Originally posted in The Financial Express on 8 February 2025
Private investment is experiencing major disarray during the tenure of interim government which was started in the previous regime. Bangladesh did not manage to raise its investment levels to match those of its peer developing countries during previous regime. Over the past decade, investment levels in Bangladesh have remained stagnant, consistently ranging between 30 and 32 per cent of gross domestic product (GDP). Private investment has similarly remained limited, fluctuating between 22 and 24 per cent of GDP, while Foreign Direct Investment (FDI) has persistently accounted for less than 1 per cent of GDP. Private investment contracted steadily during the fiscal years 2023 and 2024, whereas FDI has been in continuous decline since FY2018.
Bangladesh’s weak performance in attracting higher investment is mainly due to long-standing issues like an unfriendly business environment, complex bureaucracy, weak institutions, and unpredictable policies (Raihan, et al 2023). However, the recent years’ fall in private investment and FDI reflects the country’s more recent struggle in maintaining macroeconomic stability particularly in the area of exchange rate management.
The new interim government replaced the previous administration on 8 August 2024, commencing its tenure nearly at the start of a new fiscal year. To boost the country image and improve business environment, it has added new positions in the cabinet (such as special envoy to the chief advisor) and replaced leadership of important business-related organisations such as BIDA. This transition of power brought both new hopes and potential risks in terms of investment generation. In its first six months, a number of reform measures have been undertaken by the new government. However, it remains uncertain whether these new initiatives will be sufficient, effective, and aligned with the latest investment trends and challenges.
Against this backdrop, this section attempts to examine the most recent state of investment in Bangladesh’s economy, with a focus on identifying newly emerged opportunities and risks and assessing the initiatives undertaken by the interim government.
STATE OF PRIVATE INVESTMENT DURING H1 OF FY2025:
Investment. A major challenge in evaluating the most recent investment trends in Bangladesh is the lack of monthly investment-related data. However, proxy indicators can provide a useful basis for estimating and understanding investment performance.
Private sector credit growth can provide an indication of the investment climate in a country. The most recent data on private sector credit growth shows higher growth in FY2025 (as of November), with a 9.0 per cent increase compared to that of FY2024; for the same period (July- November) the growth was 9.9 per cent in the case of FY2024 vis FY2023 (Table 5.2). However, when examining monthly data, it can be observed that following the interim government took over of August 2024, there was a sharp decline in credit growth during the subsequent three months, September, October, and November (Figure-1).
From the investment’s point of view, this could indicate that businesses either lacked the confidence to invest by securing credit amid uncertainty or found it more costly and difficult to obtain financing, which hindered their ability to invest through borrowing. Consequently, it can be inferred that Bangladesh is likely experienced a decline in private sector investment during these months. However, it is important to note that the rise in interest rates, embargo on disbursements for certain banks, liquidity crisis of Banks, and limited scope of laundering of banks money during this period may have also played a key role in the drop in private sector credit growth. In fact, liquidity data of Bangladesh Bank confirms a decline in banking sector’s lending capacity in most of the recent months. After maintaining a downward trend till September 2024, the total liquidity size started to improve
Import of capital goods. Another proxy indicator that can indirectly reflect the investment scenario is the import of capital goods. In all four months following the interim government’s assumption of power, there was a continuous significant decline in the import of capital goods compared to the previous fiscal year (Figure 5.3). Notably, in August of FY2025, the import of capital goods dropped by a significant 31.2 per cent. This suggests poor investment performance in the early phase of the current fiscal year. However, this negative trend in import growth cannot be solely attributed to the current government regime or the ongoing fiscal year. In fact, overall imports of capital goods decreased by 22 per cent in FY2024 compared to the previous fiscal year (in case of July-Nov of FY2024, there was a 15. 7 per cent decrease compared to July-Nov of FY2023).
