e-service industry is also facing similar challenges. Initially, with most of the urban Dhaka population put into isolation and following social distancing, the number of online purchases in the B2C e-commerce platforms (daraz.com, pathao, chaldal.com, etc) faced an unnatural spike. However, food delivery services have seen a sharp downturn in just the past week with orders falling by 75 to 80 percent according to an industry representative from Shohoz. Consequently, 40 to 50 percent of restaurants have also closed down leading to the fall in business. As per a BRTA directive, ridesharing by Uber and Pathao have been banned to limit the spread of COVID-19.^[6] The demand for flu-related products such as cleaning agents and healthy supplements is high. However, due to the shortage of supplies owing to the pandemic, the limited products are priced at a higher range. Delivery of e-services have also come to an halt due to the implementation of quarantine. Chaldal has seen an increase in online grocery delivery demand and along with other food delivery services have replicated the contactless delivery system. Online grocery stores are experiencing double digit growths in the number of deliveries with Chaldal’s average 5000 orders-per-day jumping to 10,000 to 15,000 orders-per-day on an average. The digital e-health service industry is facing a sudden surge in phone call consultation with Telenor Health reporting a 30 percent increase in phone consultation services.^[7] Similarly, Praava Health has launched a low cost video consultation services to tackle the upsurge in healthcare advice demand. Since the e-services and e-commerce industry is highly dependent on day-wage/contractual earners, the sudden outflow of workers from the city has also led to serious staffing shortage.

The ICT and digital sector can be easily protected from the impact of COVID-19 if precautionary measures are taken

With the challenges now apparent for the IT and digital sector, it’s crucial that the government pays significant attention to its third-engine post coronavirus Bangladesh. On a B2C level, e-service companies such as food delivery and ride-sharing companies need to create a safe and hygienic environment in its operations through ensuring all its delivery men, riders and drivers take safety precautions seriously. On B2B level, tech companies need to support its staff through providing proper work-from-home initiatives and creating accountability through better management and delivery techniques. Companies also need to reassure its clients that their work-from-home will not impact business significantly and that precautionary measures are being taken to ensure business continuity. The coronavirus stands to wipe out 1.1 percent of Bangladesh’s gross domestic product, resulting in 894,930 jobs being lost as per a projection of the Asian Development Bank (ADB)^[8]. It is highly likely that the IT and digital industry will fall into this crunch along with the RMG industry. For long term growth assurance, provisions should be made for the industry in the recently sought $1 billion in support from the International Monetary Fund (IMF) and the World Bank (WB) by the government. Admittedly, it’ll be impossible to not feel the impact of the pandemic in any industry but precautionary and supportive policies will ensure the tech and digital industry will not be crippled in a post COVID-19 economy.

Author: Rageeb Kibria, Principal Business Consultant, LightCastle Partners

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

References

• 1. ICT Export (2017), ICT Ministry, The Daily Star, Accessed From: https://www.thedailystar.net/frontpage/ict-export-fetches-800m-2017-1492510
• 2. E-commerce sales to reach $3b in 4 years, The Daily Star, https://www.thedailystar.net/business/news/e-commerce-sales-reach-3b-4-years-1841428
• 3. How The Digital Economy Is Shaping a New Bangladesh (2019), WEForum.
• 4. How the tech industry is ensuring business continuity in the times of coronavirus (2020), Economic Times.
• 5. India’s outsourcing industry struggles to work from home, Aljazeera (2020)
• 6. Coronavirus and the Bangladesh Economy: Navigating the Black Swan Event of 2020, ULAB
• 7. Coronavirus and the Bangladesh Economy: Navigating the Black Swan Event of 2020, ULAB
• 8. The Economic Impact of the COVID-19 Outbreak on Developing Asia (2020), ADB

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Read the full article: https://www.lightcastlebd.com/insights/2020/03/29/the-effect-of-covid-19-on-bangladeshs-apparel-industry

The post Infograph: Implications of COVID-19 on the Apparel Sector appeared first on LightCastle Partners.

Read the full article: https://www.lightcastlebd.com/insights/2020/04/02/bangladesh-it-and-digital-sector-tackling-covid-19-implications

The post Infograph: Implications of COVID-19 on the ICT Sector appeared first on LightCastle Partners.

Globally most of the startups are either shutting down, laying off staff or drastically changing their strategies in the wake of COVID-19. Many of the Bangladeshi startups which raised a lot of money on the promise of rapid growth are facing plummeting demand as consumer spending stalls and unemployment is set to surge. Even the buzzy sectors like fintech, healthtech, edutech and deep tech are not immune from the effects of the pandemic.

A quick survey of startup founders during these uncertain times shows that there has been a significant fall in their business activities : 32% reported a decline in business activities by more than half while another 24% reported a complete business closure.

In Bangladesh, the coronavirus pandemic has hit sectors like Apparel, e-Services and Tourism the hardest. Education (including edutech), finance (including fintech), healthcare (including healthtech) sectors have faced an initial blow but might recover partially provided that consumers will need them more if the current situation persists. Although logistics sector players have reported a loss in revenue by 20%, the sector can bounce back if they improve their operational plan by partnering with e-commerce companies. With the onset of this lockdown, some of the e-commerce sector players have reported a 50% increase in business.

According to Venture Capital and Private Equity Association of Bangladesh (VCPEAB), around 300 startups fear a loss of more than USD 53 Bn as sales of products and services have come to a halt. Also, startups having an export-oriented income have experienced an 80% fall in revenue recently. The jobs of almost 150K people– directly employed in these startups– are on the line now while about 700K service providers associated with these startups are currently not in a position to provide services either.

Each startup is different and needs to customize its survival strategy based on its market offering and value proposition. For example, Edutech startups can promote their professional courses as “skills you need to develop to survive in a post-corona world” through digital media. Most of the people have been working from home and thus doing online courses sounds way realistic than buying apparels online. On another note, many areas inside Dhaka are going into complete lockdown recently. In the face of this challenge, healthtech, e-commerce and logistics companies can come up with rescue strategies.

As a global recession awaits us, Bangladesh startup founders will have to deal with difficult decisions ranging from executing operations for the next one to two months to strategically planning the next 12-18 months. Based on our exhaustive research on available survival guides and  interviews with industry experts, we have come up with some measures that might help the startups to navigate through the rough waters.

Understanding your business as a first measure to deal with the crisis at hand

The first question every startup CEO needs to ask themselves now is what is their burn rate and runway. Before determining the runway, the founders have to look into KPIs such as debt to income ratio, revenue to employee ratio and monthly gross expenses. Then they need to ask themselves how many months their companies can survive burning the current amount of cash. It should be noted that the traditional demand and sales forecasting might not work in a recession-struck market. Therefore founders should emphasize on scenario planning to capture the real picture.

A model to map out potential strategies in regard with macro scenarios has been provided by Sequoia capital. Here the X axis represents the macro environment i.e the duration of the lockdown which is directly linked to revenue. The Y axis represents company actions i.e. curbing down the operational expenditures. Startups should implement actions from the left and gradually streamline their operations as the macro environment provides more brevity. Ideally the goal should be to be in the green zone but the yellow zone should be enough to survive the storm.

At the same time, the systematic risks should be minimized by closely monitoring both the macroeconomic indicators and business performance indicators like revenue/employee, debt/income among other metrics. The founders must check whether the sectors they operate in are getting affected and to what extent. Positive diversifying can play an instrumental role in helping startups to land on their feet. Bangladeshi ridesharing platform Pathao has recently relaunched its delivery service Pathao Tong and partnered with Shwapno to deliver goods to consumers’ doorstep, while online service marketplace Sheba.xyz has started a fund named “mission save Bangladesh” for the underprivileged and those who are deemed most at risk from the coronavirus in partnership with The Daily Star and Samakal.

Do not let the deal flow dry up – look for alternative funding sources like Impact Investments

Our survey with startup founders shows that early stage companies are the immediate sufferers in the current scenario. Funding opportunities have dried up in the short-term, and perhaps for the rest of the year. Many startups will fail, unless they are able to solve their immediate cash flow deficit. Even in the most “normal” of circumstances, startups move fast and fail fast. The COVID-19 crisis has put the startup ecosystem at the brink of collapse.

If we take a look at the 2008 financial crisis, we can observe the VC investment trend during a bear market. VCs invested around USD 3.5 Bn per quarter in seed, A, B and C rounds during 2006 which grew to USD 5 Bn per quarter in 2007 and early 2008. Then the investment velocity dropped by half to USD 2.9 Bn, USD 2.7 Bn and USD 2.3 Bn in the quarters following the crash. In the second quarter of 2010, the market finally bounced back. Seed was the fastest to recover while series C was the slowest. The long eight quarter rebound time might have worked in a recession-struck market but can take even longer in a post-pandemic world.

Fundraising was tough enough as it is, and with COVID-19, many will either a) not be able to fundraise, or b) have their earlier commitments withdrawn. Additionally in a recessionary environment, foreign capital will focus first into countries they already have operations first before Bangladesh which is a new country for most.

Bangladeshi startups should optimize their runways at these trying times to keep the existing investors motivated. Second step should be to keep looking for new sources. Going after impact investments like catalytic fund or matching fund could be a timely option for early stage startups. In a pandemic struck market, getting access to a patient capital can only help the startups buy more time. Recently, a catalytic fund named Biniyog Briddhi has been launched in the country powered by the Swiss Agency for Development and Cooperation and Roots of Impact, and implemented by LightCastle Partners. The fund aims to both train, finance and advocate impact investors and enterprises through Impact Ready Matching Fund (IRMF up to USD 100K) and Social Impact Incentives (SIINC up to USD 250K). (details) Additionally, programmes like UNDP Youth Co-Lab with a strong impact focus can be reached by early stage startups.

