Bangladesh lags far behind rivals like Vietnam in foreign direct investment (FDI), a critical source of investment for any developing economy. Meanwhile, we are also trying to sign Fair Trade Agreements (FTAs) in anticipation of the benefits we will lose when we gain official developing country status. The Business Standard spoke to the former president of Business Initiative Leading Development (BUILD) Abul Kasem KhanManaging Director of AK Khan Telecom Ltd, to find out what is holding us back and how we can get more IDE.
How important is foreign direct investment (FDI) for an emerging economy like ours?
FDI is very important for any economy. FDI ensures the injection of capital into the economy. Not only that, but foreign investors also bring in other things such as technology, research and development. This kind of thing brings multiple benefits to a country like ours.
Countries that have performed well in Southeast Asia, especially in our region, have focused their development on the basis of FDI. Say for example Malaysia, Thailand and Singapore; they were all dependent on Japanese IDE. Later, they also received FDI from other ASEAN members.
From Bangladesh’s point of view, we are not achieving the goals we set ourselves in the 7and and 8and five-year plan (FYP), which is a challenge for us.
According to the Bangladesh Bank, net FDI inflows into the country were only $2.6 billion in FY18, $3.9 billion in FY19 and fell to $2.4 billion in FY20. Why are we failing to attract FDI?
Companies that invest through FDI are looking for a return on investment. What will they get in return for their investment? They consider things like whether they will be able to bring their income home, repatriate capital investment, the state of the country, and political and economic stability. They also look at freight facilities in a regional context, what is the state of the transport system.
With international trade, port services and tax process, Bangladesh lags behind in all these parameters. In general, our policies are very good, no doubt, and if you analyze these policies, you will see that we are not behind in all aspects.
We are no less than Vietnam or Thailand. We provide all facilities. The question then arises, why do investors not invest [here] like in Vietnam? The reasons are ease of doing business, advantages in a regional context, etc.
This is reflected in various rankings, such as the World Bank’s Ease of Doing Business Report and the World Economic Forum’s Competition Report. If we compare with Vietnam in terms of logistics, they are far ahead. Our problems are trying to be solved in broad strokes, but those at the root are not solved.
We are still an investment-friendly Bangladesh, by name. First, companies that come here to invest face many hurdles. Secondly, they constantly analyze the advantages that countries can offer them. For example, it takes a year to build a factory elsewhere, but it takes three years in Bangladesh. Investors do not invest blindly; they only invest after doing their due diligence.
The whole world is open to foreign investors and they can invest in Vietnam, Eastern Europe and Africa. Bangladesh is not very attractive to them. If you analyze the FDA received by Vietnam, they get around $14-16 billion in FDI while Bangladesh struggles to get $2 billion even though we are competitors. If we analyze this huge gap, the answer to our struggles will be there.
How to accelerate foreign direct investment (FDI)?
In terms of FDI, our greatest ambassadors are the investors already present. There are a lot of big companies here, the first thing we need to do is to investigate the issues, the challenges they are facing and why they are not making new investments. We have to keep the investors who are already there. If we can solve their problems, the problems of new investors will automatically be solved. The government may contract out this investigation.
Second, people who have already made big investments should be turned into brand ambassadors. When we mark ourselves, we must highlight these stories. Why are big brands like Honda investing in Bangladesh? What facilities do they get? When they ask other foreigners to invest in Bangladesh, only then do other foreign investors feel encouraged to invest here.
We will need some brand ambassadors from this group [existing investors] to rename Bangladesh. Many people don’t know much about Bangladesh. The news fails to convey the economic fundamentals or the real benefits of Bangladesh. Positive news about Bangladesh does not spread globally but is capped by bad press.
We have to spend money on branding. Bangladesh needs to be properly represented through various forms of media and we need to show what we offer. The fact that we are one of the fastest growing countries in the world should be properly conveyed through branding.
