Bangladesh is lagging far behind rivals like Vietnam when it comes to Foreign Direct Investment (FDI), an essential source of investment for any developing economy. Meanwhile, we are also trying to sign Fair Trade Agreements (FTA) in preparation for the benefits we will lose when we get official developing country status. The Business Standard spoke to former Chairperson of Business Initiative Leading Development (BUILD) Abul Kasem Khan, Managing Director of AK Khan Telecom Ltd, to find out what is holding us back and how we can get more FDI.
How important is Foreign Direct Investment (FDI) for an emerging economy like ours?
FDI is very important for any economy. FDI ensures capital injection into the economy. Not only that, but foreign investors also bring other things such as technology, research and development. Things like that bring multiple benefits to a country like ours.
Countries that have done well in south-east Asia, especially in our region have focused their development based on FDI. Say for example Malaysia, Thailand and Singapore; they were all dependent on Japanese FDI. Later they also received FDI from other ASEAN members.
From Bangladesh's perspective, we are failing to reach the targets we have set for ourselves in the 7th and 8th Five-Year Plan (FYP), which is a challenge for us.
According to Bangladesh Bank, net FDI inflow into the country was only $2.6 billion in FY18, $3.9 billion in FY19 and dropped to $2.4 billion in FY20. Why are we not being able to attract FDI?
Companies that invest through FDI look for a return on their investment. What will they get in return for their investment? They consider things like if they will be able to take their earnings back home, repatriate the capital investment, the situation of the country and political and economic stability. They also look at the freight facilities in a regional context, what is the situation of the transportation system.
With international trade, port services and the taxation process, Bangladesh lags behind in all these metrics. In broad strokes, our policies are very good, no doubt, and if you analyse these policies you will see we are not lagging behind in any aspect.
We are no less than Vietnam or Thailand. We are providing all the facilities. The question then arises, why are the investors not investing [here] like in Vietnam? The reasons are ease of doing business, benefits in a regional context, etc.
This reflects on various rankings, like the Ease of Doing Business report by the World Bank and World Economic Forum's competitive report. If we compare ourselves with Vietnam in terms of logistics, they are far ahead. Our problems are trying to be solved in broad strokes but the ones that lie at the grassroots are not being solved.
We are still an investment-friendly Bangladesh, by name. Firstly, the companies that come here to invest have to face a lot of hurdles. Secondly, they are continuously analysing what benefits countries can offer them. For example, it takes one year to build a factory elsewhere but it takes three years in Bangladesh. The investors don't invest blindly; they only invest after doing their due diligence.
The whole world is open to foreign investors and they can invest in Vietnam, East Europe and Africa. Bangladesh is not very attractive to them. If you analyse the FDA received by Vietnam they receive around $14-16 billion FDI while Bangladesh is struggling to get $2 billion, even though we are competitors. If we analyse this huge gap, the answer to our struggles will be there.
How can we accelerate foreign direct investment (FDI)?
When it comes to FDI our biggest ambassadors are investors who are already here. There are many big companies here, the first thing we need to do is conduct a survey on what the problems are, challenges they are facing and why they aren't making new investments. We have to hold on to the investors who are already here. If we can solve their problems, the problems of new investors will automatically be fixed. The government can outsource this survey.
Secondly, people who have already made big investments should be turned into brand ambassadors. When we are branding ourselves we need to highlight these stories. Why are big brands like Honda investing in Bangladesh? What facilities are they getting? When they ask other foreigners to invest in Bangladesh, only then will other foreign investors feel encouraged to invest here.
We will need some brand ambassadors from this group [existing investors] to rebrand Bangladesh. Many people don't know much about Bangladesh. The news is failing to convey the economic foundations or the advantages Bangladesh actually has. The positive news about Bangladesh is not going out into the world but is being capped by bad press.
We have to spend some money on branding. Bangladesh has to be properly represented through various forms of media and we need to show what we are offering. The fact that we are one of the fastest-growing countries in the world needs to be conveyed properly through branding.
