The Financial Express

FDI in the time of pandemic  

FDI in the time of pandemic   

The ambitious target set in the country's medium-term development programme to attract a big volume of foreign direct investment (FDI) in five years (2015-2020) has been shattered. The Seventh Five-Year Plan (7FYP) projected to attract FDI worth $30.20 billion in five-year period ending the current fiscal year (FY20). In reality, net inflow of FDI in Bangladesh stood at around $11.0 billion in four years.

There is also little doubt that FDI in the current fiscal year is going to fall sharply due to the spread of deadly coronavirus across the world. Even before the outbreak of the pandemic, Bangladesh faced a big drop in annual inflow of FDI. Provisional estimate of the central bank showed that net inflow of FDI in 2019 declined by 20.45 per cent to $2.88 billion from $3.61 billion in 2018.

United Nations Conference on Trade and Development (UNCTAD) already projected that global inflow of FDI may decline by 40.0 per cent in the current and next years due to Covid-19. The figure is higher than the rate of decline in FDI after the global financial crisis during 2007-2008 when the world saw around 35.0 per cent drop in FDI inflow. It is already clear that the negative impact of coronavirus will be much more on trade and investment.

Nevertheless, optimism during the pandemic is a great tool to move ahead and fight against the crisis. Media reports suggest that around three dozens of Japanese firms have expressed their interest in relocating commercial operations in Bangladesh from China. The apparent reason for relocation is the trade war and corona-induced bitter feelings between China and the United States (US).

Indonesia, Vietnam and India are the three leading Asian countries in hectic race to turn themselves the alternative destinations of Japanese, American and European firms planning to exit China. As many as 27 US factories have already decided to shift to Indonesia from China amidst the spread of coronavirus.

Policymakers in Bangladesh are nor unaware of the development which is reflected in a meeting before Eid holidays. In the meeting, that took place in the commerce ministry, policymakers and business leaders expressed both optimism and disappointment on attracting FDI in the country. In the meeting, the commerce minister said Indonesia has offered 50.0 per cent tax holiday for five years on FDI worth $7.0 million while 100 per cent tax holiday for the same period on investment above $7.0 million to $70 million. He also mentioned that young and productive labour force is a strength of Indonesia where salaries and wages are at least 40 per cent higher than Bangladesh. The commerce minister added that foreign investors want transparent rules and regulations and also expect that announced polices, rules and benefits work. If they find that these are not well functioning, they will not proceed and return with a negative impression.

What the commerce minister mentioned is not a new thing. Business and trade bodies as well as economists have been arguing long for making the rules and procedures transparent and well functioning. Though a number of reforms have already taken place to ease  foreign investment, a number of barriers still exist. Despite recognising the barriers, it also appears that the country's policymakers have divergent views on some critical issues and these make the task of implementing agencies difficult. For instance, in the meeting, a senior policymaker argued that exchange rate policy is a problem for the foreign investors. He referred to the country's managed floating exchange rate policy and favoured fully floating exchange rate policy. Bangladesh Bank is, however, still not in a position to do so considering the higher deficit in trade in goods and services. The central bank has to tinker with the exchange rate from time to time to absorb the pressure on balance of payments (BoP).

Again, some policymakers and business leaders argued that reduction of corporate tax rates is critical to attract investments-- both local and foreign. Tax authorities, however, think that by reducing tax rates, they will face difficulty in revenue generation necessary for development spending.

Besides different policy and regulatory barriers, there are some other things related with governance. Corruption and irregularities in different agencies increase the cost of doing business and investment. Some policymakers have argued for addressing  bad governance to attract investment, while few others think differently. Instead of acknowledging the negative impact of corruption, they think that the situation is still tolerable and investors need to adjust with it. For instance, they argued that bribe is nothing but speed money and those who pay it are themselves responsible for this practice. Merit of such an argument is indeed difficult to comprehend.

Land and lack of physical infrastructure are big barriers to FDI. To overcome the barrier, the government has started to set up some 100 Specialised Economic Zones (SEZs). So far, more than a dozen of SEZs are either in operation or almost ready for operation. The Zone authority claims that it has received $20.50 billion investment proposal from 151 local and foreign entities. The authority has also submitted a proposal to the government for tax waivers to the investors.

Whatever favourable polices and friendly rules for FDI exist in the country, it is the proper implementation that matters most. Good polices in paper and verbal assurance of support by the policymakers will not allure foreign investors. They will also not be attracted unless adequate infrastructure is there. Without addressing the issue of governance, it is also a tough task to attract FDI.

Finally, when Covid-19 has changed the outlook of trade and investment significantly, FDI will be scarce. Foreign investors will hesitate to move to a destination which is yet to deal with coronavirus effectively. Already lagging in infrastructure adequacy and implementation efficiency, coronavirus makes Bangladesh less attractive to the foreign investors, at least for the time being. 



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