Bailout measures for import-substituting products

 Bailout measures for import-substituting products

Md. Joynal Abdin
The Financial Express on March 21, 2014
 
  The traditional agrarian economy of Bangladesh is set to be transformed into an industrial one. According to statistics, contribution of industry to Bangladesh’s gross domestic product (GDP) is increasing day by day. It was 21.7 per cent in 1991, 25.9 per cent in 2001, 28.5 per cent in 2010 and 31.98 per cent in 2012-13 fiscal year (FY). On the other hand, contribution of agriculture to the GDP has been falling: 30.4 per cent in 1991, 24.1 per cent in 2001, 18.6 per cent and 18.7 per cent in 2012-13 FY.
 
According to ‘Vision 2021’, Bangladesh would become a middle income country by the year 2021. To achieve this vision, contribution of the industry to the GDP will have to be increased up to 40 per cent.
 
The government has identified 31 industrial sectors including agro-based and agro-processing industry, human resource export, shipbuilding, renewable energy (solar power, windmill), tourism, basic chemicals/dye and chemicals, ICT and ICT-based service, readymade garment industry, pharmaceutical industry and jute and jute products etc as ‘thrust sectors’ in the National Industrial Policy 2010. Besides, 11 SME sectors, namely electronics and electrical, software-development, light engineering and metal-working, agro-processing/agri-business/plantation agriculture/ specialist farming/tissue-culture and related business, leather-making and leather goods, knitwear and readymade garments, plastics and other synthetics, healthcare and diagnostics, educational services; pharmaceuticals/ cosmetics/toiletries, fashion-rich personal effects, wear and consumption goods were identified as SME booster sectors in the SME Policy Strategies 2005.
 
First and foremost objective of identification of these thrust sectors or booster sectors is to promote development of these sectors and provide various types of monetary and non-monetary supports for their further growth. A series of development interventions/projects were designed, developed and being implemented by several government/ semi-government/ non-government organisations to foster growth of these sectors. The SME Foundation is working with 11 booster sectors and implementing cluster-based SME  (small and medium enterprises) development approach to strengthen capacity and increase growth of these sectors by facilitating, advocating, creating and maintaining an SME-friendly business environment with its limited resources.
 
With all these promotional, development and facilitating activities, the government should have a bailout arrangement in its existing or upcoming activities. Development projects could be designed and implemented to identify native products which are going to be abolished in the absence of little nursing. Production of coconut oil in Bangladesh is a case in point.
 
Coconut oil is an essential product in great demand throughout the Subcontinent. It has multiple uses as hair oil and edible oil, and for machine parts maintenance. It has different forms of uses in Bangladesh like coconut oil, copra, coconut oil cake and crude coconut oil. Furthermore, various types of chemical and perfume mixed coconut oil are selling with various branded logos in the market with higher prices. But 100 per cent local pure coconut oil is going to be extinct in the absence of policy-makers’ due attention.
 
For example, the Bagerhat Coconut Oil Cluster is one of the oldest in Bangladesh. It was initiated in the 1950s. Traditional oil mills were used to produce coconut oil at Bagerhat. In 1954, one mill imported a semi-auto machine to fry coconut for producing coconut oil. Local engineering workshops made  prototype of the Japanese machine and started production of semi-auto oil mills. At one stage in late 1980s there were around 150 auto coconut oil mills in Bagerhat, mainly concentrated in Nager Bazar, the BSCIC Industrial Estate, Bagerhat Sadar and adjoining areas. Once they were supplying crude coconut oil to Dhaka and other districts of Bangladesh. With the passage of time, coconut oil mills were shut down and now there are only about 30 running mills in Bagerhat Sadar and adjoining areas. About 10-15 mills were closed down for an uncertain period. Auto coconut oil mills are being shut down due to the following reasons:
 
a. Absence of refinery: The Bagerhat Coconut Oil Cluster is producing crude coconut oil due to absence of a refinery. Establishing a modern refinery machine is costlier for the micro/small investors of Bagerhat Sadar. At the same time, the quantity of total production by a single company is not profitable to establish a refinery at their own cost. It could be the government or donors to provide them soft loan to establish a refinery at Nagerbazar area on a cooperative/ association basis and refine their crude graded oil at a nominal charge. Thus their products could fetch competitive prices in the market and bail out the sector from bankruptcy.
 
b. Absence of testing facilities: There are no laboratories in Bagerhat or nearby for chemical testing of their produced coconut oil to maintain prescribed quality.
 
c. Non-cooperation from the tax/VAT authority: Previously Bagerhat coconut oil producers were paid turnover tax at 4.0 per cent rate due to their micro/small industry size. But currently local VAT authorities are collecting 15 per cent VAT from them though their annual turnover is less than Tk. 8.0 million (upper ceiling for turnover tax). One factory owner challenged their decision in the High Court and returned to the turnover tax regime. But average micro/small industry owners are unable to go to the court due to their financial and educational limitations. As a result, they are bound to pay 15 per cent VAT. As a result, a market distortion is created and micro/small entrepreneurs are losing price competitiveness to others. On the other hand, these micro/small factories are creating employment for hundreds of poor workers, both male and female. They are using 100 per cent local raw materials and producing import-substitute products. Therefore tax/VAT authority could consider VAT exemption for those micro/small coconut oil mills. The total amount will not be more than Tk. 5 million or Tk. 10 million per year, which is very nominal against our total collection of tax and VAT. Otherwise, if current trend of shutting down coconut oil mills in Bagerhat continues, then this cluster will be abolished within the next five to ten years. Hundreds of poor workers will lose their livelihoods. Thus Bangladesh could be solely import-dependent in coconut oil.
 
d. Decreasing trend of raw materials supply: Only matured coconut is used to produce high-quality coconut oil. With increasing trend of consuming green coconut at a competitive price, supply of matured coconut is decreasing day by day. Local entrepreneurs are too small in size to import coconut from Sri Lanka, Indonesia or the Philippines. Sources say, establishment of mobile phone tower here and there is harming coconut production in the southwest belt of Bangladesh. To ensure smooth supply of matured coconuts to the coconut oil producing industries, the government could declare a policy to restrict consumption of green coconut in Bagerhat, Khulna, Satkhira and adjoining districts. On the other hand, the government could facilitate import of coconut from Sri Lanka, Thailand, Indonesia or the Philippines on a cooperative basis to continue smooth production of these coconut oil mills and reduce import of coconut oil.
 
e. Lack of knowledge about modern production process/ technology: Almost all the coconut oil-producing mills of Bagerhat as well as other parts of Bangladesh are using 50- year-old technology. As a result, quality of oil is backdated and about 20-25 per cent oil remains as oil cake. Both product quality of coconut oil and productivity could be improved through upgradation of technology. The government could supply soft loans for upgrading technology.
 
f. Limited access to finance: Micro/small coconut oil-producing mills are not getting proper investment loans. As a result, they have to get high interest micro-finance or CC loan. This high rate of interest is making their products over-priced and decreasing their competitiveness in the market.
 
g. Absence of linkage with branded companies: Local coconut oil producers do not have linkage with branded coconut oil companies. As a result, they are selling crude-graded oil as machine oil or hair oil to the poor families. If branded companies could purchase their crude-graded oil and refine, then local coconut oil mills could have survived. The government may encourage large branded coconut oil companies to refine and purchase their products. Thus a suitable win-win outsourcing supply chain could be developed between the local mills and the branded companies.
 
The government should, therefore, introduce a bailout package not only for coconut oil but also other domestic products/sectors which face extinction in the absence of support from the authorities.
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Md. Joynal Abdin

Development Researcher, Columnist and Author

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