Challenges and policy pathways for private investment

Gross investment in Bangladesh has declined from more than 32 percent of GDP to about 31 percent. Given the recent hike in borrowing costs, it is feared that private investment could see a further fall in the near future. However, the government can take critical policy measures to stimulate private investment.

To identify which policy measures will be most effective, we first need to understand why investment is dwindling in Bangladesh. Private investment is sluggish and lagging because of various types of uncertainty.

First, there is uncertainty regarding the state of critical infrastructure and energy. Investors consider both the short-term and long-term conditions of their potential returns, which largely depend on an uninterrupted energy supply to produce goods and services, and on critical infrastructure to sell these goods and services domestically and internationally.

Although Bangladesh has made significant progress in energy, the cost per unit of energy is significantly higher than in neighbouring countries. For example, in West Bengal, India, the average per unit electricity price is about 7 rupees (equivalent to Tk 10), whereas in Bangladesh, it is about Tk 12. This means the per unit electricity price is 20 percent higher in Bangladesh than in India.

This price is expected to rise significantly due to subsidy reductions in the sector. Despite higher electricity prices, there is no guarantee of an uninterrupted power supply. Higher prices and uncertainty surrounding future energy price hikes, coupled with sporadic power supply, seriously undermine Bangladesh's investment potential.

Additionally, the processes, services, and physical infrastructure—such as port facilities, customs clearance processes, transportation time, and costs—essential for importing critical capital machinery and raw materials and exporting finished products are also of poorer quality compared to neighbouring countries. In the World Bank's overall logistic performance index, Bangladesh ranked 88th in 2023, whereas India secured the 38th position. Persistent poor logistic conditions also take a toll on private investment in Bangladesh.

Second, there is significant uncertainty surrounding the bureaucratic processes involved in obtaining various government services, such as licences and certificates necessary for starting and continuing business operations. These processes are often complicated and time-consuming unless a significant amount of 'speed money' is paid.

Furthermore, corporate taxation is not streamlined. Some sectors receive ad-hoc tax holidays while others face exorbitant corporate taxes. For instance, the corporate tax rate for most domestic corporations in India is 25 percent, while in Bangladesh, it is 27.5 percent.

Interestingly, the total corporate tax collection has not increased in recent years, despite the economy consistently growing over 6 percent annually since 2011, except for 2020, the Covid-19 year. Therefore, the high corporate tax rate has not translated into increased tax collection from corporate sources but rather acts as a barrier for potential honest investors.

Third, uncertainty about sources of financing is a serious barrier to stimulating private investment. Currently, the cost of borrowing for private investors has surpassed double digits, and even with such high borrowing costs, there is a liquidity crisis in many banks.

Private businesses can't raise the required funds from the share market due to uncertainty caused by insider-trading and frequent market manipulation, leading to a loss of investor confidence.

Uncertainty in the foreign exchange market and the shortage of foreign exchange supply also deter investors from making any investment decisions. If investors can't import machinery and raw materials due to the foreign exchange crisis, they will not make any further investments but rather contract their existing ones.

What are the policy options that the government can implement in the next fiscal budget to overcome these barriers?

First, achieving efficiency in the energy sector and providing a roadmap for uninterrupted power supply for businesses is of paramount importance. Rationalising the prices of electricity is necessary, but a radical adjustment in electricity and other fuel prices will further deteriorate the investment potential.

Second, the government should prioritise infrastructure projects that could significantly lower the time and costs of transporting goods and services within the country and to export markets. The government can undertake public-private initiatives to establish off-docks and dry ports near major business hubs like Dhaka, Gazipur, Narayanganj, and other large divisional cities. This will reduce the time and costs of importing essential consumer and capital goods and exporting garments and other items. Ensuring seamless customs clearance processes at these off-docks and dry ports is crucial to achieving the full potential of these infrastructures.

Third, and one of the most important steps that need to be taken to facilitate private investment, is to adopt digitalisation in providing various government services and ensure accountability and monitoring of the offices responsible for these services. If the process of starting a business is made simpler, many young entrepreneurs will come forward with innovative ideas to invest in various thrust sectors, generating decent employment opportunities and contributing to the national income.

Rationalising corporate income tax and not granting ad-hoc tax holidays is equally important for stimulating private investment. High corporate income tax has not yielded high tax revenue, so lowering this rate slightly and encouraging more businesses to pay taxes, along with a simple digitalised tax payment system, can help businesses and raise more revenue.

Finally, allowing the market to determine the foreign exchange rate is important to stabilise the foreign exchange market. Though Bangladesh Bank recently announced a crawling peg for exchange rate determination, it has been observed that Bangladesh Bank has failed to follow through with its announced policy in the past.

If Bangladesh Bank 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 expatriates to invest in Bangladesh, not only in real estate but also in stock markets and banks. For this, it is important to ensure good governance in both the banking sector and the stock market.

The author is an associate professor of economics at the University of Dhaka.