The growth of developing countries like Bangladesh is largely dependent on foreign direct investment (FDI). Through foreign direct investment, a country not only makes money by having companies owned by another country, but also increases the knowledge, skills and technology of the country.
But according to the latest report from the United Nations Trade and Development Organization (UNCTAD), foreign direct investment (FDI) in Bangladesh fell 19 percent to $117.43 billion in the first half of this year, from $143.8 billion in the first half of 2019. According to an updated report by UNCTAD's Investment Trends Monitor on Tuesday, global FDI inflows fell 49 percent in the first half of 2020.
The downturn is due to the stagnation of existing investment projects around the world in the wake of the coronavirus pandemic and the recession.
However, the dip in foreign investment in Bangladesh started from 2018-19 fiscal year. In the 2017-18 financial year, Bangladesh was in the top position among the Asian countries in attracting foreign direct investment. That year, foreign investment was worth $1.031 bn.
On the other hand, in the 2018-19 financial year, foreign investment came down to only $525 crore. Which is less than half that of the previous year.
The reason for the increase in foreign investment in the 2017-18 financial year was the purchase of shares of Dhaka Tobacco by Japan Tobacco for about $1.5 bn.
But even if that investment is excluded, the foreign investment that year was about $325 crore which is higher than financial year 2018-19.
The latest downturn in foreign investment in the wake of the pandemic and the global recession in 2020 has also created uncertainty in the path of economic growth.
Significant investments in labour-intensive industries, including power generation and garment factories, have had a positive impact on FDI in Bangladesh. But in the days to come, new fields will be created and existing laws will be simplified, banking sector will be reformed, access to foreign loans will be made easier, policies will be easier, Bangladesh's branding activities to the world will be strengthened, investment laws will be strengthened and investment-friendly environment will be ensured.
Bangladesh is now ranked 16th among the 190 countries of the World Bank's Easy of Doing Business-2019 Index, which is the lowest position in South Asia. In this index, India ranks 7th, China 48th, Sri Lanka 100th, Pakistan 136th and Maldives 139th. This indicator is considered important in attracting foreign investment. Ensuring the availability of gas and electricity and securing capital, above all, can only change the situation if the potential for return on investment is created.
The latest Covid-19 situation has broken the shackles of globalisation. The simultaneous push by both supply and demand control systems is disrupting global production networks to a level never seen before. The pandemic has exposed how global goods and services are interconnected. As a result, countries are now rethinking their international trade strategies to reduce the risk of global economic injury.
Barriers to the flow of foreign direct investment (FDI) have affected all countries, from developed to developing. In late March, the IMF announced that investors had withdrawn $83 bn from developing countries since the onset of the Covid-19 crisis, the largest capital outflow ever recorded.
According to the UN Conference on Trade and Development (UNCTAD), global FDI inflows are expected to reach 30 percent to 40 percent by 2020/2021.
While all sectors of the economy have been affected, the sharp contraction in FDI has been more pronounced in the consumer sectors such as airlines, hotels, restaurants and leisure, as well as in the manufacturing and energy sectors.
The inflow of foreign direct investment (FDI) in developed countries is higher than in developing countries. According to sources, FDI in developed countries has fallen sharply. In the first six months of the year, these countries received FDI of $96 billion, which is 75 percent less than the same period in 2019.
The worst situation is in European countries. The Netherlands and Switzerland in particular have been hit hard by investment. However, in North American countries, FDI has decreased by 58 percent from 68 percent.
On the other hand, FDI in developing countries has decreased by 18 percent. The decline is slightly lower than expected, mainly due to the return of investment stability in China. Of this, FDI in Asia has declined by 12 percent.
In the first half of the year, investment in Asia came to $216 bn. At this time in 2019, the investment was $246 bn. FDI in Africa fell by 26 percent and in Latin America and the Caribbean by 25 percent. As of June 2020, developing Asia has attracted more than half of global investment, the report said.
Although the contraction of FDI on the basis of the index is comparatively higher in developed countries, over-reliance has hit developing countries particularly hard.
Developing countries have become more dependent on FDI over the past few decades. Between 1985 and 2016, FDI inflows to developing countries increased from $14 bn to $690 bn (current value).
It rose from 25 percent to 48 percent as part of global FDI inflows. The rise in FDI in developing countries has led to an increase in economic activity, especially in the manufacturing and services sectors, both offshore and globally.
