Robust FDI must for Bangladesh’s macroeconomic stability: Atiur
The former governor says country needs to reform the tax system effectively to get more FDI
Former Bangladesh Bank governor Atiur Rahman said despite commendable GDP growth, the diminishing net foreign direct investment inflows as a percentage of GDP is a concern.
"FDI inflows need to be bolstered to realise Bangladesh's macroeconomic potentials, particularly to stabilise its financial balance," Atiur Rahman said while addressing a monthly luncheon meeting organised by the Foreign Investors' Chamber of Commerce and Industry (FICCI) in Dhaka yesterday.
In his presentation titled "Towards a Trillion Dollar Economy of Bangladesh: Challenges and Opportunities," the former governor shed light on concerning trends, including inadequate job creation, Bangladesh's overdependence on energy imports, issues within the banking sector, and inflationary pressures.
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He said Bangladesh's average FDI inflows stood at 0.9% of GDP in 2022, while it was 1.7% and 4.6% for India and Vietnam, respectively.
He also identified factors that are hindering FDI in Bangladesh. These are inadequate trade logistics and infrastructure, complex investment policy and business regulations, low productivity, lack of depth in the financial sector, unfavourable tax environment.
Realising Bangladesh's "Vision 2041" necessitates raising the share of FDI in the GDP to 3% ($69.99 billion), he said, adding that increased inflow of FDI will also improve revenue mobilisation.
"A 1 percentage point rise in FDI inflows corresponds to a 1.5 percentage point increase in overall tax revenue ratio for developing economies," he noted.
Atiur Rahman said to get more FDI Bangladesh needs to reform the tax system effectively. For example, he said a 33% tax reduction and effective tax reforms will increase both FDI and tax revenue significantly. FDI could increase from $3.14 billion in 2022 to $51.40 billion in 2041 (2.2% of GDP), he said.
Also, tax revenue could increase from $34.44 billion in 2022 to $227.21 billion in 2041 (almost 10% of GDP, he said.
He also stressed the need to create adequate jobs for 20 lakh youth entering the workforce every year.
Atiur Rahman, now an emeritus professor at Dhaka University, highlighted the stark contrast between creating only 2 lakh formal sector jobs annually and the substantial youth demographic seeking employment.
He underscored the potential of Micro, Small, and Medium Enterprises (MSMEs), constituting 25% of the GDP and employing 30% of the workforce, as crucial job creators. However, Atiur Rahman pointed out that MSMEs face challenges like limited access to finance, infrastructural barriers, tax issues, and technological limitations.
In addition to advocating for the development of technical and vocational education and training for workforce skilling and reskilling, Atiur Rahman stressed the importance of improving the business climate to foster job creation in line with the growing population.
The former governor also said dependence on high-cost imports remains a source of pressure on macroeconomic stability. Bangladesh lags in terms of exploring new off-shore gas and oil fields unlike India and Myanmar despite peaceful resolution of disputes over maritime boundaries, he said.
Atiur Rahman said if the current trend continues, the financial account will end up in more deficit (it was $5.39 billion at the end of November 2023 as outflows continue to outpace inflows).
He also said the current account balance is likely to remain negative by the end of the current fiscal year.
Atiur Rahman stressed strengthening financial sector governance, such as promoting professionals as independent directors, implementing new bank company act for containing wilful defaulters, and encouraging mergers.
On the persistently high inflation, the former governor said it will be difficult to significantly reduce inflation in 2024 because of necessary currency devaluation and rationalisation of subsidies.
"New safety net measures will be required for low-income households as almost 32 million people are still living below the national poverty line," The former governor said.
FICCI President Zaved Akhtar said, "Bangladesh has huge economic headwinds, but we will not go far by worrying about them; rather we should be concerned more about the chances we missed."
He said FICCI luncheons are designed to look at those economic and business opportunities so that they put their best foot forward to set the country back into the right economic trajectory.
FICCI directors, CEOs of member companies, representatives of different embassies and other stakeholders attended the meeting.
