The Financial Express

FDI inflow surges but still below 7FYP projection

| Updated: November 01, 2019 21:37:24

FDI inflow surges but still below 7FYP projection

The country has long been trying to attract incremental foreign direct investment (FDI).  A number of policy measures are there to facilitate foreign investment. The government has also taken some reform measures. The jump in FDI in the past fiscal year (FY19) may apparently be seen as an outcome of the reforms.

The net inflow of FDI reached US$3.88 billion in FY19, recording around 51.0 per cent growth over $2.58 billion in FY18. This is the fourth highest growth in FDI in the last two decades. It was in FY05 when net inflow of FDI leaped by around 183 per cent to $803.78 million from $284.16 million in FY04. Nevertheless, it took seven years to cross the $1.0 billion mark and another five years to reach $2.0 billion mark. In the following three years, it grew to get close to $4.0 billion.

Notwithstanding the big surge, inflow of FDI was still well below the projection made in the Seventh Five-Year Plan (7FYP). The 7FYP projected that net inflow of FDI would be $7.44 billion in FY19. Thus the gap between the projected and actual value of FDI stood at $3.55 billion in the past fiscal. This is the fourth consecutive year when inflow of FDI fell well below the value projected in 7FYP.

There is no visible immediate impact of the surge in FDI. The balance of payments (BoP) is the indicator which usually reflects immediate impact of rise or decline in FDI. In FY19, the pressure on BoP declined mainly due to the decline in trade deficit. Double digit growth in export earnings coupled with almost stagnant import payments reduced the merchandise trade gap to $15.50 billion in the past fiscal from $18.20 billion in FY18. Reduced trade gap along with modest growth in remittance contributed to ease the current account deficit. At the same time, financial account surplus shrank by 39.05 per cent to $4.85 billion from $7.95 billion despite increase in FDI.  Sharp decline in other investments or foreign loans with short, medium and long-term maturities reduced the financial account surplus.

Bangladesh Bank is yet to release detailed statistics of FDI in FY19. Scattered data show that China was the top source of FDI in the past fiscal and the net inflow of FDI from China might cross $1.0 billion. China Global Investment Tracker, a comprehensive data set covering China's global investment and construction, however, showed that in FY19 Chinese companies invested over $2.0 billion in Bangladesh.

The challenges to attract FDI in the country are well known. Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI), in its latest quarterly economic review, briefly outlined the challenges. Released last month, the review report of the leading trade body said: "Bangladesh's low labour costs are generally believed to be attractive to foreign investors, yet they hesitate to make fresh investments in the country because of the country's underdeveloped infrastructure, and such other impediments as the shortage of power and energy, lack of consistency in policy and regulatory frameworks, scarcity of industrial land, and corruption." The chamber also argued that the government needs to address these impediments to attract more FDI to the country. "According to a government estimate, the country needs to attract average annual FDI inflow of 6 to 7 billion US dollars to graduate to an upper middle income country by 2021," said MCCI.

The outcome of this year's Bangladesh Business Environment Study (BBES), conducted annually by a leading local think-tank, also pointed out infrastructural inadequacies as the major problem to attract FDI.  However, some 72 per cent of the BBES survey respondents indicated that FDI rules and regulation are now largely relaxed and the situation has improved further.

Despite the progress, many of them opined that due to lack of infrastructural facilities, FDI inflow in the country is at a low level. Slow progress of development work of new Special Economic Zones (SEZs) could not help accommodate foreign investors' demand for infrastructural facilities.

Bangladesh is now heavily relying on SEZs to attract more FDI. In addition to the nine Export Processing Zones (EPZs), Bangladesh Economic Zone Authority (BEZA) has, so far, got approval to establish 88 economic zones across the country, of which 59 are government funded and 29 private.

Nevertheless, Bangladesh is yet to get a place in the Global Finance's index on FDI attractiveness. The index released this month is based on various success metrics to identify countries that are most successful in drawing FDI. There are four categories: superstars (20), rising stars (20), outperformers (20), and giants (20). Countries like Cambodia and Lao are included in the outperformer category though these two countries attracted less FDI ($3.1 billion and $1.32 billion respectively) in 2018 than Bangladesh ($3.61 billion).

At a time of FDI surge in the country, two evolving incidents may cast shadow on future inflow of foreign investment. One is the exit plan announced by Sanofi, a global drug manufacturer, and the other is the ongoing dispute between two mobile phone companies and the country's telecom regulator, BTRC.

Sanofi is in operation in the country for last 60 years. Despite being a profitable entity with a good market share, it is not clear why the multinational has decided to close its operation here. Speculation is that the company wants to supply drugs from its manufacturing units in India in a bid to cut the cost of maintaining a full-fledged set up here.

The ongoing dispute between BTRC and two mobile phone companies has taken a new twist. The government approved the regulator's proposal to appoint administrators for Grameenphone and Robi to realise its claim of Tk 13.44 billion. BTRC claimed Tk 1.26 billion to Grameenphone and Tk 0.87 billion to Robi as unpaid fees and taxes. The dispute over the claim has started to get complex as BTRC took a number of regulatory steps to curtail GP services. At one stage, GP moved to court seeking injunction over the regulator's claim. Later, in September, the finance minister intervened to settle the dispute amicably. Tension still continues as reflected in the regulator's move to appoint administrators.

Settlement of the dispute is essential for the sake of better foreign investment and uninterrupted telecommunication across the country. As Bangladesh and Norway have no bilateral investment treaty (BIT), GP is probably not in a position to invoke any international legal instrument to settle the dispute. Norway's giant multinational Telenor is the mother company of GP with around 56 per cent of stake in the business. Robi has three stakeholders -- Axiata Group of Malaysia (68.30 per cent), Bharti Group of India (25.0 per cent) and NTT Docomo of Japan (6.70 per cent). Bangladesh has BITs with all three countries, and so Robi may invoke certain provisions of the BITs.

Given the situation, it appears things aren't as cool as they should have been. However, the important thing is that so long the business environment is congenial and more and more facilities are added to infrastructure-related matters, the country can hope to attract FDI in an incremental manner.




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