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Deep concern surrounds foreign investment climate

M A  Khaleque

M A Khaleque

Tue, 18 Jun 24

The Foreign Investors Chamber of Commerce and Industries (FICCI), an organisation of foreign investors operating in Bangladesh, expressed concern about the future of foreign investment in the country during a post-budget press conference. They emphasised that investment, whether local or foreign, is a long-term activity, and thus, policy consistency is crucial to attract and retain investment. Frequent policy changes can spook both local and foreign investors. In particular, foreign investors seek policy continuity for the safety of their capital, as withdrawing investment from a country or region is not a simple process.

However, it is unfortunate that the policies for investing in Bangladesh have been changing frequently. This inconsistency may disappoint foreign investors. The proposed budget includes significant policy changes regarding foreign investment in privately owned special economic zones. The leaders of FICCI believe these changes will hinder the foreign investment currently in the pipeline.

According to the proposed budget, henceforth, there will be no tax exemption for setting up factories in privately owned Special Economic Zones. Additionally, no tax exemption will be available except for the formation of new companies in Government Economic Zones. This means that if a company has operations outside the economic zone and wants to expand its business by investing in the new economic zone, it will not receive the tax holiday benefit.

Conditional tax exemptions will remain in place in government economic zones, but this benefit is being withdrawn from private economic zones. Only companies that have started commercial operations in the Government Economic Zone will receive the tax exemption. Moreover, the tax exemption benefits previously available on the profits earned by foreign companies, hiring foreign workers, and paying royalties have been canceled.

The press conference also highlighted that several companies have significant investments in the pipeline in the economic sector. These companies have signed agreements with the Bangladesh Economic Zones Authority. If the tax exemptions granted to them are withdrawn now, these investments may be jeopardised. Local and foreign investors chose to invest in Special Economic Zones primarily because of the tax exemptions.

The demands raised by the leaders of the Foreign Investors Chamber of Commerce and Industries in the press conference are very important for many reasons and warrant an impartial review. Attracting both local and foreign investment is crucial for the sustainable economic development of any country. Adequate investment in the productive sector is essential for achieving sustainable economic development. Without private sector investment, employment opportunities are not created, and poverty alleviation becomes unattainable without suitable employment opportunities.

The significance of investment extends beyond the industrial sector to include agriculture and other sectors. Ensuring a stable and favorable investment environment is vital for fostering economic growth and development across all areas.

There is no employment opportunity. Therefore, developed countries have been able to make their economic development sustainable and effective only by emphasising balanced industrialisation. Not a single country in the world has managed to ensure economic development by focusing solely on the agricultural sector while neglecting industry. Even countries that have aimed for development by prioritising agriculture have also industrialised their agricultural sectors. This means they have used agricultural materials or raw materials for industrial purposes.

No country in the world has achieved economic development by producing and exporting unprocessed agricultural products without using these products as raw materials for industry. Regardless of how advanced a country is in agriculture, it must still process or export those agricultural products through industrial means. Agriculture alone can never contribute to the economic development journey to the desired extent without the support of industry.

Bangladesh has been giving special importance to industrialisation since independence. However, we have not yet formulated a proper national policy in this regard. Due to frequent changes in policies, it is still not possible to provide proper direction for our industrial sector. We have not yet decided whether to prioritise large-scale industries or if small and medium-scale industries are more suitable for us. Additionally, we seem to lack a clear strategy for using locally produced materials as raw materials for industry.

This indecision and lack of a coherent policy framework hinder the country's industrial growth and development. Establishing a stable, long-term industrial policy is crucial for providing direction, attracting investment, and ensuring sustainable economic development. By determining the appropriate focus for industrialisation and effectively utilising local resources, Bangladesh can create a more robust and resilient industrial sector.

The current government has initiated the establishment of 100 Special Economic Zones (SEZs) across the country, with several already implemented or in progress. While this initiative holds great promise, critical considerations need attention to ensure its success and national benefit.

Firstly, foreign investors will bring capital but not workers. Local labour must meet the needs of foreign factories. However, is the Bangladeshi workforce adequately prepared? We often highlight the abundance of cheap labour in Bangladesh when discussing foreign investment. But have we examined why wages are low? Most Bangladeshi workers are untrained and unskilled, leading to lower productivity and wages.

Planners claim the SEZs will provide employment for many Bangladeshis. Yet, will foreign entrepreneurs risk the productivity of their factories with unskilled labour? Addressing these challenges is essential for the SEZs to truly benefit the nation and attract sustained foreign investment.

