Unlocking investment potential: Policy actions for Bangladesh's future

Bangladesh is at a crossroads in its economic journey. The country has made huge strides to grow its economy and reduce poverty. The underlying fundamentals are strong: a growing labour force, increasing domestic demand, and opportunities for private investors across various sectors. However, since the COVID pandemic, growth has been slowing, and macroeconomic imbalances have widened.

This together with bureaucratic red tape, regulatory uncertainty and the lack of a level playing field has been discouraging private investment. Today, Bangladesh is lagging as a destination for job-creating foreign direct investment, which between 2018 and 2022, accounted for just 0.5% of GDP, below aspirational comparators like Viet Nam (4.6%), the Philippines (2.5%), and Türkiye (1.4%). As a result, Bangladesh is not creating enough jobs for its young and growing population, a source of growing political tension.

As Bangladesh prepares to graduate from Least Developed Country (LDC) to Developing Country status, it will need to navigate economic shifts that will impact its access to advanced economy markets. With major changes on the horizon, now is the time to strengthen the business environment through concrete policy actions to reduce inefficiencies and remove impediments to private investment and private sector development.

The recent World Bank Group Country Private Sector Diagnostic identifies four sectors with strong but unrealized potential for profitable investment and job creation —green ready-made garments, housing for middle-income families, paint and dyes, and digital financial services.  Realizing this potential will require concrete policy actions to address some of the impediments that currently discourage private investors.    

Bangladesh is already the world's second-largest exporter of ready-made garments, after China, with the EU as its main market. The garment and textile industry accounts for 85% of Bangladesh's export earnings. There is considerable potential to expand into new markets such as Australia, Japan, and India, and to capitalize on shifts in consumer preferences towards sustainable product lines like man-made fibres.  

Bangladesh will need to adjust to ensuing trade changes by diversifying markets through greater integration within Asia and better utilization of the EU's Generalized Scheme of Preferences Plus (GSP+), which offers preferential access to European markets. Focusing on economic diplomacy with key regional partners, reducing import costs for intermediate goods, and modernizing customs and port infrastructure will be essential. To take advantage of these opportunities, including retaining access to EU markets after LDC graduation, policies will need to be implemented to comply with new EU sustainability regulations, enhance energy efficiency in production, and uphold labour standards. Amending the 2006 Labor Law to strengthen protections against child labour, among other changes, will be imperative to maintain access to the EU market, while also implementing a Digital Product Passport program to better track product sourcing.  

Removing the 10% cash incentive to export plastic bottles, which are key inputs into the local manufacture of man-made fibres, would help facilitate domestic production of non-cotton garments.  

Housing presents considerable investment potential given the rising number of middle-income households. Bangladesh adds an average of 30,000 new apartments each year in urban areas, while the urban population grows by roughly two million annually. Building an additional 150,000 units a year would create an investment opportunity worth around $2 billion and could generate 2.4 million jobs in construction and related industries. Policy actions that could facilitate this include allocating vacant government land to build new homes, increasing allowable floor space on each lot to enhance the commercial viability of residential construction, digitising land registration records to lower transaction costs, and creating a mortgage refinance company to provide liquidity to mortgage lenders.  

Customs procedures need to be overhauled to become more transparent and predictable for private firms. At the same time, the tariff structure disincentivizes the domestic production of important inputs into the production of dyes. For instance, duties on imports of raw materials used to make dyes for the garment industry reach up to 25%, while finished dyes face import duties of at most 5%. Slow customs processes force containers to spend twice as long at ports in Bangladesh compared to Vietnam, imposing an additional cost on private firms. Equalising tariff rates, digitizing customs processes, and outsourcing lab testing to qualified third-party providers could significantly speed up the process.  

With an improved regulatory infrastructure, businesses in Bangladesh (both large and small) could benefit from greater access to digital financial services, making it easier to pay providers, bill clients, or borrow money. The extensive adoption of mobile money indicates readiness among businesses to embrace innovative solutions. The burgeoning fintech industry, collaborations between banks and mobile financial services, and the rise of embedded finance options highlight significant potential for supply-side innovation that would improve the conditions for private firms, creating new market opportunities and stimulating job creation.   

To seize this moment, policymakers, investors, and other stakeholders must take bold and strategic actions. The Bank Group Report suggests several practical steps that can be taken in the near term. Moving forward on these could generate quick wins and build consensus for more ambitious reforms to the business climate. Bangladesh cannot afford to rest on its laurels in the readymade garments industry. It needs to diversify its exports, attract new investors and leverage its strong entrepreneurial spirit to create the jobs of the future. The time to act is now, to ensure a prosperous future for all its citizens. 

About the authors:

Riccardo Puliti is the Regional Vice President, for International Finance Corporation (IFC), Asia and the Pacific. Martin Raiser is the Regional Vice President for the World Bank, South Asia.

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.