What Bangladesh needs to do to attract foreign investors

FDI (Foreign Direct Investment) plays an indispensable role in enhancing economic growth of a country. Its significance is much greater for growing economies like that of Bangladesh. 

Higher FDI inflow leads to greater employment generation, competition, higher output, better wages and improved working conditions. 

It also effectuates better exchange rate stability which is vital for the economy. Essentially, it is an important avenue for achieving economic development.

Bangladesh has been struggling to increase the pace of its FDI inflow for some time. In addition, according to Bangladesh Bank data, there has been a 39.05% decline in FDI inflow in FY20-21 amid the Covid-19 pandemic. 

Although there was a growing trend in the FDI inflow before the pandemic, that increasing rate was not sustained. Since 2014, there has been a declining trend of FDI net inflows (as a percentage of GDP) in Bangladesh. 

This was reflected by the underperformance of one of the targets in the 7th five-year plan. Specifically, the government had a target of securing FDI worth $32 billion under the seventh five-year plan (FY16-FY20) but managed to attract less than $10 billion. 

Illustration: TBS

It is very surprising that Bangladesh still does not have a pertinent FDI policy. It is mandatory to formulate a complete and comprehensive FDI policy that will attract more investment. There are several flaws in the current investment policy that discourage foreign investors from investing in Bangladesh. 

For instance, the lock-in period for a foreign investor in Bangladesh is three years which is much higher than most of its contending nations. Furthermore, the Foreign Exchange Regulation Act needs to be updated.

The existing taxation and VAT policies need revitalisation and are not welcoming for foreign investment. For instance, in the economic zone of India or Vietnam, no VAT is required to set up industries. Yet, in Bangladesh, 15% VAT is required to do that. 

Again, Indonesia offers a 50% tax holiday on FDI worth $7 million for five years. Moreover, if investments above $7 million are made, the country offers a 100 percent tax holiday for five years. Such lucrative tax incentives have been one of the main reasons why the aforementioned countries have been able to sustainably entice foreign investors.

It should be noted that just providing incentives is not enough. It is imperative to earn the confidence of the investors as well.

There are certain globally recognised indicators like 'ease of doing businesses', 'efficiency of legal framework', etc. that reflect how conducive the environment of a country is for investment. Before investing in a foreign country when investors assess the business environment, such indicators carry substantial importance. 

In "ease of doing business" index, Bangladesh moved from 130th to 172nd position in 2014 and there had not been any significant improvements since then. As per the latest report of 2020, Bangladesh ranked 168th position among 190 economies which portray a negative image of the country's business environment to the investors. 

Therefore, Bangladesh must take necessary measures to make considerable improvements in each indicator of these global indexes.

Since Bangladesh is going through a demographic dividend, there is no difficulty in terms of the supply of labour. However, foreign investors are more likely to invest somewhere with a supply of skilled labour. 

An unskilled labour force has been one of the major problems for Bangladesh in terms of tackling its unemployment for a long time. The country must pay more attention to skill development so that it will not only attract more FDI but also address the problem of youth unemployment. 

Despite the aforementioned setbacks, some positive steps have been taken in recent times including infrastructural development, power sector development, digitalisation in the registration process, regulatory reforms in foreign exchange transaction guidelines, etc. Furthermore, the Bangladesh Investment Development Authority (BIDA) has initiated some reform activities among which the 'one-stop service' is noteworthy. 

Finally, if the necessary measures are undertaken to address the country's existing challenges, it will have a great impact on improving the magnitude of the FDI inflow which will in turn foster sustainable economic growth.

Shahriaz Ahmmed is pursuing MSS at the Department of Development Studies, University of Dhaka. He can be reached at shahriaz1611@gmail.com

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