To spend or not to spend

Globally startups are slashing ad budgets, giving away products, and using content to stay connected with shoppers. The situation should not be different in Bangladesh. These work from home days are perfect for differentiating resources that are absolute musts from resources that are just nice to have.

Recently Airbnb has suspended its marketing activities to save USD 800 Mn and the CEO has promised to spend USD 250 Mn to reimburse hosts for cancelled bookings. If the lockdown persists for an extended period of time, startups in Bangladesh can also look into measures to cut expenses. Getting rid of a high maintenance office, telling employees to use their own resources rather than company laptops, organizing webinars instead of events, arranging virtual meetings instead of physical ones, using digital marketing methods instead of expensive advertising are some of the most common ways to keep the cost minimal even when the lockdown is lifted.

The most crucial decision: Human capital management

The founders of Airbnb have declared to not draw salary for the next six months while top executives will take a 50% cut. Airline industry, being one of the worst affected by the pandemic, has been taking extreme measures to survive. Players like Emirates and Malindo have been asking pilots and cabin crews to take unpaid leaves while other airlines are simply laying off people and halted new hiring from the beginning of March. Tesla will cut pay for all of its salaried employees and will flaying off hourly workers until May 4 when it intends to resume production of electric cars. Media company BuzzFeed announced a graduated salary reduction for the majority of employees, some of whom will see a nearly 25% pay cut and the CEO will forego his salary as their advertising revenue declines. Wonderschool, a childcare startup backed by VC firm Andreessen Horowitz, has laid off 75% of its staff via a Zoom call.

At the same time some companies are following less drastic measures like salary cuts going into the employee option pool. While most of the sectors are furloughing people, Amazon, among other logistics sector players, plans to hire an additional 100,000 warehouse and delivery workers amid a surge in online orders due to the coronavirus outbreak. The company is also raising pay for warehouse and delivery workers by USD 2/hour in the U.S. market.

Some of the Bangladeshi startups had to cut jobs or reduce payroll while some of them introduced salary cuts for executives as a loan to the company. If this continues, not only will it result in a domino effect on local consumption, but may also lead the best talent to opt for safer haven of large multinational companies instead of helping the local ecosystem. Letting people go in the face of an economic downturn has some legal implications and is definitely not considered as a good practice.

Additionally this concept is culturally unprecedented in Bangladesh. In the more cutthroat economies like the U.S. the practice of laying off people in difficult times has worked out mostly due to the fact that the state provides them with minimal benefits, but in our country it will lead to a dismal display of unemployment.

Pivoting in the face of the crisis

As startups scale faster, they will play an instrumental role in driving innovation and speeding up economic recovery in these testing times. Therefore the government needs to provide specific response packages to startups. While the GoB has declared stimulus packages to export-oriented industries like working capital refinancing, EDF funding, pre-export capital, industry and MSME credit at discounted rate (4.5%) totaling USD 8.5 Bn – Startups weren’t directly a part of the package. Given Startups often do not directly operate with bank financing – and investors at least take 6 to 12 months to bounce back and invest – we assume the startups are going to need support for 3 to 6 months of working capital. The size of each startup is different but if we take a look at larger ones who have 100+ employees they would need between USD 500K to 1 million as a 3 to 6 months runway. Depending on the number of Startups that needs to be supported the total response package needed would be around USD 12.5 Mn (USD 500k each on average *25 Startups) at least. If the big ones survive the benefit would trickle down to the smaller ones.

In the coming years, Bangladesh’s startup ecosystem which was set to finally come of age, will face a major setback. Startups who will adapt quickly by pivoting their businesses can navigate their way back, while companies failing to do so will get lost. In order to weather the storm, Bangladeshi businesses need to become increasingly inclusive and start creating social and environmental returns on top of positive economics. And the role of startups would become even more critical for equitable growth.

This article was written by Silvia Rozario, Business Consultant, LightCastle Partners. For any queries, you can reach us at silvia.rozario@lightcastlebd.com.

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

The post COVID-19 Pandemic: How Can Bangladeshi Startups Weather The Storm? appeared first on LightCastle Partners.

According to the Bangladesh Telecommunication Regulatory Commission (BTRC), Bangladesh has at present over 165 million subscribers, of whom 93.5 million are mobile internet subscribers. 4G has transformed the sector with massive gains in internet speeds, which has fed a growing demand for data services. Year-on-year, data consumption rose 46% between 2017 and 2018, and has been on a high trajectory since, one the back of increasing demand for digital services. ^[2]

This demand is expected to drive revenue growth by 34 percent in the next five years to $5.08 billion from $3.8 billion at present, on the back of expanding user base and wide range of services. ^[3]

Immediate term impact of the pandemic

In contrast to most other sectors, the telecommunication sector at large is expected to benefit from the COVID-19 outbreak. As social distancing confines more and more people indoors, both business and entertainment will shift to the virtual realm. In this scenario, the country’s telecom companies are expected to see a substantial increase in data consumption accompanied by a jump in voice calls in the coming days. ^[4]

However, the story may be different on the consumer end. The leading mobile network operator, Grameenphone, has been failing for some time to ensure that its Quality of Services (QoS) are upto BTRC standards [5]. At the same time, the mobile industry’s combined investment fell 19 percent year-on-year to Tk 3,695.72 crore in 2019, the lowest in recent years, as the regulatory regime continues to spook the foreign owners of the top two carriers.  ^[6] Combined with the projected surge in demand and a reluctance to invest on the part of MNOs, consumers can expect to be faced with substandard services. Already, the shifts in consumption patterns across Europe due to the lockdown effects of the coronavirus are leading to internet throttles on video streaming services ^[7], and such measures cannot be ruled out in Bangladesh to preserve the quality of service.

Long-term ramifications

While the demand will somewhat subside for digital services once the lockdown and social distancing measures post-COVID 19, it is likely to permanently strengthen the base of data subscribers as more subscribers are expected to become hooked onto digital services. Whether this will spur accelerated investment by MNOs is less certain and will depend largely on the regulatory environment. As it stands, investment is not likely to pick up.

Policy support and other means to mitigate the negative impacts of Covid-19

The government can take various measures to help improve the quality of services provided by MNOs. For one, it can relax the timeline for MNOs to pay outstanding dues as per BTRC’s audit claim contingent on MNOs directing some of the capital towards increased investments in improved network infrastructure and quality of services. The government can also offer tax breaks to the MNOs with the condition to pass on lower data and voice costs to subscribers, and for MNOs to allocate more of their already prominent CSR funds towards a coordinated COVID-19 response.

Author: Saif Nazrul, Senior Business Consultant, LightCastle Partners

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

References

1. Total Subscribers Bangladesh – BTRC
2. Mobile data usage rises 46pc on 4G – The Daily Star
3. Telecom sector’s revenue to cross $5b by 2023 – The Daily Star
4. Data consumption, voice calls to go up as virus fear confines people to home – Dhaka Tribune
5. GP fails to comply BTRC’s call drop benchmark – Dhaka Tribune
6. Mobile operators cool down on investment plan – The Daily Star
7. Netflix, Disney+, YouTube throttle Europe’s streaming due to coronavirus – Mashable

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Read the full article: https://www.lightcastlebd.com/insights/2020/03/30/bangladesh-pharmaceutical-sector-wading-through-the-pandemic

The post Infograph: Implications of COVID-19 on the Pharmaceutical Sector appeared first on LightCastle Partners.

Bangladesh Leather Industry Complementing the Footwear Industry at its Fullest

From 2009 to 2018, the economy of Bangladesh grew at an average rate of 6.5 percent, having exports and remittances as the key drivers behind this growth. Over the years, the ready-made garment (RMG) sector has had a strong dominance over the total export of the country. To sustain high economic growth, and impede the Dutch disease, diversification of major economic drivers is essential. Aside from RMG exports, which account for almost 85 percent of the country’s export basket, ^[1] leather and footwear combinedly accounts for 3.3 percent of the overall export basket. ^[7]

Utilizing Bangladesh’s abundant supply of raw materials and labor intensiveness, the country’s leather sector has been meeting the domestic demand, and actively participating in global value chains. According to rawhide industry insights, in Bangladesh per year, almost 250 million cattle are slaughtered, and 50 percent of the rawhides are collected during Eid-Ul-Adha. ^[2] In 2019, ahead of Eid-Ul-Adha, the government of Bangladesh settled the price of rawhide of cows to be BDT 45-50 per square feet inside the Dhaka region and BDT 35-40 for the other parts of the country. Additionally, the price of rawhides of goats was set to be BDT 18-20. Despite the fair price set by the government, the year 2019 was not in the favor of the industry for a price shock caused by a decline in global demand, delay in building the industrial park for tanneries in Savar, being stretched of Leather Working Group (LWG) certification, and the dearth of financing available to tannery owners, resulted to a waste of close to 100,000 pieces of rawhides. ^[2]

Nevertheless, one of the main reasons behind not being able to be as agile as her neighboring countries is, because of not having the Leather Working Group (LWG) certification. On this note, in 2019, the government of Bangladesh mentioned the continuation of incentivization during the Bangladesh Leather Footwear and Leather Goods International Sourcing Show (BLISS). ^[3] The leather industry of Bangladesh was developed back in the 1970s, and now according to Leather Goods and Footwear Manufacturers’ and Exporters’ Association of Bangladesh (LFMEAB), one of the major products of the industry is footwear. Considering the vast scope of earning foreign currency, and broadening the country’s market, the Seventh Five-Year Plan of the Government of Bangladesh showed a forecast of at least USD 5 billion of export revenues from the leather sector comprising leather, leather goods and leather footwear by the year 2021. ^[5]

