Chapter 1

Introduction
1. Background of the study
The ready-made garments (RMG) sector plays a crucial role in Bangladesh's economy, working
as the backbone of its export revenue and a significant source of employment creation. When
jute and jute-related products were losing their traditional markets and there was a risk of a sharp
decline in foreign exchange profits, the RMG sector first replaced and later surpassed jute and
jute-related products. Although traditional export industry failed to produce expected outcomes,
the Ready-Made Garment (RMG) sector progressively revitalized both exports and the domestic
market through backward and forward linking economic activities. This business has enhanced
socio-economic possibilities by generating multiple job possibilities, mostly for the
impoverished, uneducated female labor of the country. This industrial sector can offer lucrative
employment opportunities for numerous persons and enhance social productivity by
manufacturing high-value commodities on a wide scale. Bangladesh, being labor-intensive, has
seen the Ready-Made Garment (RMG) sector become its main export revenue generator. As a
prominent exporter in this sector, Bangladesh's trade dynamics are significantly affected by
several domestic and global factors, among which exchange rate volatility plays a pivotal role.
Fluctuations in exchange rates affect export competitiveness, producer profit margins, and the
stability of trade ties. Recognizing the relationship between exchange rate volatility and export
performance is essential for policymakers and stakeholders aiming to maintain and improve
Bangladesh's place in the global RMG market.
1.1. The importance of RMG exports as a driving force of economic growth in Bangladesh
The RMG industry's journey started in 1978 when Reaz Garments exported its debut shipment to
the USA, generating 69,000 USD. But the significant milestone was achieved by Desh Garments
Ltd., founded in 1979, as the first fully export-oriented company (Mia & Akter, 2019). This
industry thereafter expands at an accelerated pace, serving as a fundamental pillar of the
economy and a prominent participant in the global garment market. The Bangladesh RMG
industry, distinguished by its robust manufacturing skills and flourishing ecosystem, has
consistently advanced and emerged as a global center for clothing sourcing. Currently, the
industry has over four thousand factories, making it the third largest exporter of RMG products
globally in 2020 (BIDA). Bangladesh's RMG exports encompass a diverse range of knitwear and
woven garment products, including shirts, trousers, T-shirts, jeans, jackets, and sweaters.
The garments industry is the largest export sector in Bangladesh, having shown remarkable
expansion during the past two decades. According to Hossain and Jagit (1988), low-wage labor
has positioned Bangladesh as one of the fastest-growing garment-exporting nations. The industry
significantly contributes to employment and income production for millions, particularly among
the impoverished population. The RMG industry employs over 4 million individuals, of which
65% are women. The existence and sustenance of over twenty million individuals in this nation
are directly and indirectly connected to this business. The RMG sector constitutes approximately
84% of Bangladesh's export revenue and contributes around 11% to the nation's GDP.

Despite the remarkable growth and success, the RMG industry in Bangladesh faces several
challenges including concerns related to labor rights, workplace safety, and environmental
sustainability, limited products and market divesity, lack of sufficient backward linkage industry,
concentrated market, high lead time and lack of efficiency in producing high value products,
global geopolitical conflicts, energy price hike, etc. which have changed the overall trade
dynamics in this sector (Berg et al., 2011). Nevertheless, the RMG sector made a significant
contribution of 7.87 percent to Bangladesh's GDP in FY24. The total RMG export earnings for
FY24 stood at USD 36130.43 million, indicates a growth of 5.36 percent as compared to the
previous fiscal year (BD bank). Amid global slowdown stemming from Russian-Ukraine conflict
along with other geopolitical conflict, overall performance of RMG exports earnings was still in
better position compared to the previous year aided by notable depreciation of BDT.

Figure 1 provides the comparative value of total export and exports in terms of the ready-made
garments (RMG) sector (in million USD) of Bangladesh from 1983–84 to 2022–23. The figure
illustrates a consistent increase in both overall exports and RMG exports over the years, with a
significant increase observed post-2000. RMG sector is responsible for holding the lion share in
total exports which indicates its significance in overall Bangladesh economy. Since 2020–21,
both total exports and that of RMG witnessed a sudden rise, probably due to post pandemic
recovery and the up-surging global demand. overall the figure indicates the critical contribution
of the RMG sector to Bangladesh's overall export performance. Figure 2, illustrates the
percentage contribution of the ready-made garments (RMG) sector to Bangladesh's total exports
over fiscal years from 1983–84 to 2021–22.The RMG sector's contribution rose rapidly from the
1980s to the early 1990s, reflecting the sector's rapid development and increasing global demand.
From the mid-1990s onward, the RMG sector consistently contributed around 75–85% to total
exports, indicating its dominance in the export structure. As we can see, There are minor
fluctuations in the percentage over the years, which may reflect external factors such as global
economic conditions, policy changes, or competition. Thus, This figure underscores the
significant and sustained role of the RMG sector in Bangladesh's export economy.
Figure 1: Comparative export data of RMG and Total Export of Bangladesh

