Covid-19 has changed the foreign direct investment game. How can Bangladesh adjust?
The coronavirus pandemic has spread to and impacted over 200 countries. Although it is too early to fully assess the devastation to people, societies, and nations, the economic loss is of the gravest concern after the health crisis itself.
Economic crisis includes, besides loss of domestic productivity and employment, loss of foreign income (for example, income in the ready-made garments sector and international remittances). Foreign direct investments (FDI) have declined drastically worldwide, which has also negatively impacted Bangladesh.
This article explores the implications of coronavirus on foreign investments in Bangladesh, and how the Bangladesh Government may maximize FDI post-coronavirus inflow.
FDI stimulates economic growth by injecting foreign capital, removing constraints to the balance of payments, increasing employment, and enhancing marketing and management skills. During fiscal year (FY) 2019, FDI in Bangladesh increased by 51%, to US$3.9 billion -- a record high. FDI share of gross domestic product (GDP) also increased from 0.92% to 1.28% over the same period. During the first seven months of FY 2020 -- from July 2019 to January 2020 -- the net FDI inflow was $1.69 billion, which is 4% higher than during the same period of FY2019.
According to the Bangladesh Bank, China was the largest investor during FY 2019, with a net FDI inflow of $1.16 billion, followed by the Netherlands ($802.8 million). The energy sector received the highest amount of gross FDI ($1.27 billion).
Bangladesh also experienced a record 8.15% growth in GDP in FY2019 -- up from 7.86% FY2018. The World Bank and the Bangladesh Bureau of Statistics (BBS) projected that Bangladesh’s GDP growth would rise between 7.2 % and 8.2 % in FY 2020, respectively.
Yet the emergence of coronavirus in late 2019 disrupted economic growth worldwide, including in Bangladesh. The Asian Development Bank (ADB) estimates that coronavirus-induced GDP losses in Bangladesh will be $3 billion, or 1.1 %. The World Bank forecasts that GDP growth will be 2 to 3 % in FY 2020 -- a drop of 4.2 to 5.2 % points from the initial forecast.
To date, export-oriented ready-made garments (RMG) and international remittances have been the most hard-hit areas of foreign revenue. RMG manufacturers have lost more than $3 billion due to order cancellations by foreign buyers so far, and knitwear manufacturers are facing a similar loss.
Together, RMG and knitwear manufacturer losses constitute about 18 % of the total revenue of the garments sector, which accounts for 84 % of the country’s export market. What is worse, many of the buyers may not sustain the crisis and be back to full-scale operation anytime soon or ever again.
Similarly, international remittances have declined sharply due to business closures in other countries and the return of the migrant workers after the outbreak, particularly from the Middle East and Europe. During the month of March 2020, international remittances dropped by $172 million, or 11.8 %, compared to March 2019.
Remittance inflows, which amounted to over $18 billion in 2019 -- are a key source of income for millions of rural households and low-income families in Bangladesh. Thus, the country will face double blows -- a huge loss in income from two of its prime sources of foreign revenue and a substantial rise in unemployment. Besides the aforementioned sectors, other areas of FDI will likely be adversely affected as well because of the coronavirus pandemic.
The coronavirus pandemic has had significant, universal impact, which will likely reshape investment priorities. Due to the widespread economic impacts of coronavirus in investee countries, there will likely be significant competition among them for foreign investments in the future.
There is a lot of ambiguity around the pandemic -- in particular, when it will end and how severe the impact will be -- and the Government of Bangladesh should act fast to (1) identify investor countries for the post-coronavirus period, (2) identify and prioritize sectors for foreign investment, and (3) prepare an action plan and mobilize activities. These actions are outlined below.
Identify and prioritize investor countries
This will likely be influenced by five key factors and we should not neglect the greatest source of FDI worldwide:
The degree of coronavirus devastation across investor countries: Countries that suffer more from coronavirus will likely concentrate on nation-building versus investing internationally.
Among Bangladesh’s dominant investors, Western European countries and the United States have been disproportionately affected by coronavirus than East Asia, which suggests that East Asia may be more receptive to investing in Bangladesh.