China, Meeting Most of the Global Footwear Demand Having Vietnam on its Tail

According to 2018 data, the global footwear market was worth USD 227.1 billion. ^[4] The overall global footwear industry is dominated by the United States of America (USA) as 24.7 percent of the leather footwear is imported merely by them. To meet the demand, the USA heavily depends on China. ^[5]  In 2018, the USA imported a total of USD 2.44 billion pairs of shoes, and 69.3 percent of these shoes were imported from China, 18.9 percent from Vietnam, 4.1 percent from Indonesia, and only a meager amount from Bangladesh, which is 0.2 percent. ^[10]

Additionally, with China withdrawing from the global leather goods market, Bangladesh is presented with a huge potential to attract foreign investment into the country through this sector. On top of that, the increased labor cost in the leather industry, and the imposition of a 17 percent import tax in the leather footwear industry have made both the Chinese players and global buyers less interested to focus on the Chinese footwear market. ^[6]

On the other hand, with the developing Vietnamese economy and increasing consumer awareness of branded products, Vietnamese footwear sector has recorded a strong performance growth. Vietnam stands to be the second-largest footwear exporter in the market. Free trade agreements with the Republic of Korea, Russia, Kazakhstan and Belarus along with an agreement with the EU has boosted Vietnam’s footwear sector. Vietnam acts more like an outsourcing hub for the global supply chains of giant manufacturers, such as Nike and Adidas, which amplifies its export revenues, with this strategy Vietnam’s footwear industry is targeting to reach USD 24 billion in exports in the year 2020. ^[7] Besides Vietnam, the Cambodian footwear industry has been experiencing growth in this sector. Most of the leather and other raw materials used to produce footwear are sourced from within ASEAN region, and with Cambodia having duty-free access to the EU, the country is attracting foreign investment from countries such as South Korea, and Vietnam. Thus, to outstand and compete in the global footwear market, Bangladesh has to keep up its pace and act strategically.

Bangladesh to Secure its Place in the Global Footwear Value Chain

Though the figure above shows downbeat participation of Bangladesh in the USA shoe market, historical data shows that Bangladesh’s performance is quite praiseworthy as its export to the USA increased by triple digits. ^[7] In fact, Footwear accounts for more than 2.2 percent of the export earnings of Bangladesh. ^[8]

Although the financial year, 2018-19 was not satisfactory for the overall leather industry of Bangladesh, the performance of the footwear industry was ample compared to the previous year, where the leather footwear exports increased its value by 7.48 percent generating USD 607.88 million, and the non-leather footwear exports increased by 11.24 percent generating USD 271.53 million.^[9] The export performances for July to February of the current fiscal year for leather and non-leather footwear are respectively USD 376.60 million and USD 219.47 million, which is cumulatively 0.5 percent greater than the total footwear export revenue for July to February in fiscal year 18-19. These export revenues generally come from the EU (60-65 percent), USA (17-18 percent), and Japan (6-7 percent), and more than 100 Bangladeshi companies including Apex, Bay and Leatherex Footwear, export shoes.^[10]

The Global Footwear Market being Demolished by COVID-19 Pandemic

The recent Covid-19 outbreak has put the industry at peril of great financial loss. The industry players have already started to feel the turmoil of the supply chain disruption. Like many other countries, Bangladesh will be directly affected by the Chinese slowdown through global value chains. It is predicted that Bangladesh will incur a loss of USD 16 million in total directly because of China’s slowdown, and out of USD 16 million, USD 15 million loss will be encountered in the leather industry only.^[11] And 69.12% of the footwear export of Bangladesh depends on leather-footwear. Here the major defiance is the contraction of the demand for footwear by our major buyers (both domestic and international). These buyers have no choice here as well because they have to shut down their stores due to a decline in sales. For example, the global giant brand Adidas’s sales have declined by USD 1.1 billion only in greater China. Adidas reported a slump in sales in Japan and South Korea too, of USD 111 million.^[12] With industry giants such as Adidas, Nike, and Puma experiencing such declines in sales, it has proven to be considerably harder for nascent companies to sustain in the industry under current market conditions. Specifically, nascent domestic and foreign companies are coming across a major liquidity crunch because of the huge slump in sales.

Footwear factories all over the world, including Bangladesh, are one of the casualties because first of all, manufacturing factories are folding up production in the prevention of the virus outbreak. Secondly, with the decline in sales in the forward market (both domestic and international), the buying orders in the local industry are coming to a halt leading to the entire backward market being hampered. As a consequence, the entire value chain is being disrupted, leaving stakeholders out of businesses, people losing their jobs, and this added obstruction of the footwear industry is adding up to the catastrophe of the global crisis.

Salvaging the Footwear Industry through Strategic Measures and Taking the Edge off the Economic Burden

Importers and suppliers are here in a battle together where it is a must for them to stand side by side.  Many of the domestic and international brands/businesses are facing problems in supply chains because of disrupted cash flow. These businesses need financial support to get through this crunch period and save their suppliers/factories. Because through saving the factories, jobs of many people can be saved as well.

As the entire supply chain has been disrupted, the local economy is bound to face a huge deficit for raw materials for leather footwear as soon as the pandemic ends. Subsequently, the focus should be shifted towards non-leather footwear for the major parts in order to overcome this obstacle and get back into the global value chain as it might take a considerable amount of time for the tanneries to start functioning again due to shortage of chemicals, rawhides, etc. Given the current situation of the global economy, the demand for footwear, in turn leather footwear, might not rise significantly in the near future. Thus, it will be quite difficult to get a fair price of the rawhides during Eid-Ul-Adha this year. The tannery owners should take preventive measures in their pricing strategy keeping in mind the demand-supply factors. Followed by the recovery from the crisis caused by the pandemic, Bangladesh government could support the tanneries administratively to prompt the process of LWG certification, which can help them in mitigating their financial losses over this period.

Many of the Bangladeshi large footwear companies procure from dexterous individual-owned businesses, SMEs to satisfy the domestic demand. Some of these companies serve the local market through their outlets in different communities. Considering the ongoing crisis, the government can support the SMEs by helping them get access to financial resources in order to keep their business running. For example, applications and all the paper works can be handled digitally easing the process. Additionally, by deferring the interest payment on their existing debt, these small companies will be able to sustain in this economy. Policy support from the government such as deferred lease payments, tax breaks will result as a lifeboat to these drowning entities.

The policymakers need to emphasize on this sector in order to minimize the outcome caused by the pandemic. As the industry is struggling, both national and international regulatory bodies should initiate incentives and take such measures which will ensure a Nash Equilibrium for all the stakeholders of the value chain.

Authors: Nahian Hasnin and Dipa Sultana, Business Analyst, LightCastle Partners

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

References

•  1. BGMEA. COMPARATIVE STATEMENT ON EXPORT OF RMG AND TOTAL EXPORT OF BANGLADESH
• 2. Dhaka Tribune. (2019). Government, tanners blamed for sharp fall in rawhide prices
• 3. World Footwear. (2019). Bangladesh: support to exports will continue
• 4. PR Newswire. (2019). $266.5 Bn Footwear Market – Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2019-2024
• 5. Asian Development Bank (ADB). (2018). Developing the Leather Industry of Bangladesh
• 6. Textile Today. (2018). An overview of Bangladesh leather industry
• 7. Just-Style. (2020). Vietnam’s footwear sector set to hit 2020 export targets
• 8. World’s Top Exports. (2019). Bangladesh’s Top 10 Exports
• 9. World Footwear. (2019). Bangladesh: Leather Sector Closes the Year on the Red
• 10. Prothom Alo. (2019). Bangladesh – made shoes occupying US market
• 11. United Nations Conference on Trade and Development (UNCTAD). (2020). Global trade impact of the coronavirus (Covid-19) epidemic
• 12. HYPEBEAST. (2020). Adidas Predicts $1 Billion USD Chinese Sales Decline Due to Coronavirus

The post Withstanding the Outbreak of COVID-19 in the Footwear Industry appeared first on LightCastle Partners.

A third-party logistics service provider in Bangladesh manages and executes transportation and warehousing on behalf of a shipper. There are typically three types of logistics firms in Bangladesh: Clearing and forwarding agents, Carrier and transport operators, Warehouses. Currently, 837 freight forwarding companies are registered under Bangladesh Freight Forwarders Association (BFFA) and the estimated industry size is more than $1.5 Billion (Source BFFA Senior Vice President). One of the industry leaders is MGH Group with seven freight forwarding agencies and six shipping lines. MGH accounted for 30% volume share of export sea freight in Bangladesh and 55% of total European exports. The industry has directly generated 40,000 jobs in the last three decades.

Immediate Ramifications in the third-party logistics sector because of Covid-19

Covid 19 has significantly disrupted the global supply chain and hence, will dampen Bangladesh’s global import-export targets for the year. This will automatically trickle down its impact on the logistics industry and the following ramifications may take place in the short term:

1. Weaker demand of services would lead to dried revenue streams
2. The freight rates are seasonal and varies heavily. Price war would lead to death of small and micro organizations
3. Unfair competition would lead to bigger firms getting majority of the limited opportunities
4. Unutilized blue-collar workforce will fail to maintain economic sustenance because of the payroll structure
5. Contraband items smuggling may increase due to lucrative offerings
6. E-commerce logistics, the recent horizontal extension of the logistics industry, will also be severely affected by social distancing among citizens and work from home mandates followed by different organizations across the country which would lead to lower domestic demands.

Interventions to minimize losses

Government may introduce policies to minimize associated trade costs for logistics providers in order to help them stay afloat. The industry association needs to support the small players in order to minimize degrowth while also paying attention to the blue collar workforce’s economic sustainability.

Author: Sanjir Ali, Senior Business Consultant, LightCastle Partners

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

The post Logistics Sector Expected to Grind to a Halt appeared first on LightCastle Partners.