% of RMG’s to Total Export

90
% of RMG's Contribution in total Export

80
70
60
50
40
30
20
10
0
4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2
-8 -8 -8 -9 -9 -9 -9 -9 -0 -0 -0 -0 -0 -1 -1 -1 -1 -1 -2 -2
983 985 987 989 991 993 995 997 999 001 003 005 007 009 011 013 015 017 019 021
1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2
Fiscal Year

Figure 2: RMG contribution in total export

1.2. Destination-wise RMG Exports
Bangladesh's ready-made garments (RMG) sector has established a substantial presence in the
global market, with the majority of its exports directed toward more industrialized nations. The
EU remains the most significant export destination, contributing to over 50% of overall RMG
exports, as it permits duty-free access through initiatives like Everything But Arms (EBA). The
primary importers of the EU are Germany, the United Kingdom, and France. The United States
is the second-largest market, representing around 20% of Bangladeshi ready-made garment
exports, driven by its demand for competitively priced apparel. Other prominent destinations are
Canada and Japan, which are also growing as key markets for Bangladeshi RMG products. In
recent years, rising markets, including India, China, and Middle Eastern nations, have become
significant importers. The diverse variety of the country's export statistics serves as evidence of
the worldwide competitiveness of Bangladesh's RMG industry and its adaptability to evolving
market demands. According to the Bangladesh Bank Quarterly Review of Readymade Garments
(RMG): April-June, FY24, During the period of April to June in FY24, the primary destinations
for Bangladesh's RMG exports included the United States, Germany, the United Kingdom,
Spain, France, the Netherlands, Italy, Canada, and Belgium. The total export revenue from these
nine nations amounted to USD 6,982.66 million during the reported period. 91.08% of total
export profits, including 37.76 percent from woven goods and 43.84% percent from knitwear,
amounting to USD 6,359.72 million, has been generated from those nations over the specified
period (Table-1).

TABLE 1:Country-wise RMG Export in April-June, FY24

Countries Total Woven Knitwear Total Other Share of Others
Export Garments RMG Exports RMG in Share in
Total Export Total
(%) Export (%)
USA 1965.66 1142.36 585.92 1728.28 237.38 87.92 12.08
Germany 1167.78 402.70 682.33 1085.03 82.75 92.91 7.09
UK 1041.95 389.70 583.30 973.00 68.95 93.38 6.62
France 606.37 207.17 330.54 537.71 68.66 88.68 11.32
Spain 814.87 349.18 440.32 789.50 25.37 96.89 3.11
Italy 383.99 124.52 230.98 355.49 28.50 92.58 7.42
Belgium 167.55 54.94 91.94 146.88 20.67 87.66 12.34
Netherland 472.44 189.31 228.35 417.66 54.78 88.40 11.60
s
Canada 362.04 171.52 154.63 326.15 35.89 90.09 9.91
Sub-Total 6982.66 3031.41 3328.31 6359.72 622.94 91.08 8.92
Others 3846.52 1057.75 1419.67 2477.42 1369.1 64.41 35.59
0
Total 10829.1 4089.16 4747.99 8837.14 1992.0 81.60 18.40
8 4
Source: Statistics Department, Bangladesh Bank.
Table 2 presents the export performance of the top 10 products in the RMG sector at the 4-digit
HS-code level, with a comparative analysis. According to the findings from BGMEA, the
leading exportable apparel items from Bangladesh for the period of 2022-2023 were identified
by the following HS codes: 6109, 6203, 6110, 6204, 6104, 6205, 6105, 6103, 6108, and 6206.
The combined contribution of these 10 items to Bangladesh's total apparel export earnings
reached 71% in the 2022-2023 period, with export earnings amounting to 39,468.33 million. The
table presents an overview of Bangladesh's leading 10 RMG export items for the fiscal years
2020-21, 2021-22, and 2022-23, categorised by HS codes and export values expressed in million
USD. During the fiscal year 2022-23, T-shirts, singlets, and vests (HS 6109) emerged as the
leading export category, with a valuation of USD 9280.17 million. This segment accounted for
16.70% of the total national exports and 19.75% of the overall ready-made garment exports.
Exports of men's or boys' suits, ensembles, and trousers (HS 6203) amounted to USD 8169.82
million, representing contributions of 14.70% and 17.39%, respectively. Additional key
categories consist of jerseys and pullovers (HS 6110) valued at USD 5942.47 million and
women's suits and jackets (HS 6204) at USD 5530.96 million, accounting for notable proportions
of 10.70% and 9.96% of total exports, respectively. The remaining items, including women's
suits, men’s shirts, and various knitted articles, demonstrated consistent growth. The combined
export value of the top 10 items reached USD 39,468.33 million, representing 71% of total
exports and 84% of total RMG exports in FY 2022-23. The total RMG export for FY 2022-23
reached USD 46991.61 million, indicating steady growth across all major product categories
over the past three years.