Third, we lack interdepartmental coordination. There should be a one-stop service for FDI under one ministry. Foreign investments must be managed by a single ministry. Investors must have a front door from which they can find the solution to all their problems.
The Bangladesh Investment Development Authority (BIDA) can play this role. They already play a bit of that role, but not as a department; rather they work under one.
BIDA and its president must be made accountable. In a bureaucracy, there is the question of seniority. BIDA and government are working on the matrices in which we do poorly on the ease of doing business index, although the World Bank report is pending at this time. We are weak in areas where we lack, such as port clearance. We need to increase our ability to invest more.
As a fourth solution, some reports say that if we make minor changes to some things, we can improve a lot. For example, with port clearance time, if we can reduce it to less than 24 hours, we will be more competitive.
The Dhaka Chittagong highway has an average speed of 30-40 km/h. If we can increase this speed by 20-25%, we can improve our export competitiveness/domestic competitiveness according to a World Bank report. We can achieve maximum benefits by making minor changes.
And the fifth solution is to raise the competitiveness of our country. The only competitiveness we have is labor cost. We lag considerably behind other countries in terms of competitiveness in other sectors. Say, for example, innovation competitiveness, productivity competitiveness, transportation competitiveness, and logistics competitiveness as well.
In all these aspects, we must adopt new direct strategies on how to improve our competitiveness. Of course, the government is taking action. For trade facilitation or logistics, the government is setting up a bay terminal, they have developed an Inland Container Depots (ICD) policy, and they are also working on some logistics policies. The government is not standing idly by.
We [business leaders] are also involved in the process. The government has already summoned us to various places [for discussion]. What we have to say is that this process must be time-bound.
Everything must be done within a deadline. Our competitors are not standing still, other countries are also competitive. It’s a race and everyone runs. Obviously important is how fast you can run in a race, i.e. how fast you can get things done.
You also need durability and continuity. To achieve the 2031, 2041 visions set by the government, private sector investment is very important.
The more the private sector is engaged, the more economic freedom given to it, the better. When we talk about economic freedom, fiscal policy is also mentioned. Our tax policy is very uncompetitive. Compared to other countries, our tax policy is very uncompetitive. It can be called non-business friendly.
There is withholding income tax and withholding VAT. We are in discussions on these matters with the government and the National Board of Revenue (NBR). That’s what foreign investors are thinking about. Why should a foreign investor pay advance income tax, when there is no concept of advance tax in other countries, and why should he give tax before doing business. They should be taxed after doing business and be taxed on profits, not income.
To facilitate the conduct of business, it is possible to work on policies such as the elements of tax policy, tax refund. The government is listening and it also understands that this is a problem. The effort must be limited in time. Taxation is down in Bangladesh. Last year, it fell by 2%. Some chambers also say that it still needs to decrease by 2-5%. It’s legal, but what is the effective tax rate? It’s not 30% in Bangladesh, it’s higher.
Investors pay a tax of 40 to 45% depending on the sector. Why? Because of the income tax advance and not their reimbursement. Our reimbursement system is quite weak, in many cases companies are not reimbursed. Even though the tax rate is 30% on paper, in reality it is not, it is significantly higher. Thus, our competitiveness as a nation diminishes.
In Vietnam, the tax rate is 20-25%, and that’s the [effective] tax rate. There is no hidden or advanced tax. In Bangladesh, they see that 30% is written down, but when they talk to their listeners or other sources, they find out that the tax rate is 35% and they get scared.
They think it’s not fair for us to say one thing, but in reality the effective rate is different. The math should add up at the end of the day. 1-2% counts when talking about high volume investments.
The rationalization of taxation, both at the level of tariffs and at the level of income tax, must be carried out. The method of taxation must be modern and efficient. The government will obviously generate revenue by collecting taxes, so the tax net needs to be widened. It can be expanded and by lowering tax rates we can also follow in the footsteps of other countries and what they are doing. There is plenty of room to work here.