Removing investment constraints

Shahiduzzaman Khan | Published: November 21, 2020 19:07:54

Private investments in Bangladesh are constrained by a lack of land, reliability of energy supply, poor connectivity, cumbersome regulatory processes as well as regulatory unpredictability, high corporate taxes, limited access to long-term finance and shortage of skills.
Without removing the constraints, it will be difficult to achieve a sustained increase in the private investment rate. Public investment has increased because of higher expenditure in investment projects, mostly under the annual development programme.
The government needs to accelerate the pace of regulatory reforms, improve the implementation of high priority projects in infrastructure and energy and invest in education and health.
Reduction of corporate tax rates and simplification of the tax structure are also needed to make Bangladesh a more attractive location for both domestic and foreign investors. Also, there is a need for massive policy reforms to create a business-friendly environment for boosting private investment.
Besides, 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 the conduct of which will require exercising due diligence.
Bangladesh businesses have a crucial role to play in implementing the sustainable development goals (SDGs). There is a need for promoting foreign direct investment (FDI), improving infrastructure and facilitating cross-border trade to ensure that the private sector contributes to achieving the SDGs.
Although the finance minister has made claim about restoring 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, distrust between the government bodies and the business people is an irritant.
In a recent report, the International Monetary Fund (IMF) said the weakness in financial sector and infrastructure deficit are the major factors affecting the Bangladesh's private sector investment and growth. These constraints stem in part from low public investment and inadequate infrastructure maintenance, it added.
An economic survey report of the finance ministry said the country's private sector investment has been sluggish for some years, hovering at 22 per cent of the gross domestic product (GDP ) since 2011-12 fiscal years.
The Centre for Policy Dialogue (CPD), a private think tank, in a recent study, said investment in the country remains sluggish on one hand and, on the other, a large amount of capital is siphoned off, mainly through over-invoicing. The latest amount of capital flight is higher than the net foreign aid, it said.
In order to stimulate private sector investment and regain the growth momentum, a conducive political environment which generates confidence in entrepreneurs, and inclusive politics that ensures predictabilities and business-friendly environment, is the key determining factor for economic growth.
One of the sources of private investment is the long-term borrowing from the financial system. But such borrowing from the financial system is very inequitably distributed. Inequality in the distribution of private investible assets is itself a stumbling block to accelerating private investment.
Private investment has been hovering around the 22-23 per cent mark for long. Private sector credit growth hits a 56-month low of 12.07 per cent in recent times and the government's target to borrow more from the banks may tighten the situation further.
Despite stagnant private investment, Bangladesh's economic growth has been impressive for the past decade. Provisional estimates show the economy is likely to grow more in this fiscal year, thanks to a steady rise in public investment.
Private investments are, in fact, constrained by a lack of land, reliability of energy supply, poor connectivity, cumbersome regulatory processes as well as regulatory unpredictability, high corporate taxes, limited access to long-term finance and shortage of skills.
Without removing the constraints, it will be difficult to achieve a sustained increase in the private investment rate.
There is a need for policy reforms to create a business-friendly environment for boosting private investment. It is also important to improve ease of doing business in cooperation with concerned ministries to continue with the growth momentum and achieve the target of becoming a middle income and high-income country within the stipulated timeframe.
The government has, indeed, set an ambitious goal for the growth of private investment. The question is whether such goal is achievable or not. Analysts say the goal of doubling private investment as a percentage of gross domestic products (GDP) in fiscal year 2020-21 is unrealistic.
Taking the coronavirus effects into consideration, the government has slashed the investment-GDP ratio estimates to 12.7 per cent for FY2020 from its earlier projection of 24.2 per cent.
Analysts say the new private investment target in the next fiscal is like daydreaming when the global economy is set to dive into the deepest recession after the World War II.
Still, the country's finance minister remains upbeat about a higher private investment growth in this fiscal banking on several fiscal measures and lots of incentives. He expressed his hope that the Covid-19 would bring considerable transformation in the global trade and business scenario from which Bangladesh would be able to grab some shares in investments.
The government in its new target said the overall investment is expected to rise to 33.5 per cent of the total GDP in FY2021 from that of 20.8 per cent in FY2020. The public investment-GDP ratio in the next fiscal has been set at 8.1 per cent of FY2020.
In normal years in the past, the private investment-GDP ratio was not noticed to grow by more than 1.5 percentage points. It is very unrealistic that the government will double private investment growth within a year.
If the health situation becomes normal in the next financial year, the private sector's investment will need to be almost doubled from the government's revised target of 12.7 per cent this year. In addition, it will require boosting the investment-GDP ratio by 1.8 percentage points within a single year.
However, it is almost impossible for a country like Bangladesh to reach the target. Given the virus fallout, it will take some time to bring back confidence among the foreign and local investors.
The existing industries now remain largely unutilised and/or under-utilised due to the Covid-19 pandemic. It is not known how new entrepreneurs will come up with fresh investments in this situation. After economic recovery, they will first try to use under-utilised and unutilised capacity.
There is a general perception that a lot of FDI will be relocated to Bangladesh. But it is necessary to mention that the global FDI is projected to decline 35 per cent and the domestic corona situation will have an impact on foreign investments too. Foreign investors will not come to Bangladesh for health security reasons for a period even after the situation becomes normal.
The government needs to accelerate the pace of regulatory reforms, improve the implementation of high priority projects in infrastructure and energy and invest in education and health in order to boost private investment.
All said and done, efficient public investment and regulatory reforms are urgently needed to get the private investment rate out of the 21-22 per cent of GDP trap. For this to happen, there is a need for fixing the underlying problems that hinder private sector investment in the country.
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