TABLE 2: Bangladesh’s Top 10 RMG export item to world (values in million USD)

SL HS Products 2022- 2021- 2020- share of total

Code 23(July- 22(July- 21(July- total share in
June) June) June) export rmg
(4digit) in 2022 export
1 6109 T-shirts, singlets 9280.169 8890.831 6615.483 16.70% 19.75%
and other vests,
knitted or crocheted
2 6203 Men's or boys' 8169.818 7727.933 5742.627 14.70% 17.39%
suits, ensembles,
jackets, blazers,
trousers, etc
3 6110 Jerseys, pullovers, 5942.466 5640.455 4051.83 10.70% 12.65%
cardigans and
similar articles,
knitted or crocheted
4 6204 Women's or girls' 5530.96 5099.297 3750.972 9.96% 11.77%
suits, ensembles,
jackets, dresses,
skirts, etc
5 6104 Women's or girls' 2951.976 2700.356 2026.833 5.31% 6.28%
suits, ensembles,
etc, knitted or
 crocheted
6 6205 Men's or boys' 2548.317 1915.968 1418.609 4.59% 5.42%
shirts
7 6105 Men's or boys' 1582.354 966.7068 624.2541 2.85% 3.37%
shirts, knitted or
crocheted
8 6103 Men's or boys' 1357.707 1109.861 734.4445 2.44% 2.89%
suits, ensembles,
etc, knitted or
crocheted
9 6108 Women's or girls' 1316.912 1340.201 951.1703 2.37% 2.80%
panties and similar
articles, knitted or
crocheted
10 6206 Women's or girls' 787.6548 642.4599 469.6045 1.42% 1.68%
blouses, shirts and
shirt-blouses
Sub-Total(10items) 39468.33 36034.07 26385.83 71% 84%
total RMG export 46991.61 42613.15 31456.73 85% 100%

