Manufacturing (non-RMG): 2026-Q2 Sector Review

Manufacturing (non-RMG)

BDPolicyLab · 2026-06-30

Macroeconomic Context and the Industrial Operating Environment

The non-garment manufacturing sector in Bangladesh operates under severe structural constraints, shaped by macroeconomic adjustments, tightening liquidity, and utility price pressures. Recent national accounting and monetary data delineate a challenging production landscape. Real GDP growth moderated to 4.14% per annum according to the World Bank WDI for FY2023, while the provisional estimate from the Bangladesh Bureau of Statistics (BBS) was recorded at 6.0% for that fiscal period. Concurrently, domestic price levels have exerted persistent upward pressure on operating costs and consumption patterns. The annual average consumer price index (CPI) inflation stood at 10.47% according to World Bank figures for 2024, closely aligning with the BBS recording of 9.7% in December 2024. These pressures reflect four consecutive years of near-10% domestic inflation, which has weakened domestic consumer manufacturing by dampening real household purchasing power.

External sector accounts reflect adjustments following currency depreciations and import compression measures. Total merchandise imports totaled $63.7 billion on a c.i.f. basis in FY2023-24, whereas total merchandise exports stood at $44.5 billion for the same fiscal year based on adjusted Bangladesh Bank data. Remittance inflows provided foreign exchange support, registering $23.91 billion in FY2023-24, representing an increase of 10.66% year-on-year. Foreign exchange reserves calculated under the IMF BPM6 methodology stood at $31.07 billion in December 2024, with the Bangladesh Bank mid-rate for the exchange rate settling at 122.75 BDT per USD at the end of December 2024. Fiscal policy parameters also remain constrained, with the revised budget for FY2023-24 recording a fiscal deficit of 4.7% of GDP, alongside a public debt ratio of 40.1% of GDP in 2024.

`` +-------------------------------------------------------------------------+ | Key Macroeconomic Indicators (Contextual Baseline) | +-------------------------------------------------------------------------+ | Real GDP Growth (World Bank WDI FY2023) | 4.14% | | BBS Provisional GDP Growth (FY2023) | 6.0% | | CPI Inflation (World Bank 2024 Annual Average) | 10.47% | | CPI Inflation (BBS December 2024) | 9.7% | | Foreign Exchange Reserves (IMF BPM6, December 2024) | $31.07B | | Exchange Rate (BDT per USD, Mid-rate End-Dec 2024) | 122.75 | | Fiscal Deficit (% of GDP, FY2023-24 Revised Budget) | 4.7% | | Public Debt (% of GDP, World Bank / IMF 2024) | 40.1% | | Total Merchandise Imports (c.i.f., FY2023-24) | $63.7B | | Total Merchandise Exports (Bangladesh Bank Adjusted FY2023-24) | $44.5B | | Remittance Inflows (FY2023-24) | $23.91B | | Non-Performing Loan Ratio (Basel III Reclassification, 2025) | 35.73% | +-------------------------------------------------------------------------+ ``

Compounding these macroeconomic headwinds is severe credit distress across the formal financial system. Following the Bangladesh Bank Basel III reclassification implemented in late 2025, the banking sector non-performing loan (NPL) ratio reached 35.73%. For non-apparel industrial enterprises, which depend heavily on domestic commercial bank debt rather than foreign supplier credit or offshore development finance, this asset-quality deterioration severely restricts access to working capital and term facilities. The contraction in manufacturing sentiment was confirmed as Bangladesh's manufacturing Purchasing Managers' Index (PMI) dropped 9.9 points in June 2026, falling into contraction territory. Factory managers reported that holiday plant shutdowns around Eid, monsoon disruptions, escalating liquefied petroleum gas (LPG) prices, and the enforcement of a 15% value-added tax (VAT) across operational activities compressed operating margins. Consequently, national industrial output decelerated to decade-low rates.

Non-RMG Export Dynamics and Sub-Sector Performance

Total merchandise export receipts reached $48.00 billion in FY2025–26, representing a marginal year-on-year contraction ranging from 0.58% to 1%. This aggregate outcome was heavily supported by an outward shipment surge in the final month of the fiscal year: June 2026 exports totaled $4.20 billion, an expansion of 25.91% relative to the $3.34 billion recorded in June 2025. Ready-made garments (RMG) accounted for $38.70 billion of the total export earnings in FY2025–26, underscoring the narrow concentration of the external basket. Nevertheless, non-garment manufacturing segments demonstrated varied levels of export resilience, with specific product categories posting double-digit annual increases and significant monthly surges in June 2026.

