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Initiating policy reforms to attract FDI

Shahiduzzaman Khan | Published: October 07, 2017 21:24:02 | Updated: October 25, 2017 05:29:05


THIQAH, a newly formed business and investment platform of the Islamic Development Bank (IDB) is planning to host an international investment conference in Dhaka in January next to boost cross-border investment.

The event is planned to bring together potential foreign investors from IDB's 57 member countries as well as its non-borrowing members like the United States, China and Japan. A high-level IDB delegation recently met with the chairman of Bangladesh Investment Development Authority (BIDA) to discuss issues related to the timing and nature of the event.

The conference is aimed at attracting foreign investment and boosting trade in areas like readymade garments, pharmaceuticals and shipbuilding. There are ample opportunities for boosting Bangladesh's trade relations with IDB's African members in readymade garment (RMG) sector.

Inflow of FDI into Bangladesh is around 1.0 per cent of the country's gross domestic product (GDP) which is very low. The 7th Five-Year Plan (FYP) lays utmost thrust on the incremental inflow of FDI for the plan period (FY16-FY20). According to the Plan document, increasing the inflow of FDI  to 3.0 per cent of GDP would be critical for achieving the financing of the investment target of the 7th Plan.

Thus, external financing for private investment, comprising primarily private FDI and external borrowing in foreign currency by the private sector, will increase markedly in the 7th Plan as compared with the 6th Plan. It means one of the fundamental assumptions for achieving the higher growth -- 7.4 per cent annually on an average during the Plan period -- is the inflow of higher amount of FDI. It has to be increased substantially by FY20 when GDP growth will be 8.0 per cent.

At present more than 50 per cent of the FDI comes as reinvested earnings of the existing multinational enterprises (MNEs). It may be interpreted as a consolidation of the existing multinational firms in the country and positive in the sense that they are earning sufficient revenue to run their business. On the other hand, most of the MNEs are not injecting fresh equities to continue and expand their operation.

Central bank statistics show that during 2010 and 2015, total amount of FDI was $8.70 billion of which $4.27 billion came as reinvested earnings while $2.96 billion as equity capital and $1.46 billion as intra-company loans. But in neighbouring India the situation is just opposite: more than 70 per cent of FDI came as equity while rest of the amount as reinvested FDI (as debt or leasing). 

FDI in Bangladesh is concentrated in a small number of sectors. Five sectors, textile, power, gas and petroleum, banking and telecommunications contribute 70 per cent of the total amount of FDI. This means, there are ample scopes to attract FDI in many other sectors.

FDI and private investment are the engine of higher growth. In this regard, the challenges facing Bangladesh are many. Private sector investment, improving governance, easing the cost of doing business, boosting SME financing and improving the capital market are some of the issues that need to be confronted with due diligence.  The urbanisation process, especially the traffic jam in Dhaka city, is a big problem in the way of attracting FDI. This problem must be addressed expeditiously. 

Bangladesh is located in an important geo-political position. It links South Asia, South-East Asia, East Asia and even the West Asia. Development partners are interested to improve its infrastructure for boosting regional connectivity. The Asian Development Bank (ADB) will extend its support to establish cross-border and regional power connectivity and road connectivity under the South Asian Sub-regional Economic Cooperation (SASEC) initiative.

The country's businesses have a crucial role to play in implementing the sustainable development goals (SDGs). There is a need for improving infrastructure and facilitating cross-border trade to ensure that the private sector contributes to achieving the SDGs.

The government has already taken some measures to ensure greater public-private partnership (PPP), but much more is needed to be done, especially for the implementation of SDGs. It may be mentioned here that the SDGs have been designed in such a manner that private sector participation is essential to achieve these goals.

Although the finance minister recently claimed about restoration of business confidence, it is, unfortunately still weak. This is mainly because the structural impediments to investment, such as infrastructure bottlenecks and the cost of doing business have not been removed. Also, mistrust between the government bodies and the business people is an irritant.

Despite various shortcomings, Bangladesh has undeniably a resilient economy and is maintaining a progressive growth since its independence. Analysts believe it's a lucrative investment destination as the key factors that can attract foreign investors are there: stable GDP growth, steady currency and a stable government for many years. Foreign investors mainly consider good returns, capital safety and dividend or capital repatriation.

In a recent report, the International Monetary Fund (IMF) said the weakness in financial sector and infrastructure deficit are the major factors affecting the country's private sector investment and growth. These constraints stem in part from low public investment and inadequate infrastructure maintenance.

There is no denying that the sluggish global economic scenario is affecting FDI and private investment in Bangladesh. And the government, on its part, has also failed to bring more investments due to energy crisis, scarcity of land and absence of necessary policy reforms.

In the circumstances, there is a need for initiating policy reforms as many of the policies, including the one on FDI, are not forward-looking. Local businesses say giving more focus on innovation and quality education will definitely raise skilled manpower and standard of services.

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