Upturn in private investment depends on political predictability

Bangladesh aspires to attain the middle-income status by 2021. In the last decade, the per capita income of the country has gone beyond US$ 800, and it is expected that it will reach the 1,000 mark very soon. To achieve this objective, the country's targeted GDP (gross domestic product) growth rate should be 7.0 per cent-8.0 per cent. As there is a sense of urgency, higher amount of investment is now a pressing need to attain the targeted growth rate.
Investment is one of the vital factors to boost the economy. If it falls, it slows down pace of industrialisation, which in turn will shrink employment generation. This will have a downward effect on consumption level, purchasing power and savings of the people. There would be, as a result, a contagious pressure on the GDP growth of the economy.  
A long time ago, British economist Roy Harrod and American economist E.D. Domar advanced a theory that says the growth rate of an economy is dependent on investment-output ratio and capital-output ratio. This formula still forms the bedrock of macroeconomic planning exercises in many countries including Bangladesh. If there is a high level of savings in a country, it provides firms with funds to borrow and invest. Investment can increase the capital stock of an economy and generate economic growth through the increase in production of goods and services.
The capital-output ratio measures the productivity of the investment that takes place. If capital-output ratio decreases, the economy will be more productive. As a result, higher amount of output is generated from fewer inputs. This again leads to higher economic growth. That's why, in order to reach the target of GDP growth rate, our current rate of investment-GDP ratio must be increased beyond its current 25 per cent.
Regrettably, statistics on investment in Bangladesh is difficult to find, and one can hardly rely on the data which are on hand. The Bangladesh Bureau of Statistics (BBS) publishes aggregative data on investment on an annual basis. Therefore, analysts and researchers are compelled to depend on proxy variables that are more easily accessible. These include data on growth of domestic credit, especially that to the private sector, and import of capital machinery, industrial raw materials and intermediate goods. If we look at some of the relevant indicators of investment, we can see that the growth in credit in the first quarter of the current fiscal year (FY) was 13.78 per cent. Though the credit growth in the government sector increased 15.56 per cent compared to the same period in last FY, the credit growth in the private sector increased 11 per cent, whereas the target was 16 per cent. The sluggish growth in the private sector credit demonstrates that new investors are not interested to invest here because of the restive political environment, longstanding problems of weak infrastructure and other bottlenecks.
At the moment, the weakest aspect of the economy of Bangladesh is the downward trend in overall investment. Particularly, the entire scenario in private investment has been very upsetting. Although in the last couple of years the inadequacy in private investment has been covered by public investment, this year public investment has also seen a considerable decline. Because of this significant reduction in the size of public investment, along with the decline of private investment, the overall situation of investment this year hasn't been satisfactory. The evidence that public investment, the major part of overall investment of Bangladesh, is falling is demonstrated by poor implementation of ADP  (Annual Development Programme) projects, which has been the lowest in the last six years.
The government should encourage the foreign investors to invest more in the share market and make it more open and restriction-free to invite portfolio investment. Recently, they have become more interested to invest in our stock market due to some careful and well-thought-out policies adopted by the government. However, handling the portfolio investment sensibly is a tough job to ask for.  If the portfolio investment cannot be controlled efficiently, then Bangladesh will have to face an adverse situation like that in India caused by haphazard investment in their share market. The most worrying chapter for India during the last two months has been the weakening of Rupee against US dollar. In order to find out the reason behind the weakening of Rupee against US dollar, we have to look back a little.
After the 2008 massive bubble burst, investors and economic commentators were eagerly looking forward to the emerging markets in the hope of investing their idle capital. China and India were two major playgrounds for this capital, and a vast sea of 'hot money' had been poured into these markets. China has been very prudent to utilise this sudden rush of foreign investment, opposed to India, where it has mainly been concentrated in the domestic market. The situation was fine until the developed economies became submerged in the crisis and were searching for a way out. But problems started when these economies began recovering from the bad times. Usually in the recovery period, the expectations of return to capital increase, and capital starts to fly in from the low-return economy to high-return economy. This capital flight imposes huge pressure on the current account balance, which influences exchange rate, and, as a result, domestic currency depreciates. Against a backdrop of this type, Bangladesh has to be careful in crafting policies for portfolio investment if they do not want to face the adverse situation like in India.
Besides the portfolio investment, the most important component of private investment is Foreign Direct Investment (FDI). Unfortunately, there was no significant breakthrough in the inflow of FDI during the first half of FY 2013-14. Although FDI inflow has decelerated in later months (September and October), overall FDI inflow during July-October period in 2013 (US$ 538 million) was 1.3 per cent higher compared to that of the previous year. In contrast to the overall FDI trend in H1 of FY `14, the Bangladesh Export Processing Zones Authority (BEPZA) gained a healthy growth in investment by 26.50 per cent during the first six months of the current fiscal year compared to the corresponding period in the previous FY. In spite of various adverse situations in the country's industrial sector, the BEPZA's (Bangladesh Export Processing Zone Authority) scenario appears to be full of prospects.
Bangladesh is a country with enormous potential to grow faster than other least developed countries (LDCs). According to the 2010 report of the World Bank, Bangladesh was one of the safest and most profitable destinations for the investors. But because of bureaucratic tangles, infrastructural weaknesses and severe crisis in electricity and gas supplies the cost of doing business has been mounting since then. This has gradually slowed down the pace of investment. Bangladesh has enjoyed about 10 years of steady, impressive growth; and its economy has grown steadily for the past five years despite the global financial crisis. But if the aforementioned negative factors continue to dominate our investment scenario, economic growth will have to take the heat and could fall below 6.0 per cent in both this and the next fiscal year.
The government has already declared a number of supportive policy measures for private sector investment in view of its downward trend, keeping in mind the recent political unrest. The effectiveness of policies will critically hinge on an environment which can create investors' confidence, and ensure predictability for them. Without greater predictability on the political front, one may not expect any significant upturn in private investment - both local and foreign - in the country.
The writer is lecturer, the Department of Business Administration, University                     of Asia Pacific. [email protected]