UNDP Bangladesh Research Facility 

Covid-19 is ripping Bangladesh’s Ready-Made Garments (RMG) sector to shreds.  The industry forms the economy’s backbone, accounting for 84% of all exports. But the global pandemic has disrupted supply of raw materials, delayed shipments, cancelled or suspended orders and led to factory closures. Moreover, the heavy blow comes at a time when local manufacturers were already compromised in pre-Covid-19 days.

Rana Plaza’s painful legacy already overshadows the industry. 24 April marked seven years since the tragedy that killed 1,136 workers and injured over 2,000. In the aftermath, Bangladeshi garment manufacturers either built new factories or remediated existing ones to comply with the Accord on Fire and Building Safety in Bangladesh (Accord) or the Alliance for Bangladesh Worker Safety (Alliance). Both options dearly cost them and industry profit margins were squeezed. As per the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), between April and October 2019, 59 factories that failed to comply were shut down and 25,900 workers were laid off.

While Bangladesh was upgrading its factories into some of the world’s safest and greenest ones today, competitors gained ground in the global market. China, Vietnam, Cambodia and Turkey did not have to abide by the same guidelines as Bangladesh and were able to offer lower prices. This forced Bangladeshi manufacturers to offer rock-bottom prices to bring business back even if it meant lower export earnings.

RMG was in a similar tight spot last year when Wuhan’s outbreak grabbed world headlines. While China focused inwards to fight the virus, global trade suffered. The Bangladeshi RMG sector faced severely disrupted supply chains as it heavily leans on China for raw materials and capital machinery. By February, Covid-19 emerged in US and Europe—Bangladesh’s major RMG export markets—and manufacturers were already trying to estimate losses. By the third week of March, brands began to either cancel or delay order shipments although materials were already in house. So far, USD 3.17 billion worth of orders have been either canceled or suspended, as per BGMEA. Brands used the force majeure clause – a clause which frees parties of contract from liabilities—to cement their decision.

BGMEA data indicates exports from March-May 2020 will fall short of approximately USD 4.9 billion and unsettled liability will amount to USD 1.96 billion.

Figure-1: Comparison of day-wise RMG exports (in million US$) for the first week of April 2019 and 2020. Source: BGMEA 

Figure 2: Estimated liabilities due to unused raw materials imported against back to back Letters of Credit (RMG export in million US$):

Meanwhile, to contain Covid-19’s spread in Bangladesh, the government started closing off the economy starting 26 March. Export-oriented industries were exempt from lockdown. But without appropriate guidelines for managing infection risks in factories, the BGMEA and BKMEA prioritized their workers’ health and safety and began recommending factory closure. Even then, factories owners can seek permission from the associations and the industrial police if they want to keep their factories open to pay their employees. A few also remained open to produce Personal Protective Equipment (PPE) for local hospitals.

The industry now risks losing out on orders for the entire Autumn/Winter buying season if factories do not re-open by the first week of May. Otherwise, there will be no orders for three months. The orders will be diverted to China and other competitors that are open for business during the pandemic. The only way to retract orders for the Spring collection would be to offer even lower prices than before, a feat almost impossible to pull off given how circumstances stood before Covid-19 and when considering the battering that the sector is now taking in this crisis.

For manufacturers who survive, their immediate goal will be to take care of existing liabilities. Going forward, however, these manufacturers will be inclined to only accept orders from financially solvent brands such as H&M, M&S, Target, Primark and Tesco that are standing by them now. It will also mean significant downsizing and job loss for many of the 4 million+ workers currently employed in Bangladesh’s RMG sector. As women make up two-thirds of the sector’s workforce, these job losses will not only affect their earnings but also push back gains made in empowering women.

As per BGMEA, 87% of member factories paid wages to their workers as of 17 April, and the ones that couldn’t are small and medium enterprises facing financial crisis. Their ability to pay will likely worsen from May onwards. Despite the lockdown, workers already took to the streets on 16 April demanding unpaid wages, and extensive layoffs/retrenchment can lead to severe unrest.

Given the circumstances, the Bangladesh government has offered financial assistance for the entire export sector. But access to these funds is not guaranteed for many garments manufacturers. Banks get to decide who gets the loans based on exiting patron-client relations. Moreover, the banks themselves are under pressure to survive as Covid-19 has re-focused the attention on the banking sector’s volatile position. It is unlikely that banks will bail out failing factories as it poses risks to their own survival. On another level, of the total package offered by the government, only USD 495 million will be available for the garments sector. To put this figure in context, it is slightly more than one month’s wages (USD 423 million) that the garments sector pays to all of its workers.

If factories continue to stay closed in the near future because of COVID-19, the government will have to stand in with more supportive fiscal measures. But most importantly, global brands need to stand by Bangladeshi manufacturers now: it means taking delivery of produced garments and those under production, honoring agreements, and sharing the suppliers’ burden through cost sharing, advanced payments and so forth. The pandemic’s impacts on the RMG sector also point to the need for Bangladesh to focus on a hitherto unheeded call for diversifying its export basket in the long term to reduce the vulnerability of the Bangladeshi economy to future shocks.

This article is written by the UNDP Bangladesh Research Facility team