Reserve crisis affects investment

The authorities concerned are actively striving to attract both local and foreign investments; however, the success rate in this field is not significantly high. Despite setting a goal to increase the individual investment rate to 28 percent of GDP during the seventh five-year plan, this target has not been achieved. In the fiscal year 2022-23, the rate of individual investment was 23.64 percent. In the current financial year, the national budget has set a target of raising the rate of investment in the private sector to 27 percent; But in the current investment situation of the country, it does not seem possible to increase the rate of investment in the private sector by 3.36 percent in one year. There is currently political instability in the country due to the national elections.

Investors can follow a 'go slow' policy in this situation. Favorable conditions are essential for investment. If the political and socio-economic situation is not good, investors will not be enthusiastic about investing. Foreign investors are not obligated to invest in any country; they will invest where they find a favourable environment. Local investors may face various legal obstacles, so they often prefer to invest in their own country. Local investors may invest in other countries due to various legal barriers so they invest in their own country; But if the investment environment is not favourable domestically, they may also follow a slow-moving policy in making new investment decisions. They will want to see if the investment situation improves in the future. The 12th National parliamentary election is imminent. Entrepreneurs will think twice in making new investment decisions in the situation where there is a threat of instability in the country's political arena due to the upcoming elections because investment cannot be the result of an immediate decision. After making an investment, one has to wait for an extended period to see the outcomes. Therefore, any entrepreneur would not want to risk their capital in an uncertain environment. They will want to monitor the situation. If necessary, take a decision to invest after a few more days. They would like to see the country's political and socio-economic situation improved. If the situation improves, they may again decide to invest an increased amount. I mean, they will wait for the enhancement of the investment environment.

Secondly, there is currently a crisis of US dollars in the country's currency market. Adequate amounts of US dollars are not readily available. Investment in the industry requires a lot of dollars because those who invest in our country have to import raw materials from abroad. Capital machinery and intermediate goods have to be imported; But Bangladesh Bank is not able to provide dollars as per the demand of entrepreneurs. Large companies used to be able to raise dollars in exchange for money from various banks and financial institutions; But the banks themselves are now in a dollar crunch. They are not able to supply the required dollars to entrepreneurs at will.

Some entrepreneurs used to borrow dollars from banks or financial institutions; But now they are not agreeing to take dollar loan. They think that if the exchange rate of the US dollar increases further in the future, it may cause inconvenience for them. In other words, if the value of the local currency decreases, it may be difficult for them. So entrepreneurs are now showing interest in taking loans in local currency instead of taking US dollar loans. But raw material or capital machinery for industry cannot be imported with local currency. For this, there will be a need for US dollars. According to the latest calculations, Bangladesh Bank's net foreign exchange reserves have fallen below 1,800 crore US dollars. An average of 100 crore US dollars is being depleted from the reserves every month. If this situation continues, we may have to face a severe crisis with foreign exchange reserves in the future. This crisis in foreign exchange reserves will affect investment. If you want to invest, you will need US dollars; however, the question arises: where can we obtain those dollars? Currently, the ongoing crisis in foreign currency reserves is a cause for concern, and many economists in the country believe that this issue may become even more pronounced in the future. So investors are now very hesitant in making new investment decisions. They are patiently waiting for an improvement in the investment environment before making decisions.

Bangladesh Bank is currently suffering from shortage of reserves. It acts as a major deterrent to investment like in other sectors. The United Nations Trade and Development Organization (UNCTAD) has mentioned in a recent report that in 2022, Bangladesh received a total of 348 crore US dollars in foreign direct investment. It is Bangladesh's second highest foreign direct investment in the last 33 years. In 2018, Bangladesh attracted foreign investments amounting to 361 crore US dollars, marking the highest foreign investment acquisition in the past 33 years. However, when compared to other countries, the absolute volume of our net foreign investment is not significantly high. Furthermore, if you analyze the foreign investment acquisition in 2022, you will observe that a substantial portion of the investment is, in fact, reinvestment or re-investment. Foreign companies could not take home the profits they made by doing business in Bangladesh. They invested that profit in this country. This is primarily why the amount of foreign investment has increased.