`` +-------------------------------------------------------------------------+ | Non-RMG Export Performance Overview (FY2025–26 / FY26) | +-------------------------------------------------------------------------+ | Sub-Sector | Full-Year Receipts | Full-Year YoY | June 2026 | | | | Growth | YoY Surge | +------------------------+--------------------+---------------+-----------+ | Leather & Products | $1.23 billion | 7.09% | 47.68% | | Jute & Jute Goods | $883.69 million | 7.75% | 76.60% | | Synthetic Footwear | $523 million | N/A | N/A | | Engineering / Light | N/A | 21.77% | 44.74% | | Home Textiles | N/A | 6.52% | 59.95% | +------------------------+--------------------+---------------+-----------+ ``

Leather and leather goods reached $1.23 billion in export earnings across FY26, which represents an annual growth rate of 7.09%. This performance was assisted by a 47.68% year-on-year surge in shipments during June 2026. Despite this positive trajectory, structural compliance issues prevent the sector from capturing broader international market share. As reported by the Commerce Minister in Parliament, aggregate leather export proceeds remain capped between $1.10 billion and $1.23 billion, falling well short of the estimated $10 billion potential latent in domestic raw hides. The persistent discount applied to domestic leather arises from unresolved environmental compliance failures at the Central Effluent Treatment Plant (CETP) in the Savar Tannery Industrial Estate, combined with the resultant inability of domestic tanneries to secure Leather Working Group (LWG) certifications. Uncertified tanneries are excluded from major global brand supply chains, forcing local processors to sell untanned or semi-finished hides to secondary markets at deeply discounted prices.

In contrast, synthetic footwear production continues to emerge as a viable channel for industrial diversification, with export receipts rising to $523 million. The expansion of this sub-sector has been accelerated by international brand purchasers shifting sourcing portfolios outside China, which has channeled procurement orders directly into domestic manufacturing establishments such as RFL Group, Bling Shoes, and Jennys Shoes. Corporate viability within footwear manufacturing was also underscored by Bata Shoe Company (Bangladesh) Limited during its 54th Annual General Meeting, held digitally under the chairmanship of Shaibal Sinha, where shareholders approved a 248% cash dividend.

Natural fiber fabrication demonstrated parallel momentum. Shipments of jute and jute goods generated $883.69 million in FY26, expanding by 7.75% over the previous year, supported by a 76.60% shipment spike in June 2026. Engineering and light engineering manufacturing emerged as the fastest-growing non-apparel export segment, posting an annual growth rate of 21.77% across FY26, alongside a 44.74% increase in shipments during June 2026. The home textiles segment also exhibited stable growth, rising by 6.52% over the full year, underpinned by a 59.95% volume jump in June 2026.

Structural Cost Escalations and Input Bottlenecks

While non-RMG exports showed momentum late in the fiscal year, domestic-oriented manufacturers face acute margin compression driven by utility price adjustments and import duty structures on critical inputs. Energy pricing has altered factory cost structures over a two-year window. Grid electricity tariffs for industrial consumers rose to Tk 10.63 per unit in June 2026, marking an increase of nearly 19% from Tk 8.95 in early 2024.

Gas tariff adjustments have placed a heavy burden on energy-intensive plants. Commercial gas tariffs for new industrial connections reached Tk 40 per unit, while rates for captive power generation were fixed at Tk 42 per unit. Given unreliable pipeline pressures and grid interruptions, non-RMG processors frequently rely on captive generation, rendering electricity generation at Tk 42 per unit a major driver of elevated factory-gate prices. In addition to utility adjustments, operations have absorbed price increases in commercial LPG, compounding the operational friction created by the 15% VAT levied across various business transactions.

Upstream tax policies have created vulnerabilities across secondary processing chains. Bangladesh's domestic plastics ecosystem, encompassing more than 5,000 plastic processing factories, registered formal concern over fiscal proposals to double the import duty on raw polymer resins from 5% to 10%. Polymer resin serves as an essential raw material for consumer goods, engineering plastics, medical disposables, and intermediate packaging utilized by both the footwear and agro-processing sectors. Raising duties on raw polymer inputs from 5% to 10% risks elevating working capital requirements across these 5,000+ establishments, heightening the risk of imported product substitution and reducing the competitiveness of domestic packaging components.

