Stimulating private investment in times of pandemic | The Daily Star
12:00 AM, May 09, 2021 / LAST MODIFIED: 06:07 AM, May 09, 2021

Stimulating private investment in times of pandemic

In Bangladesh, despite the gradual rise in the investment-GDP ratio over the past three decades, private sector investment, in proportion to GDP, had remained stagnant for years even before the onset of Covid-19. The Covid-19 crisis intensified the problem.    

While the official statistics on private sector investment during the pandemic are yet to come, the indicators related to private sector investment are showing a very alarming picture. Depressing trends of imports and exports and the private-sector credit growth are testimony to this picture.  

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One of the most critical aspects of Bangladesh's economic development in the 1990s and 2000s was the increased participation of the private sector, with the rise in private investment's share in overall investment, which contributed significantly to elevate the investment-GDP ratio. During those decades, there was a persistent rise in the private investment to GDP ratio. However, during the 2010s, the ratio remained almost stagnant. In the time of the pandemic, this ratio is likely to fall further.

Bangladesh is also seriously lagging in attracting foreign direct investment (FDI). Bangladesh has not been able to attract much FDI even by LDC (least-developed country) standards. Between 2015 and 2019, the FDI share in GDP in Bangladesh was only 0.9 per cent against the LDC average of 2.5 per cent.

Therefore, the question is, how to boost private sector investment in Bangladesh in the time of the pandemic?

There is no denying that the government, in the first place, should effectively implement its stimulus packages so that firms, especially cottage, micro, small and medium enterprises, can continue to grow even during these troubled times.

The government should address several long-standing policy-induced issues, with greater importance, to boost private investment. In this context, trade policy reform and strategic and dynamic industrial policies, aimed at economic growth and diversification through large-scale domestic and foreign investments, would be the priority.

Bangladesh's banking sector crisis is not conducive to private sector investment. Banking scams and the escalation of non-performing loans reveal the financial sector's main structural flaws. Simply lowering the interest rate is not enough to expand private sector credit as a slew of other issues must be addressed as part of the broader reform agenda.

The disbursement of the stimulus packages through the banking channels is also encountering problems due to the inherent institutional weaknesses of the sector.

Therefore, it is necessary to undertake concrete and immediate remedial measures in the banking sector to gain the business confidence of the private sector.

Furthermore, the tax system in Bangladesh is still a revenue-seeking tax system, not development-oriented and private investment-friendly. Therefore, it requires a substantial overhauling.

A variety of supply-side constraints, such as a lack of infrastructure and a high cost of doing business, must be addressed quickly. Bangladesh must resolve vital infrastructure and a weak business environment to draw both domestic and FDI. According to most of the global indices of the business environment, Bangladesh is at the bottom of the rankings in most cases.

However, it is not just the size but also the quality of the infrastructure that is equally important. Due to institutional deficiencies, infrastructure projects suffer from massive cost and time overruns. Overly expensive infrastructure projects, and uncertainty in the timely delivery of such projects, may reduce the rate of return of private investment.

Furthermore, although many supply-side constraints related to poor infrastructure limit future private investment in new and emerging sectors, some of these constraints are 'universal' in nature when others are critically sector-specific. Interconnection and complementarities between universal and sector-specific infrastructures are critical for improving service quality, introducing new technology and encouraging private investment in those sectors.

As there is a general trend in Bangladesh, like in many developing countries, to focus excessively on large-scale infrastructures, such as increased power supply, improved highways, and improved port facilities, vital sector-specific infrastructural development remain unaddressed. Developing large-scale infrastructure is relatively attractive to the policymakers as solving the challenges of sector-specific infrastructure necessitates prioritisation in the policy-making process and consideration of several political economy factors, institutional deficiencies and vested interests.

However, failure to address sector-specific infrastructure issues in Bangladesh leads to a situation where many potential growth-enhancing sectors fail to enjoy the benefits of improved large-scale infrastructures. This situation deters private investment in those sectors.

The country's current level and efficiency of human resources also discourage domestic and foreign private investment in high-value and diverse industries. Bangladesh has some of the lowest public expenditures on education and health, as proportions of GDP, in the world. There is a need to prioritise increased public spending on education, skill development, and health facilities. 

During the pandemic, the added challenge is how to recover the losses in the education and health sectors and place them in the higher development trajectories.

In sum, we need successful implementation of stimulus packages; critical reforms in macro, trade and investment policies; institutional reforms in the banking sector; investment-friendly taxation regime; efficient public investment in social and physical infrastructure; faster and quality implementation of some special economic zones to attract FDI; and improvement in the overall governance of the macroeconomic policy environment.

The author is executive director of the South Asian Network on Economic Modeling.

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