It is still investment, stupid!

BANGLADESH is in a quandary. There are two major concerns in the country. The first is of course the need to overcome the present democracy deficit. Of course, there has been a parliamentary election as scheduled. But close to half of the seats in the body went uncontested as the major opposition party decided to boycott the election at that time. The result has been that the party in power flooded most of the seats occupied earlier by the major opposition party. Legitimately, the power went to the ruling party.

Subsequently, the Election Commission organised major city elections, elections to the municipalities of other townships. The next major elections to take place will revolve around the lowest tier of governance - the Union Parishads. Once that takes place, the government need not worry about elections till the end of this parliamentary term which will not take place before 2020.

Now the question remains about the state of the country's economy. Major indicators show that the country is doing well. In spite of the hype surrounding the activities of BNP, the country has now graduated from a least developed economy to a low middle income country. The government has targeted that by 2021, when we will be celebrating 50 years of our country's independence, we shall be a middle income country, brandishing a per capita income of over US $4,000. The next goal is to become a developed country by 2041, when we will cross the 70 year threshold.

But how much of this is feasible? Undoubtedly, economic indicators in major sectors are positive. But the rocket fuel to spur the economy is still not there. Recently, the Dhaka Metropolitan Chamber of Commerce and Industries (MCCI), in its latest review (October to December 2015) of the economy pointed out that the investment rate is much less than the target of 35 percent of GDP. Such investments are required to propel the GDP growth to 7 percent per annum. We seem to be 'trapped' in a 6+ percent growth rate over the last decade. It specifically points to three issues that must be resolved in the coming decade. First, there needs to be continued political stability. Second, there should be reasonably priced utilities. The third is the availability of adequate infrastructure facilities. To any economist, the last two conditions presage easy access to bank loans at low interest as a precondition to cut the cost of doing business.

Having said this, it is critical to understand that Bangladesh needs to undertake wide ranging reforms to improve the investment climate as well as public infrastructure. In order to do all of this, the government's priority is to mobilise domestic revenue in order to create fiscal space for increasing public investment in critical infrastructure. It will also need to improve social safety nets. While increasing public investments, the government has to keep an eye on subjecting public investments to strict cost-benefit analysis. It also has to improve the management of state-owned enterprises and revert to a market based fuel price regime.

As for private investments - both foreign and domestic - several steps need to be taken. On one hand, foreign investments need to be attracted. Among the major obstacles to FDI growth is poor socio-economic and physical infrastructure, unreliable energy supply, corruption, administrative complexities and non-transparency in bureaucratic decision making, low labour productivity, undeveloped money and capital markets, political instability and overt disturbances, high cost of doing business, etc. Just providing an incentive package or formulating ample liberalisation measures are not likely to improve the level of FDI. Comprehensive efforts by both government and the private sector can push FDIs to new heights in Bangladesh.

The regulatory environment for private business always determines private investment. Complex regulation and bureaucratic hurdles always increase the cost of doing business in the private sector of Bangladesh. There are three areas where state intervention is needed to reduce the cost of doing business. They are inadequate legal framework for contract enforcement , insolvency and the lack of implementation of labour protection law. Recently road congestion, poor conditions of roads as well as internal river ports are also causes of concern. All these three factors lead to slow investment in the private sector. There are several more areas of concern which also need to be addressed. If these are not tackled then the country will not be able to move up the investment ladder. This will deter investors to pump money into the economy in order to create more money for business and industries.

In a recent move, Bangladesh Bank announced the reduction of interest rates on repurchase agreement (repo) and reverse repo in in its monetarypolicy for the forthcoming six months. This bringing down of repo and reverse repo rates by 50 basis points to 6.76 and 4.75, respectively, is a welcome sign. Along with this, the interbank call money rate is now 3-4 percent. Other interest rates have also been kept low. This might lead to increased credit flow to the private sector in Bangladesh. But let us wait and see how this will play out to bring down the cost of doing business. This policy calibration may prompt growth in investments without affecting inflation. It is expected that credit flow will also increase, as all banks in the country have large idle funds. The central bank will hope that there will be high investments in the private sector. It will then eat into the 200 billion takas idling in the coffers of private banks.

It is expected that increased investments will lead to the creation of new jobs and an enabling environment for the private sector.

Human capital will also be created, strengthening social protection, deepening women empowerment and enabling Bangladesh to start addressing climate change issues. Bangladesh is at a cusp of change this year. If this leads to the creation of a resilient economy, a healthy private sector can take off. Bangladesh can resolutely move forward towards achieving a middle income status by 2021. Isn't that what we all are waiting for?

The writer is a former ambassador and a regular columnist for The Daily Star. 
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