Over the last decade, Bangladesh has been experiencing unprecedented growth in all aspects of development.  The country has exceeded global expectations in economic development with a GDP growth rate of 7-8 percent on average and having a national per capita income of USD 1,698 in 2018. With the span of time, Bangladesh has witnessed a considerable increase in the consumption of protein-based and staple food categories. Subsequently, the country has achieved self-sufficiency in producing meat and fish along with rice and vegetables. The per capita meat consumption of an average Bangladeshi is amounted to be 45.62 Kgs stated by the Ministry of Fisheries and Livestock of Bangladesh. With the increase in consumption of meat, public concern regarding the safety of foods sourced from animals has heightened.

The animal feed industry of Bangladesh has been slowly growing over the last decade as a key backward linkage of the animal-based food system. The market size of total commercial feed stands to be at 5.03 MMT. It is identified that safeguarding animal feed and feed additives (including medicines) is a significant step in ensuring safe food for human consumption. Furthermore, with increasing urbanization and the popularity of processed food in the millennial generation and working families’ segment, the demand for further processed meat has also increased.

During the COVID-19 virus pandemic, the agricultural sector is deemed to be a critical industry. Sustainability of the entire value chain of the livestock industry is under questionable impression owing to the outbreak. A few major implications on the industry due to COVID-19 are mentioned below:

• Major raw materials of animal feed are soy and maize. About 50-60 percent of the maize and almost 40 percent of soy used are sourced internationally. With the ongoing pandemic, the import scenario is most likely to remain stagnant causing a crisis of raw materials for animal feed nationally.
• In Bangladesh, the API used for animal medicine is imported for the most part. With international haltering of transactions, the supply of API is about to witness an abrupt fall resulting in a shortage of supply of animal medicines for the sector.
• With rising health concern, there are misconceptions formed of the virus originating or transmitting through livestock (poultry, cattle) causing a decline in consumption of animal-based protein. This eventually will lead to a financial crisis for farmers and other stakeholders in the supply chain.
• Having the supply chain of livestock and poultry products hindered, the price of DOC, eggs, poultry, meat, and dairy products has started declining at the wholesale level. SMEs incurring a substantial loss are battling their sustainability in the industry in the long run.
• As the number of animal production operations are hampered, the number of animals slaughtered and processed will also decrease. Insufficient workforce, inadequate farm truck delivery, and transportation facilities will also play a major role in the decline of growth in this sector.

The livestock sector is an essential part of the supply of protein for human beings. Owing to the pandemic, this sector is subject to facing privation. The regulatory authorities must work in reducing the supply-demand deficit throughout the value chain. The government should raise awareness in clearing the misconceptions in the mind of consumers. It is to be duly noted that, with the fall of this sector, the whole nation would be looking at an economic downfall. This sector is in dire need of policy reforms and support from the government in order to fight its battle against the global pandemic COVID-19.

Author: Dipa Sultana, Business Analyst, LightCastle Partners

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

The post Livestock Industry: Sustaining COVID-19 appeared first on LightCastle Partners.

USD 19.3 Billion investment in physical infrastructure has been proposed by the government for FY 2019-20, leading to a surge in demand for building materials. Similarly, given the rising middle and affluent class population and shrinking family size, 3.9 members per family as of 2016 according to BBS, there’s been a gradual increase in demand of affordable housing in metro cities. B2B businesses have achieved an increase in turnover over the years especially for cement and steel industry. B2C building material demands have been steady and stagnant for a while. However, the slump has picked up and potential increase in demand had been forecasted by industry professionals. This is due to the entrance of newer generations in to the economy with a higher disposable income and in need of real-estate.

As rapid urbanization has led the home owner/ real estate developer to build multi-stored buildings to meet the demand of people and at the same time in rural areas we are observing the trend to forgo the traditional style of building homes and using the mainstream building materials. According to the Bangladesh Population and Housing Census (2011) the number of Kucca houses has been decreasing with an increase in Pucca and Independent houses. Based on projections (tied to population growth and segregation of class), the number of Kucca houses will almost halve by the year 2021 and the number of Pucca houses will increase to 22.24 million. Additionally, according to representative from REHAB (Real Estate & Housing Association of Bangladesh) the number of large (average 3000 Sq. Ft) and smaller buildings (average 1200 Sq. Ft) are projected to increase due to higher demand of commercial space and compact homes for nuclear families.

With the advent of coronavirus in the country, the industry faces certain uncertainties in terms of demand. Most construction activities have been halted as part of the government’s announced holidays till April 25th. Cement and steel companies have seen a fall in demand from dealers and retailers but purchases already conducted on credit is still in the process of completion without much deterring of sales. Industry experts expect the industry to experience a medium term vacuum of orders as most consumers will tend to be more conservative in their personal and housing investments now. Due to the impending economic crisis that the country will experience, commercial consumers will look to conserve cash and will refrain from making any cash flow outlays for construction activities.

On the supply chain end, most cement manufacturers import clinker, gypsum, fly ash and iron slag from the neighboring countries such as China, Hong Kong, India, Indonesia, Thailand, Japan, Korea, Malaysia and the Philippines. Given the supply chain disruption caused by country lockdowns, the industry will face raw material shortages, resulting in imminent production halts. Similarly, China holds 80% of the world’s steel production but Bangladesh has been mostly self-sufficient in producing billets from scrap and the industry is not expected to face much supply chain shocks due to the pandemic. However, demand still remains unpredictable with major dealers renegading orders due to capital crunch. The industry is also heavily reliant on credit, hence cashflows will be inevitably affected for most major producers of cement and steel.

In the immediate short-term, the government can intervene to ensure workers’ safety with collaboration with major construction companies to set the precedence for the industry and cement and steel manufacturers can safeguard their orders through extending line of credit as best possible. In the long-term, once the vaccine for the virus is successfully invented and commercialized, the industry is expected to resume normal growth given that demand for building materials is mostly dependent on long-term investment decisions of buyers.

Author: Rageeb Kibria, Principal Business Consultant, LightCastle Partners

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

The post Building Materials Industry Stagnant Amidst COVID-19 appeared first on LightCastle Partners.

The country’s working population in jeopardy

COVID-19 has in more than one way impacted the lives of millions in Bangladesh. The country recorded an impressive annual GDP growth rate of 7.9% in 2018; the highest in the country’s history and in South Asia for 2018 and has been delivering continuous growth over the last decade propelled by a growing middle-income population and a steady rise in per capita income. However, the vast majority of the population is still employed in the informal sector. As per Bangladesh Bureau of Statistics’ Labor Force Survey 2016, 86.2% of employees aged 15 or older belong to the informal sector, which also includes the farming sector.

Due to the pandemic, Bangladesh is predicted to lose 894,930 jobs along with USD 3.021 Billion of GDP growth. [1]

Metro cities such as Dhaka and Chittagong host the largest number of inward migrant workers and the country is yet to decentralize its economic activities beyond its major cities. Given the quarantine and lockdown in these cities, the working class has been hit the hardest with loss of jobs and earnings. In the first week of the quarantine alone, based on cellphone movement data by National Telecom Monitoring Centre (NTMC), it is estimated that 10 million people have left Dhaka city to return to their districts and majority of these people are from the working-class population.

Global guidelines on tackling COVID-19 have been highly thorough

According to ILO, globally about 25 million could become unemployed, along with a loss of workers’ income as much as USD 3.4 trillion as a consequence of COVID-19 pandemic. [2] The outbreak will be affecting economic, social and developmental aspects of mankind along with forming grave health conditions globally. As the countries are being locked down, the entire world economy is coming to a halt. With the outbreak, the questionable policies of the labor market have been brought under the spotlight. Majority of the piece rate workers, day laborers and informal traders are usually not subject to unemployment benefits, or paid sick leaves. [3]

In order to prevent the ongoing economic downturn from becoming a continued global recession, formative fiscal and monetary policies are essential. As the governments are unitedly working to flatten the curve of people infected by the COVID-19, crucial measures such as income support, wage subsidies and temporary layoff grants are needed to be implemented for piece workers, self-employed people and part-time or temporary workers who may not qualify for unemployment benefits or health insurance, which are being provided by developed nations across the world. In Bangladesh, the situation is not as easy as there’s rarely any unemployment benefits for the labor market.

During previous crises such as the floods of 1988,1998 and 2007, the government took several initiatives to support the bottom of the pyramid population and similar measures in supporting the working class should be taken in a post pandemic economy. The International labour organization has set some standards for policy formation to be adopted by representatives of governments, workers’ and employers’ organizations in order to achieve a sustained and equitable recovery.

Policy responses should focus on two immediate goals – health protection measures and economic support on both the demand and supply-side. For Bangladesh this means supporting the medical industry with proper equipment, infrastructure and sufficient funding to prop up the healthcare system. Within the government, the Ministry of Health and Family Welfare (MOHFW) is responsible for health and population policies. It implements health service programs through the Directorate General of Health Services (DGHS) and the Directorate General of Family Planning (DGFP).

Building confidence through trust and dialogue is crucial in making policy measures effective. Creating transparency and leveraging industry forums would be key to ensuring industry support needs are met. Currently, the government is working with the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) to ensure RMG industry receives facilitative support as the livelihood of 3.5 million workers depend on the industry growth being stagnant.

Protect workers in the workplace to minimize the direct effects of the coronavirus, in line with WHO recommendations and guidance. The government is yet to give directives to the major manufacturing industries about stopping work in fear of an economic recession, but have guided them to follow proper medical and safety standards in order to remain functional. However, no monitoring plan has been initiated as of yet.

Lessons on Policy Response from Peer Economies  

India’s Ayushman Bharat is being poised to help the working class

India’s flagship insurance/assurance scheme, Ayushman Bharat has been launched by the government with the vision of universal healthcare, which is to include the 40 percent “missing middle” who are neither covered by private insurance nor by the government in order to cover expenses related to COVID-19. [4] The government currently has over 430 schemes that use direct benefits transfer (DBT), which is designed to target groups such as pensioners, bereaved and unemployed people.

