Welcome to SouthAsia Research & Corporate Advisory Ltd.

Blog

Foreign direct investment on dive

Foreign direct investment in Bangladesh seems on a dive as the net FDI inflow marked about 30-percent annualized fall in the first quarter of this year, under lingering shadows of global economic upset.

Latest statistics available with the central bank show the ebb tide in flow of foreign capital into the country, acting as one of major factors for its deficit in financial account.

Among the other reasons the country sees prolonged balance-of-payments (BoP) shortfall are below-par remittance and export receipts, according to finance officials and economists.

The unhappy development in the area of inbound overseas investment comes at a time when the 450-billion-plus economy is passing tough times amid forex dearth in the wake of the country’s falling foreign-currency reserves.

In the January-March period of 2023, the FDI-starved Bangladesh received net inflow of overseas investment equivalent to US$ 626.47 million, down 29.49 per cent from US$ 888.48 million recorded in the same period of time a year before.

Compared with the immediate-past quarter, the figure also went down 10.99 per cent from US$ 703.83 million recorded in the last quarter (October-December period of 2022) of the previous calendar year, according to the Bangladesh Bank (BB) data.

Net FDI inflows are the value of inward direct investments made by non-resident investors, including reinvested earnings and intra-company loans. This excludes the amount that goes out of a country through the repatriation of capital and repayment of loans.

Non-EPZ area received the highest flow of $541.49 million while textiles and wearing becomes top foreign investment-earning sector pooling $ 143.81 million followed by banking ($93.43 million), telecommunications ($71.98 million), gas and petroleum ($55.28 million) and trading ($ 34.46 million).

Seeking anonymity, a senior BB official said the remarkable drop in net FDI inflow was observed mainly because of two factors – a drop in reinvestment by the foreign companies and increased volume of payback by foreign companies operating here.

Reinvested earnings plummeted 13.58 per cent while the inter-company loans went up 272.72 per cent in Q1 of this calendar year in year-on-year terms.

But the most interesting and surprising part of the Q3 FDI data is that the highest volume of the net overseas investment comes from Malta, a country that is not even seen on the list of major FDI-sending countries in the past.

Economists have, however, hailed the growth in this tough period of time, suggesting the authorities concerned to properly check the source of international investment to avert any possible trouble in the days to come.

The existing volatility in local currency in the form of continued depreciation of Bangladeshi Taka against the greenback has basically been hurting confidence of the overseas investors in making fresh investment or expansion of their business here.

Tight-fisted import is giving a signal that the decision of putting in more money under such a controlled business climate will not be sustainable one for the investors. “So, they defer their investment.

On the other hand, the escalating cost of business in this higher-inflation regime is the third factor that is discouraging the foreign investors.

According to the BB data, the gross volume of forex reserves remained on a slide, amounting to $29.85 billion as of July 19, 2023 by official count, but the net volume of reserves under the IMF’s BPM6 manual is equivalent to $23.45 billion.

 

RMG exports to non-traditional markets increased by 23pc in July 2023

RMG exports to the United States, the largest export destination for Bangladesh, has increased by 6.31% in July of the fiscal 2023-24 to USD 729.03 million, from USD 685.77 million in the corresponding month of the previous fiscal , according to recent statistics of the Export Promotion Bureau (EPB). During the first month of the fiscal year 2023-24, our clothing export to the EU market grew by 17.40% to USD 1.95 billion from USD 1.66 billion in the same period of last fiscal year. During the mentioned period, our exports to some major markets in the EU region such as Spain, France, Italy, Netherlands and Poland grew by 36.35%, 22.71%, 36.75%, 23.03% and 18.07% respectively.

However, our export to Germany, the second largest export destination for Bangladesh, saw 0.70% year-over-year negative growth and reached USD 514 million. At the same time, exports to Finland, Cyprus, Czech Republic, Estonia, Lithuania, Malta, and Slovakia have declined significantly. During July, FY23, exports to the UK and Canada reached USD 475.54 million and USD 128.89 million, with 29.78% and 14.78% year-on-year growth respectively.

At the same time, apparel exports to the non-traditional markets also increased by 23.75% and reached USD 674.82 million. Among the major non-traditional markets, exports to Japan, Australia, India and South Korea increased by 49.99%, 55.73%, 2.60% and 19.59% respectively.

DCCI for smooth credit flow to private sector

Dhaka Chamber of Commerce and Industry (DCCI) recommended on Thursday rapid revival of smooth credit flow to the private sector for benefitting the country’s economy. It said while the economy was recovering from the pandemic repercussions, the Russia-Ukraine war heavily destabilised the global geo-economic scenario and supply system across the world, including Bangladesh.

