As uncertainty persists, clouds get thicker over investment frontier

Investment has not picked up in Bangladesh despite the reopening of the economy five months back largely due to the deep uncertainty caused by the coronavirus pandemic which continues to creep along.

Several entrepreneurs and economists now say the investment would not return to the pre-pandemic level until the crisis comes under control.

The opening of letters of credit for importing capital machinery, one of the major indicators to gauge investment sentiment in Bangladesh, plunged 24.93 per cent year-on-year in the July to August period of the current fiscal year. Correspondingly, the LC settlements plunged 38.93 per cent.

The opening and settlements of LCs for intermediate goods dipped 19.38 per cent ad 28.87 per cent respectively, showed data from Bangladesh Bank.    

The opening of LCs for raw material import dropped 10.57 per cent while its settlements declined 6.99 per cent.

Disbursement of industrial term loans, another indicator, stood at Tk 28,063 crore in the April to June quarter, down 34.99 per cent from Tk 43,154 crore year-on-year.

Although the latest data is not available, the LC openings and settlements may have fallen in the entire first quarter of the current fiscal year as shown in the trend of imports, which declined 11.47 per cent year-on-year.

Asif Ibrahim, vice-chairman of the Newage Group of Industries, one of the leading garment exporters, said the drop in capital machinery import and disbursement of term loans were mainly due to the lack of confidence of investors due to the global coronavirus pandemic.

"Although Bangladesh performed remarkably compared to other countries in terms of GDP growth, investors will open up once the pandemic is on a downward spiral."

He anticipated that by the end of spring 2021, these figures would again pick up gradually.

Humayun Rashid, managing director of Energypac Power Generation, said there had been a liquidity crunch in the banking sector since January. Besides, the bank interest rate had been high.

"So, investors did not go for expansion in a bigger way. The pandemic dealt another blow, slowing down many projects."

Some projects of Energypac had also slowed after the crisis hit Bangladesh in March. Now, the implementation of the projects has started resuming, he said.

The company is importing some capital machinery that would help product automation. Some of the electrical products being manufactured would be exported to regional markets such as India, Pakistan and Nepal, said Rashid, also the president of the International Business Forum of Bangladesh.

Zaid Bakht, chairman of state-run Agrani Bank, blamed the 9 per cent lending rate ceiling, which has been in place since April this year, for the fall in industrial term loans.

"Private commercial banks are very conservative in lending at 9 per cent. They are giving loans on a priority basis. They don't want to take any risks."

The banks with excess liquidity are investing in the treasury bills, said the former research director of the Bangladesh Institute of Development Studies.  

As a result, many entrepreneurs who usually do banking with private banks are coming to state-run banks for new loans. Agrani Bank's credit growth is 17 per cent even during the pandemic, he said.

"The machinery import has gone up in recent months," said Abdul Halim Chowdhury, managing director of Pubali Bank, a private commercial bank.

"This would be reflected in the quarterly report in December," he said, adding that some clients have opened LCs with Pubali Bank.

Chowdhury also said banks were cautious in lending so that none could take out funds through forgery.

He said industries have received funds under the stimulus package introduced by the government. So, they did not apply for new loans.

"Banks also worried about the threat of the second wave of coronavirus. We are not sure how deep the effects would be. So, many banks have adopted the wait-and-see approach."

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, said the significant decline in LC settlements for import of capital goods, disbursement of long-term loans and LC openings for the import of capital goods indicate continued weakness in investment.

He said investment recovery was stunted by lingering uncertainty on the trajectory of the domestic and international economy. These uncertainties are rooted in the unpredictability of the trajectory of the pandemic and how long it would take to be tamed once and for all.

"Investment is all about confidence which has remained fragile in Bangladesh for quite a while now."

According to Hussain, returns on investment are hard to assess in an environment where both sales and costs are hard to project as economies all over the world struggle to crawl back from the pandemic-induced recession.

Simply lowering the costs of financing, as appear to be happening recently due to an abundance of liquidity in the banking system, does not do much to bolster the animal spirits in such an environment.

"Excess liquidity itself is in part a consequence of the lack of demand for investments."

There are structural impediments to investment that hinder initiatives to start and expand production activities in sectors where new opportunities are opening up.

Reforms to ease these impediments such as establishing one-stop shops, economic zones and increasing the transparency and predictability of business regulations have stumbled.

"These are areas where the policy implementors can make a difference if only they could tear apart bureaucratic red tapes and speed up decision-making," Hussain said.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said there has to be demand for normal goods first. Then comes the question of investment.

"The demand for the normal goods has not rebounded. So, entrepreneurs will not go for fresh large-scale investment."

People would invest for the projects that are already in the pipeline or have seen significant progress in the implementation because a significant amount of investment has been stuck there, he said. 

"Why should anyone go for new investment if the existing capacities remain under-utilised?"

The former official of the International Monetary Fund predicted that investment would not return to normalcy until the second half of 2021. "This is most likely to happen in the first half of 2022."

"Industrialised nations have already said it would take until 2024 to see a pickup in investment."

In India, capacity utilisation in the economy was somewhere around 69 per cent, and expecting any fresh investment demand coming from the private corporates looked quite unlikely for some time to come, said State Bank of India Chairman Dinesh Kumar Kharahe, according to the Financial Express newspaper.

Across Asia, on the demand side the only spending that is growing in 2020 is government consumption and investment, in emerging as well as advanced economies.

In other words, economies are relying heavily on government stimulus, said Tao Zhang, deputy managing director of the IMF, in July.

"On the downside, further waves of infections, a rapid tightening of financial conditions, declining trade, and rising geopolitical tensions, among other factors, could further erode confidence with respect to consumption and investment, leading to deeper downturns or slower growth."

Industry-wise data, however, pointed to some recovery in June.

For example, jute textile production rose 12.4 per cent in June compared to May, the peak month for the coronavirus pandemic in Bangladesh. It is, however, down 29.95 per cent from the same month a year ago.

Yarn production edged up 0.38 per cent in June and jumped 32.58 per cent year-on-year, data from the Bangladesh Bureau of Statistics (BBS) showed. 

The country produced Tk 9,131 crore worth of garments in June, up 72.77 per cent from that a month ago but down 9.44 per cent from that in the same month last year.

Similarly, knitwear production advanced 91.42 per cent to Tk 9,892 crore in monetary terms in June compared to May. It was down 2.93 per cent from June 2019.

Paper production rose 59.64 per cent in June compared to May and 64.58 per cent year-on-year. Fertiliser production declined 28 per cent to 21,529 tonnes in June compared to that a month ago.

The production of mild-steel products surged 66.55 per cent in June from May. It was 21.76 per cent below than the level of June in 2019.

Cement production rose both from a month ago and from last year: by 49.89 per cent and 3.51 per cent.

The production of petroleum products recorded a staggering increase as it skyrocketed by more than 43 folds, or 4,269 per cent to 75,905 tonnes in June from May's 1,737 tonnes. It dipped 33.72 per cent from the same period a year ago.

Pharmaceuticals production was up 1.5 per cent, tea production 0.17 rose per cent, salt advanced 43.56 per cent, edible oil gained 14.77 per cent and soap and detergent surged 195.12 per cent. Cigarette production fell 0.38 per cent, according to the BBS.