Investment stagnation: Restoring confidence is now the biggest challenge 

The stagnation in investment has now emerged as the biggest concern for Bangladesh's economy. Entrepreneurs are still showing little interest in setting up new industries, expanding businesses or investing in large projects. Instead, most businesspeople now see keeping their existing enterprises operational as the biggest challenge, rather than making new investments.

Many factories in the readymade garment sector, widely regarded as the heart of the country's economy, have already shut down. If this trend continues, the economy will soon face a deeper crisis.

Most of the key indicators of Bangladesh's economy are now negative. The situation is deteriorating by the day. The same is true of both domestic and foreign investment.

Private investment is the principal driver of long-term economic growth. Investment lies at the heart of establishing new industries, adopting modern technologies, increasing production, expanding exports and creating employment.

Countries such as Vietnam, Malaysia and Indonesia have consistently increased domestic and foreign investment, opening up new horizons for industrialisation. As a result, these countries have not only expanded their exports but have also reduced unemployment by creating large numbers of jobs.

Bangladesh, too, had been moving along the same path for a long time. Private investment had taken the development of the readymade garment, pharmaceutical, agricultural, agro-processing, leather and light engineering sectors a long way forward.

But over the past two years, the pace of this progress has slowed considerably amid various crises.

According to businesspeople and industrial entrepreneurs, a number of factors – including high bank lending rates, uncertainty over gas and electricity supplies, weaknesses in the banking sector, pressure in the dollar market, policy instability, high production costs and declining purchasing power – have brought new investment to a standstill.

According to businesspeople and industrial entrepreneurs, a number of factors – including high bank lending rates, uncertainty over gas and electricity supplies, weaknesses in the banking sector, pressure in the dollar market, policy instability, high production costs and declining purchasing power – have brought new investment to a standstill.

At the same time, political instability, frequent changes in government policies and a lack of good governance have made foreign investors wary of making long-term investments in the country.

Energy is one of the most important components of industry. But the energy crisis has now assumed alarming proportions.

New industries are struggling even to obtain gas connections, while existing factories are also being forced to remain shut for much of the day because of shortages of gas and electricity.

Already, several hundred small and large industrial units have been forced to suspend operations because of the energy crisis. And the energy shortage is discouraging anyone from taking the risk of making new investments.

High bank lending rates have become another major obstacle to investment. Interest rates on industrial loans have risen to as high as 14 to 16 per cent. Such high rates are discouraging long-term industrial investment.

As a result, entrepreneurs are reluctant to take up new projects. When the central bank raises interest rates to contain inflation, the cost of borrowing from banks rises sharply. Consequently, businesses are unable to undertake new projects.

Most of Bangladesh's productive industries depend on imported raw materials. As a result, volatility in the dollar market makes it difficult to open letters of credit (LCs), because production costs cannot be determined in advance.

Even when dollar reserves decline, businesses have to wait for days to open LCs for importing raw materials and machinery, directly hampering industrial production and investment.

The value of the taka against the dollar in international markets continues to decline. As a result, more taka is required to obtain less foreign currency when converting taka into dollars.

This means that investors can lose a significant amount of capital at the very beginning of an investment. Consequently, small investors are reluctant to invest for fear of losing their capital.

Bureaucratic complications have become a long-standing practice in Bangladesh. They discourage many investors.

Completing all the necessary procedures – including obtaining business licences, gas and electricity connections, clearance from the Department of Environment, documentation of the source of income and approval from the central bank – is extremely time-consuming.

As a result, an investor faces harassment at every step. Files do not move without bribery. Even then, applicants have to wait for a long time.

In many countries, "one-stop services" have been introduced to attract domestic and foreign investors. In other words, all services have been brought under one roof to facilitate faster investment by businesses.

Political stability and the rule of law are essential for creating an investment-friendly environment.

Businesspeople had hoped that political instability would ease and a business-friendly environment would emerge once a democratic government came to power after the election.

But an unexplained sense of fear still persists among businesses. They believe that the situation in Bangladesh could become unstable again soon.

According to economists, in the current situation, the biggest crisis among entrepreneurs is not a shortage of money but a lack of confidence. They want to invest but are unable to feel certain about the future.

For this reason, they have adopted a "wait-and-see" approach. Foreign investors are even more cautious than domestic investors in this regard.

Foreign investors have to commit their capital for a long period, and they will not take such risks unless they consider the environment favourable.

Alongside political stability, they generally attach importance to energy security, an easy business environment and stability in the foreign exchange market.

But as the desired improvements have not been achieved in these areas, Bangladesh has been unable to attract foreign investors.

Restoring confidence is now the biggest challenge for Bangladesh's economy.

Ensuring political stability, guaranteeing uninterrupted supplies of gas and electricity, bringing interest rates down to a tolerable level, restoring discipline in the banking sector, removing bureaucratic complications and introducing "one-stop services", maintaining stability in the dollar market, controlling non-performing loans in the banking sector and making credit more accessible to genuine businesses, modernising the port system to facilitate the clearance and transportation of goods, simplifying the process for foreign investors to repatriate their profits, and, above all, keeping investors free from political influence – if these measures can be ensured, the stagnation in investment will end and the economy will regain its momentum.

Shoyeb Arefin is a columnist. Email: shoyebarefin@gmail.com 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of The Business Standard.