Private sector faces burdensome business climate: IFC

The private sector in Bangladesh faces one of the most burdensome business environments in the world, the International Finance Corporation (IFC) said in a report yesterday.

"To improve the business environment and attract more local and foreign investment, the country needs to embark on a new round of reforms," it said.

The report, the Country Private Sector Diagnostic, was launched at a virtual event.

The reforms would enable the country to have an economy of $900 billion by 2030 from around $300 billion at present, it said.

While Bangladesh has been one of the biggest development success stories in recent decades, it's now time to switch gears to meet ambitions to transform into an upper-middle-income country in the next decade, said the report.

"The pandemic has hit Bangladesh hard, and as the country recovers from Covid-19, the need for reforms will become even more compelling. Finding new sources of income and growth will be an urgent priority," said IFC Vice President for Asia and the Pacific Alfonso Garcia Mora.

The private sector, which already accounts for more than 70 per cent of all investments in Bangladesh, supported by a strong financial sector, will need to play an important role in spurring the recovery so that the country can grow, export and create quality jobs, the IFC said.

Key priority areas for the reform agenda include creating a favourable trade and investment environment for domestic and foreign investors, modernising and expanding the financial sector and removing impediments for developing infrastructure.

Transport and logistics, energy, financial services, light manufacturing, agribusiness, healthcare and pharmaceuticals sectors are among those with the strongest potential for private investment that could play a significant role in boosting economic growth.

Bangladesh has nonetheless reached the limit of its current development model, it said.

"Moving to the next stage of development will require a new round of reforms to strengthen and modernise the private sector, which faces an economic policy environment that increasingly undermines its potential to drive diversified, export-led growth."

High import tariffs and the discretionary use of regulations protect well-established businesses and sectors at the expense of the rest, and this impedes innovation.

Limited progress in opening the infrastructure sector for competitive private participation -- with the exception of power generation -- holds back investment and modernisation, the IFC said. 

"As a result, Bangladesh's private sector has not moved beyond its initial success and is becoming increasingly concentrated and inward-looking, seeking to maximise rents from existing markets instead of embracing openness and competitiveness." 

The report said the financial sector lacks the capacity to efficiently channel domestic savings into a productive investment because of an elevated ratio of non-performing loans and weak capital buffers, underscored by inadequate corporate governance, weak supervision, and a lack of breadth.

Since the private sector is the engine of growth, the facilities that have been given to the garment sector should also be extended to other sectors so that they can also perform well in export in a diversified way, said IFC Country Director Wendy Werner.

Currently, the garment industry contributes 84 per cent to the national export. Sectors such as leather and leather goods, footwear, agricultural products, jute and jute goods have a lot of opportunities to grow.

"For a more resilient, inclusive and sustainable growth, Bangladesh needs to diversify its export basket and develop a robust and sophisticated private sector, relevant in the post–Covid-19 recovery phase when public resources would be needed most in the social sectors," said Mercy Tembon, country director of the World Bank.

Salman F Rahman, adviser to the prime minister on private industry and investment, said protectionism was not always bad as, in some cases, it proved worthy.

For instance, the pharmaceutical industry is meeting 95 per cent of the domestic demand and exporting products to other countries due to protectionism. The same is also true for the primary textile industry, he said.

The infrastructures and power plants at Matarbari can be the game-changer for Bangladesh, he said.

Ahsan Khan Chowdhury, chief executive officer of Pran-RFL Group, said that investors needed funds from the government, local banks, debt markets, bond market, and international sources for the growth of the private sector.

Mamun Rashid, managing partner of PwC Bangladesh, said the foreign exchange regulation of 1947 needed to be amended as it acted as a stumbling block for foreign direct investment in the country.

Tofazzel Hossain Miah, secretary to the Prime Minister's Office, said the government had already formed six sub-committees with representation from businesses to simplify rules, improve logistics, facilitate trade, and create jobs.

The IFC report said challenges persist, with more than 40 million Bangladeshis still living below the poverty line today and nearly half the population vulnerable to falling back into poverty.

The private sector is responsible for 90 per cent of jobs in the developing world. "It is, therefore, critical to boosting the development of a broad-based private sector."