Decline in Credit Guarantee Insurance Facing Bangladesh RMG

The ready-made garment (RMG) sector in Bangladesh, which serves as the nation’s primary source of foreign currency earnings, is currently facing cumulative pressures from global economic slowdowns, inflation, and geopolitical volatility. This challenging environment is further compounded by a sharp decline in export credit guarantee insurance, which significantly escalates the financial risks within the country’s export sector.

Deceleration in Export Revenues

According to official data released by the Export Promotion Bureau (EPB) and Bangladesh Bank, ready-made garment export earnings decreased by 2.82 per cent during the first ten months of the 2025–26 financial year (July 2025 to April 2026), falling to $31.72 billion. Industry analysts indicate that this decline reflects a structural contraction in international demand and an elevation of trade risks. Consequently, international credit rating agencies and underwriting firms are systematically restricting their guarantee coverage for Bangladeshi exports.

The Role of Credit Guarantee Insurance

Export credit guarantee insurance serves as a fundamental security mechanism in international trade. It protects exporters against financial losses if an overseas buyer defaults on payments or enters insolvency after receiving goods. The presence of this insurance enables commercial banks to extend credit facility terms for back-to-back Letters of Credit (LCs) and pre-shipment financing, providing exporters with the financial confidence required to enter non-traditional markets.

Key Macroeconomic and RMG Performance Indicators

The statistical shifts across various segments of the RMG sector and related banking channels during the current fiscal year are detailed in the table below:

Global and Domestic Determinants of the Crisis

Experts attribute the contraction of credit guarantees to a combination of global and domestic factors:

• Global Economic Pressures: Sustained inflation across primary consumer markets, such as Europe and the United States, has diminished consumer purchasing power, lowering the aggregate demand for apparel. As several international buyers and retailers face acute financial distress, their default risks have climbed, prompting global insurers to lower their guarantee exposure limits to mitigate potential losses.

• Domestic Operational Issues: Domestically, severe energy constraints have hampered industrial operations. Industry stakeholders report that persistent gas and electricity shortages have reduced the production capacity of the RMG sector by 25 to 30 per cent. The resulting manufacturing delays disrupt delivery schedules, elevating the perceived risk profile of Bangladeshi exporters among international insurance firms.

Direct Consequences on Trade and Banking

The reduction in credit guarantee availability has directly impacted trade practices. During the July–April period, knitwear exports fell by 3.68 per cent, while woven garment exports recorded a 1.83 per cent decrease. Shipments to the European Union, the largest destination for Bangladeshi apparel, contracted by 4.38 per cent to settle at $15.54 billion.

To maintain trade volumes, many exporters have resorted to utilizing “open account” terms. Under this modality, the exporter bears the entirety of the financial risk if a buyer defaults. Furthermore, apparel exports to non-traditional, newer markets dropped by 6.34 per cent between July and February, as entrepreneurs remain hesitant to ship goods without adequate credit insurance.

The banking sector is experiencing secondary pressures from this trade slowdown. The opening of back-to-back import LCs dropped by 10.69 per cent between July and January. Banking officials have cautioned that approximately one-third of the total outstanding loans extended to the RMG and textile industries are currently at risk of becoming non-performing loans (NPLs). Delayed export receipts and diminished guarantee coverage have caused commercial banks to become highly risk-averse regarding the disbursement of new working capital loans, intensifying sector-specific liquidity constraints.

Policy Recommendations and Strategic Adjustments

Economists and trade specialists emphasize that mitigating these systemic risks requires coordinated policy intervention. Potential solutions include the establishment of a state-backed reinsurance scheme to offer alternative credit guarantee facilities. On an operational level, ensuring an uninterrupted supply of gas and electricity to manufacturing units is vital to stabilizing production cycles and supply chains.

Additionally, as Bangladesh prepares for its official graduation from Least Developed Country (LDC) status, traditional cash incentives are scheduled to be phased out incrementally by July 2026. Consequently, alternative policy support mechanisms—such as the provision of cost-effective utility tariffs and upgraded logistical infrastructure—are necessary to maintain cost competitiveness.

Over the long term, economists suggest that the sector must pivot away from a singular reliance on Generalized System of Preferences (GSP) schemes. Diversifying the export product portfolio, particularly through enhanced investment in man-made fibre (MMF) apparel production, is critical. Concurrently, increasing capital investment in seaport and airport logistics, alongside the adoption of technology-driven manufacturing systems, remains essential to modernizing the trade framework.