Empowering SMEs: Bangladesh's Urgent Path to Global Competitiveness Post-LDC Graduation

Imagine the vast, shimmering Bay of Bengal, teeming with potential. For generations, our small Bengali fishermen, with their modest boats and simple nets, have toiled, bringing in enough for their families and communities. But successive governments have often focused on the "big fish." They want to attract large international fishing companies, equipped with the latest radar technologies and massive trawlers, to fish in Bangladesh's waters. Yet, they don't even want to buy a net for the small Bengali fisherman who owns a small boat.

This parable, sadly, reflects a persistent challenge in Bangladesh's economic strategy. While our ready-made garment (RMG) sector has been a phenomenal success story, driving our economy for decades, our impending graduation from Least Developed Country (LDC) status presents both immense opportunity and significant challenge. 

To truly thrive and diversify our export basket, we must now focus on empowering our Small and Medium-sized Enterprises (SMEs) across all other burgeoning sectors, from furniture to agro-processing. The key lies in adapting the very innovations that propelled our RMG sector to global prominence: a modernized "partial bond" facility and robust oversight by our dynamic trade bodies.

Our RMG journey began with visionary leadership, particularly that of Noorul Quader Khan. In the late 1970s, his pioneering efforts brought forth two transformative concepts: the bonded warehouse system and back-to-back Letters of Credit (LCs). These innovations solved critical problems of capital access and duty burdens on imported raw materials. The bonded warehouse allowed duty-free import for export-bound goods, while back-to-back LCs de-risked financing for nascent manufacturers by linking raw material procurement to confirmed export orders. These mechanisms were foundational, enabling a cash-strapped nation to build a multi-billion dollar export industry from scratch.

Today, as we look beyond RMG, other promising sectors like furniture, agro-processing, leather goods, and light engineering face similar hurdles to those the RMG sector overcame decades ago. Many SMEs across these sectors struggle with upfront duties on imported inputs and limited access to financing.

Without the ability to import raw materials efficiently and competitively, they risk being pulverized by larger, more established global competitors once LDC-specific trade preferences vanish. We simply cannot afford to leave them to the sharks. For Bangladesh to truly compete globally, our SMEs must grow and equip themselves with the latest technologies, which often require imported components or machinery.

Here, Vietnam's economic trajectory offers valuable parallels. Vietnam transformed its economy through comprehensive market-oriented reforms, aggressive pursuit of free trade agreements, and significant investments in infrastructure. Crucially, it also employed sophisticated financial instruments, including various forms of "partial bonds" and credit guarantees, to de-risk investments and facilitate growth, particularly for its export-oriented sectors.

It is time for Bangladesh to embrace a similar, targeted approach for its SMEs: a partial bond facility.

A Partial Bond System for Diverse SMEs

This proposed system would function as a stepping stone for export-oriented SMEs across all sectors:

Capped Duty-Free Imports: SMEs would be granted permission for tax-free and duty-free imports of a capped value of raw materials and intermediate goods directly related to their export production. This cap would be initially set at a level appropriate for an SME, preventing abuse while providing crucial relief.

Performance-Based Escalation: The import cap would not be static. Companies will be allowed to increase their tax-free import limit based on proven export performance, consistent growth, and adherence to compliance standards. This incentivizes legitimate growth and ensures the facility supports productive enterprises.

Transition to Full Bonded Facility: A clear cutoff point would be established. When an SME grows large enough (e.g. reaches a specific annual export volume or import value threshold) and demonstrates the capacity for managing a larger operation, it would be encouraged and facilitated to transition to a full, dedicated bonded warehouse facility. This graduated approach provides tailored support at each stage of an SME's growth.

This partial bond concept is vital for LDC graduation. It will enable our SMEs to lower production costs, invest in necessary technologies, and compete effectively on the global stage.

The Crucial Role of Trade Bodies

The success of this system hinges on robust oversight, and our national trade bodies are uniquely positioned to lead this. Organizations such as the Furniture Exporters Association and the Bangladesh Agro Processors Association (BAPA) already play vital roles in promoting their sectors, offering training, and advocating for their members' interests. They possess intimate knowledge of product costing, supply chains, and market dynamics specific to their industries.

Therefore, the government should:

Accredit Trade Bodies: Establish clear criteria for accrediting specific trade bodies to oversee partial bond applications for their SME members. This accreditation would demand strong internal governance, transparency, and capacity for due diligence.

Empower Vetting and Endorsement: These accredited trade bodies would be responsible for vetting their SME members based on concrete indicators like regulatory compliance (e.g. Companies Act, Corporate Governance Code, labour laws, environmental standards, etc), tax compliance, audit consistency, and absence of regulatory red flags. Their "goodwill" would be judged by their positive industry reputation, consistent compliance, and active participation in promoting best practices within their sector.

Dual-Layer Oversight: While trade bodies would conduct initial oversight, government bodies (e.g. NBR, Customs, etc) would retain ultimate authority and conduct periodic joint audits. The onus would be squarely on the trade bodies to ensure their members adhere to best practices; if significant problems or abuse are found in audits, the "hammer can fall" on the trade body, potentially leading to suspension of their accreditation or other penalties.

Capacity Building & Transparency: The government should support trade bodies in enhancing their capacity for due diligence, risk assessment, and compliance training for SMEs. Accredited trade bodies would submit regular, transparent reports on partial bond applications, export performance, and compliance issues.

By leveraging the expertise and oversight of trade bodies, Bangladesh can ensure that the partial bond system is implemented effectively, transparently, and without abuse, thereby maximizing its benefits for SME growth and overall economic resilience.

Conclusion

Noorul Quader Khan's pioneering innovations laid the indispensable foundation for Bangladesh's RMG sector, transforming the nation's economy and lifting millions out of poverty. As Bangladesh prepares for LDC graduation, the need for further economic diversification and enhanced competitiveness becomes paramount. Vietnam's comprehensive economic liberalization, aggressive FDI attraction, and strategic infrastructure financing, including the successful use of partial bond mechanisms, offer a compelling blueprint.

For Bangladesh to sustain its impressive economic momentum, successfully navigate the challenges of LDC graduation, and diversify its economy, it is imperative to implement a new generation of strategic policies.

A critical step involves adopting partial bond mechanisms to support the numerous SMEs that currently face significant hurdles in accessing finance and raw materials. This will foster more inclusive growth and enhance overall industry efficiency and resilience, ensuring these SMEs can grow, adopt new technologies, and compete effectively against larger global players once LDC graduation is complete.

This strategic investment in our SMEs is not just about growth; it's about giving our local fishermen the modern nets and high-quality technology they need to fight against the big trawlers and thrive in the global ocean, ensuring Bangladesh's place as a truly competitive global exporter.

Furthermore, strengthening the role of trade bodies in compliance monitoring, incentive oversight, and capacity building is crucial. This enhanced mandate, coupled with a steadfast commitment to good governance and transparency within these bodies and across the broader economic landscape, will not only ensure the integrity and effectiveness of export incentives but also build greater confidence among international buyers and investors.

By learning from its own past achievements and drawing strategic parallels from Vietnam's experience, Bangladesh can forge a more diversified, resilient, and equitably governed economic future, paving the way for a successful transition to a higher-income economy.