1.3. Bangladesh’s exchange rate regime

Bangladesh has experienced two distinct exchange rate regimes: a fixed exchange rate regime
from January 1972 to May 2003, followed by a floating exchange rate regime starting in June
2003. After achieving independence in 1971, Bangladesh implemented a fixed exchange rate
system that allowed the government to regulate the exchange rate through the Bangladesh Bank
(BB). Within this framework, BB would declare specific rates for the purchase and sale of
foreign currencies. Beginning in 1983, there were notable adjustments in the nominal exchange
rate aimed at addressing economic imbalances, indicative of a proactive exchange rate policy
(Priyo, 2009). On December 3, 2000, BB established a 0.50 Taka band that delineated the
parameters for buying and selling transactions. The band was subsequently adjusted to Taka 1.00
on May 25, 2001, indicating a degree of flexibility in the management of exchange rates. The
government maintained considerable control over exchange rate decisions, coordinating these
actions with the Ministry of Finance.
By the early 2000s, there was growing pressure to implement a floating exchange rate system
because of regional and economic factors, including the need to restore balance of payments
equilibrium during deficits in trade, lower inflationary pressures, and increase export
competitiveness, as well as to align with regional economies that had already implemented
floating systems, like Sri Lanka (2001), India (1998), and Pakistan (2000). Another reason was
to respond to IMF and World Bank recommendations, as donoer funding became ties to
economic reforms (Islam, 2003).
On May 29, 2003, Bangladesh Bank made a formal announcement regarding the implementation
of a market-determined floating exchange rate system, which was set to take effect on June 1,
2003. This system permitted commercial banks to establish their buying and selling rates for
foreign currencies according to the dynamics of market supply and demand. Nonetheless, BB
maintained the authority to intervene in the market to mitigate excessive volatility and promote
stability (Hossain & Ahmed, 2009). The transition to a floating regime was executed effectively,
characterised by low exchange rate volatility in the initial year. The new system removed the
necessity for regular official devaluations, which were prevalent under the fixed regime, and
guaranteed that market forces predominantly dictated the exchange rate. BB maintained a
vigilant approach to market conditions and executed foreign currency transactions as needed to
ensure the stability of the Taka. In 2008, during the global financial crisis, Bangladesh's central
bank modified the exchange rate policy by permitting increased flexibility for the taka.
Nevertheless, the nation persisted in regulating the currency by implementing periodic
interventions in the foreign exchange market to avert significant fluctuations and uphold its
competitiveness. The exchange rate underwent regular adjustments to account for inflation
disparities between Bangladesh and its trading partners, particularly in relation to the US dollar.
In recent years, the Bangladesh Bank has adopted a crawling peg system, which allows for
gradual adjustments of the taka against the US dollar to ensure stability. The central bank has
focused on maintaining a stable exchange rate to prevent significant fluctuations that might
negatively impact trade and foreign investment. At the same time, it permits a gradual
depreciation to align with market dynamics and uphold export competitiveness (Hossain &
Ahmed, 2009). As of December 2024, Bangladesh has implemented a crawling peg exchange
rate system, which facilitates a gradual depreciation of the taka in relation to the US dollar. In
May 2024, the Bangladesh Bank established the mid-rate at 117 taka per dollar, allowing the
currency to vary within a defined range. This strategy seeks to achieve equilibrium between the
stability of exchange rates and the necessary flexibility, effectively responding to external
economic pressures while ensuring competitiveness in global markets. The interventions by the
central bank aim to maintain the exchange rate within established limits, thereby promoting
stable market conditions (Bloomberg, 2024). Before this, Bangladesh utilised a managed floating
exchange rate system, in which the value of the taka was shaped by market dynamics,
supplemented by periodic interventions from the central bank. The shift to a crawling peg
indicates a deliberate change aimed at improving the effectiveness of monetary policy and
bolstering economic resilience (TBS News, 2024). This policy change reflects a strategic
initiative aimed at enhancing financial sector reforms and promoting sustained economic growth.
The World Bank highlights the critical role of strong fiscal and monetary policies in reaching
these goals (World Bank, 2024).
Figure 3 illustrates the trend of the Bangladeshi Taka (BDT) exchange rate relative to USD from
January 2023 to December 2023. Figure 4 illustrates the daily percentage change in the exchange
rate of the BDT throughout the specified period. This graph illustrates the exchange rate
volatility. Throughout 2023, there was a noticeable increasing trend in the Bangladeshi Taka
(BDT) exchange rate relative to US dollar, which indicated general depreciation. In the first
quarter, the exchange rate increased from about 104.5 BDT to 107.5 BDT, characterised by
considerable volatility, as evidenced by frequent and substantial percentage fluctuations
surpassing ±1.5%. This indicates increased uncertainty in the market during the initial months.
The currency rate began to decline gradually but more slowly in May 2023 and stabilised by the
middle of the year at 108 and 110 BDT. During this time, the percentage changes got smaller,
and the fluctuations got closer to ±0.5%. This meant that the exchange rate was less volatile and
more stable. The last quarter continued this trend, with a minor decline observed in December.
Overall, the significant depreciation and volatility observed early in the year transformed into a
rather stable exchange rate in the later half.

EXCHANGE RATE
111.5
110.5
109.5
EXchange rate(BDT per dollar)

108.5
107.5
106.5
105.5
104.5
103.5
23 23 23 r-23 r-23 r-23 23 23 23 23 23 23 23 23 t-23 23 23 -2
3
a n- a n- e b- a p p a y- a y- un- Jul- Jul- ug- ep- e p- c ov- ov- ec
- J - J F M A - A - J - - A S S - O N N D
11 31 20
- - 1- 21 -M 1-M 20 10 30 19- 8- 28
-
18 7- 27
-
17
-
12 11 3

Figure 3: Trend of Exchange rate (BDT per dollar)

% CHANGE(BDT)
2.5
2
1.5
1
% CHANGE(BDT)

0.5
0
-0.5-23 23 23 r-23 r-23 r-23 23 23 23 23 23 23 23 23 t-23 23 23 23
a n a n- e b- a p p a y- a y- un- Jul- Jul- ug- ep- e p- c ov- ov- ec-
-J -J -F 2-M 1-A 1-A -M 1-M 20-
J - - A
8-
S -S -O 7-N 7-N 7-D
11 -1 31 20 1 2 11 3 10 30 19- 28 18 2 1
-1.5
-2
-2.5

Figure 4: Percentage change of exchange rate

1.4. Research objective
General Objective:
The general objective of this study is to analyze the impact of exchange rate volatility on
Bangladesh’s Ready-Made Garments (RMG) exports to its key trading partners using a gravity
model framework.

