Manufacturers in Bangladesh, already reeling from currency issues with the falling Bangladeshi taka are taking stock of Western clients’ difficulties with growing alarm.
Suppliers in the world’s second-biggest apparel-exporting nation are dealing with a taka that has been readjusted 11 times in the last two months, now approximately 95 takas to $1. And while Target already announced plans to ramp up markdowns last month, Walmart’s announcement earlier this week of a similar price-slashing tactic set off a fresh set of jitters in Bangladesh this week.
“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars. We’re now anticipating more pressure on general merchandise in the back half,” Walmart Inc. president and CEO Doug McMillon said Monday.
He added that operating income was expected to fall 13 to 14 percent for the second quarter and 11 to 13 percent for the year.
“We are worrying about coming days,” Shahidullah Azim, vice president, Bangladesh Garment Manufacturers and exporters Association (BGMEA), told Sourcing Journal. “There is a silent, economic recession and inflation going on globally, with people having to consider food rather than fashion.”
While BGMEA in Bangladesh considers its future, Azim added: “Its not only Walmart, but many buyers are making cutbacks, and that is making a big impact in our sector. Zara shut down their 800 stores in Russia, among other retailers like H&M, who are doing the same. Our export trend is declining. Unless the Russia-Ukraine war ends, we will have a difficult time.”
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Others like former BGMEA president Siddiqur Rahman are more pragmatic.
“July to September is a low season as it is. My feeling is that things will begin to look up in the next two to three months,” Rahman said. “All the buyers had ramped up their orders when markets opened after Covid, and have their inventories. They are slowing their buying, it is part of the correction.”
However, the situation in Bangladesh is being compounded by the rapidly declining foreign reserves. The government has reached out to the International Monetary Fund for a $4.5 billion loan.
Fears set off by the tumultuous situation in Sri Lanka where dwindling foreign reserves led to bankruptcy after a steep decline in the Sri Lankan dollar, and the fast declining foreign exchange reserve in Pakistan, has set off a series of measures and changing conditions in Bangladesh.
“There is not a panic but there is a concern and the government is taking a number of steps to be cautious,” said Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), a leading think tank in South Asia. “Everything is coming together and we are really in a bad situation. The origin of the problem is the global market dynamics but domestic policies have accentuated it.”
“It was comfortable for the last three to four years, because the reserves were very good. When the Russia-Ukraine war started, prices went up, costs went up. We have been talking about the need not to hold the taka up artificially, but this was forced to happen at a time when the international prices have gone up. So, it is a double whammy,” he said.
IMF aid is expected to help, but as Rahman pointed out the loans come with the expectation of change, for which the industry too would have to prepare. “IMF loans come with very tough conditions. These often include asking for the exchange rate to be fully floated—not artificially pegged bank reforms, and withdrawing subsidies to various sectors. Many of these reforms need to be done anyway, but withdrawing subsidies would fall disproportionately on the poor people when prices are going up,” he said. “That will be the litmus test—whether the government will agree to this.”
The apparel sector, which accounts for approximately 85 percent of Bangladesh exports, is gearing up for the dual shock of the global and local impact, and the immediacy of global apparel retailers’ inventory overload.
“It is not just the announcement by Walmart—many buyers are asking exporters to ‘hold a bit’,” Rahman said.
The question remains, whether the gains made over the last year as business ramped up after the earlier severity of the pandemic induced lockdowns, can carry the industry through these new conditions. It appears to be, in some measure, cushioned by the numbers: Apparel exports stood at $38.52 billion, a 34.87 percent increase over the previous year for the first 11 months of fiscal year 2021-22, ending in May 2022; exports to the U.S grew 53 percent in the first nine months of this fiscal year.
In this time, knitwear exports grew the most, to $20.98 billion, compared to the previous years $15.36 billion in the 11-month period. Woven grew to $17.53 billion up from $13.19 billion over the same period.
Trying to remain positive and making preparations, manufacturers are refelctive: “We’re thinking that a recession of the form of 2007-08 may well be averted. But if it does occur, the challenge for all of us would be immense,” former BGMEA president Rahman observed.