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Despite performing reasonably well in different economic indicators, the country still lags behind in a few critical areas like foreign direct investment (FDI). The inflow of FDI in the country is quite low and yet to reach 2.0 per cent of the gross domestic product (GDP). Though several steps have already been taken by the government to boost the FDI, the outcome is depressing.
Inflow of FDI crossed US$ 1.0 billion level for the first time in 2011 and again crossed $2.0 billion mark in next five years. There are, however, fluctuations in FDI inflows and also in the growth rates (Chart-1).
The trend of FDI indicates that business environment in Bangladesh is still not adequately supportive. This may sound contradictory given the prevailing economic growth. For the last five years, annual growth rate of GDP showed a consistent upward trend. Local traders and entrepreneurs have been doing business despite several barriers. The government has also taken a number of big infrastructure and development projects to support big investments.
The finance minister has also expressed his uneasiness regarding the low inflow of FDI. It is reflected in his budget speech in parliament on June 07 when he presented the national budget for the fiscal year (FY) 2018-19. He said: "We are seriously reviewing the fact that despite building investment-friendly infrastructure, development of the energy sector, necessary facilities and support for setting up industry, simplifying the rules and regulations, foreign direct investment and private investment did not pick up as expected." He also said that the government has taken steps to identify the obstacles and is taking actions for their removal.
The government's expectation for FDI is quite high. The Seventh Five-Year Plan (7FYP) set an ambitious target of FDI between FY16 and FY20. It projected that on average, the country would get annual FDI worth $6.0 billion during the period. But, the actual inflows of FDI are quite low. In FY16, the country received $2.01 billion as net FDI against the projection of $2.59 billion. In the next year, net inflow of FDI surged to $2.45 billion while the projected amount was $4.31 billion. In the outgoing fiscal year, inflow of FDI is set to be lower than the past year's (Table-1).
The Word Investment Report (WIR) 2018, prepared and released by the United Nations Conference on Trade and Development (UNCTAD), mentioned that net FDI to Bangladesh dropped by 7.8 per cent in 2017 to $2.15 billion from $2.33 billion in 2016. Without elaborating the reasons, it only pointed out that FDI flows to Bangladesh slowed as investment in energy and telecom levelled off in the past year while progress in major public-financed infrastructure development has been slowed.
Bangladesh became the fifth-highest recipient of FDI among the Least Developed Countries (LDCs) in the past year. Myanmar received the highest amount of FDI worth $4.30 billion which was 45.20 per cent higher than the previous year. Ethiopia ($3.60 billion), Cambodia ($2.80 billion) and Mozambique ($2.30 billion) also received higher amount of FDI than Bangladesh. Among these five LDCs, Bangladesh's five-year (2014-18) average GDP growth is lower than Cambodia, Myanmar and Ethiopia. From this finding, one may presume that the current growth rate of Bangladesh is yet to attract foreign investors.
In fact, country's growth story is a recent phenomenon. The annual average growth rate stands at 6.93 per cent during 2014-18. The 7-plus growth rate has been achieved for the last three years. A number of research already showed that higher and consistent rates of growth in developing countries attract more FDI. Factors like tax rates, infrastructure and logistic conditions are also important no doubt. But in the developing countries growth rate reflects the size and potential of the economies.
Again, Bangladesh economy now is in transition and it needs more FDI to move into a higher stage. The country is expected to come out from the LDC category by 2024 fully and formally. The United Nations has already recognised the country's eligibility for the graduation.
It is presumable that within a decade, Bangladesh will see a decline in foreign assistance and its dependence on private commercial borrowing will increase. A sign has already emerged. Total private commercial borrowing almost tripled between 2013 and 2017. Central bank statistics showed that private sector borrowed $4.01 billion from the external sources in 2013 which increased to $ 11.34 billion in 2017. These borrowings are creating financial liabilities for the near future due to continuous debt servicing. Moreover, commercial borrowing will not be able to cater to the growing demand of long-term finance in a sustainable manner. FDI is a better option in this regard. It is also helpful to offset the long-term liabilities of these loans.
Again, a big challenge for Bangladesh is to attract quality FDI. Besides transferring technology and knowledge, quality FDI helps the host countries to integrate their domestic firms into global value chain (GVC). Global value chain has already emerged as a critical element in the international trade. It is a string of all functional activities required in the process of value creation involving more than one country. Countries are generally connected with the GVC process through two types of linkages. One is forward linkage where a country supplies inputs for exports of other countries. Another is backward linkages where a country imports intermediate goods for its exports.
Bangladesh is slowly increasing its presence in the GVC. It is now 20th among top 25 exporting developing economies by GVC participation rate. Currently, the rate is 31 per cent for Bangladeshi export with the dominance of downstream component. Higher inflow of quality FDI will help to increase the GVC participation rate.