Sustaining business confidence in Bangladesh

Bangladesh has established its glowing progress to the world and is frequently cited as a global model for economic growth and bursting private sector investment, strong ready-made garment (RMG) exports, poverty mitigation and gender equality, tackling the crisis of the pandemic COVID-19 with limited resources. Though the world sees Bangladesh as a success story, the most pressing challenges may be found as the country graduates from Least Developed Country (LDCs) by 2026, becomes an upper middle-income country by 2031 and a developed country by 2041.

As the voice of business in Bangladesh, Business Initiative Leading Development (BUILD) initiated an effort to conduct a Business Confidence Survey (BCS) in 2013 to capture the pulse of the private sector’s perceptions regarding the state of their operating environment.

The recent survey was conducted by BUILD and USAID-funded Feed the Future Bangladesh Trade Activity jointly to know the business confidences in several aspects. The survey was conducted between September and November 2022, covering the country. The objective is to analyse the existing business condition in the last six months (March 2022 – August 2022) and anticipate turning points in the economic activities for the next six months (December 2022 – June 2023) to enable businesses to prepare and plan accordingly to mitigate risks.

The overall business confidence index (BCI) 2022 stands at 74.4 giving an optimistic perception of business conditions over the next six months (January-June, 2023). The business entities across Bangladesh are confident that the volume of orders for the manufacturing sector, demand for services in the service sector, selling price and business activity will increase over the next six months. Thus, the business entities are willing to expand employment and investment over the next six months. However, the index for the overall cost of business was 35.8 over the past six months and is predicted to reach 22.4 over the next six months giving a worrying signal for the businesses. The low index indicates that the rising cost of doing business is an upcoming challenge that needs to be taken care of.

The BCI for the manufacturing sector possesses a score of 78.7 indicating that the sector is willing to overcome the rising challenges with a positive outlook. Compared to the last six months, the indices for the volume of the order, business activity, selling price, stock of raw materials, stock of finished products and operating capacity at the current period pose high scores giving an impression that the entities have survived well from the losses of COVID-19 and now striving towards investing more over the next six months. However, the expectation towards such a low score of the overall cost of business (12.7) over the next six months gives an alarming signal of a worsening situation, thus immediate actions should be taken to tackle the cost burden of businesses (e.g., the cost of electricity, water, gas, cost of rent, cost of materials).

The BCI for textiles & RMG sub-sector poses an even higher score of 79.6 though the index of overall business cost scored only 4.3 which is the lowest score in this survey. As textiles & RMG industries are heavily dependent on imported raw materials, the cost is the biggest concern. However, the sector is very optimistic regarding the volume of orders over the next six months thus planning to increase employment and investment.

The BCI for the service sector is 69 giving an optimistic perspective around the general outlook, however not as high as the BCI of the manufacturing sector. Compared to the manufacturing sector, the component indices for service sectors are moderate. The overall cost of doing business for the service sector is 34.8 giving a less optimistic view however the overall cost of business for wholesale and retail is 56.7 stating an indifferent view over the next six months.

Operation capacity for the majority of business entities of the manufacturing sector is reported as more than sufficient while most of the entities of the service sector are reported as sufficient. None of the companies in the manufacturing sector performs under 50 per cent of their full capacity whereas the percentage is 27 per cent for the service sector. A sector-based specific investigation is needed to find out the possible reasons and circumstances. It is recommended to conduct a consumer confidence survey to understand the mechanisms of the service sector. The percentage of entities reported to have operation capacity more than sufficient is double for large companies compared to MSMEs. Only 2 per cent of the large companies is performing under 50 per cent and for MSMEs, the percentage is 23 per cent. Despite the circumstances, MSMEs are also keen to expand employment and boost investment over the next six months.

