FDI from US halves after sanctions

When Bangladesh is in dire need of foreign investment, FDI inflow from the top investing country the United States halved in January-June 2022 compared to the previous six months – a development that, stakeholders say, is attributable to "a lack of FDI-friendly atmosphere" in the country. 

According to a Bangladesh Bank report titled "Foreign Direct Investment and External Debt", the net FDI from the US dropped by 56% to $200.79 million in the first half of the last year from $460.33 million in the previous six months, contributing to a slowdown in FDI inflow in the second half of FY22.

Coincidentally, the dip in FDI inflow has occurred following US sanctions on RAB and seven of its current and former officials on 10 December 2021.

When asked if the fall in FDI from the US is linked to the RAB sanctions, US Ambassador to Bangladesh Peter Haas related the development to the business environment saying, "Bangladesh needs to continue to look at the business environment mainly in the logistics sector, ease of doing business, corruption, and regulations."

Whether foreign companies operating in Bangladesh can repatriate their profits to their native country is becoming increasingly difficult, he pointed out, adding that the more these difficulties companies find in any country the less they will feel inclined to invest there.

The country received a net FDI of $1.67 billion in the January-June period of 2022, 5% down from the previous six months, according to central bank data.

The total net FDI from the US in FY22 was $661.12 million, which was 19.2% of the total FDI inflow to Bangladesh. China was the second-highest source of FDI, with a total net FDI of 465.17 million, or 13.5% of the total FDI, coming from the country in the last fiscal, followed by the UK with 11.2% share, and Singapore with 8.7% share among the top five countries.

Infographic: TBS

FDI has three components including equity capital, reinvested earnings, and intra-company loans

Data from the Bangladesh Bank show that total equity capital, which is considered a fresh investment, dropped by  38% to $515.32 million in June last year from $831.62 million in December previous year due to a fall in US FDI as 94% of American investment was equity capital.

The US accounted for 20.2% of total equity capital investment in FY22 when Singapore was the second-highest equity investor with a 15.6% share, followed by China at 8.3%, according to the central bank.

The private sector's long-term loan inflow from the US also slowed down after the sanctions on RAB.

The total private sector external debt from the US declined to $749 million in January-June 2022, 6.5% down from July-December 2021.

Even though China was the third-highest source of equity investment, it became the top creditor country in FY22 when the US was fourth.

Long-term private sector loans from China surged by 28% to $2.23 billion in June last year from $1.74 billion in December 2021.

Syed Ershad Ahmed, president of the American Chamber of Commerce in Bangladesh, said bureaucracy and lack of logistic infrastructure are the major obstacles to foreign investment.

Sharing his experience, he said the Bangladesh Data Center Company (BDCCL) purchased technology equipment including a server rack for newly-built data centre from American multinational Oracle worth $11 million, and Expeditors (Bangladesh), an US-based logistic company where he is the country manager and managing director, is providing logistic service.

The problem he is facing is that the companies could not deliver the full shipment at a time because Dhaka airport does not have adequate storage capacity and security system for such large equipment. As a result, they are delivering part by part.

Another problem is the shipment remained pending in Hong Kong for the last five months since October as customs could not clear documents.

The BDCCL purchased the equipment taking tax exemption but the customs department issued the order in this regard which is not appropriate as the HS code used for international trade is not matching with the supplier's product.

However, Vietnam is more advanced in its supply chain and, therefore, the country is attracting foreign investment, he added.

Bangladesh ranked 100th in the logistics performance index 2018 while Vietnam was 39th.

Which sectors are the major recipients of US investment?

Investment by US investors is mainly concentrated in the energy sector as 46% of total investment in FY22 came in gas and petroleum, according to the central bank data.

Of the $661 million US investment coming in in FY22, $305 million was invested in gas and petroleum. The second-highest volume of investment came to the financial sector during the fiscal as $260 million was invested in the non-bank financial sector, central bank data show. 

The total FDI stock of America was $4.15 billion till June 2022 of which nearly $3 billion remained invested in gas and petroleum.

Peter Haas told TBS that the energy sector was the largest recipient of FDI because Bangladesh needs energy and US companies are very good in this sector. "My prediction is that more FDI will come to the energy sector because the business environment is better for the energy sector."  

Citing the example of Chevron, he said the US is the largest foreign direct investor in Bangladesh as Chevron alone can produce 55% of natural gas. So, the scale and the importance of US investment are huge, he added.

Chevron has invested over $3.6 billion of FDI including over $500 million in contracts with local suppliers and contractors, over the last 12 years, he noted.

In the cases of other sectors, Peter Haas said, investors look for the best possible places to invest. Investors start their investment where rule of law is the best, political stability is the best, and think about whether they can take back their profit to their shareholders, he observed.

He said Bangladesh needs to be more attractive than its competitors.

America is highest in equity capital investment in Bangladesh which is a genuine investment, said Syed Ershad Ahmed.

American investment is mostly concentrated in the energy sector but they also invested in beverage manufacturing, he said. American companies are still investing in the energy sector and a big investment is coming as General Electric started to invest in power projects in partnership with Summit.

He also said that Agriculture is a potential sector to attract FDI from the US, but the opportunity cannot be tapped because the country lacks storage capacity for processed food.

"We could not benefit from the Padma Bridge. Varieties of fruits are produced in the southern region of the country but we cannot export them because of a lack of cold storage chain infrastructure."

He went on to say that potato chips brand Lay's conducted a survey in 2021 to invest in agri-products but found that the preservation system was not there. So, they are planning to develop farmers.

US investment likely to fall further

The new Data Protection Act emerged as another threat for American companies. At present, net FDI is less than 1% of GDP.

"We fear that the Data Protection Act, if passed with strict data localisation requirements, may force some US companies currently operating in Bangladesh to leave the market," said Peter Haas at an event titled "Online Freedom and Business Investment in Bangladesh" held at the EMK Centre recently.

"The online platform regulations will similarly dissuade companies from investing in their businesses here if they face criminal liability for user content. The consequences could have very negative effects on Bangladesh. Over 2,000 startups could be put out of business…," he said.