Higher wastage rate to encourage yarn import over raw cotton

A higher wastage rate will likely encourage apparel manufacturers to import more yarn and fabric over raw cotton, the US Department of Agriculture (USDA) said in a report last week.

The voluntary report, published on January 19, also said that raw cotton is not imported under a bonded warehouse facility in Bangladesh, reports DT.

But the export-oriented apparel manufacturers are supported by duty-free imports of certain fabrics and accessories under a bonded warehouse facility, and the wastage rate is an important component for defining duties applied on different finished products. 

However, on December 19 last year, the Ministry of Commerce increased the maximum wastage rate for producing ready-made garment (RMG) items from raw materials.

The Commerce Ministry set the new maximum wastage rate at 27% for basic knitwear, 30% for special items, and 4% for sweaters and socks. 

If the production wastage rate of an export-oriented RMG manufacturer, who enjoys a duty-free facility for raw material imports, is less than the prescribed rate, they sell the excess raw materials in the open market. 

This eventually damages the business of local companies that produce raw materials.

On the other hand, if the actual wastage rate is higher than the rate set by the government, the authorities impose duty, supplementary duty and VAT on the extra wastages.

The USDA report said that the higher permissible wastage rate will likely encourage apparel manufacturers to import more yarn and fabric due to reduced duties, as opposed to importing raw cotton.

Meanwhile, the apparel manufacturers expressed disappointment over the announcement of the Bangladesh Bank on implementing the new RMG wastage rate, terming the rate as “unreasonable” and “unrealistic”.

The Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) and the Bangladesh Garment Manufacturer and Export Association (BGMEA) have opposed the revised government wastage rate as not being high enough, claiming that the rates are 35%-40% in some cases. 

While knitwear exporters have requested the wastage rate for sweater production at 12%, BGMEA sought a 16% rate and stated that the 4% wastage rate for sweaters and socks is too low. 

Earlier, regarding the increase of wastage rate, Mohammad Hatem, executive president of the BKMEA, said that the rate was not acceptable.

“We are disappointed with the decision of the Ministry of Commerce. This will hamper the growth of exports. We want at least 35% wastage rate,” he added.

“After inspecting six factories, they have found that the wastage rate is more than 40%.  So, to solve the problem, a realistic rate has to be announced according to the results obtained from the visit,” he added.

While the committee found evidence of 40% waste, it is not clear on what basis the newly introduced rate was given, he added.

“We do not understand how they set the rate at 27% and 30%,” Hatem said.

Moreover, some sources said that US delegates are keen to increase cotton exports to Bangladesh and this report may also be a reflection of that.

However, the wastage rate defines the permissible amount of leftover material made from yarn and fabrics. 

The wastage rate had previously remained unchanged since 1998, calculated 16%, and the industry had been pushing the government to increase the wastage rate. 

The report also stated that using yarns made of high-quality cotton, including cotton from the United States and Australia, reduces wastage. 

The rise in the wastage rate has exposed inefficiencies in the sector and RMG companies have expressed the desire to reduce the wastage rate and develop more sustainable practises for raw material consumption, the report further stated.  

If the actual wastage rate of the apparel producers is higher than the government rate, the company will incur supplementary duties and a value added tax on the extra wastage; however, monitoring and enforcement mechanisms are weak, the USDA added.