China has recently emerged as the leader in FDI in Bangladesh, replacing USA and UK. Other leading East Asian countries that have investments in Bangladesh are Japan and Singapore.
In fact, Japan has been a consistent economic partner of and contributor to Bangladesh’s socioeconomic developments since independence. Bangladesh needs to continue to forge these relationships to create more investment opportunities.
Identify less-affected countries within affected regions: There have been stark disparities in the burden of coronavirus within Europe and those affected less may be explored.
For example, the fatality rate in Germany and Norway is 4.1 % and 2.7 %, respectively, which is much lower than Italy (13.7 %) and Spain (10.2 %). In 2018, Germany and Norway had a net FDI inflow of about $135 million in Bangladesh, which is much lower than that by leading investors.
So, countries like these two countries can be considered for increased FDI.
Attract investors that may be redirecting funds: Since coronavirus originated from China, there has been international backlash against the country for the virus’ spread and consequent economic disruptions.
Some countries like Japan have already decided to move production plants from China. With an adequate campaign and the right incentives, Bangladesh can make itself an attractive place for the countries currently investing in China to redirect their investments.
Draw countries with low interest rates and low growth: Low interest rates motivate private companies and citizens in a country to borrow money, but because of the low growth or returns domestically, they may be encouraged to invest in foreign countries where interest or growth rates are higher.
Interest rates have been falling globally, and the coronavirus pandemic has made them drop even further. In fact, in many European countries interest rates are now negative. In contrast, the interest rate in Bangladesh is substantially higher, making it very suitable for such foreign investment.
Middle Eastern countries should not be ruled out: Middle Eastern countries may have stopped their development work because of the coronavirus crisis, but they will eventually start such work.
Bangladesh would be a good contender for providing labour supply to the Middle East because it has necessary experience and a large pool of unskilled labour.
Attract US investments: Although the United States is fourth in terms of FDI inflows in Bangladesh, it is the greatest source of foreign investments worldwide (about $6 trillion) and should be pursued.
In addition, because of the ongoing trade war between the United States and China, the United States’ imports from China dropped by about $60 billion in 2019.
Bangladesh should exploit this dynamic and market itself as a promising import base for the United States moving ahead.
Identify sectors for investment
Although many sectors will continue to draw foreign investments after the pandemic subsides, some sectors may lose their funding and some new ones may emerge after the coronavirus crisis is over.
The government may explore the following sectors to attract FDI post-coronavirus:
Health care: Health care has received limited foreign investment in Bangladesh to date despite being less susceptible to risks compared with other sectors (eg, it is not affected by seasonality and recession-proof).
In addition, healthcare expenditure is arguably the highest priority item after food and shelter as long as one can afford it. In Bangladesh, there is a strong need for quality healthcare. Every year, Bangladeshis make about one million foreign trips for medical reasons, spending over $2 billion.
Currently, there are only a few hospitals in Bangladesh that have foreign investments or are joint ventures. In these circumstances, additional investments in healthcare can be justified.
Pharmaceuticals: As the pharmaceutical sector is closely tied to healthcare, there may be new opportunities for FDI in this sector too. To date, FDI has been low in this sector -- in 2018, FDI in pharmaceuticals and chemicals was $46.8 million, which was only 1.3 % of the total net FDI inflow that year. In addition, market penetration of multinational companies is low, too.
According to the International Monetary Fund (IMF), there were 257 registered pharmaceutical companies in Bangladesh in June 2019, of which about 150 were fully functional.
Among them, only six were multinational, accounting for 10 % of the total revenue of $2.6 billion generated by pharmaceuticals for the domestic market. Low FDI may be due to Bangladesh’s reliance on imports for pharmaceutical raw materials (Active Pharmaceutical Ingredients or API), mostly from China and India, amounting to about $500 million a year.
Although an industrial plot has been allocated by the government in Munshiganj to produce API locally, the production process is very slow and should be expedited to attract potential foreign investors.
Needless to say, if the healthcare sector grows substantially with FDI injection after the coronavirus crisis, the demand for locally-produced medicines may also rise, leading to a sizable expansion of the pharmaceutical sector.
