Mobilising FDI for special economic zones in Bangladesh

The importance of attracting higher levels of Foreign Direct Investment (FDI) for Bangladesh is paramount, especially when the country aims to achieve the status of an upper-middle-income country by 2031 and a developed country by 2041. 

To achieve these targets, attracting FDI in the private sector is crucial as it accounts for more than 75% of all investments in Bangladesh. To streamline the regulatory environment for attracting FDI in the private sector, the Government of Bangladesh initiated a deregulation process that mainly took place between the 1980s and 1990s and continued during the 6FYP and 7FYP but at a slower pace.

However, the country's private investment to GDP ratio stagnated at 22-23% over the last decade. Moreover, Bangladesh's FDI to GDP ratio over the last decade was only 1.1%, while comparable nations like Vietnam and Malaysia performed better with 6% and 3.4%, respectively.

Given the stagnant investment scenario in the country, the government has no choice but to explore all potential avenues to attract investment on a large scale - both domestic and foreign. It is now evident that export processing zones (EPZs) which came four decades ago are not the best possible route for boosting investment. 

With the aim of enhancing industrialisation and employment generation through the process of adequate promotion of trade and investment, the Bangladesh Export Processing Zone Authority (BEPZA) had been formulated in 1980 and was able to establish only eight government EPZs and two private EPZs so far. 

However, the EPZ model can not attract enough FDI and export earnings. As estimated by the World Bank (2018), in the two decades until 2017, the EPZs attracted investment of only USD 4.3 billion, contributed to USD 59.4 billion in export earnings and generated employment for 4,81,000 direct workers. 

In addition, with the focus being on export, the EPZ model was not advantageous to others, except manufacturing for exports. Domestic linkages of the EPZ model were also weaker. To ensure more domestic participation in the economic zones (EZs), the Government of Bangladesh moved away from the EPZ model and emphasised the establishment of special economic zones (SEZs).

The Bangladesh Economic Zones Authority (BEZA) founded in 2010, regulates SEZs. BEZA aims to establish economic zones in all potential areas in Bangladesh including underdeveloped regions to encourage rapid economic development through the increase and diversification of industry, employment, production and export. 

BEZA's goals are to establish 100 SEZs and generate 10 million job opportunities by 2030. In that timeframe, it also intends to foster planned (direct and indirect) industrialisation by boosting output and exports by USD 40 billion. As per the BEZA brochure of 2021, BEZA confirmed an investment of USD 29 billion (USD 26 billion by BEZA-owned zones and USD 3 billion by private economic zone developers). 

So far, BEZA approved 97 SEZs, of them 26 industries are in operation and 31 industries are under construction. The SEZs attracted a total of 192 foreign and domestic investors and created 40,000 jobs (BEZA brochure, 2021).

India is a pioneer in developing SEZs in the South Asian region, and it has benefited greatly from the zones' enhanced export growth, higher use of local commodities and increased job creation. In the beginning, SEZs in India were governed by the nation's foreign trade policy, and fiscal incentives were put into force by the rules of pertinent laws and regulations. 

The idea of making SEZs an engine of economic growth is integrally linked to quality infrastructure complemented by an attractive fiscal package, with the minimum possible regulations. SEZs, with their exclusive legal framework and specialised provisions, can further facilitate investment by providing bypasses to bureaucratic red tape. 

The static and dynamic effects of the zones, ranging from job creation, export growth and increased revenues to economic diversification, innovation, skill development and technological transfer, can provide new impetus to the economic growth of a country.

Like India, the BEZA is providing multiple incentives to the developers of the SEZs as well as to the manufacturing unit investors. Benefits to the developer of the SEZs include mainly tax exemption. Incentives for unit investors range from the exemption of taxes, and custom/excise duties to non-fiscal incentives such as no FDI ceiling, issuance of work permits and recommendation for residentship/citizenship. 

To facilitate FDI, the Government of Bangladesh (GoB) has brought some significant changes in its regulatory space and institutional reforms. In its regulatory space, it is welcoming that Bangladesh has taken several initiatives for the improvement of the business environment such as the introduction of one-stop services for investors, initiation of a national single window, incremental changes in the companies' law etc. 

With regard to institutional reforms, initiatives undertaken by the GoB includes creating reform action plans, establishing task forces, coordinating reform initiatives among pertinent government agencies, offering support for reform to line agencies, engaging in discussions with stakeholders in the private sector, and keeping track of reform progress. 

In keeping with this momentum, Bangladesh needs to take some proper steps to mobilise FDI for SEZs.

Firstly, the GoB has so far approved two SEZs under public-private partnership. Expanding PPP opportunities in the country can open the door for FDI, particularly in industries with high risk and protracted returns.

Secondly, Bangladesh has partnered with the Indian government with a government-to-government economic zone approach of BEZA for three SEZs (Mirshari, Mongla and Kushtia). The speedy implementation of these SEZs will increase Bangladesh's exports and improve its trade standards and trade-handling capacity.

Thirdly, Bangladesh should look into non-traditional investment opportunities like new and emerging sectors that represent current and future trends and climate-smart investments, which have significant potential for the nation.

In many third-world countries, the liberalised FDI policy has not been able to promote sustained development. Hence, FDI for SEZs must be in line with the goals of Bangladesh's sustainable development.

Finally, Bangladesh must make every effort to present itself as a top candidate to receive foreign investors. This necessitates developing and putting into action a focused, time-bound and targeted investment promotion plan.

Md. Tuhin Ahmed, Lecturer, Department of Economics, Sheikh Hasina University, Netrokona, Bangladesh. Email: [email protected]

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.