The decline in global FDI is therefore closely related to the disruption of the global supply chain, which we have witnessed as a result of the Covid-19.
In developing countries in particular, the rapidly populous economies in Asia have been making steady progress over the past few decades. These include China, Cambodia, India, Indonesia, Malaysia, Myanmar, the Philippines, Thailand and Vietnam.
In addition, in Africa, the extractive industries such as oil and mining attract the most FDI inflows. But the rhythm of this normal pace has caused global concern.
If such a contraction in global FDI continues, the consequences for developing countries will be dire. This will affect in different ways. Countries whose inactive sectors depend on FDI inflows (African countries) will suffer massively as a result of declining export revenues (already due to the sinking of prices of primary commodities, especially oil).
The FDI inflows not only increase export earnings in these countries, but also encourage employment and infrastructure development. This could lead to new investments in the transfer of technology to the manufacturing sector economy.
In this case, more diversified areas of FDI flow and attracting investors is one of the ways of addressing the issue.
The nature of competition in the global economy of the twenty-first century is also a matter of concern for the contraction of FDI among developing countries.
The competition among developing countries, in particular, to attract FDI from high-income countries and to serve as suppliers to the consumer market in high-income countries has become fiercer than ever before in the manufacturing system.
Due to the Covid-19 situation, there is a possibility of shifting foreign investment from many countries to other countries. In this context, many countries in the region such as India, Vietnam, Indonesia have simplified investment laws, regulations and banking processes in their own countries.
Changes have been made in the policy framework. Most recently, a letter has recently been written to the Bangladesh Bank authorities from the Financial Institutions Division of the Ministry of Finance with the aim of creating a foreign investment-friendly environment in Bangladesh under the changed circumstances of Covid-19. It called for making the banking process easier and more dynamic to ensure a foreign investment-friendly environment.
In order to recover the Covid-19, the world and especially the developing countries need a significant resource. FDI inflows may bring some resources, but the government needs to create opportunities to help attract and retain productive investments and, more importantly, maximize their benefits.
The impact of the global economic contraction has also been felt in Bangladesh. Both exports and imports have been disrupted and the uncertainty of investing in various sectors is holding back the economy.
The influx of earnings from readymade garments, leather, medicines, agro-industries and even foreign remittances could, however, continue unabated.
The Bangladesh Investment Development Authority (BIDA) registers the bulk of the country's private sector investment. In the three months from April to June this year, bidder registration figures show a drop of 55 percent. In the three months of April-June 2019, the registered foreign investment proposal was $3.42 crore. In the same period of the current 2020, the investment proposal was registered for around $1.53 crore, which happened only in June. No proposals were registered in April and May due to inactivity of economic activities.
According to the latest statistics of Bangladesh Bank, the highest FDI in Bangladesh in the first quarter of 2020 came from the United Kingdom. This was followed by Norway, the United Arab Emirates, the United States, Singapore and Thailand. Besides, investments have also come from India, Hong Kong, Taiwan, South Korea, Malaysia, Netherlands, Switzerland, British Virginia Island, China, Mauritius, Japan, Sweden, Malta, Denmark.
The sectors and products in which foreign investment inflows were high include telecommunications, construction, electricity, textiles and clothing, trade, food, banking, gas, information technology, leather, chemicals, insurance, cement and fertilizers.
Competitors need to be interested in learning from other countries about the strategy of attracting FDI and creating new possibilities. The decline in FDI before the pandemic was a reflection of the fragile realities of Bangladesh's investment climate.
In addition to the shortage of physical infrastructural resources, there is widespread discomfort, opacity and confusion in the overall investment environment in Bangladesh. As a result, Bangladesh is not able to attract the desired amount of investment.
Bangladesh has a lot of potential to attract foreign investment for a number of reasons, including the current strained US-China relationship and rising cost of production in China.
Therefore, in such a context, it is necessary to take quick and effective steps to exploit the possibility of attracting foreign investment. This requires a holistic approach by the relevant government authorities, including the Investment Development Authority of the Government and the Bangladesh Economic Zone Authority, to draw up promotional plans focusing on the target sectors, to understand the need for country-based investment, to improve our laws.
Talukder Monjur Elahi is AVP at United Commercial Bank Limited. He can be reached at: email@example.com.