Bangladesh at a crossroads: The urgent need to revitalize foreign investment

Bangladesh is at a critical 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 FDI is not merely an option; it is a necessity for sustainable growth and diversification. With recent trends indicating a decline in FDI inflows, Bangladesh must take decisive action to create a more favorable investment climate.

Recent FDI trends
Bangladesh’s economy, like its politics, was upended by the protests that led to Sheikh Hasina’s resignation as prime minister, and the lingering uncertainty amid a new interim government. But it’s important to note that Bangladesh’s FDI was on a downward trend even before the events of this summer.

In 2023, Bangladesh’s net FDI inflow decreased to $3 billion, representing a 14 percent drop from $3.48 billion in 2022. Despite a remarkable increase of 20.2 percent from 2021 to 2022, the subsequent drop in FDI highlights the volatility and uncertainty that foreign investors face in Bangladesh. 

Notably, in 2023 existing companies reinvested earnings of $2.20 billion, which accounted for 73 percent of the total net FDI inflow. This indicates that a significant portion of the FDI in Bangladesh came from reinvestments by existing investors rather than new foreign investments. 

The decline of FDI in Bangladesh is particularly concerning given the backdrop of significant FDI inflows in the region, with India attracting over $40 billion and Vietnam $15 billion in the same year. The country’s total FDI stock is estimated at $21.1 billion, representing only 4.6 percent of its GDP, which is significantly lower than many of its peers in South Asia and Southeast Asia, despite Bangladesh offering similar economic conditions and opportunities. 

The United States and China have emerged as significant sources of FDI for Bangladesh, yet their overall contributions remain limited compared to what they invest in other countries. In 2023, China became Bangladesh’s largest FDI source country in terms of the gross flow of $940 million. Meanwhile, the inflow of FDI from the United States to Bangladesh dropped by 11 percent year on year to approximately $315 million in 2023.

Reasons for low FDI in Bangladesh
Bangladesh’s foreign exchange regime is currently experiencing one of its worst periods, with the taka losing 35 percent of its value against the U.S. dollar over the past two years. This volatility raises concerns among foreign investors about currency risk and the overall economic environment. 

On top of that, corruption remains a significant barrier to attracting FDI. Reports indicate that bureaucratic inefficiencies and requests for bribes create an unwelcoming environment for foreign investors. A lack of governance in various sectors further exacerbates this issue.

Though Bangladesh in the last decades experienced a boom in infrastructural development, for attracting FDI the current reality is still inadequate. A lack of infrastructure, particularly in transport and energy, hampers operational efficiency. Bangladesh’s port handling facilities are often congested, leading to delays and increased costs for businesses. Additionally, the energy supply remains unreliable, affecting production schedules.

Policy inconsistency and limited sector diversifications are some of the other reasons attributed to the low inflow of FDI. Frequent changes in investment policies create uncertainty for foreign investors. The government’s approach to taxation and regulation has lacked predictability, making it challenging for businesses to plan for the long term – and that was during a 15-year period of rule by the same government. The abrupt ouster of Hasina has stoked further uncertainty among foreign investors who are unsure what the interim government’s economic approach will be, and how long it will stay in power. 

Additionally, the heavy reliance on the textile sector, which accounts for over 86 percent of Bangladesh’s export earnings, makes the economy vulnerable to global market fluctuations. Investors are increasingly seeking opportunities in diversified sectors, but Bangladesh has yet to fully capitalize on this trend.

Steering through the FDI crunch
In the current economic landscape, prioritizing investment over loans is crucial for Bangladesh, especially given the pressures on its foreign reserves. As of recent reports, Bangladesh’s foreign reserves have fallen significantly, dropping from over $29 billion in August 2023 to around $25.6 billion in August 2024. This decline has been exacerbated by rising debt servicing costs, which have put additional strain on the reserves. 

Relying on loans can lead to a cycle of debt that hinders long-term development. While loans lead to increased debt burdens, FDI brings not only capital but also technology transfer, skill 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 enhance its appeal as an investment destination, Bangladesh must implement several strategic initiatives aimed at improving the overall business environment. The first and foremost step should be the streamlining of the regulatory framework by simplifying bureaucratic processes and establishing a one-stop service for foreign investors. This will significantly reduce the time and effort required to set up operations. 

Additionally, investing in infrastructure projects, particularly in energy and transportation, is critical. Leveraging public-private partnerships can help fund these initiatives, ensuring that the necessary facilities are in place to support foreign investments. 

Furthermore, promoting sector diversification beyond textiles – such as technology, pharmaceuticals, and renewable energy – will attract a broader range of investments, while targeted incentives can encourage growth in these areas.

At the same time, strengthening governance and addressing corruption are essential for building investor confidence. Implementing clear anti-corruption measures and e-governance initiatives will enhance transparency and accountability. Showcasing 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 vital for regaining investor confidence. This includes managing inflation, ensuring a stable exchange rate, and maintaining healthy foreign currency reserves, all of which will encourage foreign investors to commit to long-term investments in the country.

For Bangladesh, the time to boost foreign investment is now. The country has immense potential, but it must address existing challenges and implement strategic reforms to position itself as a leading investment destination in South Asia. By creating a conducive environment for foreign investors, Bangladesh can harness the power of FDI to transform its economy and improve the lives of its citizens. 

The opportunity is ripe, and the world is watching. It is imperative for policymakers to act decisively, ensuring that Bangladesh not only attracts foreign investment but also fosters sustainable economic growth for years to come.

Source: The Diplomat