Diversification in the manufacturing sector is urgent to face post-LDC challenges

The expansion of manufacturing activities over the last decade is driven mainly by Bangladesh's export-oriented RMG sector. Photo: TBS

Manufacturing activities have grown from 5.5% of the GDP to approximately 22% in 2022, to increase further in the 8th five-year plan. The expansion of manufacturing activities over the last decade is driven mainly by the country's export-oriented RMG sector, now the world's second-largest exporter. 

The RMG sector employs nearly 4.2 million people, of whom almost 80% are women, mostly in low-skilled roles. In 2022, the RMG sector accounted for 12% of the GDP and 84% of exports. The National Industrial Policy (2022-2027) has announced its ambitious goal of achieving a 40% contribution to the GDP. 

Conducting a comprehensive assessment of the industrial sector's performance is now crucial. To face post-LDC challenges, Bangladesh must diversify its manufacturing base and attract joint and foreign investment in Foreign direct investment (FDI).

A recent study by ADB, supported by OECD (Organisation for Economic Co-operation and Development), indicated that about 75% of Bangladesh's exports currently go to countries offering duty-free access. 

The loss of such preferences is expected to reduce export earnings by over 14%, particularly affecting the RMG sector. Even in the UK market, where it may continue to enjoy preferences for some time, more stringent Rules of Origin (ROO) after graduation and double transformation applicability for the RMG sector may create an unfavourable situation.

The study also highlighted that greenfield FDI in Bangladesh is highly concentrated in the oil and gas sector, creating relatively few direct jobs. A more diversified portfolio of FDI projects in more labour-intensive activities could help address Bangladesh's job creation pressure, with about two million people entering the labour market annually. 

Countries like India, Cambodia, Vietnam, Myanmar, Indonesia, and even Sri Lanka have performed better in creating jobs in new sectors such as light engineering and other innovative industries. FDI can be an essential driver of innovation and skills development.

Considering industrial strategies and redesigning policies of bilateral partner countries, Bangladesh needs to attract more green FDI, especially in the renewable energy sector. 

The share of FDI in green technologies between 2013-2022 is much higher in Cambodia, Vietnam, India, Indonesia, and Myanmar, ranging from 14%-18%, while it is only 6% in Bangladesh. 

During 2013-2012, FDI in coal, oil, and gas exceeded 18%. It is less than 2% in renewable energy, primarily solar power. Bangladesh requires a two-pronged policy approach, increasing investment in renewable energy besides solar power and diversifying FDI from coal, oil, and gas to other manufacturing sectors.

As per the Industrial Policy, only five sectors are prohibited for domestic and foreign private investment in the country: arms, military equipment/machinery, nuclear power, security printing, mechanised harvesting on the border of afforestation, and reserved forest land. 

Additionally, some policy-specific restrictions require further simplification to attract significant investment in the services and diversified manufacturing sectors.

One of these restrictions is in the logistics sector, where foreign shareholding in foreign logistics companies is limited to 49%. Maritime cabotage, meaning the transport of goods by sea, air, and other transport services, and sea-borne cargoes are mostly handled by Bangladeshi-owned companies. 

Bangladesh needs strong logistics support services at this graduation stage, as per its plan targets for trade and services to increase by about $1 trillion by 2041. Foreign shareholding is also limited to airport ground handling and air transport services.

In the telecom sector, foreign shareholding is limited to 70% in telecom value-added services and telecom tower operating companies. 

Foreign shareholding in nationwide ISP is allowed, but divisional/district-specific ISP licenses are reserved for Bangladesh investors. Similar restrictions exist in the banking sector, where reciprocity requirements are needed for granting bank licenses. 

In the insurance sector, branches of foreign insurance companies are allowed, but foreign shareholding in local insurers is limited to 60%. Legal services also face restrictions; only locally licensed lawyers (Bangladeshi citizens only) can establish law practices in Bangladesh. 

Fishing is reserved for local fishing vessels that are majority-owned (51% or more) by Bangladesh citizens. 

These restrictions limit the diversification of business and investment opportunities from foreign companies. While the Bangladesh government may prioritise local business and services growth, access to advanced services and technologies requires FDI and foreign investment in crucial sectors.

These identified barriers create discrepancies and hindrances for strengthening economic diversification and integrating the economy into the global value chain. 

For a robust manufacturing sector, efficient services contribute to competitiveness, and joint initiatives with reputed large companies help transfer technologies and knowledge. Services precincts affect FDI in these required services and impact diversifying manufacturing activities.

Capital repatriation is another long-standing issue for investors that needs simplification; even local investors face similar problems. Despite numerous reforms, prior approval is still required for liquidating direct investment in unlisted companies when the amount of proceeds to be remitted exceeds $1 million, as referred to in the study.

The Foreign Private Investment Promotion and Protection Act (FPIPPA), 1980 guarantees profit and capital repatriation rights to foreign investors, including in liquidating investment positions. However, in practice, the policy is not straightforward; the process is complicated and lengthy, requiring approval at several stages. 

The payment of royalties and technical assistance fees is still challenging for investors due to unclear processes and undocumented repeated requirements. 

Particularly in the current scenario, the repatriation process has become more stringent, with the country facing a deficit in its current account balance and foreign exchange reserves.

Price preferences differ for domestic vs foreign and joint venture industries. The study noted that while up to 7.5% for 'works' and up to 15% for 'goods' are allowed as price preferences, foreign and joint ventures are not eligible if the foreign share is 50% or more. 

Land ownership restrictions also exist, and legal uncertainties regarding the rights of foreign investors to own immovable property affect their capacity to secure land for their operations lawfully. 

The Constitution provides that only Bangladeshi citizens may hold ownership rights over land. The Transfer of Property Act 1882 and the Registration Act 1908 allow property transfer by/to 'living persons,' including a company, but are silent about the rights of foreigners. 

For legal practitioners, the practice is to treat foreign-owned entities incorporated in Bangladesh as Bangladeshi persons, thus allowing them to own immovable property used for business purposes on similar terms. Branches of foreign companies are, a priori, only able to hold long-term leasehold rights over land for business purposes.

Bangladesh urgently needs investment for job creation, especially at this transition stage towards graduation, making it a priority to sustain its growth targets. While Bangladesh boasts very liberal foreign investment policies and has announced several incentives, enjoying the benefits in practice is not instantaneous. 

The 100 Export Processing Zones (EPZs) are in the process of attracting new investments, and Bangladesh Export Processing Zones is a successful project. 

Hi-tech parks and special economic zones are all well-initiated by the government. However, the country has not been able to attract investment to the required level due to a critical investment ecosystem.

Ferdous Ara Begum. Sketch: TBS

Ferdaus Ara Begum is the CEO of BUILD, a public-private dialogue platform that works for private-sector development.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.