Utility and cost of materials are tick-marked by most of the respondents (95 per cent) as the main cost of doing business for the manufacturing sector, followed by the cost of rent and cost of equipment (94 per cent). The cost of utility (66 per cent) is the main factor for the service sector followed by the cost of rent (53 per cent). Insufficient demand, insufficient supply, shortage of labour, shortage of skilled labour, lack of appropriate equipment, shortage of materials, shortage of space, shortage of energy (fuel and electricity), and uncertainty of the economic environment are the main factors for limiting business activity for more than 80 per cent of the respondents from the manufacturing sector. Uncertainty of the economic environment (43 per cent) is reported as the main factor for limiting business activity in the service sector followed by shortage of energy (36 per cent), shortage of skilled labour (35 per cent) and insufficient demand (34 per cent).

According to a survey respondent, sectors such as steel and cement are highly dependent on raw material imports. This dependency on raw materials has created price volatility as prices of raw materials have grown up to 25 per cent for steel and cement. Moreover, the AIT and customs duties are very high for importing raw materials. The business also suffered because of the supply chain disruption due to the Russia-Ukraine war and cost-push inflation, firms are facing losses which were profitable six months ago.

Because of the rising cost in backward linkage industries such as poultry, fisheries and livestock feed, doing business has become more expensive in the agriculture sector. Respondents from the jute sector said, syndicates and middlemen often artificially regulate the market, especially for raw jute, resulting in absurd prices as raw jute prices almost double in price over months. Sourcing jute, especially high-quality finished jute products become troublesome for entrepreneurs.

Big mills prefer interacting with big players. Moreover, there is a lack of adequate promotion of jute-based products for domestic consumption.

Because of being a micro business and collateral requirement, it is difficult to avail loans of more than Tk. 5 lac from a bank. Moreover, applying for a bank loan also incurs new costs. Putting up a signboard with the same firm’s name and proprietor’s name, having at least three years’ trade license, CIB report fee etc. incur costs. One respondent said that he applied for a bank loan in 2022 but got rejected thrice for several reasons (i.e., signboard name issue, third-party guarantor, etc.). As a result, he faced difficulties in paying the supplier on time which resulted in a decrease in the supplier’s confidence.

Respondents from a restaurant said that they faced problems in connection to passing off related to trademarks for several years. A respondent said that the cost of a cheap credit/stimulus package was not very helpful because of inflation. Rising freight prices have caused a four-times increase in cost, for local companies.

The cost confidence is low amongst business entities, especially in the manufacturing sector. Immediate actions should be taken to tackle the cost burden of businesses (e.g; cost of electricity, water, gas; cost of rent, cost of materials). Compared to the manufacturing sector, the service sector has a moderately optimistic BCI (69) over the next six months. On the other hand, the service sector is operating below its capacity. A consumer confidence survey can be conducted to understand the mechanisms of the service sector.

According to this survey, the manufacturing sector has somehow reached a stable position through several developments, however, the volatile service sector is yet to recover even though has many opportunities that can be explored. Business entities in the service sector especially MSMEs need to adopt modernization and cutting-edge technology to provide competitive services.

Newly created companies that are established between 2018 to 2022, are less optimistic than companies established before 2018. This indicates these companies need more support. Thus, priority should be given to newly established companies while designing policy support. Only 6 per cent of the survey respondents are established between 2018 to 2020. Emerging entities should be encouraged to be more involved with different business associations.

Developing economic zone across Bangladesh is one of the priorities of the government. However, this survey finds that government could not attract businesses to shift to economic zones as planned. Thus, necessary steps need to be taken to find the reasons for undermining the development of the economic zones.

Uncertainty of the economic environment (manufacturing -88 per cent, service- 43 per cent) of policy inconsistencies would need to address for improved BCS in the future. Sometimes, easy market entrance creates price wars, resulting in a compromise of quality. There is a need to control market entry to help current industry players with healthy competition. Along with the modernization of the business environment, the focus should also be given to transforming towards skilled and modern nation-building. Availing trade licenses, trade make, and certifications are still troublesome for business entities. Necessary steps should be taken to make the process easy and less time-consuming.

It is seen from the survey that while the expectation of businesses is high, cost confidence is a serious concern, regulatory aspect, and enabling business environment is another area that needs special attention to sustain business confidence.

The writer is CEO of BUILD a Public Private Dialogue Platform. She can be contacted at ceo@buildbd.org