Bangladesh has been in six per cent growth trap for more than a decade mainly due to low public and private investment. The country needs to considerably increase both private and public investment to come out of this growth trap. Over more than the last decade, the private investment remained almost stagnant because of sluggish foreign direct investment (FDI) and domestic investment. During this period private investment increased from 21.87 per cent to 22.1 per cent of gross domestic product (GDP).
The growth rate of the economy got stuck at 6.0 per cent during the last few years which economists consider a growth trap. Bangladesh has to break the stagnation by accelerating domestic investment both in public and private sectors and encouraging more FDI. But, unfortunately, the latest scenario suggests that investment - both domestic and foreign - in the country has been declining.
The country's banks have about BDT1000 billion funds ready for investment. But investors are not approaching the banks for investment funds. Instead they, on the other hand, borrow from the banks mostly for trading purposes. The Bangladesh Bank recorded growth of capital machinery import at 30 per cent this fiscal year (2015-2016). But the World Bank (WB) and other organisations see a mismatch in the country's import of capital machinery and investment situation.
The WB suspects that importers of capital machinery might have laundered the money through over-invoicing. Thus the money had been taken out of the country but investment has not recorded any significant rise. The demand for credit from the banks has declined drastically. According to a source, banks' credit to private sector was 24 per cent that has now declined to 13.2 per cent. Private sector investors borrow money from foreign banks and other sources at 4.1 per cent interest. They borrowed US$4.89 billion at 4.1 per cent interest. But the Bangladesh Bank (BB) that has more than US$26.34 billion reserve is earning only one per cent profit by investing outside the country.
The standard rule is that the central bank of a country should have foreign exchange reserve that can meet the country's three months' import bill. But now with more than US$26.34 billion reserve Bangladesh can meet its six months' import bill. While 85 per cent of the foreign exchange reserve is invested outside at about one per cent interest, the private investors borrow money from foreign sources at 4.1 per cent interest. Why is not the BB advancing money to these investors to earn higher profits? The government should review the overall financial and investment situation in the country and draw a strategy to increase investment to break the growth trap.
There is plenty of money in the banks and banks are worried with idle money worth BDT300 billion. The investors are scared and sceptical about taking money at higher rate of interest because there are multiple hurdles to investment in the country. The major hurdle is the lack of availability of gas connection and adequate power supply. Available infrastructure facilities are inadequate and bureaucratic red tape discourages the investors to do business. The unstable and uncertain political situation of the country is also responsible for low investment.
There are reports that many investors could not make their projects operational mainly due to non-availability of gas and electricity. As a consequence, these investors who borrowed money from banks are now loan defaulters. The banks are accumulating huge bad loans that have been increasing the cost of credit. In this context, the government will have to improve the investment climate to break the growth trap as well as to encourage businesses to invest in the country.
Many of the investors are now looking to invest in foreign countries. If this attitude of the investors persists, Bangladesh will not be able to come out of the existing growth trap. The government will have to work on the political front too, for more domestic investment and FDI in the country. As unstable and conflicting politics discourages both public and private investments as well as inflow of FDI.
The writer is a retired Professor of Economics, BCS General Education Cadre.
sarwarmdskhaled@gmail.com
‘Quasi’-stagnant growth trap persists
Sarwar Md Saifullah Khaled | Published: January 01, 2016 00:00:00 | Updated: February 01, 2018 00:00:00
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