Information and communication technology (ICT): ICT leaders such as Wipro, IBM, and Infosys have already entered the IT market of Bangladesh through joint ventures with local companies.
The government has established measures to attract foreign investors, including 100% corporate tax exemption for local companies for 10 years, and 100 % equity control for foreign investors.
Still, the net foreign investment in ICT was $246 million in 2019 ($219.9 millionin telecommunication and $26.1 million in software and IT); therefore, there is potential for further expansion.
Online communication and transaction: The coronavirus pandemic has transitioned many activities to be performed online, such as grocery purchases for urban consumers, which may be sustained even after restrictions are lifted because of convenience.
Besides online purchase, tele-medicine is something that will be quite popular. So, e-commerce may grow tremendously in the near-term. Moreover, lockdown has forced us to work from home and conduct meetings through video-conferencing.
As organizations and companies continue to work remotely, this further underscores the tremendous growth potential in IT infrastructure and software development, which can open up new opportunities for FDI.
Cyber security: Closely related to online communication and transaction is cyber security, which protects us from online threats. In fact, Bangladesh has already been subject to cyber threats multiple times, most notable of which was the unauthorized international wire-transfer of about $80 million from the central bank.
Thus, cyber security is another area with huge potential for FDI post-coronavirus.
Business process outsourcing (BPO): BPO is the process of contracting part of the operations of a business entity to a third party. Many companies use BPO in foreign countries to keep operational expenses low and get a competitive advantage
The market of BPO has grown substantially over the years, with a global market of $89 billion in 2017. Off-shore companies often offer attractive benefits, including tax benefits for companies that are interested in BPO.
Bangladesh, with a large share of young and working age population (median age: 27), can be an attractive destination for BPO
Food and agriculture: Despite Government assurance of sufficient production of staples, Bangladesh may experience a coronavirus-induced food crisis. To date, coronavirus has had severe impacts throughout the supply chain.
For instance, farmers are left extremely vulnerable amid the pandemic without government intervention, resorting to selling their harvest at a much lower market price, or, in the worst case scenario, leaving their harvest to rot.
This is exacerbated by underdeveloped agricultural value chains: Without adequate storage facilities, most farmers cannot store their produce.
First, proper planning should be done to maintain the supply chain, reduce price fluctuations, and protect agricultural producers. Second, there is an urgent need to develop a thriving agro-food processing sector, which can reduce post-harvest produce loss by 30 to 40 %.
In addition, agro-processing has significant foreign investment potential. Agro-food processing contributes to 1.7% of GDP and 1.5 % of food exports, amounting to $400 million.
There is already a demand for Bangladeshi food items by Bangladeshi diasporas in Europe, North America, and the Middle East, and companies such as Pran, Square, ACI, and Akij Foods satisfy such needs. In addition, with a growing economy and urbanization in Bangladesh, the middle class is expected to grow, and so is the local demand for processed food.
The government has already taken measures to attract foreign investment in this sector, including allocation of a dedicated agro-processing zone, tax holidays, and cash incentives for agro-processors.
However, more needs to be done. For example, food safety issues are a concern -- the type of pesticides and fertilizers used do not always comply with the standards for foreign investment, and food safety laws are not enforced well. In addition, lack of proper storage and quality packaging may be other impediments to attracting foreign investment.
RMG: Despite the fact that the RMG sector is experiencing major losses amid coronavirus, RMG remains a need, not a luxury, for consumers in developed countries.
Although this need may be suppressed in the short-term, it is expected to rebound as restrictions are lifted and the crisis ends. Some buyer companies may disappear, but new ones will emerge if there is growth in demand.
Secondly, some RMG buyers that order from China may consider other countries for their investments, such as Bangladesh. Bangladesh’s existing manufacturing facilities and skilled employees are a comparative advantage in this regard.
Labour: Once the labour market in foreign countries expands again, these countries will need abundant unskilled labour, which may not be available domestically.
