Investment summits alone won’t help without improving investment climate

A four-day international investment summit was recently held in Dhaka. Given the changing global and domestic context, this event carried particular significance. According to the Bangladesh Investment Development Authority (BIDA), foreign investors attending the summit proposed investments amounting to Tk 310 billion. Some of these proposals were already in the pipeline. While this is certainly encouraging, especially amidst global economic instability, the mere announcement of investment proposals is not enough.

Reportedly, a Chinese minister will soon visit Bangladesh, accompanied by 200 investors. These developments are undoubtedly notable. However, for Bangladesh to sustain its current pace of economic progress, attracting adequate levels of foreign direct investment (FDI) is critical. Without sufficient FDI, there is no viable path forward. Domestic entrepreneurs consistently face a shortage of investable funds and receive inadequate support from banks and financial institutions. To build industrial infrastructure and strengthen foreign reserves, there is no alternative to increasing FDI and remittances.

FDI generally flows in two forms: direct investments and joint ventures. The challenge with joint ventures lies in finding suitable local partners, which is often difficult. Hence, Bangladesh should focus more on attracting direct foreign investments. BIDA has stated that they are making efforts to turn the proposed investments into actual ventures. However, past experience shows that many proposals never materialize. Receiving an investment proposal and seeing it through to implementation are two entirely different matters. Unless BIDA maintains regular engagement with potential investors and follows through on these proposals, the positive outlook may not translate into real outcomes.

Bangladesh ranks quite low in terms of attracting foreign investment. The country’s investment-to-GDP ratio is notably small. In the fiscal years 2021–22, 2022–23, and 2023–24, Bangladesh’s GDP stood at $460 billion, $452 billion, and $450 billion, respectively. During the same period, the foreign investment-to-GDP ratio averaged only 0.4%. According to UNCTAD, Bangladesh attracted an annual average of $2.92 billion in FDI between 2017 and 2022—just 0.75% of GDP. The statistics published by BIDA reflect registered investments, while UNCTAD’s figures are based on actual cash transfers. Despite frequent optimism about Bangladesh’s investment prospects, the reality is that actual foreign investments remain disappointingly low.

Compared to other South Asian countries, Bangladesh lags in attracting FDI. UNCTAD reports that in 2023, India attracted $28.16 billion, Vietnam $18.5 billion, Indonesia $21.63 billion, and Cambodia $3.96 billion in foreign investments. In contrast, Bangladesh secured only $3 billion. While global FDI shrank by 2% in 2023, Bangladesh’s FDI dropped by nearly 14%. According to Bangladesh Bank, the country drew $1.65 billion in FDI in 2022–23, $1.47 billion in 2023–24, and only $820 million in the first eight months of the current fiscal year.

This sluggish pace of investment is troubling economists. Bangladesh, with its 170 million-strong population, should be an attractive investment destination. There are regions in the world where three or four countries combined don’t have such a population. The middle class in Bangladesh has grown—from 12% of households three decades ago to around 20% today—boosting both consumption capacity and market size. Rural communities are adopting urban lifestyles. Bangladesh also enjoys trade privileges, including duty-free access to 27 EU countries. While the country’s cheap labor is often cited as an advantage, it’s important to note that skilled labor is never cheap. A large portion of Bangladesh’s workforce remains untrained and unskilled, which compels them to sell their labor at lower rates—true for both domestic employment and labor exports.

Local entrepreneurs are often forced to invest within the country due to legal constraints. Foreign investors, however, are under no such obligation and can easily shift their proposals elsewhere. These investors are like migratory birds—they settle only where conditions are favorable. They seek profit, investment-friendly environments, and capital safety. Many of the foreign participants at the summit emphasized the need for policy consistency. They expect that investment policies will remain unchanged even after political transitions.

Bangladesh has the potential to become an attractive destination for foreign investors due to its strategic location and other factors. But in practice, this hasn’t happened. There is a lack of investment diversification. When investors consider Bangladesh, they often focus solely on the ready-made garment (RMG) sector. However, this industry relies heavily on imported raw materials, machinery, and intermediary goods—thus contributing less to the national economy. Emphasis should be placed on industries that rely on local raw materials.

To implement a single investment project, investors must deal with multiple government agencies, many of which are riddled with corruption. It is difficult to find examples where investors have implemented projects without paying bribes to government officials. Without good governance within these institutions, neither local nor foreign investment can reach expected levels. The World Bank previously ranked Bangladesh 176th out of 190 countries in its Doing Business index. Although the index has been discontinued, a new metric called "Start Business" now evaluates 50 countries, placing Bangladesh in the fourth tier.

Foreign investors conduct thorough due diligence before committing to a country because investment is a long-term decision. There are numerous instances where investors abandoned their proposals after facing harassment and corruption from government entities.

In Bangladesh, some officials in state-run service organizations look at investors as opportunities for personal gain. It's like releasing a goat into a pond full of starving crocodiles—investors often face similar dangers. Banks typically assume that a project will become operational within six months and calculate interest accordingly. However, in reality, it often takes 1.5 to 2 years for a project to start commercial production. During that time, market demands can shift, or competing foreign companies may capture the market. No matter how many times we urge people to invest, without creating a truly supportive investment climate, the results will fall short.

If the private sector fails to invest adequately, foreign investors won’t step in either. Before making investment decisions, foreign investors assess the state of local investment. The poor state of private sector investment in Bangladesh is no secret. In March, private sector credit growth was just 6.82%—the lowest in 24 years. In the past, the government tried to portray an optimistic picture by manipulating investment growth data. The interest rate cap on bank loans was fixed at 9% for a long time, even falling below inflation at times. In one monetary policy, the target for private sector credit growth was set at 14.1%, and the actual figure reached 14.7%. However, imports of raw materials and intermediary goods fell by 14%, and imports of capital machinery dropped by 76%. This indicates that loans taken for industrial purposes were diverted elsewhere—possibly even laundered abroad.

To improve the investment situation, internal governance in state institutions must be ensured first. Corruption must not be tolerated at any level. Corruption and abuse of power typically rise under partisan governments. Therefore, political parties must commit to a zero-tolerance policy on corruption. Only candidates with a clean record should be elected—those who are consistently vocal against corruption. If an elected official is found guilty of corruption, there should be provisions to remove them from office. No government employee should be allowed to engage in partisan politics while in service.

M A Khaleque is a former banker and economic commentator.