It is disconcerting to see that foreign direct investment (FDI) in the country has contracted by around 7.0 per cent to US$3.2 billion in the current fiscal. The central bank data show that this trend started last year when the top investor country, the United States (US) halved its investments in Bangladesh over the January-June 2022 period and that was due to a perception of lack of FDI-friendly atmosphere. Obviously, this decline comes at a bad time for the country as its economy is suffering from foreign exchange (forex) market volatility. Experts have been hammering on the need for various interventions to build up foreign exchange reserves, but unfortunately the opposite has happened.
The lack of dollars has become a major impediment to FDI as foreign investors have not been able to repatriate their profits from Bangladesh. This, economists believe has dampened the prospects of FDI coming into the country. With the current impasse, there is an uptick in reinvestment and naturally the "existing foreign-owned companies experienced a surge of nearly 16 per cent during the fiscal year under review." The biggest FDI inflows have come from the United Kingdom (UK) totalling US$622 million, followed by South Korea with $603 million. Other notable investors include the Netherlands ($512 million), Hong Kong ($371 million), US (347.2 million), Singapore ($330.62 million), and finally China with $232 million in FY2022-23. The three areas that draw FDI include economic zones (EZs), export processing zones (EPZ) and non-export processing zones (non-EPZ).
To attract FDI, Bangladesh needed to show stable indicators, which unfortunately have not been in its favour. As pointed out by Dr. Moazzem Hossain of CPD, the country should have had better foreign exchange reserves to have its balance of payments stabilised. The downgrading by international rating agencies has not helped matters either. Instead of FDI, the trend has been to disinvest, i.e. foreign companies are in various stages of liquidating their assets and reducing their footprint in the country. As per official data, the volume of disinvestment stood at $1.2 billion during FY2023. But since repatriation of profits has hit a snag, the economy is witnessing partial reinvestment. The depreciation of the Bangladesh Taka against the US$ has sapped confidence in the economy by would-be foreign investors.
Then again, with imports being greatly curtailed in an effort to conserve foreign exchange, investors are put off from investing in the current environment. As pointed out by some economists, these factors amongst other like the rising cost of business and inflationary pressures are not helping matters. This is particularly true for investments from the US. According to a recent Bangladesh Bank report, FDI from the US more than halved (56 per cent) to $200.79 million in the first half of last year from $460.33 million in the previous six months.
According to media reports, this dip in US investments occurred following US sanctions on some members of the elite law enforcement agency, RAB that came in December 2021. Apart from political considerations, US officials have been pointing out that the country needs to do more in the areas of improving the business environment which encompasses issues like the logistics sector, ease of doing business, corruption and regulation. While that is easier said than done, one cannot overlook the fact that in a politically-charged situation where there is multiple alarm bells going off on the state of the economy, the environment is hardly conducive to attracting FDI.
Officials at the chambers of commerce have pointed out certain nagging deficiencies that have acted as dampeners for attracting FDI. These include bureaucratic red tape and logistic infrastructure. Many foreign companies are having trouble importing equipment to the country because there is apparently a lack of storage capacity at airports. Then there are problems clearing documents on time at customs. These are persistent issues that need to be tackled because prospective companies do look at these issues prior to making any sort of financial commitment abroad. Now that the Hazraat Shahjalal International Airport has just opened a third terminal, its capacity to efficiently handle cargo will hopefully be prioritised. The country needs to improve its logistics performance on global indices because the country that is beating Bangladesh on many fronts (including attracting FDI) Vietnam is doing far better in terms of supply chain than Bangladesh.
Bangladesh would do well to dispel regulatory uncertainties that exist currently. Rules or regulations should not be contradictory to each other. Again many investors are at a loss in getting access to information on laws and rules from a plethora of agencies and this needs simplification. Infrastructure and logistical bottlenecks are being worked out but need to be fast-tracked as the new economic zones come online. Macroeconomic stability will improve with time if we can figure out how to boost inward remittance and tackle the foreign exchange crisis. Until the nagging issues are worked out, raising FDI to a satisfactory level will remain a far cry.
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