Tackling the paradox of Bangladesh's diminishing FDI
What are the primary obstacles hindering foreign capital inflow? Various stakeholders have offered statements and comments on these challenges, yet the solution remains elusive
Like numerous other developing nations, Bangladesh remains susceptible to the ramifications of any global economic downturn. Challenges such as heightened inflation, the United States' measures to address 'democratic backsliding' through visa restrictions, an exacerbated current account deficit, adverse trends in remittance growth, and pressure on the US dollar exchange rate collectively pose significant obstacles for Bangladesh at present.
Of particular concern is the discernible decline in foreign direct investment (FDI) in 2023 compared to the preceding year, signalling a potential threat to the overall economic prosperity of the country
Foreign direct investment (FDI) plays a pivotal role in nurturing and sustaining economic growth, benefiting both the host country and the investing nation. Developing nations, seeking avenues for financing new infrastructure and generating employment opportunities for their local workforce, actively promote FDI.
Simultaneously, multinational corporations leverage FDI to extend their presence in global markets, facilitating business expansion beyond their home countries.
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This mutual exchange of investment fosters economic development and collaboration between nations, creating a synergistic relationship that contributes to overall global economic growth.
The global economy grapples with persistent challenges in the current economic landscape, leading to a discernible constraint on foreign investments across diverse nations. Bangladesh confronts a discernible restriction on present investment flows like other developing countries.
The World Investment Report 2023 by the United Nations Conference on Trade and Development (UNCTAD) elucidates an expanding annual investment deficit confronting developing nations in their pursuit of achieving the Sustainable Development Goals (SDGs) by 2030.
This burgeoning deficit now stands at approximately $4 trillion annually, marking a significant escalation from the $2.5 trillion recorded in 2015, coinciding with the adoption of the SDGs. The report delves into the 12% decline in global foreign direct investment (FDI) observed in 2022. It systematically dissects the nuanced intersection of investment policies and capital market trends, assessing their impact on SDG-related investments, particularly in clean energy.
The Government of Bangladesh has undertaken an ambitious initiative to establish 97 economic zones and has successfully developed 28 high-tech parks nationwide. These economic zones and high-tech parks are open for foreign investments, offering flexible options such as acquiring land outright, engaging in joint collaborations, or participating in investment through public-private partnership (PPP) arrangements.
To facilitate and streamline these efforts, the government has instituted key regulatory bodies, including the Bangladesh Investment Development Authority (BIDA), Bangladesh Economic Zone Authority (BEZA), Bangladesh Economic Processing Zone Authority (BEPZA), Bangladesh Hi-Tech Park Authority (HTPA), and the Public-Private Partnership Authority (PPPA).
These entities play pivotal roles in fostering economic growth by providing a conducive environment for investment and actively inviting foreign direct investment (FDI) into the country.
According to the FDI and External Debt report from Bangladesh Bank, the fiscal year 2022–23 witnessed a net FDI inflow of $3,249.68 million. This marked a 5.5% decline, equivalent to $189.95 million, compared to the fiscal year 2021–22. However, it represented a notable increase of 29.6% over the fiscal year 2020–21.
Additionally, the FDI stock in Bangladesh stood at $20,238.44 million as of the end of June 2023, registering a 1.3% decrease from the level observed at the end of June 2022. Analysts find it noteworthy that FDI stocks experienced a decline in equity capital, a phenomenon considered atypical given that our capital accounts are not convertible.
Despite the government's persistent calls for increased foreign investment in Bangladesh, as highlighted in speeches starting at ministerial levels, there remains a paradox of diminishing investment despite abundant opportunities.
The recent decline prompts the question: What are the primary obstacles hindering foreign capital inflow? Various stakeholders, including politicians, economists, and civil society figures, have offered statements and comments on these challenges, yet the elusive solution to reverse this trend remains uncertain.
Political instability is currently a noteworthy concern, hindering the prospect of increased FDI inflow. The most recent investment climate report from the US State Department identifies significant hindrances to foreign investment in Bangladesh, including corruption, bureaucratic complexities, insufficient infrastructure, and constrained financing access. While the Bangladeshi government acknowledges challenges within the investment domain, it asserts ongoing efforts to address these issues.
The 'Investment Climate 2021' annual report notes that while Bangladesh has made incremental strides in alleviating certain investment barriers, persistent challenges such as insufficient infrastructure, restricted access to financing, bureaucratic complexities, lax enforcement of labour laws, and corruption still impede foreign investment.
