It's a good piece of news that the foreign investors in Bangladesh are set to be eligible for getting the prestigious Commercially Important Person (CIP) status. A draft policy is under active consideration of the government.
The purpose of the recent initiative is apparently to attract more foreign direct investment (FDI), including overseas investment in the Special Economic Zones (SEZs).
The initiative says eligible businesspeople from a fully-foreign owned entity having investment in Bangladesh or a joint venture company with majority foreign equity can also become eligible for CIP status. FDI flow into the country is negligible and constitutes a meagre portion of its total investment. Compared to some other countries in the region, FDI flow in Bangladesh is very low.
According to the Bangladesh Bank (BB) statistics, net inflow of FDI in the country stood at US$ 2.15 billion in 2017, declining 7.72 per cent from $ 2.33 billion a year ago. The government believes that its new strategy would help encourage foreign investment, especially in the economic zones.
CIP status is generally awarded in two categories - 'goods and services' and 'trade bodies' - under the existing policy formulated by the government in 2013. The new policy might incorporate provision for a separate CIP category for the service sector to encourage more service-related export.
The service sector currently forms an insignificant portion of Bangladesh's total export. In the fiscal year 2016-17, the service sector contributed $3.42 billion to the country's total export of $ 34.83 billion. It means that only around 10 per cent of the country's total export came from the service sector.
The CIP status holders are entitled to enjoy various state privileges for one year from issuance of the status. The cardholders get special pass and vehicle stickers for entering the Bangladesh Secretariat. They also get invitations to various state functions.
The CIPs get assistance from the Ministry of Foreign Affairs for getting visa for their overseas business travels. They are also allowed to use VIP lounge of the airports and get priority booking in railways and national flag carrier airlines. The cardholders, their spouses and children enjoy privileges in getting cabins in the public hospitals.
There is no denying that the FDI flow is on a declining trend over the past few years. Some less developed African nations like Ethiopia and Angola received more FDI than Bangladesh, according to the World Investment Report 2017.
For Bangladesh, the most important source of FDI continues to be reinvestment earnings. This means the foreign companies already operating in Bangladesh feel comfortable enough to reinvest their profits for expansion of their existing operations.
Equity capital is the second most important component of FDI, which, despite some volatility, has been increasing in recent years. In 2016, it soared 30 per cent to $911 million.
For the last five years, annual growth rate of Gross Domestic Product (GDP) showed a consistent upward trend. Local traders and entrepreneurs have been doing business despite several barriers. The government has also taken a number of big infrastructure and development projects to support big investments.
The government has been developing special economic zones for attracting FDI and the one-stop service act is in the offing for providing more efficient and quick services to foreign investors.
The finance minister is not at all happy with low inflow of FDI. During his last budget speech, he said that despite building investment-friendly infrastructure, development of the energy sector, necessary facilities and support for setting up industry, simplifying the rules and regulations, foreign direct investment and private investment did not pick up as expected.
The Word Investment Report (WIR) 2018, prepared and released by the United Nations Conference on Trade and Development (UNCTAD), mentioned that net FDI to Bangladesh dropped by 7.8 per cent in 2017 to $2.15 billion from $2.33 billion in 2016. As the probable reasons, it pointed out that FDI flows to Bangladesh slowed as investment in energy and telecom levelled off in the past year while progress in major public-financed infrastructure development has been slowed.
The annual average growth rate stands at 6.93 per cent during 2014-18. The 7.0-plus growth rate has been achieved for the last three years. A number of research already showed that higher and consistent rates of growth in developing countries attract more FDI. Factors like tax rates, infrastructure and logistic conditions are also important. But in the developing countries growth rate reflects the size and potential of the economies.
Again, Bangladesh economy is now in transition and it needs more FDI to move to a higher stage. The country is expected to come out from the least developed country (LDC) category by 2024 fully and formally. The United Nations has already recognised the country's eligibility for the graduation.
There are indications that Bangladesh would witness a decline in foreign assistance and its dependence on private commercial borrowing would increase within a decade. Total private commercial borrowing almost tripled between 2013 and 2017. Private sector borrowed $4.01 billion from the external sources in 2013 which increased to $ 11.34 billion in 2017.
Such borrowings are creating financial liabilities for the near future due to continuous debt servicing. Moreover, commercial borrowing will not be able to cater to the growing demand of long-term finance in a sustainable manner. FDI is a better option in this regard. It also helps offset the long-term liabilities of these loans.
Again, a big challenge for Bangladesh is to attract quality FDI. Besides transferring technology and knowledge, quality FDI helps the host countries to integrate their domestic firms into global value chain (GVC). Global value chain has already emerged as a critical element in the international trade.
The trend of FDI suggests that business environment in the country is still not adequately supportive. This may sound contradictory given the prevailing economic growth.
However, if the new strategy of the government to give CIP status to the foreign investors clicks, FDI flow may increase. Also, it needs to go for more engagement with regional trade blocs for winning more FDI in Bangladesh.