In FY2023, foreign direct investment (FDI) in Bangladesh contracted by over 7.0 percent, amounting to US$3.2 billion. This decline is a matter of concern for economists who emphasise the pressing need for foreign exchange buildup. The country’s economy is already under strain, and the situation is compounded by the significant drop in equity investments.
Disinvestment and Investment Categories
In the same fiscal year, there was an uptick in disinvestment, characterised by asset sales or liquidation, likely due to potential fund withdrawals. The FDI landscape exhibited notable changes – equity investments saw a sharp decline of 40.91 percent, and intra-company loans fell by 40.14 percent. In contrast, reinvestment by existing foreign-owned companies surged by nearly 16 percent.
Top Contributors and Focus Areas
The primary sources of FDI inflows came from the United Kingdom and the Republic of Korea, with significant contributions from the Netherlands, Hong Kong, the United States of America, Singapore, and China People’s Republic. FDI in Bangladesh predominantly focuses on three areas: economic zones (EZ), export processing zones (EPZ), and non-export processing zones (non-EPZ). Surprisingly, non-EPZ areas attracted the highest net FDI inflows, totalling around $2.8 billion, while EPZs received $406 million, and EZ areas garnered nearly $4.2 million.
Challenges and Reasons for FDI Decline
Dr. Khandker Golam Moazzem, a research director at the Centre for Policy Dialogue, voiced concern over the FDI decline. He pointed out that foreign investors appear reluctant to invest in the country due to unstable and unfavourable macroeconomic indicators. Furthermore, disinvestment has been on the rise, reaching a volume of $1.2 billion during FY 2023. The drop in net FDI inflow can be attributed mainly to a decrease in intra-company loans and equity.
Economic Challenges Impacting FDI
The decline in net FDI inflow can be attributed to three significant economic challenges that Bangladesh is currently facing. First, the ongoing volatility of the local currency, with the Bangladeshi Taka depreciating against the U.S. dollar, has eroded investor confidence in making fresh investments or expanding their businesses in the country. Second, stringent import policies signal to investors that investing under such controlled business conditions may not be sustainable. Finally, the increasing cost of doing business in a high-inflation regime serves as a third discouraging factor for foreign investors.