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Japan-Bangladesh economic ties

Potential in the post-pandemic ‘new normal’

Shaikh Abdur Rahman
28 Dec 2021 00:00:00 | Update: 28 Dec 2021 04:00:03
Potential in the post-pandemic ‘new normal’

The global economy has been facing tremendous challenges in the era of Covid-19 pandemic, raising doubts about whether a full-scale recovery is possible in the near future. However, being a ‘development miracle’ as termed by Prime Minister Sheikh Hasina, Bangladesh has been able to maintain a steady economic growth in spite of the ongoing pandemic. The relatively stable economic growth, along with the political stability is attracting the development partners to make the country an economic hub in the Bay of Bengal region.

Japan, from the beginning of the independence of Bangladesh, has been counted as a trusted and “all weather friend” of Bangladesh. Japan is the largest donor to Bangladesh since 2012, and its total loan assistance (in yen) has reached approximately US$ 24.21 billion. Recently, the two countries signed a US$2.665 billion loan agreement for implementing the Matarbari Ultra Super Critical Coal-Fired Power project (sixth tranche) and the Dhaka Mass Rapid Transit (MRT) Development Project (Line-1). Besides, in different summits, conferences and discussions including the last Japan-Bangladesh bilateral summit on October 2021, the Japanese ambassador in Bangladesh Ito Naoki repeatedly showed his interests to deepen the bilateral economic partnership. Besides, due to competitive and cooperative advantages in the post-pandemic world, the Japanese public and private investors are withdrawing their investment from China and South Korea and diverting the destinations towards Bangladesh.

Due to the negative impacts of global lockdown, millions have lost their jobs; the poverty rate has almost doubled; and many businesses had to shut down lacking resources to continue their operations. The earnings of the vast majority of the population have shrunk to an unprecedented low. In this age of globalization and economic interdependence, the adverse effects of a global economic slowdown have a ‘contingency effect’: the total volume of exports touched the bottom line while the import-dependent countries found themselves struggling to keep their economies stable.

Bangladesh, as always, emerged as an exception. With tactful economic management in the pandemic period, high flow of remittances and consistency in the resilient RMG sector, Bangladesh has become an example to successfully address the challenges and maintain a vigilant economic growth compared to other countries in Asia. Bangladesh is one of the five fastest-growing economies. During the waves of Covid-19, Bangladesh managed to sustain a positive growth rate in 2020.

The national target of Bangladesh is now to lift the country towards the vision of becoming a developed nation by 2041. This requires colossal infrastructural and communication development. Japan has already attained the position of being the second-largest development partner of Bangladesh and the post-Covid scenario is suggesting that both countries can propel their relations to a new height. The net FDI inflow from Japan in fiscal 2020-21 is worth 49.87 million. Besides, on February 24, 2021, at the 4th meeting of the Bangladesh-Japan Joint PPP Platform, an amount of US$8.38 billion funds was proposed from Japan to revamp the transport sector. The fund will be disbursed on the construction of megaprojects including the south side of the outer ring road around the capital and Metro Rail Line-2 from Gabtoli to Chattogram. Besides, talks are underway for the construction of a second Padma bridge with Japanese support.

Most importantly compared to other development partners, Japan provides loans with less rigid conditions and at low-interest rates with high grace periods. For instance, under the 42nd ODA Loan Package (1st batch), Japan will finance the Matarbari and MRT development projects at an interest of 0.6 per cent for construction and 0.01 per cent for consultancy with a repayment period of 30 years and 10 years grace period. Besides, the two lately signed $2.665 billion loan deal covering the Covid-19 Crisis Response Emergency Support Loan Phase-2 with an interest rate of 0.55 percent—along with the development projects.

Recently, Japan International Cooperation Agency (JICA) and the Japan External Trade Organization (JETRO) have increased their engagement with Bangladesh to discuss the potentiality of Japan-Bangladesh preferential free trade area agreement and how the special economic zones can best be utilized. Besides, Japan is an indispensable partner of the developmental triumph of Bangladesh. The financial and technological support of Japan in the iconic mega projects of Bangladesh, especially Dhaka Metro Rail, modernization of Hazrat Shah Jalal International Airport, Matarbari deep sea-port under Moheshkhali-Matarbari Integrated Infrastructure Development Initiative, Padma Bridge, and Bangabandhu Sheikh Mujib Road and Rail Bridge over the Jamuna River are set to transform Bangladesh as well as the direction of Bangladesh-Japan bilateral relations.

A survey conducted by JETRO found that approximately 70.3 per cent of the existing Japanese companies in Bangladesh are interested to expand their operational activities. According to a report published in Bloomberg, the number of Japanese companies in Bangladesh has tripled in the last 10 years reaching well over 300. The transition from the lower-income to the middle-income country has opened a new horizon of extending economic opportunities through foreign investment. So far, Japan Tobacco Incorporation (JTI) and Honda Motors are the leading Japanese investors in Bangladesh. In the meantime, Mitsubishi Inc. also announced plans to invest in Bangladesh in the automobile and large manufacturing plants which may play an important role in accelerating the economic wheel of the country.

Moreover, to fend off the impacts of pandemic, Japan has adopted a policy incentivizing the process of diverting manufacturing facilities out of China and adding Bangladesh to a list of preferred destinations for relocating such factories. Bangladesh is one of the attractive destinations for Japanese companies because of the country’s invest-friendliness. To attract more investments, a special economic zone (SEZ) of approximately 1000 acres is already under construction for Japan in Narayanganj, nearly 32 kilometers away from the capital Dhaka. The Araihazar Economic Zone is a massive investment project worth US$1 billion, which will attract Japanese investment whose approximate value is over US$20 billion. 76 per cent ownership of the special economic zone will be in the hand of the Japanese Sumitomo Corporation. It is expected that the SEZ may emerge as the leading economic zone, not only in Bangladesh but also in Asia, overcoming challenges of the business environment such as tax, customs clearance, and foreign remittance as well as giving incentives.

Japan is among the top five foreign investors in Bangladesh, considering the cumulative Foreign Direct Investment (FDI). In 2020, Bangladesh became the largest ODA recipient country from Japan. The construction of the Meghna, Kanchpur, and Gomti second bridges are excellent examples of the Japanese ODA. In trade, Japan is one of the most important partners for Bangladesh. Bangladesh exports basically readymade garments, agricultural products, and handicrafts. On the other hand, the imports from Japan include electronic goods and machinery, iron and steel products, vehicles and spare parts, etc. The bilateral trade partnership crossed the mark of US$3 billion with a 10 per cent increase in the last fiscal year. There are ample opportunities of collaboration in the trade sector by diversifying products. Japan is now providing Bangladesh with special preferential treatment (SPT), however, after graduating from the LDC group in 2026, SPT will not applicable. By signing FTA or PTA, Japan and Bangladesh will be able to bolster a new partnership of trade and investment.

Bangladesh and Japan are set to celebrate the 50th anniversary bilateral diplomatic relations next year. The structural changes, as part of ‘new normal’ international order in the post-Covid period, the exemplary economic successes of Bangladesh and the strategically important ‘Big-B’ project are bringing the two friendly nations even closer. Addressing the challenges and harnessing the opportunities, it is expected that the bilateral economic relations will reach a new height in the days ahead.

 

The writer is a research assistant at the Dhaka-based Central Foundation for International and Strategic Studies (CFISS). He can be reached at [email protected]