Factors hindering country’s investment and trade environment

A recent report by the World Bank titled “Business Ready” has expressed dissatisfaction with the current business and trade environment in Bangladesh. It states that the existing conditions for business and trade in Bangladesh are far from favorable. As a result, despite having immense potential, the country is struggling to perform well in international trade. Considering the current realities of the business environment, Bangladesh has been placed fourth in the rankings. In a review based on ten indicators, Bangladesh scored 53.86 out of a total of 100 points.

The purpose of this index is to provide an overall understanding of the economic conditions in various countries. The “Business Ready” index is not anything new; previously, the World Bank published an index called “Ease of Doing Business” to highlight the business and trade environments across different countries. However, a few years ago, controversies arose regarding the “Ease of Doing Business” index. Some countries alleged that the World Bank had artificially portrayed China’s business environment in a favorable light. When an official involved in the preparation of the “Ease of Doing Business” index indirectly acknowledged the truth of these allegations, the situation became complicated.

In the face of this controversy, the World Bank announced a suspension of the preparation and publication of the “Ease of Doing Business” index. In the last published index, Bangladesh ranked 176th among 190 countries. Over the past few years, the business environment in Bangladesh has shown no improvement; in fact, in some cases, the situation has worsened. For the fiscal year 2022-2023, Bangladesh scored 61.95 points out of 100 in terms of ease of doing business. However, in the following year (2023-2024), the score dropped to 58.75 points, representing a decrease of 3.2 points within just one year. Recently, the World Bank's “Business Ready” index highlighted the rankings of 50 countries, placing Bangladesh in the fourth tier.

The reports published by the World Bank and similar international organizations regarding the real state of business and trade in various countries hold significant importance for several reasons. Foreign investors or businesses seek to understand a country's business environment thoroughly before establishing financial relationships. Through these reports, they gain valuable information about the relevant country.

Foreign investors are often compared to “winter migratory birds.” Just as these birds do not settle in a water body without sufficient food and safety, foreign investors also refrain from making investment decisions unless they see ample profit potential and security for their capital and lives. Local investors, on the other hand, often face legal complexities that force them to invest within their own country, as they cannot simply go abroad for investment. In contrast, foreign investors do not encounter such constraints; they can easily choose to invest in another country if they wish.

In the World Bank's rating, Bangladesh was classified as a lower-middle-income country in 2015. There are plans in place for Bangladesh to transition to an upper-middle-income country by 2031 and to an effective high-income country by 2041. According to the United Nations, Bangladesh has been included in the preliminary list of developing countries. If everything goes well, it is expected that Bangladesh will qualify for the final list of developing countries by 2026. However, many are expressing concerns about the feasibility of achieving these goals given the current state of Bangladesh's business and trade environment.

Once Bangladesh qualifies for the final list of developing countries, it will lose the special benefits it currently enjoys in international trade. This will place Bangladesh in a position to face intense competition in the global market. Specifically, the European Union countries currently provide Bangladesh with tariff-free access under the Generalized System of Preferences (GSP) for exports. This benefit is set to continue until 2029, after which a new type of benefit called GSP Plus will be introduced. However, meeting the conditions required to qualify for GSP Plus is unlikely to be feasible for Bangladesh.

Approximately 60% of Bangladesh's ready-made garment exports go to the European Union, a situation made possible largely due to GSP benefits. The EU first introduced the GSP scheme in 1976 to facilitate trade with least developed countries, and Bangladesh has been benefiting from it since then. The United States used to provide quota benefits to Bangladesh, but this was discontinued after 2005 when free trade was initiated. Since then, the U.S. has offered limited GSP benefits, but these were suspended a few years ago due to allegations of labor law violations, restrictions on workers' rights to form trade unions, and other related issues.

The World Bank has further noted in its report that in order to tackle the future development challenges of developing countries, both the public and private sectors must step up. Achieving the desired level of development is impossible without effective support from the private sector, and even if development is visibly achieved, it will not be sustainable. Global development economists agree that a country’s citizens cannot truly benefit from development unless the initiatives taken are sustainable. For sustainable development, a corruption-free development strategy is essential. If the government provides benefits to specific groups in the name of development, that cannot be sustainable.

