Dollar crisis spurs rise in reinvested earnings, but new FDI shrinks

Infographic: TBS

Bangladesh saw a record increase in reinvested earnings by foreign companies operating here in the fiscal 2022-23 and a significant decline in fresh investments, thanks to the ongoing dollar crisis that has hindered the repatriation of profits to their shareholders.

According to data from the Bangladesh Bank, reinvested earnings soared by 16% to $2.37 billion year-on-year in FY23. On the contrary, equity capital or new investments dropped to below $796 million from $1.35 billion a year ago. Consequently, overall FDI into the country declined by 7% to $3.19 billion in FY23 compared to the previous fiscal year.

Reinvested earnings, in the context of foreign direct investment (FDI), refer to the portion of profits or earnings generated by a foreign subsidiary or affiliate of a multinational company that is reinvested back into the same foreign subsidiary or affiliate rather than being repatriated to the home country of the multinational company.

Though an increase in reinvested earnings suggests that foreign companies operating within the country are generating profits and indicates business confidence and attractiveness to foreign investors, that was not the case for Bangladesh in the reported year.

Bankers and analysts said reinvestment by multinational companies jumped because of the difficulties relating to remitting the profits, as Bangladesh has been facing a shortage of the dollar for the past one year and a half. The taka has been devalued by over 30% during the period due to the shortage of the dollar. And the inflow of fresh investments declined because of the deteriorating economic indicators, including forex reserves, macro stability, and inflation.

When asked about the rise in reinvested earnings within the context of overall FDI, a senior official at the central bank explained, "Our current situation is marked by a dollar shortage. A significant proportion of newly opened letters of credit (LCs) for imports are facing delays, primarily due to the dollar crisis.

"Consequently, some foreign investors are unable to repatriate their earnings from the country. As a solution, they are choosing to reinvest their profits in ongoing projects within the country rather than letting those funds remain dormant," said the official.

Selim RF Hussain, chairman of the Association of Bankers, Bangladesh (ABB) and managing director of Brac Bank, said, "Bangladesh is currently facing macroeconomic challenges. In this setting, we may not see foreign investments at the levels we have witnessed in the past".

He said the return on investment in Bangladesh has also declined in comparison to many developed countries, with interest rates becoming more attractive in Western nations, including the USA. "In such situations, it's common for funds to flow towards these developed economies from emerging countries," he added.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, said, "We have not seen much improvement in our FDI inflows for quite some time. One reason for this is that international rating agencies have given us a negative rating. An investor gives importance to these ratings while making investments. This is a major reason behind the decline in FDI."

Mentioning that new jobs are not being created due to less FDI, he said new jobs are created when there is new foreign investment. Besides, domestic investors can learn a lot from them. If FDI is low, that opportunity also decreases.

When asked how FDI can be increased in the coming days, the economist said, "We have created EPZs here to bring new foreign investment, but investors have to struggle a lot to get various permissions and services. For them, online 'one-stop service' is required. If not fully implemented, arrangements should be made so that they do not have to travel from office to office to obtain permission. Without these, FDI will not increase as expected."

Data from the central bank says that the largest FDI of $662 million in FY23 came in the textile and wearing sector. Besides, a significant amount of FDI has come into the telecommunications, banking, gas and petroleum, and power sectors.

The United Kingdom contributed the highest FDI at $565 million in FY23, followed by the Netherlands with $436 million. Notable contributions also came from countries such as the Republic of Korea, the USA, Singapore, Norway, and Hong Kong.