Reduce cost of doing business to facilitate investment

Businesspeople in Bangladesh have called for improving the ease of doing business and reducing the cost of production to establish a conducive trade and investment ecosystem.

If these issues are addressed, more foreign direct investment (FDI) will flow into the country and local entrepreneurs will get the opportunity to grow further, they said.

The major challenges for the national budget for the fiscal year 2024-25 will be controlling inflation, increasing the foreign exchange reserves, exports, and the tax-GDP ratio, and bringing reforms in the banking sector.

Along with that, there are also challenges related to reforming fiscal policy.

Global FDI amounted to $1.3 trillion in 2022, with nearly half being made in Asia. South Asia saw an overall 7 percent increase, but Bangladesh witnessed a decline

Experts said the allocation for the government's open market sales programme should go up, and Bangladeshi expatriates should be incentivised to invest in the country, not only in real estate but also in stocks and banks.

"Additionally, the customs, tax and VAT systems have to be automated and if the National Logistics Development Policy is implemented, it will help cut the cost of doing business," said Mahbubul Alam, president of the Federation of Bangladesh Chambers of Commerce and Industry.

Emphasis should also be placed so that the interest rate of bank loans does not go up. This is because if the interest rate climbs, industrialisation and investment in the country will be hampered.

"It is also necessary to reduce the advance income tax rate in phases to reduce the cost of doing business," Alam added.

The top business leader in Bangladesh said the central bank will have to monitor all banks to ensure their compliance with the new exchange rate system.

He suggested that there should be instructions or plans in the budget for ensuring uninterrupted and quality gas and electricity supply. Also, it is important to bring down inflation, which has stayed above 9 percent for nearly two years.

Zaved Akhtar, president of the Foreign Investors' Chamber of Commerce and Industry, said FDI contribution to the country's GDP is inadequate and should be improved.

"We are getting significantly below our fair share, whether we are comparing with global benchmarks or even just South Asia. We must ensure that we build Bangladesh as a preferred destination for investment."

According to the latest United Nations Trade and Development report, global FDI amounted to $1.3 trillion in 2022, with nearly half being made in Asia. South Asia saw an overall 7 percent increase, but Bangladesh saw a decline.

FDI in Bangladesh amounted to just 0.4 percent of the country's GDP in 2022 while the ratio was 1.5 percent in India and 4.4 percent in Vietnam.

In 2023, FDI to Bangladesh snapped its rising trend. Central bank data showed last week that the country received $3 billion in FDI last year, a decrease of 14 percent from $3.5 billion in 2022.

Akhter said multiple factors work against the country when it comes to attracting FDI. This is because it is difficult to onboard investors as setting up their ventures entails securing 150 approvals from 23 departments while the country's uncompetitive and complicated tax structure is also discouraging.

Additionally, Bangladesh has an underdeveloped legal system that fails to respect alternative dispute resolution and international arbitration outcomes.

Predictability and planning of future tax rates are fundamental components of any long-term business planning, especially for foreign investment, he said while adding that improving tax predictability and facilitating effective tax planning is essential for implementing tax rates on a forward-looking basis.

"Moreover, a few provisions in the current tax regime are creating an unfair tax burden on businesses. Such rules are adversely impacting the growth of investment and FDI," Akhter said.

This can be best illustrated by how treating disregarded expenses as separate taxable income imposes an unjust additional tax liability on businesses, thereby raising their operational costs, he added.

Ashraf Ahmed, president of the Dhaka Chamber of Commerce and Industry, said first, Bangladesh may have issues with crop harvests and a lower production may require increased imports, for which it must pay in foreign currencies.

Second, if inflation remains high, a portion of the marginal poor slides below the poverty line and can no longer afford sufficient food.

As a solution to the first case, Ahmed said Bangladesh needs to maintain an adequate food supply, which it already does. "But these need to be released into the market in a timely manner to maintain supply and prices."

He said allowing the market to determine the foreign exchange rate is vital to stabilise the foreign exchange market.

Deen Islam, associate professor of the economics department at the University of Dhaka, said though the Bangladesh Bank recently announced a crawling peg to set the exchange rate, it has been observed that the central bank has failed to follow through with its announced policies in the past.

If the BB continues to tightly manage the exchange rate, a speculative bubble will form, leading to greater uncertainty, which could have serious negative consequences on private investment.

Therefore, the government could provide additional incentives to Bangladeshi expatriates to invest in the country, not only in real estate but also in the stock market and banks.

"For this, it is important to ensure good governance in both the banking sector and the stock market."

Due to higher inflation for the past two years, people's real purchasing power has been falling, said Mohammad Abdur Razzaque, chairman of the Research and Policy Integration for Development.

Interest rates are rising. As a result, trading activities will shrink, and employment will be affected. And the decrease in the income of ordinary people means that food insecurity will be created, he added.

"Therefore, under the circumstances, the allocation for open market sales should be increased."

Besides, the expansion of the annual development programme should be carefully considered as some cost reductions could be made from mega projects, Razzaque said.