Twenty-one years ago, it was 9-11.
Referring to the infamous attacks on September 11, 2001, this expression became known the world over.
Six years after that, we Bangladeshis coined a phrase of our own, 1-11, referring to the assumption of power by a military-backed caretaker government on January 11, 2007.
Now, 15 years later, a much-discussed term in Bangladesh, at least among those discussing economic policy, is 6-9.
It refers to the government's policy of capping bank deposit rates at 6% and lending rates at 9%.
The wisdom of this policy is being increasingly questioned.
Many argue that the low deposit rate (now negative in real terms given accelerating inflation) is creating hardship for millions of households for whom interest earned on savings certificates and bank fixed deposits was an important supplement to their modest incomes.
It is alleged that the low deposit rates are discouraging savings leading to a liquidity problem in the banks.
At the same time, it is argued that low interest rates on lending encourage inefficient use of loans.
When interest rates on bank loans reflect the scarcity value of capital, borrowers feel a pressure to make the most efficient use of their borrowed money.
But when the cost of capital is kept artificially low, as is the case with the low interest rate policy of the Bangladesh government, one should not be surprised if capital is used inefficiently.
But we also hear a counter argument to all this.
The government takes the view that high lending rates discourage investment.
Many businesses concur. But does it really?
And, if so, to what extent?
Has there been any recent study on the interest-rate elasticity of investment, which can tell us to what extent a certain percentage rise in interest rates would lead to decreased investment?
What about other factors that discourage investment in Bangladesh?
One such factor is regulatory uncertainty.
I would not be surprised if this turns out to be more important than interest rates in influencing investment decisions.
Let me share some facts.
A few years ago, I helped design a survey of Bangladeshi businesses where we sought to understand how regulatory uncertainty affects investment decisions by businesses.
This survey was carried out during February-March 2019 by the International Finance Corporation in collaboration with Business Initiative Leading Development (BUILD), the leading public-private dialogue mechanism in Bangladesh.
This was a follow-up to another survey carried out in late 2018 where we asked businesses about different manifestations of regulatory uncertainty.
That survey had revealed that regulatory uncertainty was a problem felt by most businesses in Bangladesh, and in a variety of ways.
This time we asked the “so what” question.
If regulatory uncertainty was indeed a problem, was it affecting investment decisions in Bangladesh?
Before discussing the interesting and informative findings, let me point out some limitations of the survey.
It was a small sample, and the interviews were carried out online, not face-to-face.
The tool used was SurveyMonkey.
A structured questionnaire was sent out to about 125 businesses, of which about 80 sent complete responses.
Using SurveyMonkey is cost-effective but has some limitations.
Since businesses were not interviewed face-to-face, there is a risk that they may not have adequately understood some questions.
This risk is somewhat mitigated by the fact that the questions were phrased in a relatively straightforward manner.
Nonetheless, this caveat should be kept in mind in interpreting the results.
Investment plans by respondents and factors affecting it
Businesses were asked if they had made any plans to invest in the two years preceding the survey.
Several investment areas were mentioned, such as investment in new businesses and new products, in expanding capacity to produce existing products, in improving quality or productivity of existing products, and in improving social and environmental compliance.
At least two-thirds of the respondents said that they had indeed planned to make some investments in the previous two years (Figure 1).
The most popular objective of the investment plans was improving social compliance, including workplace safety, with 84 per cent respondents having made such plans.
An explanation for this could be that many of the respondents came from the export-oriented apparel industry which had recently been under pressure from international buyers to improve social compliance.
Next came investments in improving product quality (80%) and improving environmental compliance (78%).
Businesses which reported making no investment plans were asked why that was the case.
The responses are summarized in Figure 2.
Inability to obtain finance was the most cited factor.
One-half of the respondents cited this as an important factor and 38% mentioned this as a somewhat important factor.
Nothing to be surprised there.
In most developing countries, enterprises surveys typically identify access to finance as one of the most important constraints faced by businesses.
The second factor cited by our survey respondents is difficulty in obtaining land. No surprise there too, given the scarcity of land in Bangladesh.
After these two obvious constraints, the next most important reason cited is policy or regulatory uncertainty.
Forty-one per cent of the respondents indicated that this was a very important factor in their decision not to invest with another 44% citing this as a somewhat important factor.
Regulatory restrictions, which are different from regulatory uncertainty, also discourage investment in Bangladesh with 29% citing this as a very important factor and 46% mentioning this as a somewhat important factor in deciding not to invest.
Realization of investment plans
Making investment plans is one thing.
Carrying them out is another.
In our survey, the majority of respondents did not fully carry out their investment plans.
The proportion of respondents who fully implemented their investment plans varied between 18% and 45% depending on the nature of the investments.
Interestingly, the degree of full implementation is highest for investments in improving social compliance (45%), which is also the area with the highest incidence of investment plans made.
About one-third of the businesses which made plans to invest in improving environmental compliance and in expanding capacity of existing products fully implemented their plans.
For other investment areas, about a quarter or less of the businesses reported full implementation of their plans.
At the other end of the spectrum, between 17% and 27% of businesses with investment plans failed to carry out their plans at all.
The proportion was lowest (17%) for investment in social compliance and highest (27%) for investment in new businesses.
The rest had partially carried out their investment plans.
In summary, if the proportion of businesses with investment plans is discounted by leaving out those whose plans did not materialize at all, we find that roughly one-half (49%) to two-thirds (67%) of all respondents made some investment in the two years preceding the survey, the proportion varying by type of investment.
Reasons for not carrying out investment plans
Businesses which did not carry out their investment plans at all were provided with a list of possible reasons for not doing so and asked to identify whether these factors were very important, somewhat important, or not important at all in their decisions.
While all the listed factors were cited by the respondents as important, the one standing out is policy or regulatory uncertainty.
For seven out of ten businesses (69%), such uncertainty was a very important reason why they did not carry out their investment plans at all (Figure 3).
Regulatory restrictions appear to be less of a problem with only 29% citing this as a very serious problem.
However, another 47% mention this as a somewhat important factor.
As would be expected, inability to obtain finance was a very important reason for half of the respondents who did not carry out their investment plans at all.
Given that regulatory uncertainty is cited as a serious deterrent to investment by a large number of firms, it is useful to dig deeper into this phenomenon and identify the specific manifestations of regulatory uncertainty.
It seems that the most serious reasons for regulatory uncertainty are arbitrary changes in import duties and tax rates, inconsistencies between laws and regulations, uncertainty about obtaining permits, licenses and other approvals, and undue use of discretion by regulatory officials.
These findings are based on a small survey of 80 businesses.
The small sample size may breed some skepticism; some readers may hesitate to take the findings seriously.
I understand that.
The objective of this survey was to test an approach by which we can assess the impact of regulatory uncertainty on investment.
The pilot approach seems to have worked well.
It would be very useful if someone now takes the initiative to carry out a similar survey with a much larger sample.
It is indeed useful to ask businesses the kind of questions we asked in our survey.
Did businesses make any investment plans and, if so, with what goal in mind?
Did they carry out their plans and, if so, to what extent?
If implementation fell short of the plan, whether fully or partially, what were the reasons for that?
We may also ask the respondents to put some numbers on their planned and actual investments.
Then, we would be able to say how much investment was lost due to factors such as regulatory uncertainty.
Concrete numbers matter in discussions and debates.
The results may surprise us.
We may discover that it is not high interest rates on bank loans, but some other factor, such as regulatory uncertainty that is keeping investment down in Bangladesh.
The author is an economist, previously with an international development agency