Private sector investment in Bangladesh is seeing a severe weak trend due to the ongoing global and domestic economic and political instabilities, as well as a shortage of gas supply.
According to Bangladesh Bank (BB), almost all indicators — which help accelerate private sector investment — showed unsatisfactory trends in the first half (July-December) of FY2023-24.
In H1 of FY24, the country’s LC settlement of capital machinery import declined by 26.91 per cent, to $1.43 billion, year-on-year. In the same period, LC opening of such machinery imports increased only by 1.3 per cent, to $1.34 billion, year-on-year.
The BB data also showed that the year-on-year private credit growth was 10.2 per cent in December, up from 9.9 per cent in November last year. October’s private credit growth, however, stood at 10.09 per cent.
Talking to The Business Post, Zahid Hussain, the former lead economist of World Bank's Dhaka Office, said that the indicators show that the country’s investment strength is in a poor state and the situation will not improve overnight.
He said that there were two reasons for the weak investment scenario. First, some people are interested in investing, but they are delaying due to the dwindling foreign exchange reserves and other related crises. Second, many investors lost interest due to the global and domestic crises.
“This crisis will hit employment generation, export earnings and GDP growth as well,” he added.
Industry insiders also blamed the forex shortage, gas crisis and political instability as the key reasons behind the declining trend of capital machinery import.
Pacific Sweater Managing Director Mohammad Rashed had plans to set up a dyeing factory as the country’s apparel export is increasing day by day, creating new windows. However, due to the severe gas shortage, he is now afraid of starting his new venture.
“This will be a massive investment, and if I don’t get an uninterrupted gas supply, I’ll suffer a huge loss. That’s why I am still waiting to invest,” he told The Business Post.
Another investor, requesting anonymity, said, “The political situation is venerable and not in favour of investing. We don’t know yet how the government will manage the Western community, especially the United States, which is our largest trading partner. This situation is not encouraging us to invest.”
Faruque Hassan, the president of the Bangladesh Garment Manufacturers and Exporters Association, said, “Not only financial and political crises, but harassments by NBR and customs as well as bureaucratic red tape are also acting as barriers to investment growth.”
A recently published business climate index by the World Economic Forum (WEF) showed that businessmen identified uncertainty over adequate energy supply as the biggest risk in the next two years and corruption as the foremost obstacle in doing business in Bangladesh, as well as the lack of government official skills.
Key reasons
Industry insiders also said that due to the forex shortage, businesses were unable to open LCs on time to import industrial raw materials. At the same time, authorised dealer banks are taking months to open an LC.
Besides, the US dollar rate is fluctuating regularly and is also in an upward trend. That is why investment cost is increasing day by day, they said.
Seeking anonymity, senior BB officials told The Business Post that the growth of import and export decreased in the last six months and that pushed the payment of LC settlements down as well.
On the other hand, the pressure of the deferred LC payment is decreasing, which is why LC settlements declined in H1 of FY24. Many LC payments were deferred in FY2022-23, which will have to be paid in the ongoing fiscal year, they said.
“On top of all these, Bangladesh is facing severe high inflation. That increased our investment cost. All in all, investment in the country is becoming tougher day by day,” said another investor, asking not to be named.
Last year, the average inflation rate was more than 9 per cent. In December, it was 9.41 per cent. To tame inflation, the central bank has imposed a contractionary monetary policy for the second half of FY24 and hiked the policy rate in line with its implementation.
Accordingly, the interest rate of the banks’ loans has now increased to around 12 per cent and NBFI interest rate stands at 14 per cent.
Bangladesh Employers’ Federation (BEF) Director Fazlee Shamim Ehsan told The Business Post, “Tax policy is also a barrier to invest here. The government changes the policy every year and that creates a barrier to making a concrete plan.
“We always urge to set a policy at least for five years, but the government is yet to do it.”
“The overall investment environment should be reformed. Otherwise, even after the financial crisis is resolved, private sector investment will not improve,” Zahid Hussain warned.
