Bangladesh And FDI: Growing Faster, Going Further.

Legal News & Analysis - Asia Pacific - Bangladesh - FDI

Asia Pacific Legal Updates

 

26 June, 2019

 

Bangladesh And FDI: Growing Faster, Going Further.

 

When it comes to foreign direct investment (FDI), Bangladesh finds itself at a crossroads. Rising FDI inflows paint an optimistic picture, but the country is struggling to keep up with its own rapid economic growth.

 

Although FDI has nearly tripled over the last decade from US$981 million in the 2008-2009 financial year to US$2.45 billion in 2016-2017, it is being outpaced by the country’s gross domestic product (GDP). Bangladesh is the world’s second-fastest growing economy and FDI represents less than 1% of GDP, one of the lowest rates on the continent.

 

Conventus Law spoke to Habib Rahman, research associate at A.S & Associates, a Dhaka-based law firm, to find out what is holding Bangladesh back and what can be done about these barriers.

 

“The growth of FDI has still not reached the desired level considering the size and growth of the economy of Bangladesh,” he told us. “There are multiple barriers of deregulation, valuation challenges, repatriation restrictions, lack of comprehensive policies regarding foreign direct investment, and limited institutional capacity as well as policy coordination to provide effective services to foreign investors.”

 

As a result of these obstacles, Bangladesh was the lowest-ranking South Asian country in the World Bank’s ‘Ease of Doing Business’ 2019 survey, placing 176th out of 190. Clearly, investor confidence is being stunted by a negative and unappealing business environment.

 

However, the government appears committed to identifying and clearing these hurdles in the hope of unlocking the vast potential Bangladesh has as a destination for FDI, and in turn, the potential this has for the country’s socio-economic development.

 

All the right moves

 

One thing that definitely isn’t doing Bangladesh’s image as an investment environment is its geography. Despite regulatory obstacles, it is ideally located for foreign investors looking to access multiple markets across the Asian continent.

 

“Bangladesh is favourable to the investors due to its strategic position at the delta of South Asia acting as an economic corridor between South and Eastern Asia,” says Habib Rahman. “It has been ranked by 2018 JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania’ above India and Myanmar and more than 50% of the FDI is reinvestment which shows confidence in the economy.”

 

In an attempt to make its investment climate more attractive, Bangladesh has put in motion a number of initiatives and incentives aimed at facilitating the ease of doing business in the country. These include the establishment of the Bangladesh Economic Zone and the Bangladesh Export Processing Zone. According to Rahman, these provide “facilities to foreign investors”, such as:

 

  • Tax holiday
  • Exemption from dividend tax
  • Double taxation relief
  • Repatriation of capital and dividend
  • Foreign currency loan facility

 

“Recently Bangladesh government has enacted One Stop Service, 2018 through which all foreign investment related services came into one umbrella and as a result it became the most successful initiative,” he adds. “Introducing One Stop Service (OSS) to facilitate more foreign investors in seamless fashion along with other incentives and facilities indicates government’s desire to attract and encourage FDI in Bangladesh.”

 

“As for recent development Bangladesh government is reforming various laws and working for improvement the ranking at ease of doing business of World Bank.”

 

The government also has an ambitious target of establishing 100 different economic zones in areas across the country it considers primed for increased levels of foreign investment. These new economic zones will be spread across 40,000 hectares of land, of which it had already acquired 16,000 by September 2018. Paban Chowdhury, executive chairman of Bangladesh Economic Zone Authority, told Bangladeshi media last year that the agency had received numerous investment proposals.

 

So where is all this interest coming from? Well, according to Bangladesh Bank, the country’s central bank, the USA, China and the United Kingdom are the three most important countries for FDI in Bangladesh, investing a combined US$68 billion. Singapore, South Korea and the Netherlands are all also key foreign investors in Bangladesh’s economy.

 

In the 2017-2018 financial year, Bangladesh received:

 

  • US$506 million from Chinese investors
  • US$373 million from the United Kingdom
  • US$171 million from the USA
  • US$158 million from Singapore
  • US$125 million from South Korea

 

Private sector taking the lion’s share

 

The impact of these pro-FDI incentives is uneven across various sectors of Bangladesh’s economy, with some sectors not being prepared or having the right infrastructure in place to reap the rewards, notes Rahman.

