Dim prospect of FDI inflow
Saturday, 18 October 2008
Syed Jamaluddin
The latest World Investment Report published by the United Nations Conference on Trade & Development (UNCTAD) for 2008 shows 16 per cent drop in the flow foreign direct investment (FDI) into Bangladesh in 2007 from a year ago. This is in contrast to a 32 per cent increase in FDI receipts globally. The decline for Bangladesh began in 2006 when the figures dropped to $793 million from $854 million in 2005. Political unrest was believed to be responsible for the decline at that time. But the decline under the caretaker regime was rather unexpected. Although there has been no political unrest during nearly last two years, still political uncertainty and business and investment hesitancy did exist to a certain extent.
In this connection, it may be noted that local investment proposals registered with the Board of Investment (BOI) increased substantially during the current year. The vastly improved performance of Chittagong port has a positive bearing on local investment. This may eventually lure the potential foreign investors provided the situation in the port remains the same after the departure of the caretaker government.
Bangladesh is committed to protect the interests of the foreign investors but we lack negotiating skills to deal with big investment proposals. Decisive political will also be necessary. A recently published report in a national daily said that six large-scale foreign direct investment proposals amounting to $8.3 billion have been on hold for the past several years because of indecisiveness on the part of the government, absence of proper policies and inadequate infrastructure. Foreign companies have also pulled out their investments from Bangladesh on different occasions.
We are caught up in a dilemma on infrastructure. We are rationing gas and electricity for industrial purposes. Therefore, we cannot expect FDI in industrial projects. At the same time, supply constraints of gas and electricity cannot be overcome without massive doses of FDI. Large number of completed projects cannot come into stream for want of gas connection. We cannot expect new foreign investment in this situation. Policymakers should develop sector-wise investment policies to attract both FDI and local investment.
The critical investment factors involve fewer restrictions for profit remittances or repatriation, sound legal framework, transparent customs and tariff procedures, favourable tax policies, political and economic stability, availability of land and suitable infrastructure and lack of corruption. We are to demonstrate whether we are truly committed to foreign investors by creating a level playing field for them. The authorities in charge have to ensure that the foreign companies have an investment-friendly environment in the country and can earn adequate return on their investment.
A recent report quoting Bangladesh Bank says that 65 per cent of the total FDI that came in last ten years has been repatriated as profit. Companies, who invest, are likely to take out their profits or dividends back. However, it is the job of the home country regime to keep the balance and make sure those inflows and reinvestments are always higher than outflows and disinvestment. Foreign entrepreneurs are discouraged by bureaucratic tangles in our country. Despite the presence of a government of technocrats, the red tape is still very much there. This has to be removed.
Bangladesh has slipped by four steps in global competitiveness. This has come after the country tumbled in the index of doing business. CPD has rightly commented that Bangladesh downgraded itself in all indices except in Transparency International's corruption perception index. Though there may be questions about the scientific basis and methodology in working out such rankings, these are useful indicators of business and investment climate. Potential entrepreneurs use them as a tool for making investment decisions.
It is ironical that despite the reform measures taken by the caretaker government to enhance the efficiency of public institutions, the latter's performance is yet to show significant improvement. Business confidence shaken by the crackdown on corruption is yet to bounce back fully. The Better Business Forum and the Regulatory Reform Commission are yet to make their presence felt. While Chittagong port's efficiency has markedly improved, the energy sector remains the Achilles heel. CPD is of the view that poor implementation capacity of the institutions and the gap between the government and the businesses are liable for the poor impact of the reforms.
In the context of the sluggish inflow of FDI to Bangladesh, global financial situation is deteriorating fast. Banks and financial institutions in the US and to a lesser degree around the globe are falling like nine-pins. Suddenly, the whole global financial system looks shaky and crumbling. What is really happening is a chain reaction that started off from assets created by bad mortgage lending. When these assets lost value because of falling US housing prices, the banks were unable to offload them causing an immediate hit on their capital.
The US government has stepped in to save the financial sector from total collapse. The Senate and the House of Representatives have approved the $700 billion bailout plan. The bailout plan is aimed at buying out by the government the toxic assets of the financial institutions, cleaning up the balance sheet, helping to bring back confidence in the market and allowing the inter-bank market to function normally. But the bailout plan has many problems. It is not known whether this plan will work. Major central banks launched joint efforts to battle the global financial crisis slashing interest rates. Britain rushed out a package worth up to US$875 billion to head off a banking collapse. Throughout the current financial crisis, central banks have engaged in continuous close consultation in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets .The US president discussed the global meltdown with leaders of Britain, France and Italy. Japan and Australia pumped billions dollars into the banking system. Stock markets nosedived all over the world .Investors dumped shares across the globe.
International Monetary Fund has warned that the financial crisis will drive down global economic growth to its lowest since 2002. The US and European economies were already in or close to recession. Oil prices sank one year low as plunging stock markets generated fresh fears of slowing economic growth and in turn weaker global demand for energy. This is good for poor countries.
Under the present scenario, aid flows are likely to come down and exports may shrink, especially from poor countries. The global slowdown will also touch Bangladesh, which will become clear soon. Therefore, we cannot expect any surge of FDI inflow into Bangladesh in near future. Meanwhile, we have to improve upon domestic investment which is unfortunately hostage to energy crisis.
