THE IMPACT OF EXCHANGE RATES, INFLATION, AND COMMODITY PRICES ON BANGLADESH’S RMG EXPORT EARNINGS: A LONG-TERM PERSPECTIVE

Abstract

In Bangladesh's economic growth, the ready-made garments (RMG) sector stands out as a vital catalyst. However, recent global crises including the COVID-19 pandemic, the RussiaUkraine war, and the Red Sea conflict, have introduced significant volatility and vulnerability into the global economy. The vulnerability of Bangladesh’s RMG sector is more pronounced, as it is mostly dependent on imported raw material and its primary export destinations are some of the most severely affected by these crises. These events have ultimately led to sharp increases in global fuel and cotton prices, heightened exchange rate volatility, and persistent inflation. Given the critical importance of this sector for Bangladesh, this study aims to investigate the long-run relationships between RMG earnings and key macroeconomic variables: exchange rates, inflation, global fuel prices, and cotton prices. To achieve this, the study analyzed a monthly dataset covering the period from July 2016 to December 2023, and employed the Johansen cointegration test followed by the Vector Error Correction Model (VECM). The results reveal that, in the long run, exchange rates, inflation, and the global fuel price index have positive association with RMG earnings, while the global cotton price shows a negative relationship. However, the coefficients for exchange rates and inflation are relatively low, suggesting a limited influence on RMG earnings.