The government of Bangladesh with the World Food Programme (WFP) had previously provided cash support as a precautionary measure with the UN, which had yielded favorable results. In 2015, the government provided  BDT 4,500 taka (USD 53.42) to 25,000 people in Kurigram district via their mobile phones, under the WFP “forecast-based financing” project. [5] Those than received funding bought food, rented a boat, and took their belongings to a government shelter on a nearby island before the flood hit dangerous levels. Similar support systems can be developed in response to COVID-19 as cash given support would allow low-income workers to sustain through the lockdown.

Vietnam’s preparedness should be an example to follow

Vietnam’s Ministry of Health confirmed a total case of 194 of COVID-19, as of March 30. Furthermore, the Ministry of labor, War Invalids and Social Affairs (MOLISA) has proposed the government to issue a USD 854 million bailout package in order to alleviate the impact of COVID-19. Subsequently, more than 10 Vietnamese are set to launch an initial package worth 285 trillion dong (US$12.3 billion) to support Vietnamese enterprises during the current coronavirus pandemic. [6] Additionally, Vietnam’s military is expanding quarantine facilities for up to 60,000 people as thousands of Vietnamese return home from virus hit countries. After a successful pilot and approval from the World Health Organization (WHO), Vietnam will be producing 10,000 COVID-19 test kits daily. Moreover, the country set to officially export 7,500 COVID-19 test kits to Ukraine and Finland. [7]

The Bangladeshi government needs to highlight the working class as the primary beneficiary of any reformative fiscal or monetary policies it proposes in the coming months. This can be done through supporting the employment generating industries or providing basic amenities needs of this working class.

West Africa’s Ebola outbreak shows stark similarities with COVID-19

The Ebola outbreak in West Africa in between 2013-2016 has left a resource-poor country with a large low-income population similar to Bangladesh, Guinea, Liberia and Sierra Leone were the three major hotspots of contamination and resulted in thousands of death. Due to this, Sierra Leone is in a well-experienced position to deal COVID-19 pandemic. The country’s eastern region was the first to be affected by Ebola in 2014 causing more than 4,000 deaths in the country. According to the Disaster Emergency Committee, food shortages in a time of aggressive quarantines were affecting social order and 4 November 2014, media reported that thousands had violated quarantine in search of food in the town of Kenema.

During the Ebola outbreak, Sierra Leone implemented a “less touching” policy, [8] which limited the frequency of physical contact between people. [9] The policy was implemented through ensuring community wide sign posting and PSAs (public service announcements). At present, the health officials are applying this policy in order to prevent the COVID-19 pandemic. They are also adapting targeted quarantining by selecting and subsequently quarantining individuals who are at high risk for an infection without testing the person for the presence of the virus. Back in 2014, there was a massive effort to train volunteers and health workers, sponsored by United States Agency for International Development (USAID) to implement contact tracking and surveillance. According to WHO reports, 25,926 contacts from Guinea, 35,183 from Liberia and 104,454 from Sierra Leone were listed as of 23 November 2014. [10] As the epidemic worsened, most schools were shut down and UNICEF and other NGO partners build strict hygiene protocols, that were implemented  post quarantine. They taught thousands of teachers and administrators to work out hygiene guidelines. Installing hand-washing stations and distributing millions of bars of soap and chlorine and plans for taking the temperature of children and staff at the school gate were established in order to stop the spread to children. Local health workers were one of the group than was most affected during the outbreak due to lack of protective gear and awareness of this new disease.

In Bangladesh, reducing spread of misinformation and calming social tension through proper advocacy would be crucial in ensuring quarantine and social distancing is maintained strictly. The first case of Ebola in Sierra Leone resulted from a ‘tribal healer’ who was treating Ebola patients and ignoring precautions, subsequently contracting the virus herself. Bangladesh needs to prioritize rural families as the main starting point of messaging interventions before moving on to urban areas. Training health workers and ensuring their protection should also given the utmost precedence to prevent the spread of the virus.

Bangladesh has instituted helpful initiatives through calamities over the last few decades

In response to floods of unprecedented nature, Bangladesh government placed a request to the Asian Development Bank (ADB) for rehabilitation assistance and formulated a project named ‘The Flood Damage Rehabilitation Project’ in the year 1998. The total cost of the project was estimated to be at USD 130 million, of which, USD 104 million was to be financed by ADB and the rest USD 26 million equivalent of the Government’s counterpart funds. [11] Majority of this funding was directed towards building infrastructure and creating employment for those in need. Similarly, the rehabilitation plans and budgeting post coronavirus economy will need to be directed towards the development and employment generation activities.

In 2002, aiming at ensuring poverty reduction exclusively targeting the country’s ultra-poor women, the government of Bangladesh undertook Vulnerable Group Development (VGD) Programme with the assistance of the World Food Programmed (WFP). Since the food price crisis in 2008, Bangladesh government has sharpened up its food distribution mechanisms. A system is in place set by the government where they would be storing procured gains and would release staples in a calculated manner in order to bring prices down, and ensure the accessibility to the poor. [12] Access to food would become an increasing challenge with the spread of the virus and post quarantine, industries will require transformative policies to bring them up again

Following the 2015 Earthquake in Nepal, the government of Bangladesh established a National Emergency Operation Centre (NEOC) in order to effectively respond to disastrous situations, of the unanticipated events. In 2017, 22 districts of Bangladesh were affected by flooding because of monsoon rains and rain waters from the Indian states in the north of the country. In response, Bangladesh Government had allocated USD 0.15 million and 3,607 MT of rice to the flood affected area. [13]

As of 2017, Bangladesh has not experienced any “monga” (cyclical phenomenon of poverty and hunger)  since 2008 owing to the successful implementation of massive social safety-net programmes (SSNPs) including Test Relief (TR), Food for Work (FFW), Works for Taka (Kabita), Vulnerable Group Development (VGD), Vulnerable Group Feeding (VGF), employment generations, providing shelters among other various assistance and allowances. These initiatives serve as a strong blueprint for developing a post COVID-19 support system for the working class and given that Bangladesh is in a much better economic situation compared to a couple of years ago, the country is much more equipped to tackle hunger and poverty challenges.

Two basic amenities for surviving -food and money – will be the most challenging needs to address and should be the main priority when formulating policies and interventions in a post COVID-19 economy. In order to tackle potential challenges involving the crucial population segment it is imperative for the government and relevant stakeholder bodies to follow a few major directives:

1. It is important for the government to mobilize the existing civil society and development organizations, along with its funding commitments, to tackle the basic challenges of food and healthcare commodities shortage. Supporting the medical infrastructure will also be crucial to ensure the country evades recurring cases that may inevitably result in further economic losses. A few great examples through the fray have already emerged with community driven initiatives such as Bidyanonodo and Feed a Family among others that can be used as base examples of community initiatives. Similarly, BRAC pro-poor urban development project is working in partnership with the government, private sector, professional and other non-government organizations in developing and effectively implementing pro-poor policies, which aims to help the ultra-poor. Through this project, 12 community information resource centers were established, 1,926 people received livelihood support and 2,277 people received education grants. Furthermore, 300 children living on the streets of Dhaka received services at their drop-in centers. Additionally, USD 0.4 million was leveraged through partnerships and collaboration and 5,500 houses were rebuilt and relief coordination and supports were provided in slums with the help of local community organizations. [14] These initiatives provide an excellent blue-print for the government to utilize in the coming months to tackle the COVID-19 fallout.
2. The government and relevant stakeholders will need to prioritize the sectors that create the most employment for the working class through the informal sector. Although bailout monetary packages are necessary for some large industries, it’s important to prioritize systematic challenges before using financial easing as the first solution. i.e. ensuring proper wage rates in manufacturing industries, breaking up and strictly controlling syndication of commodities to protect agriculture sector, ensuring the first value chain players within the farming sector receives sufficient support and guaranteed pricing are some of the basic examples to follow.
3. Lastly, any monetary and fiscal policies such as regulating interest rates or quantitative easing to be implemented in the post pandemic economy has to focus on ensuring the financial sector, including micro-finance institutions and digital financial services – which the working class uses heavily – are able to support the needs of the working class. Whether through ensuring a new work-for-cash model or through zero-interest lending, the government needs to ensure the poverty metrices are maintained and at the end of the day all low-income families are able to sustain.

In the end, given the widespread historic evidence from similar pandemics, what is only easy to predict is the uncertainty of the situations to come. In times such as this, it is imperative that the government and development sector are taking proactive measures instead of reactive ones in order to tackle the challenges head-on. Economic implications of a post COVID-19 world are currently hard to gauge according to most reporting bodies. However, from a health perspective, it is indubitably necessary to prioritize health and awareness of low income communities in order to stop the spread and ensure social stability in the coming months.

Authors: Rageeb Kibria, Principal Business Consultant and Dipa Sultana, Business Analyst, LightCastle Partners

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

References

• 1. ADB. (2020). The Economic Impact of the COVID-19 Outbreak on Developing Asia
• 2. ILO. (2020). COVID-19 has exposed the fragility of our economies
• 3. ILO. (2020). How will COVID-19 affect the world of work?
• 4. World Economic Forum. (2020). COVID-19: How India’s government and businesses can lead
• 5. World Economic Forum. (2019). Bangladesh tries new way to aid flood-hit families: cash up front
• 6. The Asset. (2020). Vietnam banks to offer US$12.3 billion coronavirus support package
• 7. Vietnam Briefing. (2020). Vietnam Business Operations and the Coronavirus: Updates
• 8. World Economic Forum. (2020). This is how Sierra Leone is preparing for a potential coronavirus outbreak
• 9. (UNICEF). (2014). Ebola in Sierra Leone – the ‘don’t touch!’ rule
• 10. (WHO). (2014). Ebola Response Roadmap Situation Report
• 11. ADB. (2003). Flood Damage Rehabilitation Project in Bangladesh
• 12. Dhaka Tribune. (2013). The long shadow of famine
• 13. Relief Web. (2019). Bangladesh Flood Response 2019: Situation Update, as of 24 July 2019 – Bangladesh
• 14. BRAC. (2018). Pro-poor urban development – BRAC Annual Report 2018

The post Tackling COVID-19: Lessons from the Development and Public Sector Interventions appeared first on LightCastle Partners.