Since Bangladeshi workers have experience working in Middle Eastern countries, for instance, Bangladesh labour may be preferred to unskilled labour from other countries. Besides promoting unskilled labour for low-end manual jobs, developing vocational skills would be a good idea too as it will enable Bangladeshi migrant labourers to compete for higher-level jobs.
Prepare an action plan and mobilize activities
Although Bangladesh secured a record high FDI in FY2019, it was only 1.28 % of the country’s GDP. According to the World Bank, this is slightly less than the global average of FDI inflows (1.39 %) and far less than Vietnam (6.3 %), a competitor for FDI.
The Bangladesh government has taken various steps to incentivize FDI in the country. However, since global foreign investment is estimated to drop by as much as 40 % in the wake of the coronavirus crisis (estimated by UNCTAD), competition for FDI will heighten, and thus, more work is urgently needed.
Below is a summary of what the government has planned, or what is underway, and recommendations for creating a more favourable environment for FDI:
1. The Bangladesh Investment Development Authority (BIDA) is preparing a database of 41 countries with FDI-related information, and planning to develop an active network among the bilateral chambers of these countries.
This action must be accompanied with continuous follow-ups, identifying sectors of mutual interests for investments, and removing barriers to such investments. These activities must be expedited and, if possible, carried out by bypassing bureaucratic long lines and red tape.
2. Bangladesh Economic Zones Authority (BEZA) has offered an incentive package to attract foreign investors after coronavirus is over, which includes a VAT waiver on land leasing, bonded warehouse facility for local companies, 100 % waiver on corporate tax for 10 years, and more.
BEZA has already received FDI proposals worth $5.8 billion, which is a good indication that the incentive package is attracting investment.
3. While BIDA is actively exploring new countries for FDI, as mentioned in item 1, exploring opportunities to increase FDI among existing investors should be pursued as well, especially among countries that are investing less than what they can.
For example, Germany’s net FDI inflow in Bangladesh in 2018 was $26.2 million, which is 0.02 % of Germany’s total outflow of $159 billion FDI globally that year.
Thus, Bangladesh should explore which countries Germany is investing in, in which sectors it is investing in, and identify actions for incentivizing Germanyto redirect its investments from those countries to Bangladesh. This may apply to other countries, too.
4. Difficulty in repatriation of profit is another deterrent to foreign investment. Foreign investors should be able to take back profit to their home countries without going through bureaucratic hassle.
This is only fair as they create opportunities and values in investee countries. This is another area where bureaucracy should be relaxed.
5. Every year, the World Bank ranks economies worldwide on the ease of doing business in those countries. As Bangladesh has been ranked 168 out of 190 economies in 2020 -- the lowest inSouth Asia except Afghanistan -- there is significant room for improvement.
Among the indicators in which Bangladesh performs the worst is “Enforcing Contracts” (189), following “Registering Property” (184), and “Getting Electricity” (176). This ranking is a key signal for potential investors about a country’s business environment.
A good sign is, BIDA and BEZA have launched their One Stop Service (OSS) Centres in an attempt to bring a number of services for investors from a single window. Upon successful implementation of these services, EODB ranking of Bangladesh will certainly improve.
We must remember that if Bangladesh does not raise its Doing Business ranking, the country’s other efforts to attract FDI at this critical juncture may goin vain.
In sum, coronavirus is changing the dynamics of foreign investment -- priorities are shifting among investors and investees, traditional investors are retreating and new ones emerging, and sectors for investments are getting reshuffled.
With investment volume plunging drastically worldwide, competition among the investee countries will be greater than ever. However, with the right priorities, a work plan, and timely action, Bangladesh can make itself an attractive place for international investment.
This article is an effort of IDEA (Innovation and Development Associates), with the contribution of Kazi Aminul Islam (Ex Executive Chairman, Bangladesh Investment Development Authority), Md Abul Kalam Azad (Ex Principal Coordinator (SDG) and Ex Principal Secretary), Mohammad Shahidul Haque (Ex Senior Secretary, Legislative, and Parliamentary Affairs Division, Ministry of Law), Shibli Rubayat Ul Islam (Professor, Department of Banking and Insurance, University of Dhaka), and Hussain Samad (Senior Researcher, World Bank).