Thirdly, we lack inter-ministry coordination. There needs to be a one-stop service for FDIs and under one ministry. Foreign investments need to be handled by one ministry. Investors need to have one doorway from where they can find the solution for all their problems.
Bangladesh Investment Development Authority (BIDA) can play that role. They already are somewhat playing that role but not as a ministry; rather they work under one.
BIDA and their chairman need to be empowered. In a bureaucracy, there is the issue of seniority. BIDA and the government are working on the matrices we are doing poorly in on the Ease of Doing Business index, although the World Bank report is on hold at the moment. We are weak in sectors where we are lacking, such as the port clearance. We need to increase our ability to invest more.
As a fourth solution, some reports say if we make minor changes to some things we can improve a lot. For example, with port clearance time, if we can cut it down under 24 hours we will be more competitive.
The Dhaka Chittagong highway has an average speed of 30-40 kph. If we can increase that speed by 20-25 percent we can improve our export competitiveness/country competitiveness according to a World Bank report. We can get maximum benefits by making minor changes.
And the fifth solution is picking up our country's competitiveness. The only competitiveness we have is the cost of labour. We are lagging far behind other countries in terms of competitiveness in other sectors. Say, for example, innovation competitiveness, productivity competitiveness, transport competitiveness and logistics competitiveness as well.
In all these aspects, we need to adopt some new direct strategies on how to improve our competitiveness. The government is of course taking some actions. For trade facilitation or logistics, the government is making a bay terminal, they have drafted an inland container depots (ICD) policy and they are also working on some logistics policies. The government is not sitting idle.
We [business leaders] are also involved in the process. The government has already called us to various places [for discussion]. What we have to say is that this process needs to be time-bound.
Everything needs to be done within a deadline. Our competitors are not sitting idle, other countries are competitive as well. It is a race and everybody is running. How fast you can run in a race is obviously important, that is, how fast you can get things done.
You also need sustainability and continuity. To realise 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 they are given, the better things are. When we are talking about economic freedom, taxation policy also comes up. Our taxation policy is very uncompetitive. Compared to other countries our taxation policy is very uncompetitive. It can be termed non-business friendly.
There is advanced income tax and advanced VAT. We are in talks about these issues with the government and the National Board of Revenue (NBR). This is something foreign investors think about. Why does a foreign investor have to pay advance income tax, when there is no concept of advanced tax in other countries and why should they give tax before doing any business. They should be taxed after conducting business and be taxed on profits, not on revenue.
To make doing business easier, there is room to work on policies like the elements taxation policy, tax refund. The government is listening and they also understand that this is a problem. The effort needs to be time-bound. Taxation is decreasing in Bangladesh. Last year it decreased by 2 percent. Some chambers are also saying it needs to decrease a further 2-5 percent. It is as per the law, but what is the effective tax rate? It is not 30 percent in Bangladesh, it is higher.
Investors are paying 40-45 percent tax depending on the sector. Why? Because of the advanced tax on the revenue and not refunding them. Our refund system is quite weak, in many cases, businesses are not getting refunded. Even though the tax rate is 30 percent on paper in reality it is not, it is clearly higher. Thus, our competitiveness as a nation is decreasing.
In Vietnam, the tax rate is 20-25 percent, and that is the [effective] tax rate. There is no hidden or advanced tax. In Bangladesh, they see that 30 percent is written but when they talk to their auditors or their other sources, they find out the tax rate is 35 percent and they get scared.
They think this is not right that we are saying one thing but in reality, the effective rate is different. The maths needs to add up at the end of the day. 1-2 percent matters when you are talking about big volume investments.
Taxation rationalisation, both at the tariff level and the income tax level needs to be done. The taxation method needs to be modern and effective. The government will obviously generate income by collecting taxes so the tax net needs to be broadened. It can be broadened and by decreasing 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.