Foreign Direct Investment is a potent fuel for a country’s financial engine that propels economic growth. Countries like Bangladesh acquire more benefits as FDI enables countries to gain capital, generate employment, increase production capacity and develop human capacity and skills. The world now is transforming into what seems to be a first multipolar world order. This poses challenges but also offers excellent opportunities which a country like ours can capitalize on. It would still need to be backed by policy support and an investment climate that must be well-regulated.
According to Vision 2041 Bangladesh needs to get FDI equivalent to 1.66% of its GDP annually to become an advanced economy. From 2017 to 2022, Bangladesh received an annual average of $2.92 billion in FDI. According to UNCTAD’s World Investment Report 2023, Bangladesh ranks fourth among South Asian nations in terms of FDI inflow as a percentage of gross domestic product (GDP). This is a bit surprising as Bangladesh is the second-largest economy in the region. Surprise becomes perplex when we consider that Bangladesh has achieved 6% annual growth on average in the last two decades. Maldives and Sri Lanka have acquired FDI more than 11% worth of their respective GDPs only in 2022 despite Maldives having literally a single industry economy and Sri Lanka experiencing a major economic downturn in the years prior.
Bangladesh Bank (BB) has however recently taken multiple initiatives to increase inflow of forex. The central bank advised to curb imports, and banks to offer incentives on remittance, provided approval and encouragement for opening offshore (foreign currency accounts), and more.
They’ve advised to curb imports because if we start to reduce imports our obligation will be reduced within six to nine months. This has worked in terms of keeping the foreign exchange market volatility in check. However, the cost of curbing imports has an impact on our export sector and essential imports. A low level of inventory will lead to reduced exports, thus less foreign currency inflow. Our other source of foreign exchange is remittance. However, if we are unable to send skilled/semi-skilled people to new destinations the amount of remittance -- despite the incentives and attractive rates -- will always be finite (within $20-24 billion).
All steps are taken to increase the inflow of foreign currency. Financial uncertainty also led the Central Bank to take cautionary steps, but at the same time allowed provisions that were counterproductive. On one hand the governor termed containing inflation as a priority, but the central bank printed money to support certain Shariah-based banks, according to the BB report from December 2023.
Our net reserve has been declining steadily. And aforementioned steps, if implemented effectively, can provide some respite in the short run but it will not create a permanent solution.
For maintaining our import obligations, meeting the foreign debts (current and future) and other outward payments, we need a sustained and increasing inflow of forex. The most sustainable way to increase the inflow is to increase exports and diversify the export bucket of the country. This entails increasing the number of export sectors, volume of exports, and also increase of export destinations.
The other most effective sustainable source of inflow is increasing the FDI, a factor which remains low compared to other countries that we consider as peers. As mentioned before, FDI begets contexts to achieve improved skilled force, enhanced output through technology (agri, food, healthcare, education), increased employment opportunities, while making a stable base of foreign currency inflow. The prescription for boosting the volume and diversification has been there for more than 12 years, but little has been done.
The government has taken initiatives like establishing the Economic Zones, Hi-Tech Park, and one stop digital solution. However, these have failed to attract investment due to lacking the needed infrastructure ie roads, utilities, etc.
The most sustainable way to increase the inflow is to increase exports and diversify the export bucket of the country
Add to that the unfriendly business environment or low ranking in the now defunct ease of doing business index. In an informal conversation, when asked about this issue, a relevant cabinet member answered that in Bangladesh, this is how things have always been done and this is how we have achieved such growth. How could such an approach to business would be acceptable to a foreign investor and why would such a practice ever be of pride to our policy-makers?
The rating agency Fitch has downgraded our country, a definite red flag to potential investors who are seeking new frontiers and even considering Bangladesh as their next destination.
And now we have come to know that a foreign bank, Bank Alfalah, a definite and fruitful source of FDI in the country, is undergoing an acquisition process by a local bank.
Why would a foreign bank doing well in the local market choose to sell off their operations? Does this not send another red signal to the foreign investor pool abroad that Bangladesh may not be as safe as it portends to be? It is likely to give a bad signal to the potential investors regarding the country’s economic stability.
The acquisition will definitely have an impact on foreign currency outflow. Additionally, a greater impact will be on the divestment itself. Reports underscore that the bank’s immediate last performance was strong and positive.
Thus, begs the question, what prompted the management of Alfalah, a UAE based bank with HQs in Pakistan, to sell off the operation here and simultaneously buy the operations of another bank in Pakistan, as per reports, while all the economic indicators of Bangladesh are stronger than Pakistan? Furthermore, the investment is from the UAE, a friend from the Middle East. Does the divestment indicate further erosion of Middle Eastern FDI from Bangladesh?
Any FDI withdrawal of a successful operation should properly be scrutinized to improve our investment attractiveness. At the same time, it is the ethical duty of the related authority to ensure people employed in those foreign institutions are properly compensated, and their skillset is not wasted.
While we need to improve our investment climate for foreign investment, we also need to ensure our skilled labour remains protected so they can contribute more in the economy.
