No good news in investment as well

With major indicators showing stress in the economy, there is no good news in the investment flow too as investors now prefer to stay away from taking new projects or expanding their existing capacity.

Apart from challenges such as high inflation, difficulties in import for the US dollar crisis and rising bank interest rates, a growing political uncertainty has worsened investment sentiment.

This reflects a bleak prospect for jobseekers and a lack of economic expansion, casting doubt over the government's 7.5 percent GDP growth target for the current fiscal year.

Last week, the World Bank revised down Bangladesh's growth forecast for fiscal 2023-24 to 5.6 percent as the economy is expected to remain stressed throughout the year thanks to persistent inflation and external challenges.

Entrepreneurs said private investment flows usually remain subdued ahead of any general election. This year, the economic challenges have made the situation worse.

Take the case of registration of investment proposals at the Bangladesh Investment Development Authority (BIDA), which dipped in the last fiscal year.

The registration of investment proposals by local and foreign investors slumped 39 percent year-on-year in the July-May period of the previous fiscal year.

BIDA data shows that during the July-May period of fiscal 2022-23, foreign and domestic investors placed proposals amounting to $9.4 billion in different sectors, down from $15.30 billion during the corresponding period of the previous year.

This was mainly due to a slide in investment registration by local entrepreneurs.

The lack of appetite for investment is also visible from the sharp decline in opening letters of credit (LCs) for importing capital machinery in fiscal 2022-23 and the downward trend continued this year too.

Data of Bangladesh Bank shows that LC opening to import capital machinery plunged 22 percent year-on-year to $381.8 million during the July-August period of fiscal 2023-24.

Besides, the settlement of LCs slumped 35 percent to $490 million in the first two months of the current fiscal compared to the same period a year ago.

The biggest dip in LC opening was recorded in the leather industry followed by the jute and packing sector.

LC opening for importing machinery for the pharmaceutical industry declined 65 percent. Similarly, LC opening for textile machinery, the backward linkage sector of the garment industry, plummeted 55 percent during the July-August period, according to central bank data.

LC opening for machinery for various other industries also declined.

The demand for loans from the private sector also waned as evinced by the slowing growth of banks' credit to the private sector.

In August, the growth was 9.75 percent year-on-year whereas it was 9.82 percent the preceding month, shows Bangladesh Bank data.

"Investors are cautious for political uncertainty centring the next election. Macroeconomic vulnerability, price hike of raw materials, high rate of bank interest and import restrictions have affected investment interest too," said Selim Raihan, executive director of the South Asian Network on Economic Modeling.

He said although all investment proposals do not materialise fully, "it is an indicator for the investment scenario and intention of investors".

"It is even applicable for foreign investors," added Raihan, also a professor of economics at Dhaka University.

BIDA Executive Chairman Lokman Hossain Miah declined to comment regarding the fall in investment, citing that there are a number of reasons for the issue.

Mostafa Kamal, chairman and managing director of Meghna Group of Industries, said he is implementing five projects, including a steel mill, glass factory, paper mill, and expansion of chemical plant.

"But even though the project cost is increasing due to the increased price of raw materials and US dollar rate, there is no scope to postpone the projects at this stage," he added.

Asif Ibrahim, former president of the Dhaka Chamber of Commerce and Industry (DCCI) and chairman of the Chittagong Stock Exchange, said a key reason for the drop in local and foreign investment is economic uncertainty stemming from the Russia-Ukraine war.

As a chain reaction, pressure was put on taka and consequently the foreign exchange reserve. As a cautionary measure, import restrictions were put in place, he added.

This, along with the short-term unavailability of raw materials for energy production and the rating downgrade by Moody's, Fitch and S&P has created an overall negative impact on the investment climate.

However, the energy situation has improved and the reserve situation is expected to get better after January 2024.

"So, a turnaround may be possible in the first quarter of 2024," Ibrahim said.

Sameer Sattar, president of the DCCI, said the current geo-economic state induced by the Russia-Ukraine war triggered breaks in the global supply chain, energy price hikes and high inflation.

These external factors have resulted in a decline in investment in Bangladesh.

"I feel this investment trend is interim and as soon as the geo-economic crisis ends, our foreign and private investment health will positively surge," he added.

Humayun Rashid, president of the International Business Forum of Bangladesh, said the government has developed major infrastructure in the past decade.

Besides, during the last 15 years there was political stability, which is a positive side for investment.

However, there is a requirement for massive reform in policies regarding investment, including improvement of ease of doing business and making customs procedures easy.

Also, if the government does not address the governance issues, investment will fall further in the future, he added.

M Masrur Reaz, chairman of the Policy Exchange Bangladesh, said domestic and foreign direct investment will not improve without stability in the foreign exchange market, reforms in investment related policies and tax system.

He said domestic and foreign investment is very low compared to the country's requirement.

The current macroeconomic challenges are responsible for the downturn in investment too. Without addressing this, investors will not make fresh investments or expand existing businesses, Reaz added.

Ferdaus Ara Begum, chief executive officer of Business Initiative Leading Development, said investment is a long-term decision so the private sector will need full security of their investment.

As such, they will employ a wait and see strategy regarding making new investments.

"We will have to wait until the situation becomes normal after the election," she added.