Foreign investors are like wintering birds. Just as a winter guest bird will not settle in a water body without adequate food and security, foreign investors are not interested in investing in a country unless they see security for their capital, personal safety, and adequate profit potential. Foreign investors have the freedom to invest in any country they choose. Therefore, to attract and retain foreign investment, a suitable investment environment must be ensured.

Despite claims of a favorable investment environment in Bangladesh, the reality is quite different. According to a report from a private organisation, the investment environment in the country has recently deteriorated. Bangladesh was ranked 176th out of 190 countries in the 'Ease of Doing Business' index published a few years ago by a subsidiary organisation of the United Nations. This means 175 countries offered a more favourable investment environment than Bangladesh.

Corruption and lawlessness are prevalent at every level of service organizations, preventing the optimization of the investment environment. To improve this situation, significant efforts are needed to tackle these issues and create a genuinely conducive environment for foreign investment.

Bangladesh is unable to attract sufficient local and foreign investment despite its potential due to its failure to ensure an investment-friendly environment. While public sector investment is increasing, private sector investment is not keeping pace. Investment in the private sector is crucial for productivity growth and widespread employment, whereas public sector investment primarily focuses on infrastructure development, offering limited opportunities for increased production and employment.

Many believe that for an economy the size of Bangladesh's, the private sector investment rate should be above 40 percent of GDP. However, the private sector investment rate has been fluctuating around 23-24 percent of GDP for a long time. According to data from Bangladesh Bank and the Bureau of Statistics, the private sector investment ratio was 24.94 percent of GDP in the financial year 2017-18.

In FY 2018-19, the ratio of private sector investment was 25.25%. In the financial year 2019-20, it was 24.02%, and in FY 2020-21, it further declined to 23.70%. In FY 2021-22, the private sector investment ratio slightly increased to 24.52% of GDP, but it dropped again to 23.64% in FY 2022-23.

Meanwhile, attracting foreign investment has been particularly challenging. In 2021, Bangladesh attracted foreign investment equivalent to USD 114 crore. This decreased to USD 102 crore in 2022, and further to USD 71 crore in 2023. Additionally, the foreign investment that does come in is often not fully realised. Frequently, foreign investors express interest and initiate investment proposals but later withdraw due to various frustrations.

Many years ago, a survey on foreign investment in the country was conducted at the initiative of the Board of Investment. The persistent challenges and barriers identified in such surveys highlight the need for sustained efforts to create a more favorable investment environment. This includes addressing bureaucratic hurdles, ensuring policy stability, and improving infrastructure and governance to attract and retain both local and foreign investors.

It was found that only 39 percent of the foreign investment registered in Bangladesh each year was implemented, while 61 percent of proposals were not reported at all. Although the situation has improved, the extent of this progress remains uncertain.

The question arises: why would a foreign investor leave their home country to invest in Bangladesh? The biggest attraction is the country's huge market of 17 crore people. Bangladesh is progressing rapidly, with increasing consumption and spending power among its population. Three decades ago, the middle class in Bangladesh comprised 12 percent of the population; now, it has exceeded 20 percent. Urban amenities are now extending to rural areas, with various city facilities available in villages. For example, refrigerators are reportedly being sold more in rural areas than in cities.

Many regions in the world do not have a combined population of 17 crore even across 3-4 countries, making Bangladesh an attractive destination for foreign investors. The country's large and growing market presents significant opportunities for investment and economic growth.

Bangladesh is attractive to foreign investors due to the duty-free Generalised System of Preferences (GSP) benefits for exporting goods to 27 European Union countries. Bangladesh also enjoys customs exemptions from many other countries. For example, a Malaysian investor would have to pay a minimum duty of 12 percent if they produce goods in Malaysia and export them to a European Union country. However, if the same investor sets up an industry in Bangladesh and exports the products to any EU country, no duty is required.

Unfortunately, this advantage is set to change. In 2026, Bangladesh will lose the GSP benefits granted by the European Union after being promoted to the final list of developing countries. Consequently, exporting goods from Bangladesh to any EU country will incur a minimum duty of 12 percent. This change will make Bangladesh less attractive as an investment destination for foreign investors, and it is likely that their interest in investing in Bangladesh will decrease.

Moreover, the pervasive corruption in Bangladesh's service institutions will pose additional challenges in attracting foreign investment in the future.

MA Khaleq: Retired General Manager, Bangladesh Development Bank Plc and Writer on Economics.

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