FDI and external debt management

Are the foreign investors sensing a gradual improvement in the country's business climate? Did the much-hyped four-day investment summit in April instil some confidence in foreign businesses to invest in Bangladesh now? These two questions seem pertinent in light of the data released by the central bank'for the third quarter of the past fiscal year (FY25) regarding foreign direct investment (FDI). It showed that the net inflow of FDI jumped significantly in the third quarter (January-March) of FY25. 

The big jump is presented in the newspapers with various attractive headlines, as if something significant has happened.  One daily writes: ''FDI hits 2-year high in Jan-Mar''; another heading goes like this: ''FDI surges despite economic headwinds.'' Central bank statistics showed that the net inflow of FDI stood at around $864.63 million in Q3 of FY25, which was 114.31 per cent higher than the net FDI in the same period of FY24 and also 76.31 per cent more than the amount in the immediately preceding quarter, Q2 of FY25. The latest quarterly net FDI is the highest amount of quarterly FDI in the last five years. It also indicates an improvement in the foreign investment situation, although some caution is necessary regarding interpretation of the jump.

As the full-year FDI data is not available for FY25, one needs to review the data for the first three quarters or first nine months of the fiscal year and compare it with the previous fiscal years to get a broader picture. Bangladesh Bank statistics showed that net FDI in the first nine months (July-March) of the past fiscal year stood at $1459.36 million (or $1.46 billion). It is approximately 26 per cent higher than the same period of FY24, mainly due to a surge in FDI in the third quarter of FY25.

Central bank data further showed that FDI surged after a decline in two consecutive fiscal years (FY23 and FY24). Although FDI data for the last quarter of FY25 is yet to be available, it is clear that the full-year FDI will be significantly higher than the previous year, as the nine-month FDI in FY25 has already surpassed the yearly FDI in FY24. Bangladesh Bank statistics also showed that net FDI in FY23 declined by 6 per cent to $1.60 billion from $1.71 billion in FY22 and further dropped by 11.80 per cent in FY24 to $1.41 billion.   

The latest surge in FDI is unrelated to the investment summit or the various activities of the Bangladesh Investment Development Authority (BIDA). Speaking to the media, the BIDA chairman made it clear that the investment promotion agency played a limited role in the recent rise in FDI inflows, as most of the decisions had been made earlier. His acknowledgement is admirable, as people got used to a culture of taking all the credit by politicians and bureaucrats without doing any real work. 

The Q3 of the last fiscal was a comparatively stable period after the post-July disruptions. The first quarter of FY25 passed through the most unstable period in recent Bangladesh history. In this quarter, a student-led mass uprising in the country compelled Sheikh Hasina to step down and flee on August 5 last year. In the three weeks of mass movement, which had erupted on July 15, witnessed a brutal suppression by the Hasina regime. Law enforcers and security forces killed around 1,400 people, injured more than 20,000 people. Lots of property were damaged. After the fall of the regime, the country descended into anarchy for some time, and the interim government struggled to restore normalcy. 

In the third quarter of FY25 a relative stability returned. The business climate also started to improve, although not enough to attract new investment. This is also reflected in the inflows of FDI, as around 47 per cent of the total investment came from intra-company loans, 22 per cent from reinvested earnings, and 31 per cent through equity capital. Nevertheless, the increase in FDI helped support the balance of payments (BoP), providing a sense of reassurance about the country's economic situation. 

It is worth noting here that the inflow of FDI dropped significantly in the last two fiscal years under the ousted Hasina regime, indicating country's limited capacity to attract FDI despite some policy support and considerable rhetoric of development aired by the ruling party leaders. Now, the course is reversing slowly, which is a positive development. 

Meanwhile, the foreign debt situation in Bangladesh has also improved modestly in the first nine months of the past fiscal year. The stock of the national external debt increased by approximately 6 per cent at the end of the third quarter of FY25 compared to the same period in FY24. However, compared with the end of FY24, the stock of external debt increased by around 1.31 per cent at the end of March this year. 

Over the years, the country's debt-to-GDP ratio has increased gradually. The ratio was 15.60 per cent in FY17, which increased to 22.60 per cent in FY24. The figure for FY25 is still not available.  Although the ratio is considered safe, the burden has been growing over the years, and it is not possible to reduce it all at once. It is worth noting that at the end of FY24, total public debt stood at 37.62 per cent of GDP, comprising 21.52 per cent from domestic sources and 16.10 per cent from external sources.

Currently, around 80 per cent of the country's external debt is public debt, which was approximately 75 per cent a decade ago. The rise in public external debt is mainly due to the past government's excessive borrowing from external sources to finance various development and mega projects, mostly at inflated costs. Thus, long-term debt servicing liabilities have also increased. The country's per capita external debt crossed $600 in FY24, up from $258 in FY16. 

The finance ministry projected that public sector external debt-to-GDP ratios would remain steady at around 15.74 per cent in FY28. The Medium-Term Macroeconomic Policy Statement: FY2025-26 to FY2027- 28, however, cautioned that though the country's debt-to-GDP ratio is currently within the IMF's safe threshold, the upward trend "necessitates careful monitoring and proactive measures to ensure long-term fiscal sustainability and to safeguard socioeconomic development. Addressing the challenges of low revenue Mobilisation and rising debt servicing costs will be crucial for maintaining a stable and growing economy."

The UN Trade and Development (UNCTAD) has developed a dashboard that helps make insightful comparisons across countries, regions, and special country groups, including those based on development status and public debt. It showed that in many key debt-related indicators, Bangladesh is behind the average status of Least Developed Countries (LDCs). 

The latest slowdown in external debt is a temporary phenomenon. Debt management in the coming days will be more challenging. In that case, attracting more FDI is necessary to reduce the burden of external debt in the long-term.

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