The World Investment Report 2020, published in June, painted a gloomy picture of Foreign Direct Investment (FDI). Amid the Covid-19 pandemic, FDI during the current fiscal year (July-November 2020) declined by more than 30% compared to the same period of the previous financial year – coming down to $950 million from $1.36 billion. One may find a resemblance with the global trend.
There is no denying that before the pandemic we had observed some improvement in attracting foreign direct investment. However, such advancement was still relatively slow and inadequate.
In the seventh five-year plan, the government set a $9.6 billion target for FDI inflow annually. However, we failed to reach the target set by far. We have tremendous potential for attracting FDI, targetting both the domestic market and export.
The whole world is bearing the brunt of the coronavirus pandemic. We cannot be absolutely certain about FDI recovery in the new year. We are still in the middle of the pandemic, and a lot will depend on the recovery of the global economic and pandemic situation.
However, in view of the vaccine hope in 2021, Bangladesh will need to prepare itself for the time when global investors are ready to explore new possibilities. The challenges faced by the domestic and foreign investment climate need to be addressed during the "recess" period. We have to be remindful that FDI inflow critically hinges on our investment competitiveness vis-à-vis our competitors.
One may look at the so-called investment or "doing business" conditions through several structural blocks. One such block is macroeconomic stability. For several years, we have broadly experienced macroeconomic stability. Recently, the budget deficit is increasing, while inflation is also creeping up. On the other hand, the external balance is stable.
The second block is infrastructure. There is hardly any doubt that we have achieved a considerable improvement in the power sector over the past decade. However, there is still much to be done in the energy sector. Ensuring energy security is critical because foreign investors will always like to come in with a longer-term plan. They do not come to do business just for five or ten years.
One of the major bottlenecks is connectivity. We have several large projects on the ground while some are being planned; the concern is that we have not been able to deliver these within planned time.
The third block is labour market competitiveness. We have cheap labour. This is where our past competitiveness has been. But if we want to bring diversified investment, we will need to ensure the supply of skilled labour. Successful countries, such as China, were excellent in this area. As we have the population, we just need to convert them into skilled labour, as per the industry demand.
The fourth block is institutional capacity or good governance. In this regard, access to finance and policy continuity need to be ensured. We need substantial improvement in the area of good governance. We still need much time in starting a business. Coordination among public agencies is often absent or inadequate.
There is much to be hopeful about FDI inflow in Bangladesh. The economy itself is growing substantially. FDI can be attracted in more diversified areas considering our growing middle class.
Hence, FDI for both import-substituting and export oriented commodities should be welcomed. Indeed, many industries can start with a plan to meet domestic demand and gradually seek export opportunities.
Our geographical location is a vantage point in this context, considering our proximity to larger economies such as China and India. We have GSP market access to the EU market for a few more years. Nevertheless, our plan to accommodate a post-graduation period will also influence foreign investors.
One of the areas where the government may concentrate is to promote joint ventures. It is a win-win solution for both foreign and domestic investors in most cases. It helps the foreign investors understand the domestic circumstances; while for domestic investors, it helps with upgrading corporate governance.
The government has adopted some plans which may help attract FDI, including large infrastructure projects, specialised economic zones, and seaport capacity expansion. The government will need to ensure delivering them on time. If foreign investors do not feel confident that the public infrastructure related to their planned investments are to be delivered in a timely manner, they may wait for their decision and seek opportunities elsewhere. At the end of the day, FDI is a competitive bidding. As a result, we have to keep our commitments to reap a better outcome when the global economy will turn around.
The author is a senior research fellow at Centre for Policy Dialogue