Investment challenges and opportunities for Bangladesh under the interim government

Since August 2024, Bangladesh has witnessed a decline in foreign direct investment (FDI) inflows, continuing a downward trend from earlier in the year. In the fiscal year 2023-2024 (FY24), net FDI inflow fell by 8.8% compared to the previous fiscal year, decreasing from $1.61 billion in FY23 to $1.47 billion in FY24. 

However, the interim government has initiated significant policy changes to attract FDI, recognising its critical role in job creation and fostering economic and social development.

FDI landscape before August 2024

FDI inflows were steady but moderate, concentrated in key sectors such as textiles, garments, pharmaceuticals, and ICT. However, political instability, bureaucratic inefficiencies, and inadequate infrastructure posed significant barriers to growth. Limited energy resources and service facilities further deterred large-scale investments. 

Major investors included China, Japan, India, and South Korea, focusing primarily on manufacturing and energy. At the same time, the European Union and the United States prioritised textiles and garments due to preferential trade agreements.

The political uncertainty surrounding the general election in January 2024 led many investors to be cautious. Economic challenges, such as currency devaluation, the dollar crisis, and economic instability, compounded this hesitation. 

Ratings downgrades by S&P Global Ratings and Moody's Investors Service in mid-2024 highlighted concerns about liquidity and political risks. Challenges in repatriating earnings and volatile foreign exchange markets further dampened investor confidence.

Post-August 2024 FDI trends

With the change of government, Bangladesh has experienced notable shifts in FDI flows influenced by political, economic, and strategic factors. The interim government has taken various measures to address these challenges.

Policy reforms: The interim government established a committee of economists and experts to develop a 'White Paper on the State of the Bangladesh Economy'. The recommendations of the paper need to be examined and considered for implementation where applicable and practical. 

Deviating from the past practice of appointing senior and retired bureaucrats to key positions, a young investment banker has been appointed to lead the Bangladesh Investment Development Authority (BIDA) along with a special advisor with private-sector expertise to promote investment. Their leadership aims to inject new ideas, enhance efficiency, and eliminate corruption.

Operational improvements: BIDA's strategy has been reorganised, with private-sector representatives joining its initiatTo reduce investor displeasure and expand service offerings, efforts are underway to improve the One-Stop-Service (OSS) offerings. Focus has been redirected to fewer but more effective Special Economic Zones (SEZs), addressing long-standing issues like utility shortages and delays.

Infrastructure and policy integration: Proposals are being considered to integrate BIDA, BEZA (Bangladesh Economic Zones Authority), BEPZA (Bangladesh Export Processing Zone Authority), and Hi-Tech Parks and to establish a Business Regulatory Reform Commission. 

Public-private partnership (PPP) infrastructures have also been made available for foreign investors. Tax reforms and policies to protect intellectual property and technology, as demanded by stakeholders, are also being seriously considered.

Current challenges

Despite these efforts, several barriers persist.

Political instability: Deteriorating law and order, labour unrest, and uncertainty over a free and fair election continue to deter investors.

Weak partnership with private sector: Low trust and inadequate understanding and cooperation between the government and the business community are leading to inadequate access to funds, loans by businesses, high policy/bank rates, uncontrolled inflation, and inability to effectively manage issues like labour unrest, wage and factory security, affecting production as well as trade and investment.

Economic constraints: Low wages, delayed salary payments, difficulties in accessing industrial loans, and burdensome VAT laws hindering industrial growth.

Global and domestic pressures: The IMF has just revised Bangladesh's growth forecast for FY25 to 3.8%, the lowest in three decades, signalling the need for urgent reform.

Insufficient direction for pursuing effective economic diplomacy: Even the interim government has theoretically re-emphasised economic diplomacy like the pre-August government; no strategies or guidelines for this purpose have been provided to the Bangladesh Missions abroad outlining the priorities of the interim government in attracting FDI. This deserves immediate attention.

Opportunities and strategies to attract FDI

Renewed investor interest: The new government's pro-business policies have garnered interest in sectors such as renewable energy, infrastructure development, and ICT. 

Regional and global dynamics: Geopolitical stability and trade diversification are creating new opportunities, though competition from neighbours like Vietnam and India necessitates innovative strategies. The interim government may consider promoting and reinforcing inter- and intra-regional investment and trade agendas through BIMSTEC, D-8, and SAARC mechanisms.

Indo-Pacific Outlook: Under Bangladesh's Indo-Pacific Outlook, efforts need to be made to attract investment in the blue economy. Without publicly aligning with any major power, the government should look into the Canadian Indo-Pacific Strategy, which offers huge investment opportunities.

Proposed strategies

Policy enhancements: Ensure consistency in pro-investment policies and strengthen intellectual property protections.

Infrastructure development: Expedite transport, energy, and urban projects and improve SEZ facilities.

Diversify investment sources: Engage with non-traditional markets like ASEAN, the Middle East, and Africa while leveraging diaspora networks.

Branding and promotion: Promote Bangladesh as a competitive investment destination through targeted campaigns and agreements, such as foreign investment protection agreements.

Digital transformation: Advance e-governance, incentivise startups, and enhance digital infrastructure.

Sustainability focus: Prioritise eco-friendly projects and partner with international organisations to meet ESG standards.

Harnessing blue economy: Appropriate strategies should be devised to harness our marine resources.

The post-August 2024 investment landscape in Bangladesh reflects both challenges and opportunities. While efforts to attract FDI are commendable, addressing underlying issues such as political stability, regulatory efficiency, and economic reforms will be crucial. 

A focus on innovation, diversification, and sustainability will position Bangladesh as a preferred destination for global investors. To reverse the current declining trend, holding a free and fair election and ensuring a smooth transition to a stable political government will be key.

Dr Khalilur Rahman is the former High Commissioner of Bangladesh in Canada. 

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.