(The writer is an economist and columnist)
The latest World Investment Report published by the United Nations Conference on Trade & Development (UNCTAD) for 2008 shows 16 per cent drop in the flow foreign direct investment (FDI) into Bangladesh in 2007 from a year ago. This is in contrast to a 32 per cent increase in FDI receipts globally. The decline for Bangladesh began in 2006 when the figures dropped to $793 million from $854 million in 2005. Political unrest was believed to be responsible for the decline at that time. But the decline under the caretaker regime was rather unexpected. Although there has been no political unrest during nearly last two years, still political uncertainty and business and investment hesitancy did exist to a certain extent.
In this connection, it may be noted that local investment proposals registered with the Board of Investment (BOI) increased substantially during the current year. The vastly improved performance of Chittagong port has a positive bearing on local investment. This may eventually lure the potential foreign investors provided the situation in the port remains the same after the departure of the caretaker government.
Bangladesh is committed to protect the interests of the foreign investors but we lack negotiating skills to deal with big investment proposals. Decisive political will also be necessary. A recently published report in a national daily said that six large-scale foreign direct investment proposals amounting to $8.3 billion have been on hold for the past several years because of indecisiveness on the part of the government, absence of proper policies and inadequate infrastructure. Foreign companies have also pulled out their investments from Bangladesh on different occasions.
We are caught up in a dilemma on infrastructure. We are rationing gas and electricity for industrial purposes. Therefore, we cannot expect FDI in industrial projects. At the same time, supply constraints of gas and electricity cannot be overcome without massive doses of FDI. Large number of completed projects cannot come into stream for want of gas connection. We cannot expect new foreign investment in this situation. Policymakers should develop sector-wise investment policies to attract both FDI and local investment.
The critical investment factors involve fewer restrictions for profit remittances or repatriation, sound legal framework, transparent customs and tariff procedures, favourable tax policies, political and economic stability, availability of land and suitable infrastructure and lack of corruption. We are to demonstrate whether we are truly committed to foreign investors by creating a level playing field for them. The authorities in charge have to ensure that the foreign companies have an investment-friendly environment in the country and can earn adequate return on their investment.
A recent report quoting Bangladesh Bank says that 65 per cent of the total FDI that came in last ten years has been repatriated as profit. Companies, who invest, are likely to take out their profits or dividends back. However, it is the job of the home country regime to keep the balance and make sure those inflows and reinvestments are always higher than outflows and disinvestment. Foreign entrepreneurs are discouraged by bureaucratic tangles in our country. Despite the presence of a government of technocrats, the red tape is still very much there. This has to be removed.
Bangladesh has slipped by four steps in global competitiveness. This has come after the country tumbled in the index of doing business. CPD has rightly commented that Bangladesh downgraded itself in all indices except in Transparency International's corruption perception index. Though there may be questions about the scientific basis and methodology in working out such rankings, these are useful indicators of business and investment climate. Potential entrepreneurs use them as a tool for making investment decisions.
It is ironical that despite the reform measures taken by the caretaker government to enhance the efficiency of public institutions, the latter's performance is yet to show significant improvement. Business confidence shaken by the crackdown on corruption is yet to bounce back fully. The Better Business Forum and the Regulatory Reform Commission are yet to make their presence felt. While Chittagong port's efficiency has markedly improved, the energy sector remains the Achilles heel. CPD is of the view that poor implementation capacity of the institutions and the gap between the government and the businesses are liable for the poor impact of the reforms.
In the context of the sluggish inflow of FDI to Bangladesh, global financial situation is deteriorating fast. Banks and financial institutions in the US and to a lesser degree around the globe are falling like nine-pins. Suddenly, the whole global financial system looks shaky and crumbling. What is really happening is a chain reaction that started off from assets created by bad mortgage lending. When these assets lost value because of falling US housing prices, the banks were unable to offload them causing an immediate hit on their capital.
The US government has stepped in to save the financial sector from total collapse. The Senate and the House of Representatives have approved the $700 billion bailout plan. The bailout plan is aimed at buying out by the government the toxic assets of the financial institutions, cleaning up the balance sheet, helping to bring back confidence in the market and allowing the inter-bank market to function normally. But the bailout plan has many problems. It is not known whether this plan will work. Major central banks launched joint efforts to battle the global financial crisis slashing interest rates. Britain rushed out a package worth up to US$875 billion to head off a banking collapse. Throughout the current financial crisis, central banks have engaged in continuous close consultation in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets .The US president discussed the global meltdown with leaders of Britain, France and Italy. Japan and Australia pumped billions dollars into the banking system. Stock markets nosedived all over the world .Investors dumped shares across the globe.
International Monetary Fund has warned that the financial crisis will drive down global economic growth to its lowest since 2002. The US and European economies were already in or close to recession. Oil prices sank one year low as plunging stock markets generated fresh fears of slowing economic growth and in turn weaker global demand for energy. This is good for poor countries.
Under the present scenario, aid flows are likely to come down and exports may shrink, especially from poor countries. The global slowdown will also touch Bangladesh, which will become clear soon. Therefore, we cannot expect any surge of FDI inflow into Bangladesh in near future. Meanwhile, we have to improve upon domestic investment which is unfortunately hostage to energy crisis.
(The writer is an economist and columnist)