Greenfield investment is what we refer to as not significantly increasing new investments from outside. Foreign entrepreneurs have not significantly brought investments to Bangladesh for the establishment of new projects. Hence, if we look at the foreign investments in Bangladesh in 2022 from a straightforward perspective, it may not reveal much. It requires a slightly different angle to understand. We all want a large amount of foreign investment in Bangladesh. Let Bangladesh be transformed into a prime destination for foreign investment; however, that is not the case. Many assert that political instability is the most significant hindrance to both local and foreign investment in our country. But the question is, so far there was no political instability, then why the investment was not at the desired level!

In fact, investment in our country has always been a problem. Especially in state-owned service institutions, lack of internal good governance, rampant corruption-irregularities and bureaucratic complications at all levels were, and still are. Investors are harassed in various ways while implementing the project proposal. Political instability certainly discourages investment activity; but this is not the sole or primary obstacle to achieving the desired level of investment. Political instability has already begun; but earlier there was no political instability. So why is the investment not high? The overall investment environment of Bangladesh is not very favorable for local and foreign investment. Foreign investors are completely free to decide in which country to invest and in which country not to invest. So, if they do not see the highest level of security for their capital and the possibility of maximum profit, will they consider investing in a country?

There are many restrictions and obstacles to be faced in the implementation of investment proposals in Bangladesh. Therefore, many of the entrepreneurs lag behind in the implementation of the project even after taking the investment decision. Many of the foreign investors who come up with project proposals end up leaving without implementing the project. Managing state-owned service-oriented institutions and receiving services is often not feasible. In every sector, there is the issue of bribery and corruption. Foreign investors do not prefer engaging in corrupt practices with service-oriented institutions. The question is, why would a foreign investor come to Bangladesh for investment? What is the most promising aspect for attracting foreign investment in Bangladesh? If we can maintain the pace of our GDP growth, it can be reasonably assured that foreign investors will bring investment proposals to Bangladesh in the future. Bangladesh has achieved a high level of growth so far in spite of various adversities in the international field.

At present the growth has slowed down a bit but it is expected that Bangladesh will achieve high growth again in the future. Bangladesh is a rapidly developing country. Bangladesh has a huge market of 17 crore people. People's purchasing power is increasing. Bangladesh is getting various trade benefits from developed countries. Therefore, if foreign investors establish projects in Bangladesh and produce goods locally, they can enjoy duty-free facilities not only in the local market but also in exporting goods abroad. For these reasons, foreign entrepreneurs may show interest in investing in Bangladesh. Bangladesh market needs backward linkage. Foreign entrepreneurs are bringing investment interest in Bangladesh; But we are still not able to eliminate the obstacles in the field of investment. Tax rate is very high in Bangladesh. The tax administration system is very complex. There is a problem in bringing industrial raw materials from abroad. The tax rate is very high. A stable government established through national elections will greatly improve the investment climate; but investment does not only depend on the political environment.

If we continue as we are now, it doesn't seem likely that investment will increase even after the elections. To achieve a GDP growth rate of 9-10%, significant increases in both local and foreign investments are necessary. Beyond merely boosting investment in both categories, there is no alternative. If we genuinely want to attract those who are elected in the future to make substantial contributions to various sectors of the economy, we need to undergo extensive reforms in our economic policies related to investment. Especially, there needs to be a significant increase in the amount of revenue collection in Bangladesh. The current revenue collection in Bangladesh is very low. It will be impossible to implement development programs with such a small amount of revenue. Extensive reforms are needed in various areas of the economy. Whether the next government will do it or not, the issue of investment attraction depends on it.

Author: Economist and Executive Director, Policy Research Institute (PRI)

Transcribe: M A Khaleque