The “Business Ready” report also states that least developed countries need to create suitable employment opportunities for an average of 44 million young people each year over the next decade. Among these, 30% of the employment must be generated in African countries. Without providing adequate employment opportunities, poverty alleviation is unattainable. It is noteworthy that both developing and least developed countries prioritize poverty alleviation in their national agendas. However, most policymakers in these countries lack a clear understanding of how to effectively reduce poverty. To eradicate extreme poverty, most of the least developed countries will need to achieve an average GDP growth rate of 9% over the next decade. To avoid falling into the “middle-income trap,” developing countries must sustain a growth rate of at least 5.5% for an extended period.

At the same time, to achieve economic development and make it sustainable, countries will have to spend a significant amount to tackle the impacts of climate change. By 2030, developing countries need to invest an average of $2.40 trillion annually to address climate change-related challenges. It is important to note that while financial assistance was available from development partners for the implementation of the Millennium Development Goals (MDGs), the financing for achieving the Sustainable Development Goals (SDGs) must come from the countries themselves.

In the future, special emphasis must be placed on trade and investment to achieve and sustain economic development. However, countries like Bangladesh, which are in the process of development, heavily rely on international trade for sustainable development. The volume of international trade will not increase merely through verbal commitments or legal support. It is essential to create an effective investment and trade environment for this purpose.

To boost exports, increasing local investment is indispensable because the products that will be exported are those that are produced locally. Yet, we are not as enthusiastic about creating an investment environment as we are about boosting exports. As a result, investment is not increasing to the desired levels. Bangladesh has made various plans to enhance exports over time, but those plans have ultimately not materialized. At one point, there was talk of an export-oriented development strategy, and later, the "Look East" policy was discussed. However, none of these policies have yielded positive results, as increasing exports requires an increase in production. Are we taking this into consideration?

A major weakness in Bangladesh's international trade is that the countries or regions from which we import a large quantity of goods have very low export volumes to us. Conversely, the countries where we export a significant amount are those from which we import very little. For example, China and India can be cited. Bangladesh imports the highest amount of goods from China, and India ranks right after China in terms of export destinations. However, the volume of Bangladeshi exports to both China and India is very low. On the other hand, Bangladesh exports a substantial amount of goods to the European Union and the United States, but the import volume from these two regions is still quite minimal. Although there is significant demand for Bangladeshi products in China and India, we are not able to leverage this potential.

The banking system in Bangladesh is gradually weakening. Due to poor country ratings, there is negative messaging about the Bangladeshi banking system internationally. The consequences of this will be severe. Many foreign banks are already showing reluctance to accept letters of credit (LCs) issued by some Bangladeshi banks. If any importer in Bangladesh opens an LC with a local bank, it requires a guarantee from a local bank in the exporting country. This means that if the Bangladeshi bank fails to pay for the imported goods, the foreign bank that provided the guarantee will cover the payment. Recently, several banks in the country are nearing bankruptcy, and foreign banks are unwilling to accept LCs issued by these banks. They have reduced the LC margin. If this situation continues, it could lead to a dire scenario in the future.

The latest report from Bangladesh Bank states that in the first two months of the current fiscal year (July-August), the trade deficit of Bangladesh has decreased by 9 percent compared to the same period last year. During this time, importers have imported goods worth $99.14 billion, which is a 1.2 percent decrease from the previous year. While the reduction in import expenditure might seem encouraging, there is no reason to be overly excited. Not all imports are negative; if the import of unnecessary and luxury items decreases, that is certainly a positive sign.

However, there are concerns if the imports of raw materials, capital machinery, and intermediate goods for industry decline. In the past two months, imports of capital machinery have decreased by 44 percent, indicating that industrial production is likely to decrease in the future.

M A Khaleque: Economic affairs writer and retired General Manager of Bangladesh Development Bank PLC.