The First Industrial Revolution is known to be the point in history when economies started shifting from agriculture to industry, and it began in countries like the United Kingdom, France, and Germany. The prominent names like Bangladesh, India, Vietnam that we see today in the manufacturing map came about over the last fifty years, when most of the developing countries then had begun shifting away from the manufacturing sector to service sectors because of factors like rising costs, changing customer demands and increasing use of technology. The service sector now contributes over 70% to the GDP of those advanced economies, while the manufacturing sector is dominated by nations such as China. [1]

China is considered to be a global manufacturing powerhouse, due to its undeniable presence in all industries of the manufacturing sector. In fact, the country ranks first in output of more than 220 of approximately 500 global industrial products. [2] In 2018, the exports and imports of China alone accounted for 12.4% of the global trade. [3] The United States, Germany, Singapore, EU are all overly dependent on imports from China. [4] The first steps for the dominance that China enjoys now were taken in 1979 through major economic reforms to empower the grass-root producers, encourage FDIs and decentralize economic policymaking activities primarily. [5] The reforms prompted large-scale capital investments and expeditious growth in productivity in the country, that eventually led the country to become the “factory of the world”.

Changes in factors affecting the production in China such as geopolitical crises, rising costs or necessity for skills and expertise are highly likely to have spillover effects on other countries, creating both opportunities and threats.

Rising costs deter buyer

China gained popularity among international manufacturers by being one of the lowest labor cost countries. In recent years, China has turned its focus towards creating more value-added products rather than apparel manufacturing. This, together with the increasing living standards of the people of China and the significant brain drain that the country suffered, has raised the labor costs in the country, breaking down one of its competitive advantages. Markets in countries like Bangladesh, Vietnam, and India developed by ensuring cheaper labor. In 2018, the minimum monthly wage in China was USD 160, while those in Indonesia, Vietnam, and Bangladesh were  USD 75,  USD 154 and USD 69 respectively. [6] Despite being the second-largest exporter of RMG products,  Bangladesh’s productivity in the garment exporting industry is approximately one-third of that of China. [7] Nonetheless, China’s rising wages and lack of skilled labor due to its shift from the textile industry to more high value-added manufacturing like consumer durable and electronic items and the service-driven sectors are set to create more opportunities for low cost serving South-Asian and African countries.

The Geopolitics of Trade

While the impacts of geopolitics on the production in China pose a threat to some nations, it presents an opportunity to others. The US-China trade war decreased bilateral trades between the two countries while increasing product prices thus ultimately harming the consumers. China suffered USD 35 billion of export losses, which were absorbed mostly by developing countries such as Taiwan, China, and Vietnam. [8] 70% of the shoes sold in the US were manufactured in China and faced duties above 67%. [9] These duties were taken a notch higher due to the trade war which meant that the footwear industry took a hard hit. Brands like Nike suffered negligibly compared to others, as they had already been moving their production to Vietnam. [10] Due to the impacts of the war, more brands began to diversify their production and supplies focusing primarily on Vietnam and India. Even though opportunities for making higher-value products were guaranteed to increase for the countries, competition from China could present itself in a newer way. India and Vietnam feared competing with Chinese products in other markets given the excess in supply, or worse, suffering through the dumping of cheaper Chinese products into their local markets. 

Skills shifts creating new opportunities

Even though China became the first choice for buyers by providing low costs, it eventually strengthened itself in technical skills and expertise. In 2015, highly skilled technicians and workers were officially given the same value as scientists or entrepreneurs in China. [11] However, in recent years, companies have started to diversify their production into different countries. India has been making its name as a global manufacturer in electronics manufacturing, due to continued government initiatives and policies in this regard like the Modified Incentive Special Package Scheme (M-SIPS) or the “Digital India” initiative. [12] While Xiaomi set up its 7th manufacturing plant in India, Samsung opened the world’s largest mobile factory in the country. [13] Other global manufacturers like Oppo and HMD Global also plan on commencing manufacturing in India due to the cheap labor and skills it has to offer. Government and private initiatives such as the “Learn and Earn” scheme by Lava, the Indian handset maker, are focusing on building the right skills and expertise in India to compete with China in this industry and garner a bigger global market share. [14] However, China continues to invest in building and maintaining its competitive edge through workshops and vocational training.

But what happens to industrial production when all the factors are triggered together? What spillover effect do countries like Bangladesh face when both the demand and supply connected to China dry up? The coronavirus (COVID 19) outbreak, which was first detected in Wuhan, in the Hubei Province of China on 31st December 2019, has recently been declared a pandemic.  The virus has spread over 210 countries and territories and has claimed 165,174 lives already. [15] With 2,414,595 detected cases, China has been hit the hardest by the pandemic, but the health of the people isn’t the only concern for the country. It is feared that the Chinese economy could contract for the first time after 44 years of constant growth. With most of the major importers of China going into lockdown and factories in China shutting down, the industrial production of the country has taken a hit. The China Caixin Manufacturing PMI dropped from 51.1 to 40.3 by the end of February. [16]

Bangladesh’s predicament in times of the COVID-19

Bangladesh, like most developing countries dependent on the Chinese economy, has been negatively affected. In the worst-case scenario, the pandemic has the potential to wipe off USD 3.02 billion and 894,930 jobs from the economy of Bangladesh. [17] Bangladesh has become handicapped due to shortage of supplies, travel restrictions and, slip in lead time and quality of the products reduced.  Furthermore, the Chinese experts who were employed in the different industries of Bangladesh have not yet been able to return after the Lunar holidays.  

Thirteen possible sectors including the leather, plastics, pharmaceuticals, and jute sectors are likely to be negatively affected the most according to a report by the Tariff Commission. [18] The leather industry is likely to be damaged the most taking a potential loss of about BDT 30 billion, followed by the apparel and textile industry.

The RMG industry, the main driver of the economy of Bangladesh, faces a potential halt as well. China alone comprises 26.1% of the total imports of Bangladesh which includes over 40% of textile and related goods and 30% of capital machinery and spare parts for the textile and garment industry imported into the country. [19] As a result, the prices of many accessories increased by around 50%. [20] The factory owners are also facing financial constraints as buyers continue to request payment rescheduling and hindrance in supplies push towards defaulting on L/Cs opened. Till April 13th, the total value of RMG orders lost summed approximately to around USD 3.15 billion. [21]

Companies all over the world were already diversifying out of China, especially US companies after the trade war. The recent pandemic underscored the necessity for supply diversification, and it is opined that Mexico and South Asia have the most to gain. According to a recent survey by QIMA, a popular name for countries looking to diversify away from China, is Bangladesh. [22]

Summing Up and Way Forward

Is Bangladesh ready to handle the influx of orders? The factories of Bangladesh are already facing cancelled orders worth millions of dollars and matters are expected to become worse in the short-term. Factories have also shut down because of preventive measures or shortage of supplies. Bangladeshi factory owners are hence facing numerous obstacles of which working capital management, supply sourcing and lack of expertise rank the highest. In the long run  however, because of the newfound direction of global companies towards diversifying away from China, Bangladesh is highly likely to get increased orders in different industries.

Policies and structural changes need to be made to prepare for this shift. The garment factories have been kept closed for almost a month now while competitors like Vietnam, Cambodia and Indonesia are still partially, if not fully, open. The GoB also instructed factory owners to pay off the wages of its employees by April 16th. However, 609 BGMEA factories failed to meet the deadline. Furthemore, Bangladesh continues to lose orders but some have been reinstated due to the efforts of BGMEA and GoB. Bangladesh needs to meet these orders by June and commence production for winter orders in the short run to retain its buyers.  In the short term, controlled opening of the factories is necessary through strict protocols and policies.

Special interest-free funds have already been introduced to manage short-term expenses like employee wages. The government has initiated multiple stimulus packages for supporting working capital requirements, pre-shipment credit and paying salaries and wages of export-oriented industry workers. The interest rates for borrowings from the Export Development Board have also been capped. However, the apparel industry makes up about 80% of the total exports of the country, and thus requires special attention. 

The factories in Bangladesh are already over-dependent on China for fabric, chemicals, and accessories, and the huge amount imported from China cannot easily be substituted. Even though the task may not be easy in the short term, strategic alliances and trading partners need to be made to avoid such setbacks in the long run. Bangladesh also needs to incorporate lean manufacturing methods in its production as early as possible, especially to cope with the aftermath of the COVID-19. The skill and expertise of the people need to be developed further to not only reduce foreign dependence but also prepare for the advancement of technology in the manufacturing production. Finally, In the long run, Bangladesh needs to build brands of its own to ensure demands even in trying times in the future. 