Institutional and Regulatory Realignments: Pharmaceuticals

Governance dynamics within the pharmaceutical manufacturing sector experienced critical shifts in 2026, illustrating the challenges of regulatory administration under updated legislative statutes. Following the enactment of the Drugs and Cosmetics Act, 2023, the government established the National Drug Advisory Council, formally inducting the Director General of the Directorate General of Health Services (DGHS) into its statutory structure. The council was created to serve as the principal authority for regulating drug pricing, assessing clinical necessity, and updating national therapeutic schedules.

A major regulatory transition took place when the Cabinet cancelled the drafted 'Essential Medicines List 2026' and the 'Medicine Pricing Method 2026'. The decision occurred because executive bodies had prepared both regulatory instruments without prior statutory consultation with the newly constituted National Drug Advisory Council, as mandated by the Drugs and Cosmetics Act, 2023. Consequently, the Cabinet ordered the regulatory framework for medicine pricing controls and product classifications to revert immediately to the 1994 list.

This regulatory reversal creates short-term policy ambiguity for domestic pharmaceutical formulators. Reverting to the 1994 list temporarily suspends proposed pricing methodologies that sought to incorporate modern active pharmaceutical ingredient (API) cost structures, inflationary trends, and currency depreciations. The regulatory reset provides breathing room against immediate price mandates, but it leaves modern formulations outside the 1994 schedule under uncertain oversight until the National Drug Advisory Council conducts statutory reviews.

Industrial Policy Levers and Sectoral Strategy

To reverse the decelerating trend in manufacturing output, senior economic authorities must reconcile tariff policies, energy allocations, and targeted fiscal incentives. The contraction of the manufacturing PMI by 9.9 points in June 2026 illustrates that ad-hoc fiscal measures risk depressing industrial activity. Policymakers hold several concrete levers across distinct non-garment sub-sectors:

Electronics and High-Tech Assembly: To capitalize on export opportunities and strengthen domestic electronics manufacturing, the Ministry of Industries and information and communication technology (ICT) authorities have formulated incentive frameworks. These plans propose a 0% import duty on raw components, import concessions on capital machinery, and dedicated export subsidies. Providing 0% import duty schedules on basic electronics components allows domestic assembly plants to maintain margin viability against imported consumer electronics, encouraging light engineering and electronic sub-assemblies to expand beyond domestic borders. Plastics and Intermediate Manufacturing: Maintaining tariff stability is critical for the over 5,000 plastic processing factories. Abandoning the proposed import duty increase from 5% to 10% on raw polymer resins will preserve cost competitiveness across downstream packaging, consumer goods, and electrical casing manufacturers. Given that polymer resins cannot be sourced domestically at scale, retaining raw material import tariffs at 5% shields domestic processors from intermediate cost inflation. Tannery Remediation and Environmental Compliance: Unlocking the export gap between the current $1.23 billion in leather receipts and the $10 billion raw hide potential requires completing the environmental infrastructure at the Savar Tannery Industrial Estate. The Ministry of Industries must prioritize operational remediation of the Savar CETP to ensure full treatment efficiency, solid waste management compliance, and international standard certification. Achieving functional compliance will allow tanneries to obtain LWG certification, removing the market discounts that currently depress domestic export values. Pharmaceutical Pricing and Therapeutic Listings: Following the Cabinet's revocation of the drafted 2026 documents, the Ministry of Health and Family Welfare must convene the National Drug Advisory Council, including the Director General of Health Services. The council needs to formulate an updated Essential Medicines List and transparent pricing formulas that balance public affordability against input cost realities, avoiding arbitrary price caps that undermine production viability for critical molecules. * Energy Reliability and Financial Rehabilitation: The sharp climb in industrial power costs, with electricity reaching Tk 10.63 per unit alongside captive gas tariffs of Tk 42 per unit, requires predictable utility rate-setting. Stabilizing fuel supplies to industrial clusters will lessen reliance on expensive captive generation. Additionally, restructuring banking oversight is necessary to address the 35.73% NPL ratio, ensuring that viable non-RMG manufacturers can secure credit despite financial sector adjustments.