Bangladesh FDI Imperative: Gains and Policy Options


Over the past five decades, Bangladesh has successfully transitioned to an increasingly manufacturing and service-oriented economy and has performed well in terms of social indicators. It has recorded average gross domestic product (GDP) growth rates of over 6% over the past 10 years and over 8% in fiscal 2019.

The poverty rate fell from 31.5% in 2010 to 21.8% in 2018, an important step towards achieving the sustainable development goal of eradicating extreme poverty by 2030.

The success of a persistent and strong growth rate depends on genuine structural transformation, growing private sector engagement, export-oriented industrialization, a vibrant rural economy and stable development outcomes. In February 2021, Bangladesh was given the green light to move from a least developed to a developing country, which will take place in 2026.

The economic slowdown due to the coronavirus pandemic poses multidimensional challenges for Bangladesh that can extend into the medium to long term. However, it seems that one of the main victims of the fall is likely to be private investment, in particular foreign direct investment (FDI). A UNCTAD assessment suggests that global FDI contracted to a large extent by 42% in 2020, the magnitude of the decline being one of the largest in recent decades.

Such challenges come at a time when Bangladesh needs more FDI more than ever. There are several compelling reasons for this. First, according to the 8th Five-Year Plan, Bangladesh must accelerate the pace of its growth to over 8% if it is to progress to an upper middle-income country by 2031.

It is important for the economy to have increased levels of FDI as this can not only help create the jobs that Bangladeshi youth so badly need, but also support the increase of national capital, help transfer of new technologies and new products, facilitate access to new and large foreign markets and provide training for the local workforce by improving their technical and managerial skills, making them more efficient and productive.

Impressive economic and human development gains provide ample room for maneuver for FDI growth

The importance for Bangladesh of securing higher levels of FDI is paramount, especially as the country aspires to become an upper middle income country by 2031 and a developed country by 2041. For that this takes place, the private investment-to-GDP ratio should rise to 27 percent. However, the past decade has seen this ratio stagnate between 22 and 23 percent.

In addition, FDI over the past decade has averaged 1.1 percent of GDP, while comparator countries like Vietnam and Malaysia have fared better with 6 percent and 3.4 percent. percent, respectively.

Building on its strengths in economic and human development, Bangladesh has sufficient leeway to attract more diverse sectors as candidates for FDI, as the lion’s share of FDI is concentrated in a narrow range of industries such as electricity, banking, food, telecommunications, and textiles and weaving. during the last years. FDI can provide much needed boost to engines of growth

The impressive economic and social progress achieved by Bangladesh had much to gain from a growing number of better paying jobs, from the exploitation of the international market by increasing exports, from the knock-on effects of the manufacturing sector of the RMG sector. and improving rural and energy infrastructure.

In recent years, some of these growth drivers have come under pressure. Drivers of employment such as exports are slowing, and FDI can help provide jobs for the more than 20 million young people who are expected to enter the workforce over the next decade.

One of the prerequisites for Bangladesh to achieve a sustained growth path of 8% is a higher degree of economic diversification. However, diversification remains elusive and one of the main reasons is the lack of adequate infrastructure.

Currently, there is an infrastructure deficit of $ 350 billion in Bangladesh in the energy, water, logistics and transport sectors.

The infrastructure / GDP ratio is 3 to 4% and should be increased to 6 to 7%. The economic diversification agenda requires new manufacturing and service sectors capable of penetrating international and domestic markets, and FDI will be key to circumventing barriers to market access and the exploitation of new technologies.

Moving Forward with Smart Strategies and Developing New Growth Engines Using the Power of FDI

Many aspects of public policy have supported the development of private enterprises and FDI over the years. This includes the gradual liberalization of trade since the 1990s, several financial policies implemented by the central bank, a relatively competitive exchange rate and the expansion of access to electricity and energy since 2009.

A major constraint for private investment was access to serviced land which is addressed through the introduction of economic zone (EZ) policy and development projects, and earlier through export processing zones.

In the regulatory space, it is encouraging to see the momentum the government is giving to regulatory reforms for a better business environment.

A number of initiatives of crucial importance for improving the business environment have recently been undertaken, including reforms aimed at improving the ease of doing business, the introduction of one-stop services for investors , several recent changes in the Foreign Exchange Regulation Act, gradual changes in company law, and trade facilitation measures such as the establishment of a national one-stop-shop for faster and easier customs clearance.

Regarding the institutional aspects of the improvement efforts, the Government of Bangladesh, mainly through the Prime Minister’s Office and the Bangladesh Investment Development Authority, has put in place a concerted effort which includes the development of action plans. reform, forming working groups, coordinating reform initiatives among relevant government agencies, providing reform support to implementing agencies, conducting dialogues with private sector stakeholders and monitoring progress of reform.

Building on this momentum, it is essential that Bangladesh moves away from traditional approaches to promoting FDI to harness the policy catalysts. For example, exploring non-traditional sources of investment such as new growth sectors that reflect global and future trends, and climate smart investments have great potential for Bangladesh.

A $ 2.3 trillion halal food market by 2025, the outlook for a $ 3 billion domestic e-commerce market by 2023, and a $ 23 trillion global market by 2030 for green investments, all of this says a lot about the potential for FDI in these emerging growth sectors.

A recent commendable initiative from the Foreign Investor Platform in Bangladesh, the Foreign Investors Chamber of Commerce and Industry, details the opportunities for Bangladesh in these new areas of growth and the strategies Bangladesh needs to deploy to realize the potential.

Accelerating public-private partnership opportunities in the country can pave the way for FDI, especially in sectors and projects associated with high risks and longer returns. Many of these projects, such as a new container port in Chattogram, will be critical to the competitiveness of Bangladesh’s exports and investments.

Bangladesh can also benefit from changing trends in the global value chain. Many countries seek to expand the basics of the supply chain and diversify the existing concentration of the production system. In addition, Bangladesh can take advantage of its export potential and favorable factors of production for efficiency-seeking investments to anchor inward FDI.

Currently, Bangladesh has duty-free entry into China for more than 8,000 products. The country can take advantage of the new developing economic zones to attract foreign investors who would enjoy the benefits of duty-free entry into China. Other large regional economies such as India and Japan also have similar prospects if complementary trade and investment strategies can be put in place.

Ensuring more global economic cooperation and expanded market access with the support of regional free trade and trade agreements can translate into better market access and increased confidence in host countries leading to greater IDE.

Thus, it is imperative that Bangladesh prepare and position itself as a strong candidate to welcome foreign investors. This requires the preparation and implementation of a targeted, time-bound and focused investment promotion plan, which will help identify and target the investor group, raise awareness of Bangladesh’s value proposition in the markets. sectors with high potential, and to put in place an effective system of facilitation and monitoring processes.

The author is president of Policy Exchange of Bangladesh

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