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Bangladesh is at a crucial crossroads in its economic development, where the urgent need to boost foreign direct investment (FDI) has never been more pronounced. As the country grapples with macroeconomic challenges, it is essential to recognize that attracting foreign direct investment is not just an option; it is a necessity for sustainable growth and diversification. With recent trends pointing to a decline in foreign direct investment inflows, Bangladesh needs to take decisive measures to create a more favorable investment environment.
Recent FDI Trends
Bangladesh’s economy, like its politics, was turned upside down by the protests that led to Sheikh Hasina’s resignation as prime minister, and by the continued uncertainty surrounding a new interim government. But it is important to note that foreign direct investment in Bangladesh was already on a downward trend before this summer’s events.
In 2023, net inflows of foreign direct investment into Bangladesh fell to $3 billion, representing: 14 percent decreased from USD 3.48 billion in 2022. Despite a notable increase of 20.2 percent between 2021 and 2022, the subsequent decline in foreign direct investment highlights the volatility and uncertainty faced by foreign investors in Bangladesh.
It is striking that in 2023 existing companies reinvested profits of 2.20 billion dollars, which was good for profits 73 percent of total net FDI inflows. This indicates that a significant portion of foreign direct investment in Bangladesh came from reinvestment by existing investors and not from new foreign investment.
The decline in foreign direct investment in Bangladesh is particularly worrying given the backdrop of significant foreign direct investment inflows into the region, with India attracting over US$40 billion and Vietnam attracting US$15 billion in the same year. The country’s total FDI stock is estimated at US$21.1 billion, representing just 4.6 percent of GDP, which is significantly lower than many of its peers in South Asia and Southeast Asia, despite Bangladesh offers comparable economic conditions and opportunities.
The United States and China have emerged as important sources of foreign direct investment for Bangladesh, but their overall contribution remains limited compared to what they invest in other countries. In 2023, China became Bangladesh’s largest FDI source country in terms of gross flow from $940 million. Meanwhile, foreign direct investment inflows from the United States to Bangladesh fell 11 percent year-on-year to approx $315 million in 2023.
Reasons for low foreign direct investment in Bangladesh
Bangladesh’s currency regime is currently going through one of its worst periods, with the taka Lose 35 percent of its value against the US dollar over the past two years. This volatility raises concerns among foreign investors about currency risk and the overall economic environment.
Moreover, corruption remains a major obstacle to attracting foreign direct investment. Reports show that bureaucratic inefficiency and bribe demands create an unwelcoming environment for foreign investors. A lack of governance in various sectors further exacerbates this problem.
Although Bangladesh has experienced a boom in infrastructure development in recent decades, the current reality is still inadequate for attracting foreign direct investment. A lack of infrastructure, especially in transportation and energy, hinders operational efficiency. Bangladesh’s port handling facilities are often overloaded, leading to delays and higher costs for businesses. In addition, energy supplies remain unreliable, impacting production schedules.
Policy inconsistency and limited sector diversifications are some of the other reasons attributed to low foreign direct investment inflows. Frequent changes in investment policies create uncertainty for foreign investors. The government’s approach to tax and regulation is unpredictable, making it challenging for companies to plan for the long term – and that was over a fifteen-year period under the same government. Hasina’s abrupt ouster has fueled further uncertainty among foreign investors, who are unsure what the interim government’s economic approach will be and how long it will remain in power.
Moreover, the heavy dependence on the textile sector, which accounts for more than 86 percent of Bangladesh’s export earnings, makes the economy vulnerable to fluctuations in the global market. Investors are increasingly looking for opportunities in diversified sectors, but Bangladesh has yet to fully benefit from this trend.
Leading the FDI Crunch
In the current economic landscape, it is crucial for Bangladesh to prioritize investments over loans, especially given the pressure on foreign reserves. According to recent reports, Bangladesh’s foreign reserves have fallen significantly and are falling again $29 billion in August 2023 to approximately $25.6 billion in August 2024. This decline has been exacerbated by rising debt levels, which have placed additional pressure on reserves.
Relying on loans can lead to a cycle of debt that hinders long-term development. While loans lead to higher debt burdens, foreign direct investment brings not only capital, but also technology transfer, skills development and integration into global supply chains. FDI can stimulate local economies and create jobs, making it a more sustainable option for economic growth.
What Bangladesh can do to attract foreign investors
To increase its attractiveness as an investment destination, Bangladesh needs to implement several strategic initiatives aimed at improving the overall business environment. The first and most important step should be to streamline the regulatory framework by simplifying bureaucratic processes and setting up a central service for foreign investors. This will significantly reduce the time and effort required to set up activities.
Moreover, investing in infrastructure projects, especially in energy and transport, is crucial. Leveraging public-private partnerships can help finance these initiatives and ensure that the necessary facilities are in place to support foreign investment.
Furthermore, promoting sector diversification beyond textiles – such as technology, pharmaceuticals and renewable energy – will attract a wider range of investments, while targeted incentives can stimulate growth in these areas.
At the same time, strengthening governance and tackling corruption are essential for building investor confidence. Implementing clear anti-corruption measures and e-governance initiatives will increase transparency and accountability. Highlighting successful foreign investments can serve as a powerful marketing tool to attract potential investors by demonstrating the benefits of investing in Bangladesh.
Finally, creating a stable economic environment is crucial to regaining investor confidence. This includes controlling inflation, ensuring a stable exchange rate and maintaining healthy foreign exchange reserves, all of which will encourage foreign investors to make long-term investments in the country.
Now is the time for Bangladesh to encourage foreign investment. The country has enormous potential, but it needs to address existing challenges and implement strategic reforms to position itself as a leading investment destination in South Asia. By creating an enabling environment for foreign investors, Bangladesh can harness the power of foreign direct investment to transform its economy and improve the lives of its citizens.
The opportunity is ripe and the world is watching. It is imperative that policymakers act decisively and ensure that Bangladesh not only attracts foreign investment but also promotes sustainable economic growth in the years to come.