When the then finance minister presented the national budget for the current fiscal year in parliament in June last year, he had taken into consideration at least six points while making proposals regarding duties and taxes at import stages. One of the points was improving the country's position in terms of foreign investment. He also mentioned that 100 economic zones (EZs) were being established to ensure environment-friendly industrialisation and to 'enhance domestic and foreign investment along with youth employment.' In his speech, the minister also underscored the importance of foreign investment.
The issue of foreign direct investment (FDI) needs some explanation. Mentioning it in the annual budget speech is consistent with the country's medium-term development plan. A key strategic focus of the 8th Five-Year Plan (8FYP) is to accelerate FDI flows into Bangladesh through 'a massive drive to improve the investment climate and strengthen the capabilities of BIDA to do policy-based research, advocacy and deliver speedy and efficient services to foreign investors.' According to the plan document, some one-fourth of the projected 9.1-percent increase in private investment will come from FDI by the end of fiscal year 2024-25 (FY25), the terminal year of the planning period. It also set a goal to increase the FDI-GDP ratio to 3 per cent in FY25 from 0.54 per cent in FY20.
Nevertheless, available statistics showed that the country has yet to attract adequate foreign direct investment (FDI). In the last calendar year, the net inflow of FDI declined by 13.80 per cent, according to the latest statistics of Bangladesh Bank. It also showed that the net inflow of FDI decreased to $3.0 billion in 2023 from $3.48 billion in 2022.
Net FDI declined by 7 per cent to $3.20 billion in FY23 from $3.44 billion in FY22. As FY24 is yet to end, it will take some more months to get the data on the total volume of FDI in the current fiscal year. Net FDI in the first half (H1) of the current fiscal year, however, dropped by 14 per cent to $1.56 billion from $1.80 billion in the same period of FY23. So, it is unlikely that the annual inflow of FDI in the current fiscal year, which ends on June next, will cross the last fiscal's amount. Instead, there is a high chance of it falling below the FY23 as overall economic trend is sluggish in the current fiscal year.
Despite the government's efforts to attract foreign investors by relaxing rules and regulations, the annual FDI inflow data for the last calendar year suggests that the country is not yet seen as an attractive investment destination. This underscores the need to address several barriers that hinder the improvement of the investment climate. These include regulatory uncertainty, trade logistics and infrastructure inefficiencies, labour productivity and skill development, and a challenging business taxation environment.
Last year, the Foreign Investors' Chamber of Commerce & Industry (FICCI), representing more than 200 foreign companies operating in the country, prepared and published a comprehensive paper focusing on the challenges and opportunities of FDI in the country. The paper outlined a series of barriers and also presented a set of recommendations to overcome these. Thus, the challenges and barriers to attracting more FDI are well known.
It is also well known that developing countries like Bangladesh require more institutional frameworks to encourage investors to remain in the country. Inconsistent institutional and legal frameworks may lead to a lack of confidence in the domestic economy, leading foreign investors to divest, withdraw, or reduce their investments.
The central bank's annual statistics also showed that the gross inflow of FDI was $3.97 billion last year due to a decline of around 18 per cent from $4.83 billion in 2022. The amount of disinvestment was $1.34 billion in 2022, down to $0.96 billion last year. Disinvestment includes capital repatriation, reverse investments, loans given to parent firms and repayments of intra-company loans to parent firms. The amount of net FDI is derived after deducting the amount of divestment from gross FDI,
For FDI, disinvestment is not an unusual thing. Nevertheless, the ratio of disinvestment in terms of gross FDI has increased for the last couple of years. In 2017 and 2018, the ratio was 20 per cent, which jumped to 28 per cent in 2019. It moderated in the next two years to 24 per cent and 25 per cent and again increased to 28 per cent in 2022. The disinvestment to gross FDI ratio in the last year stood at 24.30 per cent. As disinvestment is almost one-fourth of the gross FDI for the last half-decade, it needs some examination.
Again, economic zones (EZs) have attracted a tiny amount of FDI in the last two years. In 2022, the EZs received a net FDI worth $2.47 million, which increased to $8.2 million in the previous year. So far, only six government-owned EZs are in operation, although in total, 68 EZs got approval. In addition, 29 EZs have also got permission for setting up by private investors. Yet, only five EZs are in operation. Currently, around 50 factories are operating in 11 government and private EZs. So far, the proposed amount of FDI stood around $1.40 billion in these EZs. Thus, the high expectation that EZs will draw a big chunk of FDI within a decade will take more time to be realised. The crisis and instability in the country's foreign exchange market during the last two years may also discourage potential foreign investors. And there is no quick fix to attract a higher amount of foreign investment within a year or two.
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Are foreign investors shying away from Bangladesh?
Asjadul Kibria | Published: May 11, 2024 20:50:11
Are foreign investors shying away from Bangladesh?
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