Searching for investment recovery
Monday, 21 December 2009
When it comes to investment there seems to be no dearth of good ideas around, some really innovative by Bangladesh standards like the Public Private Partnership (PPP). If all the talk about boosting domestic investment were to materialize, economic growth would get a boost in no time. Yet, reality is something else. For five years running, the economy's investment-GDP ratio has been stagnant at 24 per cent. Economists have pointed out that without a substantial increase in this ratio, growth rates of 7.0-8.0 per cent per annum will remain a far cry. Where lies the problem?
The phenomenon about the level of public investment suffering due to poor implementation of the planned Annual Development Programme (ADP) is unlikely to change overnight. While mega projects in the public sector are on the cards, financing and implementation of these can hardly be thought of as exclusive public sector undertakings. A lot rests on the shoulders of private entrepreneurs, domestic and foreign, in giving concrete shape to the mega infrastructure projects that will have to be undertaken over the next five to ten years. There is no alternative to PPPs in such endeavours.
Properly conceived and orchestrated, roadshows in major financial centers of the world - e.g. London, New York - could be highly productive in attracting foreign investment while dispelling some of the misgivings about the Bangladesh economy. The recent London roadshow looked ambitious in its goal of mobilizing $5.0 billion for the energy sector. This paper earnestly hopes for its success in getting the job done. More of these might be necessary in the months to come. But they must be results-oriented and will be judged by their outcomes, rather than ending in a lot of fanfare signifying little.
On paper, Bangladesh has among the most liberal foreign direct investment (FDI) regime, especially in South Asia. That, however, is merely a necessary condition. It has not yielded the desired results, for various reasons now well known. The overall investment climate in the country has not been conducive to attract massive amounts of foreign investment the way it has occurred in, say, Vietnam which drew $12 billion (or 13% of gross domestic product or GDP) of FDI even in 2009 despite all the adverse developments for capital flows during the global crisis. Bangladesh has only managed to attract FDI of $700-800 million in the past couple of years, which is less than 1.0% of GDP. More than capital, FDI brings technology, skills, and ideas, besides creating jobs. That is what Bangladesh is missing - and Vietnam is gaining - by its inability to attract sufficient FDI.
In the past two decades private investment has begun to play a dominant role as the prime mover of the economy. The share of public investment has accordingly shrunk. Now, only one-fifth of total investment takes place in the public sector. Lately, however, part of the problem has been a lacklustre performance in domestic private investment which has contributed no less to the stagnation in national investment. That bodes ill for foreign investors looking at Bangladesh as a place to invest. If domestic investment is not ticking, FDI will be hard to come by. And symptoms are not bright at all. Quite apart from the uncertainties created by the global recession, energy constraint has stifled private investment as banks stayed away from lending to new projects that would require additional gas and power supply that was not there. Consequently, capital machinery imports have declined signaling weaker industrial performance in the near-term. While robust remittance growth has fueled monetary expansion and created excess liquidity in the banking system, the slowdown in private investment has made the excess liquidity situation only worse.
It is imperative for the economy to come out of this investment stagnation, sooner rather than later. The nation is thus faced with an enormous challenge of resuscitating the economy's investment drive. Confidence of investors has to be restored by concrete gestures and sound policies. The time for talk is over. What is needed is action that leads to augmentation of investment. At this juncture, a lot of synergy and interface is required between public and private investment in order to bridge the enormous gap that currently exists. As a rapidly growing economy, there is endless thirst not just for infrastructure but also for private investment in industry, agriculture and services. Complimentarity of public and private investment must be invoked for best outcomes such that the former crowds in - not crowds out -- the latter, producing the green shoots of investment the economy is looking for.
The phenomenon about the level of public investment suffering due to poor implementation of the planned Annual Development Programme (ADP) is unlikely to change overnight. While mega projects in the public sector are on the cards, financing and implementation of these can hardly be thought of as exclusive public sector undertakings. A lot rests on the shoulders of private entrepreneurs, domestic and foreign, in giving concrete shape to the mega infrastructure projects that will have to be undertaken over the next five to ten years. There is no alternative to PPPs in such endeavours.
Properly conceived and orchestrated, roadshows in major financial centers of the world - e.g. London, New York - could be highly productive in attracting foreign investment while dispelling some of the misgivings about the Bangladesh economy. The recent London roadshow looked ambitious in its goal of mobilizing $5.0 billion for the energy sector. This paper earnestly hopes for its success in getting the job done. More of these might be necessary in the months to come. But they must be results-oriented and will be judged by their outcomes, rather than ending in a lot of fanfare signifying little.
On paper, Bangladesh has among the most liberal foreign direct investment (FDI) regime, especially in South Asia. That, however, is merely a necessary condition. It has not yielded the desired results, for various reasons now well known. The overall investment climate in the country has not been conducive to attract massive amounts of foreign investment the way it has occurred in, say, Vietnam which drew $12 billion (or 13% of gross domestic product or GDP) of FDI even in 2009 despite all the adverse developments for capital flows during the global crisis. Bangladesh has only managed to attract FDI of $700-800 million in the past couple of years, which is less than 1.0% of GDP. More than capital, FDI brings technology, skills, and ideas, besides creating jobs. That is what Bangladesh is missing - and Vietnam is gaining - by its inability to attract sufficient FDI.
In the past two decades private investment has begun to play a dominant role as the prime mover of the economy. The share of public investment has accordingly shrunk. Now, only one-fifth of total investment takes place in the public sector. Lately, however, part of the problem has been a lacklustre performance in domestic private investment which has contributed no less to the stagnation in national investment. That bodes ill for foreign investors looking at Bangladesh as a place to invest. If domestic investment is not ticking, FDI will be hard to come by. And symptoms are not bright at all. Quite apart from the uncertainties created by the global recession, energy constraint has stifled private investment as banks stayed away from lending to new projects that would require additional gas and power supply that was not there. Consequently, capital machinery imports have declined signaling weaker industrial performance in the near-term. While robust remittance growth has fueled monetary expansion and created excess liquidity in the banking system, the slowdown in private investment has made the excess liquidity situation only worse.
It is imperative for the economy to come out of this investment stagnation, sooner rather than later. The nation is thus faced with an enormous challenge of resuscitating the economy's investment drive. Confidence of investors has to be restored by concrete gestures and sound policies. The time for talk is over. What is needed is action that leads to augmentation of investment. At this juncture, a lot of synergy and interface is required between public and private investment in order to bridge the enormous gap that currently exists. As a rapidly growing economy, there is endless thirst not just for infrastructure but also for private investment in industry, agriculture and services. Complimentarity of public and private investment must be invoked for best outcomes such that the former crowds in - not crowds out -- the latter, producing the green shoots of investment the economy is looking for.