The increasing negative trend in the import of capital goods can likely be attributed to several past and a few new factors. Firstly, the rise in the dollar price has led to higher import costs, secondly, the ongoing foreign reserve crisis has made it difficult for companies to open new letters of credit (LCs), further restricting their ability to import these goods. Thirdly, the decline in consumer confidence, and consequently their purchasing demand, is evident. A recent survey by SHWAPNO Super Shop in Bangladesh revealed that the consumer confidence index stood at 32.5 in early October 2024, significantly below the benchmark value of 50. This decline in consumer demand due to higher prices has put pressure on businesses. Along with these persisting challenges, the new uncertainty created over political stability and increasing financing costs in view of the increasing rate of interest have further deteriorated situation in these months.
Financing SMEs. At a time when the rising financing costs affect the entire business sector, small and medium-sized enterprises (SMEs) are likely bearing a disproportionately greater impact. Data from Bangladesh Bank indicates that the average interest rate for SMEs is notably higher than that of other sectors in the ongoing fiscal year, meaning that, on a relative scale, SMEs cost of financing has increased more significantly. Data on the level of loan disbursements to Cottage, Micro, Small, and Medium Enterprises (CMSMEs) for the latest fiscal year is not available. However, the available data of Bangladesh Bank indicates that loans disbursed to Cottage, Micro, Small, and Medium Enterprises (CMSMEs) declined by 13.10 per cent year-on-year during the April-June quarter of FY2024 compared to the same period in the previous year. Given the deterioration of the overall business investment scenario in the beginning of FY2025, the CMSMEs, which was already experiencing negative growth in receiving of loan in FY2024, are likely to go through an even tougher situation presently.
FDI Inflow. The net FDI data reflects a trend similar to other investment-related scenarios. While there was a 2.9 per cent increase in net FDI during FY2024 compared to FY2023, the most recent months of FY2025 show a significant decline in net FDI compared to FY2024. Furthermore, if only net inflows are considered, FDI actually declined in FY2024 as well. According to Bangladesh Bank data, net FDI inflow decreased by 8.8 per cent in FY2024 compared that in FY2023.
Investment in the capital market. The performance of the capital market during the first six months of the interim government remains somewhat similar, if not improved, compared to the last six months of the previous government. Although there was a significant spike in the market index initially when the government took overpower, a downward trend can be observed over time. Specifically, the mean DSX index point decreased to 5,393, compared to DSX index value of 5,778 under the previous government (last six months) (Figure 2). However, in terms of market stability, the market under the current government has performed relatively well-the standard deviation of the index reduced from 408 to 267. Despite the return from the market remains negative during both the previous and current governments, there has been an improvement under the current government, with returns shifting from negative 16.2 per cent to negative 4.8 per cent (2).
Since the interim government has replaced the previous administration, only an Initial Public Offering (IPO) of BDT 5,000 crore has been issued in the primary market. Although the capital market has yet to show significantperformance improvements, net portfolio investment (investment in financial assets) has remained higher in recent months compared to the previous fiscal year. Notably, in September of FY2025, net portfolio investment reached a staggering USD 81 million-the highest recorded during this period . However, despite this substantial investment, share prices did not show notable increases during that month or in subsequent months. This is likely because much of the investment was directed toward purchasing other financial assets, such as bonds, rather than stocks in the capital market.
When examining portfolio investments by foreigners (non-resident Bangladeshi), a contrasting trend emerges. While the amount of portfolio investment has remained relatively consistent, ranging between USD 6 to USD 9 million during the initial months of the current fiscal year, a month-on-month decline is evident compared to the corresponding months of the previous fiscal year (Figure 5.7). Although the differences in amounts are not substantial, the downward trend could signal a gradual erosion of foreign investors’ confidence in Bangladesh’s financial markets.
PRODUCTION AND EMPLOYMENT SCENARIO:
Amid the ongoing economic crisis in Bangladesh, it is crucial for businesses to maintain their current level of sales, export and production. The monthly Industrial Production Index (IPI), published by the Bangladesh Bureau of Statistics (BBS), provides insights into the overall production scenario, shows a similar trend to the investments.