 

“Existing constraints of varying degrees of difficulty [...] may render some of the sectors less ready than others to accommodate and absorb increased foreign investment,” he says.

 

However, many of Bangladesh’s most important industries are thriving as a result of an influx of FDI. The sectors benefiting the most from higher levels of FDI, according to Rahman, are:

 

  • Gas and petroleum
  • Textile and wearing
  • Banking
  • Power
  • Telecommunications
  • Food

 

Indeed, Bangladesh’s power industry attracted US$589 million of foreign investment in the 2017-2018 financial year, the most of any sector. Textiles came in second—bolstered by more developed economies outsourcing their textiles work to Bangladesh—,bringing in FDI inflows of US$489 million, and banking was third with US$321 million. Overall, FDI growth in Bangladesh is led by the private sector.

 

The government has also earmarked a number of industries as representing significant opportunities in attracting and maximising FDI inflows.

 

“The sectors with significant potential for development are agribusiness, electronics, plastics, footwear, leather, services, infrastructure and strategic investments,” says Rahman. “Bangladesh Investment Development Authority (BIDA) will proactively reach out to potential investors identified as being desirable and likely to invest and present them with tailored business cases for selecting Bangladesh.”

 

However, Bangladesh will need to tread carefully to ensure industries aren’t restricted by other legislation. When Paypal launched in Bangladesh back in 2017, its high-growth potential was held back on account of Bangladesh Bank’s foreign exchange rules, a problem the government is still trying to resolve.

 

Transformation on the horizon

 

Maximising FDI inflows could be a game-changer for Bangladesh and is a crucial step in the Bangladesh Awami League party achieving its ‘Vision 2021’ manifesto, as outlined during its successful election campaign in 2008. Vision 2021’s primary objective is pursuing socio-economic development through digitisation, a transparent governance system and greater foreign participation in industry.

 

“Ensuring a good number of FDI will help Bangladesh to achieve ‘Vision 2021’, a goal set to become a middle income country by 2021 where poverty will be drastically reduced, where our citizens will be able to meet every basic need, and where development will be on fast track, with ever-increasing rates of inclusive growth,” explains Rahman.

 

Crucially, pursuing Vision 2021 led to Bangladesh graduating from the ranks of the world’s poorest countries—officially known as least developed countries (LDCs)—six years ahead of schedule. Last year, Bangladesh’s income per capita reached US$1,909, above the minimum requirement for being formally recognised by the United Nations as a developing country, the next-highest category. This milestone was originally targeted for 2024.

 

“While Bangladesh, being one of the prime locations where factors of production are available at a competitive rate, is benefitting immensely from FDI, as it has received the formal recognition as a developing country from United Nations in April 2018,”  says Rahman.

 

Foreign investment in various sectors of the Bangladeshi economy truly has the potential to lift the country and its citizens out of poverty, Rahman notes. He explains that the transformative potential of FDI in Bangladesh is almost 30% higher this year than it was in 2018.

 

Revamping Bangladesh’s image

 

Bangladesh is certainly on the right track when it comes to incentivising FDI, but there are undoubtedly many barriers in place that some would argue have been there for too long. Nonetheless, the outlook is positive and foreign investors could unlock enormous potential in Bangladesh if the investment environment is improved.

 

“Bangladesh is positioned to compete with major middle-income countries providing favourable regulatory framework, tax incentives and specific economic/ processing zones for foreign industries along with infrastructural development initiative to boost the GDP,” says Rahman. “It has posited itself as a major developing country of the world parallel to the regional counterpart such as Myanmar, Vietnam and Indonesia.”

 

It has also identified a number of countries whose investors it hopes to court, outside top of its existing pool, including:

 

  • Japan
  • India
  • Saudi Arabia
  • Sri Lanka
  • Hong Kong
  • Australia
  • Malaysia
  • The British Virgin Islands

 

In the most basic terms, Bangladesh’s image needs a makeover. Investors are all too familiar with what Rahman terms a “lack of comprehensive policies regarding foreign direct investment” and will need a reason, aside from geography, to pour money into Bangladesh’s economy over its regional competitors.

For further information, please contact:

 

Ibtida Farhat Tropa, Senior Associate, A.S & Associates

[email protected] 

 

Faria Huq, Senior Associate, A.S & Associates

[email protected]