Author: Mashiath Khurshid, Trainee Consultant, LightCastle Partners 

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series

References

• 1. Is Manufacturing Still the Main Engine of Growth in Developing Countries? – UNU WIDER
• 2. China becomes world leader in industrial economy scale – China Daily
• 3. Is China the world’s top trader? – article on the platform “China Power”; data sourced from UN Comtrade Database
• 4. Mapping China’s Biggest Trading Partners – Is Your Country One of Them?
• 5. China’s Economic Rise: History, Trends, Challenges, and Implications for the United States – A report on EveryCRSReport.com 
• 6. CPD Working Paper 122: Livelihood Challenges of RMG Workers  – CPD
• 7. RMG hourly productivity still lower in BD – The Financial Express
• 8. Trade war leaves both US and China worse off – United Nations Conference on Trade and Development
• 9. 70% of shoes sold in the US come from China. With new tariffs, the industry braces for a hit – CNBC
• 10. How Nike is Winning the U.S.–China Trade War – Investopedia
• 11. Producing China’s manufacturers of tomorrow – The Telegraph
• 12. India to be the next big Electronics Manufacturing Hub
• 13. Can Vietnam or India challenge China’s manufacturing leadership in global electronics industry? – techradar.com
• 14. Skill India: How Lava is boosting mobile manufacturing
• 15. Worldometer- Coronavirus accessed on 20th April, 2020
• 16. China’s factory activity slumps in February to weakest reading on record, private survey shows – CNBC
• 17. Coronavirus stands to wipe $3b off Bangladesh economy – The Daily Star
• 18. Bangladesh export-import may be affected by coronavirus: Commercial counsellor – Prothom Alo
• 19. Bangladesh’s economy braces for coronavirus fallout – Dhaka Tribune
• 20. RMG sector faces the heat – The Daily Sun
• 21. Pins and needles at the time of a pandemic – The Daily Star
• 22. Bangladesh to benefit from coronavirus fallout: survey – The Daily Star

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To learn more about the Impact of Coronavirus on the Urban LIC Population, download full report.

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In the wake of COVID-19, a large number of startups around the globe are either ceasing operations, laying off employees, or pivoting business models. Bangladesh is looking at its promising startup ecosystem severely suffering as the pandemic has significantly stalled consumer spending. With the downturn in revenue generation, funding will also be naturally delayed for the upcoming quarters.

In the light of such events, investors and mentors are coming forward to offer guidance and support for the entrepreneurs to navigate through this upheaval. The Dialogue session between startups and investors was one such initiative that highlighted a number of insightful points regarding the investment landscape, government initiatives, funding opportunities, investors’ sentiments, and the key roles of the enterprises during such tough times.

VCPEAB (Venture Capital and Private Equity Association of Bangladesh), Bangladesh Angels, and LightCastle Partners jointly organized the virtual dialogue session.

The discussion panel consisted of government bodies, angels, and institutional investors represented by:

1. Tina Jabeen, Investment Advisor of Startup Bangladesh
2. Nirjhor Rahman, CEO of Bangladesh Angels
3. Shameem Ahsan, Chairman of VCPEAB & General Partner of Pegasus Tech Ventures
4. Rahat Ahmed, CEO of Anchorless Bangladesh
5. Bjoern Strudder, CEO of Roots of Impact
6. Bijon Islam, CEO of LightCastle Partners (moderator)

Role of Government

Stimulus package and in-kind support for the digital ecosystem of Bangladesh

1. To tackle the COVID-19 pandemic and its economic repercussions, the Bangladesh Government has devised a stimulus package, as of now, the amount stands at around Tk.100,000 cr. The majority of the amount has been designed to support the export-import sector alongside SMEs and agricultural industries. Despite the large amount, none has been allocated for the startups and the digital Bangladesh ecosystem yet.
2. Hence, under the guidance of Tina Jabeen, LightCastle Partners has formulated a proposal with and on behalf of the startup ecosystem, to be presented to the ICT ministry, to let the startup ecosystem take part in the Stimulus Package and deploy immediate funding for the ones at need. 
3. The main objective of the package will be to enable startups to clear out rents, payrolls, and stay afloat. Given Startups often do not directly operate with bank financing – and investors will at least take 6 to 12 months to bounce back and invest – we assume the startups are going to need support for 3 to 6 months of working capital. 
4. The Idea Project of the government is in the process of providing funding to needy startups. Funds from Startup Bangladesh may also be allocated to give immediate support to the startups.
5. The top-tier essential startups would be high on the priority list in terms of need, impact, employment, and reputation.
6. Apart from financial aid, government initiatives like Hi-tech parks are willing to support startups with data center facilities, warehouse facilities, co-working spaces, and mentorship. 

“Some principles stay the same – early-stage investing depends largely on the leadership quality of the founding team and now is the time to distinguish yourselves as a founder.” – Nirjhor Rahman, CEO of Bangladesh Angels	“Investors will look for the ability of the startups to navigate through a crisis and also do the job previous funds were provided for.”                                                                                 – Rahat Ahmed, CEO of Anchorless Bangladesh
“The funding scenario will drastically change and enterprises  need to shift to profitability models from  growth models to secure funding.”  – Shameem Ahsan, Chairman of VCPEAB & General Partner of Pegasus Tech Ventures

Investor’s sentiment

Future funding landscape for startups

1. Venture Funds and Investors understand the gravity of the situation and the fact that revenue generation is very likely to come to a halt for the next 3-6 months (or at least till the situation passes). The right investors wouldn’t raise questions regarding that, though what they would look for is the proper utilization of the existing funds and resources to navigate through the crisis.
2. Opting to show higher valuation should not be the prime concern when looking to raise funds, preferably having a qualified management team who are eager to grow collectively is critical for now.
3. In terms of long-term strategy, startups should look to pivot from growth models to profitability models because the post-COVID-19 scenario will be drastically different. A lot of the angel investors would not be willing to reward top-line growth unless it is of high quality.
4. It is the prime time to think about how to optimize the metrics – average basket size, recurring revenue, customer acquisition costs, marketing spends.
5. If there are any ongoing investment discussions, the wisest thing would be to secure the investment even if it is at the cost of a reduced valuation.
6. Going after impact investments like a catalytic fund or matching fund could be a convenient option for early-stage startups.
7. A catalytic fund named Biniyog Briddhi has been launched in Bangladesh powered by the Swiss Agency for Development and Cooperation, Roots of Impact, and implemented by LightCastle Partners. Applications are open till 31st of May (fast track till 26th of April) for Impact Ready Matching Fund (up to U$ 100K) and Social Impact Incentives (up to U$ 250K).

“Cash is King. The startups have to make sure that their cash goes the extra mile during this crisis.” – Tina Jabeen, Investment Advisor of Startup Bangladesh

“Pivots of business models can also adversely affect the low-income vulnerable groups because organizations are going to shift towards the middle-income groups in order to survive. Biniyog Briddhi is focusing on trying to help these enterprises to stay focused on marginalized clients and beneficiaries.”  – Bjoern Strudder, CEO of Roots of Impact

‘Given the current scenario, even if there is a reduction in valuation it is better to secure the investment  sooner than later.’                                                                                                                                                                                                                                                                                                                                                     – Bijon Islam, CEO of LightCastle Partners

Key Advice for Startups

Roles and responsibilities for sustaining during and beyond the COV19 pandemic

1. Pivoting in such times is essential, but shifting to a business model (e.g. online grocery) just because it is currently thriving in the market is highly discouraged. As there are quite a few prominent players in the market, even generating profit for the short term is highly unlikely.
2. Focusing on cost reduction currently should be given more importance than raising funds because startups need to ensure they go the extra mile. Some of the key ways to provide cost reduction during the pandemic are – salary deferrals, lengthen payable terms, shorten receivable terms at discounts, and ESOP options.
3. Explore strategic partnerships among enterprises and work out ways to develop and support each other by interchanging resources without the transfer of any money. Arrange agreements to build products and services for both parties.
4. Startups should also be open to mergers and acquisitions if they believe it is the best option to keep afloat.
5. Working from home is going to be the new normal, and utilizing various co-working tools such as Slack, Monday, Zoom, and others will play an integral role in being productive and efficient.
6. The post-COVID market is going to be very different locally and globally, and thus a behavioral shift in the consumers is evident. Startups have to think and dig deep to figure out how behavioral and other changes will come and look for legitimate options of pivoting and how expanded services can be added. Similar to how Pathao and Shohoz are offering pharma and grocery products on their platforms.
7. Immediate and long term plans should be formulated from now on to ensure building brand equity and valuable consumer engagement.
8. Last of all, the employees who support the company during this unprecedented time, even with a pay cut, must be rewarded for their loyalty in the long run.

This was the first webinar of the dialogue between Startups and Investors series with around 100 participants and 2,000+ views over Facebook Live. To participate in our coming virtual sessions, sign up here.

This article was written by Mehad ul Haque, Senior Business Consultant, and Ishtiak Mourshed, Trainee Consultant from LightCastle Partners. For any queries, you can reach out at mehad.haque@lightcastlebd.com.

The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the COVID-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

The post A dialogue between Startups and Investors to tackle and survive during the COVID-19 Pandemic appeared first on LightCastle Partners.

The Covid-19 pandemic has brought about multi-faceted impacts on the economy, encompassing disruptions across the value chain in almost all the sectors. As an economy with large scale contributions from semi-formal and informal sectors, the impact of the pandemic has disproportionately reverberated across the economy in terms of income and job losses for the informal sector workers. The resulting economic and humanitarian crises are hard to tackle solely through government fundings. Contributions from private sector enterprises are imperative for fulfilling the unmet needs of the economically vulnerable population. 

CSR: The concept

The concept of Corporate Social Responsibility (CSR) was introduced in the 1950s and defined CSR as the obligations of businesses to pursue their policies, make their decisions or follow their lines of action in accordance with the terms of objectives and values of society. The rationale was not to limit a businesses’ responsibility and their actions within the firm’s direct economic or technical interest, but to make them contribute towards broader social ends. 

In 2008, Bangladesh Bank formalized CSR guidelines which allows companies in the financial sector to allocate a percentage of post-tax profit for CSR activities. However, companies can spend a maximum of 30% on education, 20% on health care and 10% on climate and disaster management of their total CSR outlay.

