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OP-ED: Panacea for delayed settlement of basic payments at export trade

  • Published at 11:34 pm May 25th, 2021
Aerial top view of business logistic import and export freight transportation by container ship in open sea
Aerial top view of business logistic import and export freight transportation by container ship in open sea Bigstock

Mismatch between cash inflows and payment on due time requires financing from banks

Readymade garment (RMG) is a major export player, consisting around 85% in export basket. 

It brings annual foreign exchange near to $40 billion. 

Export is nothing but a cross border sales activity. Exporters produce but do not consume. 

Sales to consumers residing abroad is not so easy. Theory tells competitive advantage is a tool to sell goods abroad. 

But many countries have same advantages resulting in competition. 

To avoid the competition, exporters export at suppressed price. Often their sales prices are called underinvoicing. 

On the other hand, export sectors are supported by different policy measures like low cost financing, competitive price for local currency, cash subsidy, rebated tax, duty free imports, etc. 

So sales at low price is not under invoicing, rather price taker initiative to remain in the market.

We are talking about RMG export whose cash flows are generated after shipments; rare cases for export under advance payment. 

Currently exporters need to extend credit facilities to foreign buyers. Export bills can be discounted or financed at the cost of exporters. 

But it takes time in consideration of cross border formalities.

Export entities need to incur regular operating cost, in addition to direct operational cost, like salaries, utilities, etc.

Mismatch between cash inflows and payment on due time requires financing from banks.

RMG exports enjoy back to bank input procurement facilities for which banks extend non-funded credit facilities in the form of letter of credit, known as back to back LCs, with export development fund (EDF) refinancing links. 

All types of procurements are conducted within this non-funded credit channel. So, exporters do not face problems for direct procurements. 

The liabilities are settled out of export proceeds. But regular recurring expenses need regular cash inflows. 

Otherwise exporters cannot meet recurring type of payments. In this case, they wait for receipt of export proceeds. 

In case of credit sales, they wait for payment through discounting/receivable/factor financing. 

Recurring payment like salary depends on availability of fund. At this stage, exporters need financing in the firm of working capital.

In Bangladesh, export credit known as packing credit is available at dictated rate of interest. 

Refinancing scheme during the ongoing Covid-19 pandemic is also available at reduced rate. As noted earlier all procurements are arranged by back to bank LC methods. 

Why packing credit is required is a question. In reality, packaging items are procured through back to back arrangement. 

Nothing is further required in the same name. So for what purposes, packing credit is used stands as a question mark. 

Exporters basically use it for settlement of recurring expenses during the period they are out of fund or export proceeds are in pipeline. 

In many cases, they try to avoid cost bearing financing and wait for export bill discounted which is cheaper than the so called packing credit or refinancing scheme. 

Banks in Bangladesh are allowed to discount export bills in foreign currency at a reasonable rate compared to the rates applicable for packing credit/refinancing. 

Mismatch between cash inflows from export proceeds and payment for recurring expenses needs packing credit facilities. 

Without it exporters need to defer such type of expenses including salary payment. 

Exporters in many cases cannot avail it due to non-availability of funded credit line from banks.

Policy support to RMG sector is well suited since production is in operation based on export orders. 

No inventory in the form of finished goods needs to be maintained. 

Hence, import financing facilities in the form of back to back LC, buyer’s/supplier’s credit, refinancing from EDF are enough for production activities. 

The facilities are in foreign currency, resulting in cost effective arrangement for the industries. 

But working capital other than input procurements is also required as mentioned earlier for meeting recurring expenses such as salary, rent, and payment for utilities. 

It is frequently reported that workers of RMG industries do not get salary on time. 

Lack of effective financial management may bring such result. This is academic talk. 

In real life scenario, effective treasury or financial management is not workable if credit line is not linked up with banks for the purposes of recurring expenses. 

Import liabilities are linked with export proceeds. But such is rare possible for the purposes as talked for.

A simple example may be cited here. 

Export proceeds are repatriated on maturity from buyers since most shipments are executed on credit term. 

Exporters need to wait till the maturity. 

To meet the import payment needs, the export bills are being financed through discounting/supply chain financing/factoring on sight basis. 

But it takes a reasonable time due to cross border formalities from the date of shipment. In case, the arrangement is executed after few days of salary payment, workers need to wait for such period. 

In some cases, RMG industries have pre-shipment financing/packing credit arrangements with banks to support working capital need. But majority avoids such arrangements due to involvement of cost. RMG industries are being run at thin margin. Extra cost is rarely possible to be borne by them, in reality. 

The situation of ‘no credit line’ for recurring expenses results in delay for salary payments, including payment for other utilities. 

But establishment of credit line for such purposes with banks is easily possible. 

The arrangement shall ensure on time payment of salary. 

Despite, the question comes why RMG industries do not avail this credit line. Simple answer is involvement of incremental cost which is not bearable in consideration of thin margin of the industries, as already noted.

As stated earlier that RMG exporters sell goods abroad for which they receive payment in foreign currency. 

A part of the payment is retained in foreign currency for settlement of import payments. Of the remainder, a portion can be retained in exporters’ retention quota accounts and balance is converted into Taka. 

As it is well known that exports need supports to sustain in global markets. Financing is one of the supports. 

Exporters can be extended with financing in foreign currency, the cost of which is comparatively lower than financing in local currency. 

Other than import financing, pre-shipment financing in Taka is also directed rate. Apparently, it is cost effective. 

But in reality, it is not cost effective compared to foreign currency financing. 

It will be a great help to RMG exporters provided that pre-shipment financing in foreign currency can be arranged with cost as applied for import finance under buyer’s/supply’s credit. 

Banks including their offshore banking operations can extend such financing facilities to exporters. 

The financing will be bridging the gap between repatriation of export proceeds and payment of recurring expenses, salary payment in particular. 

The tenure of such financing may be from 30 days to 90 days depending on the situation. 

Authorities concerned should definitely think of it for the betterment of economic activities of the country.

 

The author works in the development sector and can be reached at [email protected]