Specific Objectives
 To examine the relationship between exchange rate volatility and the export performance
of Bangladesh’s RMG sector.
 To assess the extent to which exchange rate fluctuations influence RMG export flows
with Bangladesh’s top 10 trading partners.
 To incorporate key economic variables, such as GDP,GDP per capita, distance, and
trade agreements, into the analysis to understand their combined effect on RMG exports.
 To evaluate whether trade agreements, such as GSP mitigate the impact of exchange rate
volatility.
 To analyze the impact of the COVID-19 pandemic on Bangladesh’s RMG exports and
evaluate how it affected trade patterns during the study period.
 To provide policy recommendations for stabilizing exchange rates and strengthening
Bangladesh’s RMG sector against external shocks like exchange rate volatility and
global disruptions such as COVID-19. organization of the paper

1.5. Significant of the research

This research conducts a thorough examination of the effects of exchange rate volatility on
Bangladesh's Ready-Made Garments (RMG) exports, which are crucial to the nation's economy.
This study employs a gravity model framework to analyze Bangladesh's trade with key partners
from July 2011 to December 2023, offering insights into the impact of exchange rate
volatility on trade flows. Understanding the role of exchange rate volatility is essential for
policymakers, exporters, and stakeholders due to the RMG sector's significant contributions to
employment, economic growth, and foreign exchange earnings. This paper's findings clarify the
impact of exchange rate volatility on RMG export performance of Bangladesh and assess the
degree to which trade agreements and macroeconomic variable either mitigate or exacerbate this
effect. This study also fills in an important gap in the research by focusing on Bangladesh's top
trade partners and combining exchange rate volatility with the gravity model. The findings of the
study can help policymakers adopt measures to maintain exchange rate stability, negotiate
advantageous trade agreements, and guarantee an atmosphere that is favorable to long-term
export growth. This study enhances the resilience and competitiveness of Bangladesh's RMG
sector amid global economic uncertainties.
1.6. Organization of the Paper
This thesis empirically examines the impact of exchange rate volatility on the RMG exports of
Bangladesh with the top 10 trading partner: USA, UK, Germany, France, Spain, Italy, Belgium,
Netherlands, Poland and Canada. The remaining chapters of the thesis are organized as follows.
Chapter 2 reviews the existing literature regarding the relationship between exchange rate
volatility and exports, along with analyses associated to the gravity model. The literature review
is categorised into two categories: theoretical framework and empirical studies. The theoretical
framework is divided into two parts: the Gravity Model of Trade and Exchange Rate Volatility
and Trade. The theoretical literature examining the impact of exchange rate volatility on trade is
inconclusive, providing the nature and extent of the relationship between exchange rate volatility
and trade an empirical matter. The second section of the literature review encompasses empirical
studies pertinent to the topic. Chapter 3 outlines the methodology to be applied in the empirical
chapters. This chapter presents an empirical specification derived from the generalised gravity
model, together with the definitions of variables, data sources, and estimation methods utilised in
the thesis. Chapter 5 empirically investigates the impact of exchange rate volatility on the ready-
made garment export flows of Bangladesh to its principal trading partner, employing an
augmented generalised gravity model. This chapter's primary contribution is to offer novel
insights into the correlation between exchange rate volatility and Bangladesh's RMG exports, a
topic not previously explored in existing empirical literature. Chapter 4 presents an analysis of
the research findings using correlation matrices, fixed and random effects models, PPML, and
other methodologies. The analysis employs monthly panel data observations from July 2011 to
December 2023 for Bangladesh and its 10 main trading partners. Chapter 5 examines the major
findings and implications of the study. And finally, Chapter 6 concludes the thesis by offering a
concise summary of the results. The thesis highlights its contributions to the current literature
about the correlation between exchange rate volatility and RMG exports of Bangladesh. The
chapter discusses the study's limitations and offers considerations for further research.