 In situations like the Covid-19 pandemic, where a global recession is imminent, countries like Bangladesh need to redirect the private CSR funds towards containing the crisis, developing health care infrastructure and cushioning the economic blow that will follow once the crisis is managed. However, lack of monitoring of CSR fund disbursement and lack of institutional policy support will work as a major bottleneck when considering this approach and its effectiveness. Practices like ad-hoc one time donations and greenwashing needs to be redirected towards supporting the economy in order to mitigate losses and minimize casualties.

CSR in Bangladesh: The Status Quo 

Companies carrying out CSR activities in Bangladesh can benefit in the following ways:

• Corporate Tax exemptions for fulfilling CSR commitments in terms of budgetary allocations. Bangladesh Bank offers a conditional 10% income tax exemption. 
• Improved brand image and possible higher added-value to products on the basis of ethical considerations. An example may be BAT Bangladesh being awarded Asia Responsible Entrepreneurship Award in 2014 under Green Leadership by Enterprise Asia for their Aforestation activities.
• Less stringent regulation on core activities by monitoring bodies or the Government. An example may be the heavy compliance standards of bodies such as Alliance & Accord on RMG.
• Improved likelihood of receiving investments, especially from foreign investors. Improved worker motivation and productivity.

 The financial sector in Bangladesh spent BDT 627.13 Cr on CSR activities between Jan-Jun 2018. A total of 51 scheduled banks contributed to different causes in accordance with their company’s mission and vision. Islami Bank Bangladesh Limited was the highest contributor in this regard with a total expenditure of BDT 281.32 Cr on CSR. (Source: IDLC)

British American Tobacco (BAT) focuses on green sustainability through afforestation, the flagship programme of BAT which led them to receive several corporate social awards. The organization also focuses on safe water and solar home system developments under its livelihood improvement thematic category.BAT global has also recently pledged on working for the vaccination of Covid-19. (Source: BATB Website)

As part of its CSR activities, Unilever Bangladesh focuses on four thematic areas in order to fulfill its social obligations as an organization: Employees, Community, Climate & Environment, Organization. (Source: Mapping the Current Status of Corporate Social Responsibility Activities and the Scope of Workers Participation)

PRAN, one of the biggest local conglomerates in Bangladesh, contributes to government expenditure in education, infrastructural development, public employment generation and cash transfer under safety net. PRAN also promotes long term individual sustainability through provision of tools and knowledge required to ensure the self-sufficiency of its value chain actors. (Source: PRAN Website)

Most private organizations like the aforementioned contribute towards CSR significantly. However, the efforts are dispersed and impacts aren’t evaluated. Therefore, concentrating the cumulative CSR funds towards a single point/cause would definitely help recover from the aftermath of the Covid-19 crisis and provide clarity on the impact of such initiatives.

Private Sector tackling Public Crisis 

The coronavirus pandemic has mobilized funding from governments and corporations across the globe. Bangladesh, too, has seen some tremendous response from both private sector and NGOs alike. Private sector contributions to tackle the Covid-19 fallout have generally been across a combination of three streams: (a) cash donations or in-kind contributions directly addressing the Covid-19 health crisis; (b) temporary restructuring of operations to mitigate the Covid-19 health crisis; and (c) contributions to tackle the financial fallout arising from the Covid-19 pandemic.

In cases of the first, companies and individuals have been making direct contributions to tackling this health crisis. To cite some examples from fashion houses, Dolce & Gabbana has been financing research into the coronavirus, while Giorgio Armani has been directly funding hospitals to help their response in this crisis. In Bangladesh, companies such as Summit Group and multiple banks, among others, have donated to the Prime Minister’s relief fund. In kind contributions have been offered by companies such as Navana Group, Akij Group, Bashundhara Group and Green University who have offered their facilities to set up temporary hospitals or isolation zones in order to help deal with the crisis. Beximco Pharmaceuticals has donated PPE, test kits and medications to help tackle this crisis. Perhaps, most prominently, Alibaba Foundation (the non-profit arm of Alibaba Group) has sent PPE and test kits to at least 10 Asian countries and more than 40 African countries to help them prepare for the Covid-19 crisis.

Some companies have also agreed to temporarily re-structure their operations and production lines in order to tackle the virulent pandemic. Internationally, General Motors, an automotive company has been re-organizing its production lines to manufacture ventilators, while Dyson, a British home appliance manufacturer have invented a new type of ventilator altogether. Ventilators are artificial respiratory equipment that are essential to save lives in this pandemic. In an inspiring turn of events, Walton Electronics has received the patent and source code for ventilators from Medtronics, an international medical device company and plans to be the first in Bangladesh to commercially produce ventilators, PAPRs, and oxygen concentrators despite most of its other production lines being closed due to the government shutdown. The BGMEA and Marks & Spencer have begun to produce large volumes of PPE locally that are needed to arm the frontline health workers. Other ways companies have been adjusted during this crisis include Karew & Co., a local distillery, which has shifted its resources to producing hand sanitizers for sale at fair prices during this time of acute shortage. Online meal delivery services such as Pathao Food and Foodpanda have also reformed their operations to encompass retail shops in the hopes of minimizing customers’ external contact and help enforce social distancing This has also been a time for technology companies to step up their game. Internationally, several remote communication and file sharing companies have offered free products/ products at reduced prices to support people who are working from home and students in remote learning. In a similar manner, the Bangladeshi streaming service Bongo has opened up its premium content free of cost for the duration of the coronavirus pandemic. In America, major MNOs such as Comcast, Verizon, T-Mobile and Sprint have signed a pledge to keep Americans internet-connected for the next 60 days, even if people cannot afford to pay. But such an initiative has not been replicated by the MNOs in Bangladesh.

Finally, companies have also looked at ways to mitigate the very real and tangible financial fallout arising from the Covid-19 pandemic. Internationally, Apple and Amazon have announced unlimited paid sick leave for their employees who had contracted coronavirus, and continued payment to staff whose hours have been disrupted by store closures. The self-employed gig economy is especially vulnerable to the coronavirus crisis, and in these times, Microsoft and Google have announced that they will keep paying their temporary (hourly) workers. Uber has also pledged to support their drivers during this period. Some companies online retailers such as Amazon and supermarkets such as Aldi have offered their staff bonuses in recognition of the risk they are taking in continually serving customers and because of the increased demand for groceries during this period. In Bangladesh, the focus has been primarily on the manufacturing industries, where working from home is not a pragmatic option and idle production lines can translate into layoffs and unpaid salaries. Bangladesh government itself has unleashed a stimulus package of BDT 5,000 crore for export-oriented industries, and it is assumed that proceeds from the PM’s relief fund will also go towards keeping the vulnerable populations afloat. Migrant workers have also suffered massively due to this crisis and at least 

40 small and medium-sized local foundations and NGOs have been engaged in activities related to financial assistance and delivering food, hygiene products and protective equipment to vulnerable communities in Bangladesh.

Way Forward

In Bangladesh, there is no clear guidance for CSR spending and disclosure. Bangladesh would have been more prepared to mobilize CSR funding more effectively had the government created a coherent CSR policy articulating its expectations and providing guidance on the kinds of CSR activities possible. At the moment, the government’s largest CSR initiative is the PM’s relief fund where companies can contribute, but donation is not mandated by law and the fund’s disclosure and transparency mechanisms could be improved further. Outside of this fund, most CSR practicing companies which practice CSR do so independently, and often without dedicated departments or external expert recommendations. It also does not help that one of the biggest motivators for companies to contribute is to reduce their tax burden (as contributions are tax-free) and increase their profile among government stakeholders. In fact, a local study had found that many companies, whilst providing CSR, did not comply with the law in providing basic labor standards to their employees. [1]

To find examples of other countries where CSR Policies have been implemented more coherently, one needs look no further than India. In India, CSR has been legally enshrined through amendments to the Companies Act. Companies with a net worth of INR 5 billion (US$70 million) or more, or an annual turnover of INR 10 billion (US$140 million) or more, or net profit of INR 50 million (US$699,125) or more are mandated to spend at least 2 percent of their profits on CSR, and the Government of India has also specified the list of initiatives in which companies can allocate their CSR funds. [2] CSR spending has also been made time-sensitive and companies cannot withhold CSR funds for more than 3 years. The CSR contributions are also disclosed with full transparency through a dedicated government portal. [3] Finally, the list of sectors where companies can contribute CSR funds towards is also dynamic; recently, funding to combat the coronavirus has been introduced into the list. [4]

Bangladesh, too, should enshrine mandatory CSR through comprehensive legal enactments. The government should also resist the temptation to manage and implement all incoming CSR funds by itself and be cognizant of the benefits of engaging NGOs in certain types of service delivery and in certain regions. CSR proceeds of the PM fund should be shared with NGOs on the basis of their strengths and competencies in achieving desired outcomes, with strict monitoring and control measures.

After enactment, awareness should be raised amongst businesses about corporate social responsibility and the kinds of CSR activities they could undertake. Public disclosure should be practiced to the fullest with businesses disclosing their CSR engagement to the public through their annual publications. Transparent reporting can improve the companies’ credibility; it can also open up opportunities for coordination of CSR initiatives across businesses, and facilitate better research and inter-stakeholder dialogue resulting in general improvement of CSR.

Given the likelihood of Covid-19 to become a seasonal disease like the flu, some CSR funding should be directed by the government to engage in curative and preventive (e.g. vaccines) for Covid-19 as well. With the wealth of human resources and technology at the hands of the private sector pharmaceutical companies, they might be taken on board for a PPP initiative, to which the pharmaceutical companies will contribute a significant amount.

Authors: Saif Nazrul, Senior Business Consultant and Sanjir Ali, Senior Business Consultant, LightCastle Partners 

References

• 1. Corporate Social Responsibility in Bangladesh: Practice and Perpetuity Promoting, Safety & Rights
• 2. Corporate Social Responsibility in India, India Briefing 
• 3. National CSR Data Portal, Government of India
• 4. Now, Indian Inc can spend CSR funds to combat coronavirus, Business Today 

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