While there were initial peaks in early of 2024, most scales-particularly Large Scale and Manufacturing-have experienced significant declines by mid-year. Although there is some recovery observed in the later months, the overall performance remains subdued, highlighting ongoing challenges in the industrial sector. It is important to note that the ongoing closure of factories, including 60 RMG factories such as those of Beximco and Keya Cosmetics, could hinder the recovery trend and further exacerbate the crisis in the upcoming months.
Along with businesses, the unemployment scenario appears to have declined in recent months. The data from BBS suggests that the rate of unemployment, which was 4.07 per cent in the (July-Sep) period of 2023, increased to 4.49 per cent in the same period of 2024. The increase in the unemployment during this period occurred for both male and female workers.
On the other hand, wage index published by BBS for across industries exhibits a relatively slow upward trend since the new government assumed office. In fact, wage growth in the manufacturing sector has remained lower compared to the agriculture and service sectors under both the previous and current regimes.
ONGOING CHALLENGES FOR BUSINESSES:
The business sector of Bangladesh was already going through difficulties during the previous regime. The transition of government has introduced new challenges for businesses while intensifying many existing ones. The following table summarises major challenges that are still relevant for businesses:
While the most of structural challenges needs long term initiatives to be addressed, the government can focus on the operational challenges which can be addressed in the short term and bring immediate good outcomes. It is worth noting that numerous enterprises owned by individuals closely allied with the previous government were found to have acquired substantial loans through illegal means, which remain unpaid. Given the significant debt these companies carry, it is economically unviable to continue their operations in an attempt to recover the loaned funds. However, shutting down these enterprises would result in thousands of workers losing their jobs. Under the circumstance, the government must without delay intervene especially for the sake of workers.
INITIATIVES UNDERTAKEN BY THE INTERIM GOVERNMENT:
Although it has only been around six months since the interim government assumed power-arguably too short a time to enact drastic changes-several immediate measures have been introduced to lessen the burden on businesses and attract investments. The following table summarises the key initiatives undertaken by the interim government that could affect the businesses and investment:
RECOMMENDATIONS FOR THE INTERIM GOVERNMENT:
In view of the current situation, the following recommendations can be considered by the interim government:
Operational
a) Prioritise immediate improvements in the law-and-order situation to ensure businesses can operate safely without the threat of extortion;
b) Offer long-term, fixed exchange rate guarantees specifically for potential foreign investors;
c) Design a subsidised credit facility with lower interest rates to support SMEs;
d) Expand the coverage of the social safety net programme to provide better protection to the ongoing deteriorating employment situation;
e) Explore further reductions in fuel prices using a market-based pricing model, with the potential to lower costs by BDT 10-15 per litre as suggested by CPD in its recent study;
f) Ensure a better supply of gas for industry by first track gas exploration in the country;
g) Enhance awareness of BIDA’s one-stop service among stakeholders to improve accessibility;
h) Quickly hold the elections for the trade bodies that are being managed by administrators in order to better raise the voice to government and international community;
i) Avoid increasing VAT on goods without first strengthening monitoring mechanisms and digitisation of the process.
j) Address the anomalies in the primary and secondary markets
Structural
a) Set up a Better Business Forum (BBF) comprising representatives of government, business and other stakeholders and ensure businesses are notified of policy changes well in advance.
b) For revenue generation focus should be more on tax justice perspective, increasing dependency on direct tax and property tax.
Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Mr Muntaseer Kamal and Mr Syed Yusuf Saadat, Research Fellows, CPD. moazzem@cpd.org.bd; avra@cpd.org.bd
[Abu Saleh Md Shamim Alam Shibly, Tamim Ahmed and Helen Mashiyat Preoty, Senior Research Associates; M Tanjim Hasan Khan, Resource Mobilisation Associate; Afrin Mahbub, Preetilata Khondaker Huq, Anika Tasnim Arpita, Jannath Sharmin Chowdhury, Anindita Islam, Abrar Ahammed Bhuiyan, Nuzaira Zareen, Ayesha Suhaima Rab, and Safrina Kamal, Programme Associates of CPD provide research assistance.]