Currently, foreign investment contributes approximately 1% of Bangladesh's GDP. Economic experts posit that elevating FDI in Bangladesh to 5–6% could catalyse a 10% growth in GDP. Bangladesh is presented with opportune conditions, notably amid the US-China trade dispute and China's assertive control over Hong Kong.
These geopolitical developments have prompted foreign investors to reassess their business engagements in Hong Kong, potentially diverting investments to alternative destinations, including Bangladesh. Seizing this momentum involves proactive measures such as streamlining investment processes, improving infrastructure, and ensuring a conducive business environment to attract and retain foreign investors.
With Bangladesh poised to exit the Least Developed Country (LDC) category by 2026, there is a pressing need for increased FDI to sustain economic vitality and enhance its participation in global trade.
In the fiscal year 2022–23, sector-wise net FDI inflows revealed that the manufacturing sector dominated, garnering $1,315.72 million, constituting 40.5% of the total FDI inflows, predominantly driven by textiles and weaving. The second-highest attraction was observed in the power, gas, and petroleum sectors, with $690.59 million accounting for 21.3%.
Conversely, the agriculture and fishing sectors and computer software and information technology (IT) reported lower FDI inflows, each contributing 1.5%, reflecting comparatively modest amounts. Despite these modest figures, these emerging sectors hold immense potential to attract more FDI in the near future, emphasising the importance of diversifying investments across sectors for sustainable economic growth.
Countries employ various strategies to attract foreign direct investment (FDI) as a catalyst for economic growth. One common approach is the creation of favourable investment climates through regulatory reforms, the simplification of bureaucratic processes, and the establishment of investor-friendly policies.
Offering tax incentives, subsidies, and financial support to foreign investors is another widely adopted tactic. Developing robust infrastructure, including transportation and communication networks, enhances a nation's appeal to investors.
Additionally, some countries focus on skill development and education to ensure a skilled workforce that aligns with the needs of potential investors. Political stability and transparent governance are critical factors that instil confidence in foreign investors. Successful examples of countries attracting FDI include Singapore, which emphasises a business-friendly environment and strategic location, and Ireland, which leverages a low corporate tax rate to entice multinational corporations.
Singapore's success in attracting FDI lies in its holistic approach, which combines favourable policies, investment in human capital, and a commitment to innovation and technology. Overall, a comprehensive and well-executed strategy that addresses multiple aspects of the investment climate is essential for attracting FDI and fostering economic growth.
During my tenure with a prominent big four consulting firm, I had the privilege of closely collaborating with the Bangladesh Investment Development Authority (BIDA). My engagement afforded me insights into the commendable initiatives BIDA undertook to stimulate foreign direct investment (FDI) across various sectors. Participating in key events such as plenary sessions and roadshows organised by BIDA provided first hand exposure to their out-of-the-box strategies to enhance FDI inflows.
BIDA's innovative approaches included tailored investment promotion campaigns, sector-specific roadshows, and proactive engagement with potential investors. Despite these commendable efforts, it is essential to acknowledge the existing limitations and challenges faced by BIDA.
These may include bureaucratic hurdles and regulatory complexities that, while being addressed, underscore the need for ongoing improvements to ensure a seamless and efficient investment process. Nevertheless, BIDA's proactive measures and collaborative initiatives reflect a commitment to fostering a conducive environment for foreign investors, contributing significantly to Bangladesh's economic growth.
Despite prevailing political instability and an upcoming national election in 2024, Bangladesh can take strategic steps to instil confidence among investors and stimulate economic growth. First and foremost, ensuring transparent and fair electoral processes is crucial to addressing concerns related to political stability. The government can actively communicate its commitment to maintaining a stable business environment and upholding the rule of law.
Implementing and reinforcing investor-friendly policies, streamlining bureaucratic procedures, and curbing corruption will enhance the overall investment climate. Engaging in diplomatic outreach to promote Bangladesh as an attractive investment destination and foster international partnerships can further bolster investor confidence.
Additionally, diversifying the economy and promoting sectors with high growth potential, such as technology and renewable energy, can attract forward-looking investors. By demonstrating a commitment to political stability, good governance, and economic diversification, Bangladesh can navigate the challenges of political uncertainties and lay the groundwork for sustained economic development.
Mohammad Ashraful Islam Khan, President of The Supply Chain Street and previously Head of Supply Chain Advisory Services at KPMG Bangladesh, now resides in Winnipeg, Canada.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
