Foreign investment cannot be attracted without conducive environment

A four-day International Investment Summit was recently held in the capital. Over 500 investors and investment-related professionals from various countries participated in the event. This recently concluded international investment summit was significant for several reasons.

For a developing country like Bangladesh, there is no alternative to attracting foreign investment. Bangladesh has the potential to become a major destination for such investment for a variety of reasons. The country has a large market of 180 million people. The number of middle-class families is increasing, and consumers’ purchasing power is rising. Many countries offer different tariff benefits to Bangladeshi exporters.

Foreign investors may be interested in investing in Bangladesh to take advantage of duty-free trade benefits. However, the reality is that neither local nor foreign investment is currently coming at the expected level.

During the recently held international investment summit, Bangladesh called on foreign investors to bring forward new investment proposals. The country also presented the existing investment environment to them. However, I don’t believe that hosting such summit alone is particularly effective in attracting foreign investment—because investment is a long-term process.

Local investors are often compelled to invest in their own country due to various legal constraints. However, foreign investors can choose to invest anywhere they want, without any such obligations. At the summit, the foreign investors expressed a desire to see consistency in policies and legal procedures. In other words, they expect an environment where investment policies remain stable—even if the government changes.

According to a source, in the first nine months of the 2024–25 fiscal year, Bangladesh managed to attract net foreign investment of $82.4 million. This is the lowest amount of foreign investment recorded during the same period over the past four years.

In recent years, foreign investors often came forward with investment proposals, but these proposals ultimately were not implemented for various reasons. They ended up withdrawing their proposals and leaving. Although foreign investors show considerable interest in investing in Bangladesh, they are often compelled to walk away due to existing obstacles. Foreign investors are like migratory birds—they will not settle in a waterbody unless it offers sufficient food and safety. Foreign investors will not be interested in investing in a country unless they see the potential for adequate profits and the security of their capital and lives. Foreign investors have the freedom to choose where to invest. If they wish, they can easily shift their investment from one country to another.

There aren’t many issues with the legal facilities currently available for attracting foreign investment in Bangladesh. However, the actual investment environment is far from satisfactory. Overall, there is a lack of good governance in the country. This is particularly evident within state-owned enterprises, where internal governance is often weak. As a result, entrepreneurs are not receiving the expected level of service from these institutions.

There are various problems in the infrastructure sector as well. From product transportation to other areas, the expected level of infrastructure support is not available. In many service-oriented institutions, certain officials and staff are unwilling to work without bribes. Without addressing these existing problems, simply organising investment summits will not bring in the desired level of foreign investment. Foreign investors may express interest in investing in Bangladesh, but making a statement and actually investing are two very different things. Foreign investors consider many factors before making a final investment decision in any country.

The information and data released by various international organisations about Bangladesh’s investment environment are not encouraging. In the World Bank’s most recent Ease of Doing Business Index, Bangladesh was ranked 176th out of 190 countries—essentially placing it at the bottom in terms of investment conditions. Although the World Bank has now discontinued the Ease of Doing Business Index, it has introduced a new index called Business Ready. This new index evaluates the investment environment in 50 countries, where Bangladesh is positioned in the fourth tier. Unless there is real improvement in the existing investment environment, merely organising investment summits will not be enough to attract foreign investment.

A sound and healthy banking sector is essential for both local and foreign investment. However, the banking system in our country is currently in a state of crisis. The amount of defaulted loans is increasing rapidly. Recently, existing laws in the banking sector have been amended and revised in ways that provide various benefits to loan defaulters. Through these legal changes, the actual volume of defaulted loans was concealed. Now, those hidden defaults are gradually coming to light.

Policies such as easing the rules for loan write-offs, making it easier to reschedule loans, and redefining what qualifies as a defaulted loan have all benefited defaulters. But these measures have not been helpful in improving the overall condition of the banking sector.

Many economists believe that the total amount of defaulted loans in the banking sector currently exceeds Tk 6 trillion. Most of the banks that were approved during the previous government’s tenure—often based on political considerations—are not performing well today. If the banking sector cannot provide sufficient loans to entrepreneurs, private sector investment will not increase. Most banks are now facing liquidity crises. Even if they want to, they are unable to meet the loan demands of entrepreneurs. In a developing country like Bangladesh, at least 5 percent private sector investment is needed for every 1 percent of GDP growth. However, for a long time, the rate of private investment has hovered around 22–23 percent of GDP.

During the Seventh Five-Year Plan, the target for private sector investment was set at 28 percent, but that goal was never achieved. In the current fiscal year’s budget, the target has been set at 27 percent, but there is little chance of reaching it. If the desired level of private investment is not achieved, new employment opportunities will not be created, and poverty alleviation efforts will be disrupted.

In developed countries, entrepreneurs usually rely on the stock market—rather than banks—for long-term financing. Raising capital through the stock market offers various advantages. If a project is financed through the stock market and becomes profitable after starting commercial production, the company can distribute dividends to its shareholders.

On the other hand, when borrowing from banks, loan repayment with interest is not linked to the project's completion or commercial launch. Banks start collecting loan installments with interest after a fixed period, regardless of whether the project has started generating income.

Typically, a project is expected to be implemented within six months of registration. However, in most cases, project implementation is delayed. In some situations, it can take one and a half to two years for a project to reach commercial production after implementation.

This often results in the risk of losing the market for the products to be produced. Due to delays in implementation, large debts accumulate on the project even before commercial production begins. Those involved in executing investment proposals must work responsibly and free from corruption. To implement a project, one often has to go through several state-owned service institutions. These institutions are frequently plagued by corruption and unnecessary bureaucracy. Those who hinder investment in such ways should be brought to justice. They should be identified and subjected to various forms of punishment, including dismissal from their jobs. On the other hand, those who sincerely support investors should be rewarded. Policy consistency is a key factor in attracting and retaining investment.

Not only the foreign investors, but the local investors also expect consistency in policies. If investment policies change with every government change or if policies are frequently altered for any reason, it creates problems for investors.

For instance, the United States has imposed a 245 percent tariff on China under its extended new tariff policy. China has been the leader in garment exports in the international market, with Vietnam now rising to second place. Previously, Bangladesh was in second place for garment exports. Due to the unusually high tariffs imposed on China, it may face difficulties in its garment export sector. In such cases, small Chinese companies may consider relocating their factories, and Bangladesh could become their preferred destination.

Dr AB Mirza Azizul Islam: Economist and former Economic Advisor to the Caretaker Government