From London to the Bay of Bengal, Brexit looms large
Eight thousand kilometres from London’s busy shopping districts, the economic ripple effects of Brexit are being felt in one of the world’s poorest nations.
In Bangladesh, garment makers typically charge in US dollars. For UK retailers, that means import costs are rising in line with sterling’s 16% slump since Britain’s vote in June last year to leave the European Union. Reluctant to raise prices for shoppers, big high street brands are squeezing suppliers instead.
For the densely populated country of 160 million by the Bay of Bengal, that stings. Garments account for about 80% of exports and the UK is the nation’s third-largest market. Fazlul Hoque, managing director of Plummy Fashions that supplies garments to Next Plc and Primark is among those feeling the Brexit pinch.
“We are in a price war and we are getting pushed from all sides to lower prices,” he said. “British retailers are sending us a common message that the situation will be worse in future.”
A spokesperson for Primark said the company had longstanding relationships with its suppliers in Bangladesh, was mindful of their cost base and was assisting them to improve their productivity.
The spokesperson added that the company believed suppliers were often able to share some of their dollar gains with Primark and reiterated the company’s margins would be affected by the strong dollar. A spokesman for Next declined to comment.
So far, Bangladesh’s economy is holding up, but there are worries. The Dhaka-based Centre for Policy Dialogue warned in a report last month about the negative impact of Brexit and its implications for future market access.
Listed by the United Nations as one of the world’s least developed countries, Bangladesh has made strides in recent decades to combat poverty. Yet challenges remain, with around 47 million people still below the poverty line.
The World Bank forecast growth of 6.8% in the fiscal year ending June 30, lower than the official estimate of 7.1% in the previous fiscal year. The central bank has forecast growth of 7.2%.
It’s not just the impact of a weaker sterling that’s weighing on trade. Bangladesh is also on edge over what kind of tariff regime the UK will adopt once it formally leaves the EU, which could erode the preferential access that the South Asian country now enjoys in Europe.
“My concern is with the uncertainty the Brexit vote brings, it may lead to temporary suspension of the dutyfree market access for all products for Bangladesh exporters,” said Bharti Bhargava, an economist with Oxford Economics in Singapore.
To be sure, the UK economy is defying expectations and the Bank of England has upgraded its growth and inflation forecasts. That bodes well for clothing retailers. It’s also the case that the dollar’s rally could fizzle out, easing pressure on the pound.
Then there’s Donald Trump. If he ploughs ahead with steep tariffs on Chinese-made goods, it could force production into cheaper bases including Bangladesh, according to Steven Englander, global head of Group-of-10 currency strategy at Citigroup.
Still, in Bangladesh, suppliers are anxious. Abdus Salam Murshedy, managing director of Envoy Group, which supplies big UK retailers such as Next, said he was on edge amid increasing pressure to lower his prices. Sales to Next rose 11% year-on-year to US$10 million in 2016, according to Murshedy, while Envoy’s total sales amounted to $260 million.
“We are coming under tremendous pressure to keep prices low,” he said. “As their cost of business rose with the devaluation of the British pound, they focused more on Bangladesh to buy more from here but at lower prices. That’s their strategy.”