FDI imperative for Bangladesh: gains and strategic options

Over the past five decades, Bangladesh managed to transition to an increasingly manufacturing-based and service-oriented economy and fared well in social indicators. It has registered average gross domestic product (GDP) growth rates of more than 6 per cent in the last 10 years and over 8 per cent in the fiscal year 2019.

The poverty rate dropped from 31.5 per cent in 2010 to 21.8 per cent in 2018, a significant step toward reaching the Sustainable Development Goal target of eradicating extreme poverty by 2030.

The success of a persistent and sturdy growth rate is based on real structural transformation, growing private sector engagement, export-oriented industrialisation, vibrant rural economy, and steady development outcomes. In February 2021, Bangladesh secured final nod to graduate from a least-developed country to a developing country which will take place in 2026.

The economic downturn from the coronavirus pandemic poses multidimensional challenges for Bangladesh that may span over the medium and long-term horizon. However, it seems a major casualty of the downfall will likely be private investment, particularly foreign direct investment (FDI). An UNCTAD assessment suggests that the global FDI contracted by a large margin of 42 per cent in 2020, the magnitude of the fall being one of the largest in last many decades.

Such challenges emerge at a time when Bangladesh is in need to enhance its FDI more than ever before. There are several compelling reasons for this. First, according to the 8th Five Year Plan, Bangladesh needs to step up the pace of growth to more than 8 per cent if it has to move towards upper middle-income country by 2031.

It is important for the economy to have increased levels of FDI because it can't only help create the much required employment for Bangladeshi youths but also support in augmenting domestic capital, help in transfer of new technology and products, facilitating access to new and large foreign markets, and provide training of local workforce by upgrading their technical and managerial skills, hence making them more efficient and productive.

Impressive economic and human development gains provide strong headroom for growth in FDI

The importance of Bangladesh raking in higher levels of FDI is paramount, especially when the country aspires to become an upper-middle-income country by 2031 and a developed country by 2041. For this to materialise, private investment-to-GDP ratio needs to rise to 27 per cent. However, the last decade has witnessed this ratio being stagnant at 22 to 23 per cent.

Additionally, FDI over the last decade has averaged 1.1 per cent of GDP, whereas comparator countries like Vietnam and Malaysia have fared better with 6 per cent and 3.4 per cent, respectively.

Building on its economic and human development strengths, Bangladesh has ample headroom to bring in more diversified sectors as candidates for FDI as the lion share of FDI is concentrated within a narrow spectrum of industries such as power, banking, food, telecommunications and textile and weaving over the past several years. FDI can provide much-needed impetus to growth drivers

The impressive economic and social progress Bangladesh secured had much to gain from increasing number of higher-waged jobs, exploitation of international market through increasing exports, spill-over effects in manufacturing from the RMG sector, and improvement in rural and energy infrastructure.

In the recent years, some of these growth drives have come under pressure.  Job-drivers such as exports are decelerating and FDI can help provide employment to over 20 million youths that are expected to enter the labour force in the next decade.

One of the prerequisites to Bangladesh attainting sustained 8 per cent growth trajectory is a higher degree of economic diversification. However, diversification remains elusive and one key reason is a lack of adequate infrastructure.

At present, there is $350 billion infrastructure gap in Bangladesh in the energy, water, logistics, and transport sector.

Infrastructure to GDP ratio is 3 to 4 per cent that needs to be increased to 6 to 7 per cent. Economic diversification agenda requires new manufacturing and services sectors that can break into international and domestic markets, and FDI will be quintessential to circumvent hindrances with regard to market access and tapping into new technology

Moving ahead with smart strategies and developing new growth drivers through power of FDI

Many aspects of public policy have supported the development of private business and FDI over the years.  This includes gradual trade liberalisation since the 1990s, several financial policies implemented by the central bank, a relatively competitive exchange rate, and the expansion in power and energy access since 2009.

A key binding constraint for private investment was access to serviced land that is being addressed by introducing economic zones (EZs) policy and development projects, and earlier through the Export Processing Zones.

In the regulatory space, it is heartening to see the impetus the government is attaching towards regulatory reforms for a better business environment.

A number of critically important business environment improvement initiatives have recently been undertaken, including reforms to improve ease of doing business, introduction of one-stop services for investors, several recent changes in the foreign exchange regulations act, incremental changes in the companies' law, and trade facilitation measures such as implementation of a national single window for faster and easier border clearance. 

On the institutional aspects of the improvement efforts, the government of Bangladesh, primarily through the Prime Minister's Office and the Bangladesh Investment Development Authority, has put in place a concerted effort that include developing reform action plans, forming taskforces, coordinating reform initiatives among relevant government agencies, providing reform support to line agencies, conducting dialogues with private sector stakeholders, and monitoring reform progress.

Building on this momentum, it is critical for Bangladesh to move away from traditional approaches to FDI promotion to leveraging strategic enablers. For instance, exploring non-traditional sources of investments such as new growth sectors that reflect global and future trends, and climate smart investments possess strong potential for Bangladesh.

A $2.3 trillion halal food market by 2025, prospects of a $3 billion e-commerce domestic market by 2023, and a global market of $23 trillion by 2030 for green investments all speak volumes with regard to FDI potential in these emerging growth sectors.

A recent commendable initiative by the foreign investors' platform in Bangladesh, the Foreign Investors Chamber of Commerce and Industries, outlines in detail the opportunities for Bangladesh in these new growth areas and the strategies Bangladesh must deploy to realise the potential.

Accelerating public-private partnership opportunities in the country can pave the way for FDI, particularly in sectors and projects that have high risk and longer returns associated. Many of such projects, such as a new container port in Chattogram, will be key determinant of Bangladesh's export and investment competitiveness.

Bangladesh can also take advantage of the shifting trends in the global value chain. Many countries are looking to expand supply chain bases and diversify existing concentration of production system. Moreover, Bangladesh can leverage its export potential and favourable factors of production for efficiency-seeking investments to anchor incoming FDI.

Presently, Bangladesh has duty-free entry into China for over 8,000 products. The country can use its advantage of the newly developing economic zones to attract foreign investors who would harvest the benefits of duty-free entry into China. Other major regional economies such as India and Japan also hold similar prospects if complementary trade and investment strategies can be put in place.

Securing more global economic cooperation and expanded market access with the support of free-trade and regional-trade agreements can result in greater market access and increased confidence towards host countries leading to greater FDI.

Thus, it is imperative for Bangladesh to prepare and position itself as a strong candidate for hosting foreign investors. This calls for preparing and implementing a targeted, time-bound, and focused investment promotion plan, which will help identify and target the investors' group, outreach with Bangladesh's value proposition in high-potential sectors, and putting in place an effective investors facilitation and after-care process.

The author is chairman of Policy Exchange of Bangladesh