Can there really be a big jump in private investments?

Infographic: TBS

Having the country suffered a big dip in investments in the tough fiscal year of 2022-23, Finance Minister AHM Mustafa Kamal now aims for a moderate growth in public investments and a big jump in private investments. 

His target is 27.4% in the next fiscal and 29.4% by the next two years – from 21.8% (in the revised budget) of the GDP in the outgoing fiscal year. 

The proposed national budget, however, is barely letting analysts and entrepreneurs believe it not to be realistic when the macroeconomic factors are not in favour. 

There is neither any aggressive fiscal incentive, nor any indication of a rapid improvement in the factors hurting investors' confidence over the years.

"The private investment target is unrealistic," said economist M Masrur Reaz, chairman of Policy Exchange Bangladesh.

Balance of payment issues that would keep forcing import restrictions, be it on capital machinery and raw material, energy problems and higher costs of business that hurt private-sector production and profitability would be discouraging investments.

Then there is high inflation along with the tight money market, he added.

"Foreign investors who earlier decided to build factories in Bangladesh would defer the trigger, fearing a further devaluation of taka, while local businesses, with their already squeezed profitability, would wait and see if the situation improves," he said.

Even if some investors aggressively want to come, they would have to face the hurdle of restrictions in capital machinery imports, at least over the first six months of the next fiscal year, he noted. 

The government itself targets over 25% growth in its bank borrowing and that would leave less room for private sector credit growth at least throughout December, he forecasts.

On top of those, the proposed budget had no aggressive incentives that would flood the economy with big investments this year, Masrur Reaz opined.  

In the last Finance Act, there had been incentives for investing in several new industries in Bangladesh, including automobile, engineering and their backward linkages, and those were yet to be realised, instead investments declined amid the macroeconomic issues.

This year, the proposed budget did address and upheld the theme of strengthening the local manufacturing sector. 

However, it was mainly limited within the pattern of discouraging finished products imports and in a few cases reducing the duty burden on raw material imports that would give a hand to the local manufacturers of the particular products, alongside helping conserve some dollars.

In contrast, some industries started to see the premature reversal of the course of the incentive.

For instance, the nascent mobile phone industry that has had most of the popular brands, except for Apple, opening their local factories in the recent years will face 2% value added tax (VAT).

Business Initiative Leading Development (BUILD) trustee Abul Kasem Khan said the investors had some longer term expectation for the tax and duty benefits they started to avail and the VAT was proposed too earlier.

Policy stability is important to investors and Bangladesh significantly lacks it, he added.

Walton, the biggest homegrown name in electronics manufacturing, in a post-budget statement said the VAT imposition would hurt their return from gigantic investments in local manufacturing facilities.

Tax cuts are a common tool for encouraging reinvestment of corporate profits as well as attracting new investments and corporate tax remained unchanged this year.

Abul Kasem Khan, also a former president of Dhaka Chamber of Commerce and Industry, said "corporate tax structure is mainly on paper" and companies across industries were bleeding due to the advance taxes, minimum taxes the tax authority imposed on the top line regardless of the fact that they ultimately made money or not.

Effective tax rate is even up to 60%-70% for many companies and the tax injustice of the minimum tax should go away, he said.

Bangladesh and Vietnam both have their lucrative offers for investors who build factories, the difference is investors mostly find the benefits on paper in Bangladesh, while Vietnam means it – in terms of file processing speed, logistics efficiency, effective tax burden and the costs and ease of doing business, added Khan.

"Understandably the government is in need of higher revenue and it should be done through an efficient, transparent, enterprise-friendly way instead of making good taxpayers' lives tougher."

The entrepreneur feels sad for the country's backwardness in the ease of doing business index and logistics capacity.

The budget speech did mention the government steps for improving the ease of doing business, including the one stop services, special economic zones alongside the verbal announcement of having a stronger logistics ecosystem.

Abul Kasem Khan said Bangladesh did ensure improvements over years, but still it was sliding in The World Bank's ease of doing business index – from 105th position in 2005 to the 168th position in 2018.

It was not because Bangladesh walked back, but because it walked too slowly while the competitor economies ran so fast.