FDI inflow shows positive trend

Annual inflow of foreign direct investment (FDI) into Bangladesh again crossed US$3.0-billion mark, after three years, in the last calendar year. The amount stood at $3.48 billion, recording a 20 per cent growth over 2021 when the net inflow of FDI was $2.89 billion. The figure for 2022 also matches the figure for the last fiscal year (FY22) when the net FDI inflow was recorded $3.44 billion. In respect of Bangladesh's graduation requirement, however, the country stays underserved in foreign investment.

For international comparison, FDI data based on calendar year is generally used. However, for the internal understanding, the FDI figures are prepared for a fiscal year, as it is done in the case of other macroeconomic indicators. The country's fiscal year spans the July-June period. As the central bank publishes detailed statistics of the country's foreign investment on half-yearly basis, it is not difficult to find out and compare FDI situation in two different time periods.  

 The boost in FDI in the last year, however, needs to be reviewed with some caution. The half-yearly inflow indicates a bit different picture. In the second half (H2) of the last year, also the first half (H1) of the current fiscal year, net inflow of FDI increased by only 2.30 per cent from the same period of the past year. The growth rates of FDI in the same period of previous years are much higher. For example, net FDI jumped by 16 per cent in H1 of 2020 and increased further by 28 per cent in H1 of 2021.

Again, statistics available with Bangladesh Bank showed that there is a general trend to make a big jump in FDI in the last quarter (Q4) of the calendar year which is also the second quarter (Q2) of the fiscal year. It did not happen in the past year. Net FDI dropped 36 per cent in Q4 of 2022 to $0.70 billion from $1.10 billion in Q3 of the same year.

Another trend is that FDI through equity capital mostly saw a surge in the above mentioned quarter. As total inflow declined significantly in the period under review, it also fell sharply to $0.25 billion from $0.54 billion in the Q4 of 2021.  Equity capital is defined as 'remittances received by the incorporated or unincorporated direct investment enterprises operating in Bangladesh on account of equity participation in those by the non-resident direct investors.' In other words, it is a fresh investment by an existing multinational enterprise (MNE).

The annual inflow of FDI in terms of equity capital dropped to $1.02 billion last year from $1.14 billion in 2021. At the same time, FDI from reinvested earnings of the MNEs increased to $2.51 billion last year, recording a robust growth of 60 per cent over $1.56 billion in 2021. It implies that, instead of injecting fresh capital, the MNEs in Bangladesh prefer to reinvest a portion of earnings which also include profits.

Now, FDI usually also drops in the first quarter of the calendar year. As the updated data on the Q1 of 2023, which is also the Q3 of FY23, are not available so far, it is not known what actually happened in the period. Provisional estimate, as incorporated into the balance-of- payments (BoP) table, indicated that there was a decline in the net inflow of FDI in the quarter. It showed that net inflow of FDI dropped by around 18 per cent in the first nine months (July-March) of the current fiscal year although gross inflow increased 7.0 per cent at the same time.

FDI statistics quoted in the Balance of Payments (BoP) table is preliminary estimate and subject to revision. Moreover, the data of net inflow are under-reported as it has to match the IMF-guided calculation. Usually, the figure of disinvestment is deducted from the gross inflow of FDI to determine the net inflow. Gross FDI in 2022 was $4.82 billion whereas the amount of disinvestment was recorded at $1.34 billion. So, the net FDI was $3.48 billion last year.

It is to be noted that gross inflow of FDI is the total inward direct investment made by non-resident investors in the host economy. Disinvestment includes capital repatriation, reverse investments, loans given to parent firms and repayments of intra-company loans to parent firms.

BoP table, however, does not show the disinvestment figure explicitly, which is available in the half-yearly report of FDI and external debt. FDI data are incorporated into the report on the basis of regular survey. So, it is difficult to know the actual amount of net FDI from BoP table.  Nevertheless, it can be presumed that net inflow of FDI actually declined in the third quarter of the current fiscal year.

Meanwhile, the annual data also showed that the highest amount of FDI came from the United Kingdom (UK) last year, followed by the United States (US) and South Korea respectively. Textiles and weaving attracted the highest amount of net FDI worth $706 million last year, followed by $599 million in power sector and $450 million in telecommunication sector.

Overall FDI situation in the country shows a positive trend which is necessary in the time of widespread geopolitical tensions. However, the annual inflow of FDI is still below the desired level though there is no official target or projection to this effect.

It was the Seventh Five-Year Plan (7FYP) document which set an annual average target at $6 billion worth of FDI. In reality, during FY16-FY20, the annual average FDI was recorded at $2.66 billion. The 8FYP, however, discarded such target-setting or projection of FDI. Nevertheless, it is clear that the country has yet to attract $6.0 billion annually even as gross FDI.

As Bangladesh is set to graduate from the Least Developed Country (LDC) category by 2026, more FDI is needed to keep the economy vibrant and raise its share in the global trade.  

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