Firms go slow on investments amid crisis

Firms, both local and foreign, have put on hold their investments in Bangladesh owing to the surge in the dollar price, the energy crisis, the escalated cost of production, and the deep uncertainty caused by the Russia-Ukraine war. 

One of the key indicators of the investment situation is the import of capital machinery.

The opening of letters of credit (LCs) to import capital machinery declined 65.74 per cent year-on-year to $606.89 million during the July to September quarter, data from the Bangladesh Bank showed.

It was $926.25 million in the identical quarter a year earlier.

Similarly, the opening of LCs for importing intermediate goods and industrial raw materials, both used by factories, fell more than 14.5 per cent during the three-month period.

The slowdown in investments is the result of the conflict, the sharp rise in the price of the US dollar against the taka, the energy shortage and above all uncertainty, said investors, business leaders and economists. 

Meghna Rubber Industries Ltd, a concern of Meghna Group, the largest bicycle tyre and tube manufacturer in the country, has been compelled to delay the implementation of a Tk 500 crore plant to produce tyres used in large buses and trucks.

It started the project around two years ago but could not complete it due to the pandemic and the ongoing crisis.

"Our project is being delayed for the current realities," said Md Luthful Bari, director for operations at Meghna Group.

Meghna, which produces tyres for motorcycles, easy bikes, CNG-run three-wheelers, light trucks and rickshaws, and exports bicycle tyres and tubes, now plans to complete the project by the middle of 2023 and that's too would depend on the improvement in the scenario.

Firms in Bangladesh are now having to settle import bills by buying each American greenback for Tk 108, which was trading at Tk 84 to Tk 86 a year earlier, a jump of at least 28 per cent.

They are also facing higher raw materials and freight costs.

The gas and power crisis has deteriorated after the government stopped buying liquefied natural gas from the international spot markets because of the depletion of the foreign currency reserves. 

"It is quite rational to delay investments during a crisis," said Abul Kasem Khan, a former chairman of the Business Initiative Leading Development (BUILD).

He thinks of the total investment that has been put on hold, around 75 per cent is foreign direct investment.

Japanese firm Ship Healthcare Holdings, in partnership with Bangladesh's Aichi Medical Group, was scheduled to set up a 1,000-bed dedicated cancer hospital and research centre in Dhaka at a cost of Tk 2,000 crore by early 2024. But it is yet to start the project first for the prolonged pandemic and then for the ongoing dollar crisis and inflationary pressure.

"And it might not be possible to go into operation as per schedule," said Prof Md Moazzem Hossain, chairman of Aichi Medical Group.

The joint venture has received design approval from the Rajdhani Unnayan Kartripakkha for the construction of the physical infrastructure. But the work has not progressed much as it could not open LCs to bring necessary equipment and machinery.

After the improvement of the pandemic situation in Bangladesh, the joint venture was about to start the construction work, but the outbreak of the current crisis at home and abroad has hampered the plan.

"We will not be able to start the project in full swing until normalcy returns," Hossain said.

The estimated project cost has gone up for the higher dollar rate, according to Rizwan Rahman, president of the Dhaka Chamber of commerce and Industry.

"So, investors will delay making investments to avoid cost overruns. In some cases, investments would be delayed as investors do not feel confident."

Apart from the volatility in the global economy, the higher inflationary environment is also causing headaches for investors.

Inflation in Bangladesh stood at 8.91 per cent in October, slightly lower than a multi-year high in the previous two months.

"Investors do not feel comfort pouring in funds when inflation remains high and is rising," Rahman said.

In 2017, CEAT Ltd, the flagship company of Mumbai-based RPG Group, formed a joint venture with Chattogram-based AK Khan & Company Ltd for CEAT AK Khan Ltd in order to invest around Tk 670 crore for a plant in the Bhaluka upazila of Mymensingh. There has not been much progress for the plant as well.

"The project was put on hold after Covid-19 emerged. But the current situation has added to the uncertainty," said one official linked with the joint venture.

Kazi Iqbal, a senior research fellow of the Bangladesh Institute of Development Studies, said the rising trend of the dollar price is the main reason for the delay behind investments as the cost of investment would increase.

"And investment will not get momentum until the crisis of the dollar subsides."

Even if investors want, they may not be able to execute their expansion plans because of the appreciating dollar and the central bank's move aimed at limiting imports.

"So, under the present scenario, investment and business expansion will slow down," said Iqbal.

M Masrur Reaz, chairman of the Policy Exchange of Bangladesh, said investors have become very cautious due to the persisting uncertainty.

"The power and energy crisis and the rising cost of production for the higher inflation have left investors uncompetitive."

Infrastructure investment is key to enabling jobs in the short term and growth over the medium term. In times of crisis, these critical investments often lose out, according to the World Bank.

Selim Raihan, executive director of the South Asian Network on Economic Modeling, said the LC opening has dropped as banks are discouraging it in line with the central bank's policy to protect the forex reserves.

"Industry, investment and employment will suffer because of this. That's for sure and we have to keep this in mind.  This will also have a chain and linkage effect."

The professor of economics called for a comprehensive understanding of the whole situation and efforts to minimise damage.

BUILD's Khan suggested the government cooperate with investors and provide policy support and incentives so that investment does not stop permanently.

"We need to nurture investors so that they don't ditch their plans completely," he said.

"Similarly, the government should be ready to absorb the flow of investment once the country recovers from the ongoing crisis, by way of improving the doing business situation and cutting costs."

Masrur Reaz urged the government to create multiple sources of energy to ensure an uninstructed supply of power to industries with a view to encouraging investors to make investments.