Finance Minister AMA Muhit has expressed his disappointment at the inadequate inflow of foreign direct investment (FDI) in the country. In a pre-budget discussion this week, he clearly said that he had been emphasising on the higher FDI inflow for the last few years, but nobody had lent him support. The finance minister has also urged the private sector to extend their coperation towards him in his effort to attract FDI.
Disappointment of the finance minister appears valid. Average annual inflow of foreign direct investment (FDI) in the country is around $900 million for the last one decade. FDI-GDP ratio is well below 2.0 per cent. Net inflow of FDI has dropped to $1.52 billion in 2014 from $1.6 billion in 2013.
In his budget speech last year, Mr Muhit expressed optimism of higher inflow of FDI. He said: "We hope that in the next fiscal, investment, export and remittance flows will increase as it is expected that the global economy will experience accelerated growth..... Fiscal, monetary and stock market reforms will go on. Foreign investment and assistance are expected to increase." Providing budgetary support to the foreign investors, he also said: "To ensure employment opportunities for our workforce as well as to attract foreign direct investment (FDI), I propose to reduce corporate tax rate for non-listed companies from 37.5 per cent to 35 per cent."
In fact, good inflow of FDI was a major assumption for the finance minister while setting the target of 7.3 per cent growth rate for the current fiscal 2014-15 (FY'15). So, FDI below the desired level hurts the country's growth prospect.
According to the central bank statistics, inflow of FDI stood at $1.13 billion in the first nine months (July-March) of the ongoing fiscal year. The amount is 5.12 per cent higher than the corresponding period of the last fiscal year. The moderate growth of FDI is not sufficient, along with other factors, to push the country's growth rate to 7 per cent and above.
The basic presumptions of attracting FDI are overcoming the shortage of capital and acquiring better technology in the country to enhance productivity in the long run. And it is also true that during the initial phase of development, bad or low quality FDI generally comes to any country. Bangladesh has, however, overcome that phase and there is a little room for allowing inflow of low quality FDI.
Nevertheless, the reluctance of foreign investors may be traced to some factors, not necessarily linked with the FDI policy. It is well recognised that the country's policies to attract FDI is quite supportive. But lack of adequate energy, infrastructure along with bad governance makes it difficult for the foreign investors to come and invest.
It is also interesting to note that the country's medium-term development plan doesn't prioritise FDI. The Sixth Five Year Plan (SFYP), to be phased out by the end of current fiscal year, actually projected lower amount of FDI inflow.
To attain the goals set in SFYP, achieving 8.0 per cent GDP growth by the end of FY'15, investment requirement was estimated at Tk 13.5 trillion (around $175 billion). About 9.3 per cent of the required investment was targeted to finance from external sources worth Tk 1.3 trillion or $16.7 billion in five years during FY'11 and FY'15. Of this, only Tk 0.4 trillion or $5.2 billion was projected to come from FDI. The planning document substantiated the projections by saying: "These modest levels of foreign financing are realistic in relation to the current trends and are consistent with prudent external borrowing strategy of the government."
Bangladesh Bank statistics revealed that inflow of FDI during four years of FY'11 and FY'14 stood at $5.25 billion. Thus the targeted amount of FDI has already been there. Again, in nine months of FY'15, FDI inflow stood at $1.13 billion. So, at the end of the current fiscal -- also the terminal year of the SFYP-- annual inflow of FDI may cross $1.5 billion. Finally, total amount of FDI in five years under the sixth plan may touch $7 billion level which is 33 per cent more than the projected amount.
Against the backdrop, disappointment of the finance minister about FDI may sound odd. One may rather put a question whether the country's development planning document failed to prioritise FDI. If the country's medium or long-term planning document puts FDI at a lower level, then there will be little effort to remove the related barriers.
As the exercise of formulating the SFYP is now in full swing, it is the right time to intervene. The finance minister can take necessary move in this regard so that attracting FDI becomes one of the priorities for the country's development tools.
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