Bangladesh garment sector faces energy and demand crises

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The world’s second largest garment exporter is experiencing a slowdown that threatens the country’s economic recovery.

The garment industry of Bangladesh, the world’s No. 2 exporter after China, is facing a double blow from slowing global demand and a domestic energy crisis that threatens to thwart the country’s pandemic recovery.

Plummy Fashions Ltd., a supplier of PVH Corp., parent company of fashion brand Tommy Hilfiger, and Zara of Inditex SA, saw new orders drop 20% in July from a year earlier, CEO Fazlul Hoque said.

“Retailers in both the European and US markets are delaying shipments of finished products or delaying orders,” he said in an interview. “As inflation is rising in our export destinations, this has a serious impact on us.”

Declining orders pose a risk to the economy, where the garment industry accounts for more than 10% of gross domestic product and employs 4.4 million people. It couldn’t have happened at a worse time for Bangladesh as authorities resort to productivity-destroying power cuts to maintain fuel reserves amid a region-wide energy crisis triggered in part by the war in Ukraine.

“Uninterrupted energy supply is the key to delivering products on time,” said Hoque. “We are dealing with a combination of several problems at home and abroad.

3 hours out

When the energy crisis hit, the cost of doing business skyrocketed. Standard Group Ltd., one of the largest exporters supplying Gap Inc. and H&M Hennes & Mauritz AB, relies on generators for at least three hours a day to power its dyeing and washing facilities at the Gazipur manufacturing center on the outskirts of Dhaka.

“The cost of electricity from generators is three times what we get from the national grid because diesel is expensive,” Atiqur Rahman, chairman of Standard, said in a separate interview. “Due to the power outage, we cannot close our paint and wash units. If we do that, all the substances will be lost.”

Add to this the weakness of the euro against the dollar which is undermining the attractiveness of Bangladesh’s dollar-priced exports.

“Clothing is a discretionary item,” said Charlie Robertson, global chief economist at Renaissance Capital. “If your energy bills in Europe skyrocket then people have to cut back on discretionary spending and clothing will be one of those areas,” he said.

Regional Contamination

Concerns in the South Asian country’s garment industry are reminiscent of canceled orders in the early days of the pandemic. Clothing exports fell to a five-year low of $27.95 billion in the fiscal year to June 2020, before a recovery began. The country saw clothing exports soar to a record $42.6 billion in the year ended June, accounting for 82% of total exports.

Exporters are also seeing ominous signs of Walmart Inc.’s full-year profit forecast and its promise to cut clothing prices.

And there is a regional contagion effect from Sri Lanka, Robertson said, noting that Pakistani exports are getting “so much cheaper” because of the currency’s weakness. “That will increase the pressure on Bangladesh and key export markets such as Europe will buy less textiles,” as sales growth is taking a hit.

Bangladesh has applied for a loan from the International Monetary Fund, the latest South Asian country to ask for help as more expensive oil eats up the region’s dollar reserves.

Bangladesh’s foreign exchange reserves fell to $39.79 billion on July 13, from $45.33 billion a year earlier. That’s enough to cover about four months of imports, slightly more than the IMF’s recommended three-month coverage. The country’s trade deficit hit a record $33.3 billion in the fiscal year ending in June.

“We just recovered from the Covid pandemic and then the war came,” said Rahman of Standard Group. “We’re just unwitting victims.”



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