Bangladesh's garment exporters are entering a delicate window as the International Monetary Fund (IMF) has agreed to negotiate a new loan program to replace the existing $5.5 billion arrangement. An IMF staff mission is expected to visit Dhaka soon.
For the world's second-largest garment exporter, this is not just a sovereign debt rollover—it could fundamentally reshape the liquidity environment for the country's textile supply chain over the next two to three years.
Textile sector deeply tied to IMF terms
Bangladesh's textile and apparel sector accounts for over 80% of export earnings. Its factories rely heavily on imported yarn, fabric, and dyes. The current IMF program, approved in early 2023, came with conditions including higher interest rates, fiscal deficit reduction, and greater exchange rate flexibility for the taka.
These conditions have been gradually implemented over the past 18 months: the central bank raised its policy rate from 5.5% to 7.5%, and the taka depreciated by about 15% against the US dollar. For textile mills, this means imported raw material costs have risen by roughly 15% in local currency terms, while the margin requirement for opening letters of credit (L/C) has jumped from 20% to 40-50%.
A new loan negotiation will likely maintain or even tighten these conditions. The IMF typically requires borrowers to keep interest rates high to curb inflation and reduce foreign exchange market intervention. For Bangladesh's textile industry, that translates into persistently high financing costs and continued credit constraints on raw material procurement.
Direct impact on Chinese textile exports
China is one of the largest suppliers of textile raw materials to Bangladesh. In 2023, China exported about $4.5 billion worth of textile yarn, fabrics, and made-up articles to Bangladesh, accounting for 2.8% of China's total textile exports. Key products include chemical fiber yarn, pure cotton grey fabric, and polyester fabrics.
Difficulty in opening L/Cs by Bangladeshi mills has already caused some Chinese exporters to experience order delays or payment slowdowns in Q4 2023. If the new loan talks lead to further credit tightening by the IMF, Chinese textile raw material exports to Bangladesh could face two direct shocks:
- Short-term order contraction: Bangladeshi factories, unable to secure sufficient trade finance, will reduce raw material purchases, especially chemical fiber and cotton yarn.
- Higher payment risk: The acceptance cycle under L/Cs may lengthen, slowing receivables turnover for Chinese exporters.
Notably, Bangladesh's garment export orders themselves have not shrunk significantly. In 2023, the country's garment exports reached $47 billion, up about 4% year-on-year. The problem lies in the intermediate financing bottleneck, not end demand.
Exchange rate flexibility and cost pass-through
The IMF's push for exchange rate flexibility has a deeper impact on China-Bangladesh textile trade. Taka depreciation continuously raises import costs for Bangladeshi mills in local currency terms, but garment export contracts are mostly priced in US dollars, with limited room for price hikes.
This means factory profit margins are squeezed from both sides: rising import raw material costs and inability to raise export prices. Some small and medium-sized factories are already operating at a loss, forcing them to switch to cheaper alternatives—such as replacing virgin polyester with recycled polyester, or increasing use of local cotton.
For Chinese exporters, this implies that demand for high-end chemical fibers and premium cotton yarn may be eroded by lower-cost substitutes. Bangladesh's local cotton production is limited, but Indian and Pakistani cotton yarn prices are more competitive and could seize market share.