As a result, the private-sector investment dropped and was recorded at 21.8 per cent of the gross domestic product (GDP), against the target of 24.8 per cent, in the fiscal year (FY) 2022-23 – having manifold negative impacts on the economy. In this regard, despite various efforts by the government and other stakeholders, private sector credit growth has not yet revived at the expected level.

Bangladesh has emerged as a role model for the developing countries, achieving an average 6.0 per cent plus GDP growth backed by consistent development in socioeconomic fronts.

The private sector has evolved as the key driver in Bangladesh, contributing significantly to the economy in terms of investment, production, trade and employment growth. Furthermore, the private sector has contributed greatly to build a strong local industrialisation base by creating SMEs and large businesses in diverse sectors that have strengthened and connected our local value chain with global value chain system.

The private sector was experiencing smooth investment until the Covid-19 pandemic and geo-economic crisis kicked off.

Due to the pandemic stress, the private sector investment to GDP ratio dropped to 21.25 per cent in FY 2021, which was the lowest in 14 years.

In the first half of FY 2023, public sector credit growth was targeted at 43 per cent, while private sector credit at 10.9 per cent.

This wide gap in targets between private and public sectors indicates and causes underperformance of private sector credit flow. The private sector investment has reduced due to rising development expenditure, relying on borrowing from the banks and non-banking financial institutions (NBFIs), meeting the huge budget deficit, soaring inflation, and contractionary monetary policy.

In addition, increased pressure on the foreign exchange has also affected private investment to some extent.

Amidst this context, to make both the private sector and the economy competitive, improved private sector credit growth is essential. The trade-body urged the government to consider lowering the cost of doing business, easy access to credit for micro, small and medium-sized enterprises (MSMEs), promoting import-substitute industries, continuing the austerity measures, and selecting priority-based development projects.

These focused and time-bound solutions are expected to improve pro-business environment in the economy and cease lowering private sector credit flow in no time, it opined.

China now largest FDI source of Bangladesh

China has become the largest FDI (foreign direct investment) source country of Bangladesh in terms of the gross flow of $940 million for fiscal year 2022.

It has also ranked top in foreign investors with 104 investors at eight export-processing zones (EPZs). China has been the largest trading partner of Bangladesh for the past 12 consecutive years.

The trade volume between the two countries increased by 58 per cent last year showing strong resilience of bilateral trade during the Covid-19 pandemic. Chinese companies in EPZs have created employment for 129,000 people while companies outside the EPZ and Chinese building contractors continue to hiring more and more local workers.

Skills of various professionals have also been increased due to work experience with Chinese companies here and overseas. During the past decades, we have sowed the seeds of mutual benefit, nurtured shared growth through comprehensive collaboration and discussion. We are now entering a harvest season.  According to the Chinese embassy, more than 3,600 officials and technical staffers have attended the Chinese government’s seminars and training courses since 2013, mostly offline before 2020.

 

Bangladesh Bank creates BDT 100 billion export facilitation fund

Bangladesh Bank (BB) has created an export facilitation fund of Tk 100 billion to support export-oriented firms.

Under the fund, an exporter will be allowed to take a loan of a maximum of Tk 2.0 billion from the fund, which is a pre-finance scheme by nature, as per a BB circular issued on Sunday.

As per the circular, BB finances businesses through banks in response to their applications and exporters will have to use the fund to import raw materials, reports BSS.

Banks will avail the fund at an interest rate of 1.5 per cent from the central bank. The end users will pay 4.0 per cent to avail the fund from banks, according to a Bangladesh Bank notice.

The fund would help exporters to tackle challenges in external trade stemming from its journey towards becoming a developing nation from a least developed one.

It will also help exporters address the challenges of emancipating from the ongoing Russia-Ukraine war.

Lenders will have to repay the fund within six months. But they can extend or reduce the repayment tenure for clients.

If any exporter fails to repatriate the worth of the exported goods on time due to any unexpected situation, the central bank will extend the repayment facility for another three months on a case-to-case basis.

Clients will not be allowed to enjoy new funds from the scheme if they have overdue export bills.

Banks would be able to enjoy new funds from the scheme if they failed to repatriate their export bills on time for unforeseen reasons.

In such a situation, exporters will have to repay at least 50 per cent of their overdue payments before availing the loan facility.

Clients already enjoying loans from other funds of the central bank to import raw materials will not be allowed to take loans from the central bank’s scheme.

Members of the Bangladesh Garment Manufacturers and Exporters Association, Bangladesh Textile Mills Association, Bangladesh Knitwear Manufacturers and Exporters Association, and B and C types industries of the export processing zones (EPZs) will be eligible to avail the fund.

There are three types of companies in the EPZs, namely A, B, and C.

Joint venture companies with foreign and Bangladeshi ownerships are treated as type B and those with 100 per cent Bangladeshi ownerships type C.