Originally posted in The Daily Star on 28 January 2025
Trade and investment are interlinked, and they can reinforce each other, fostering economic growth, creating employment opportunities, and driving social progress. They also act as critical components of economic framework by generating higher revenues, which can be channelled into developmental initiatives and social protection programmes for underprivileged communities. Therefore, countries must design and implement robust policy measures to create conducive environments, that encourage increased trade and investment.
Bangladesh has transitioned from an aid-dependent economy to a trade-dependent economy over the past decades. The share of foreign aid has declined to less than two percent at present while the shares of export and import are 13.1 percent and 15.7 percent, respectively. However, the opportunities for higher trade remain largely untapped. On the other hand, despite claims of high economic growth by the previous government, investment levels have stagnated over the last decade.
In the fiscal year (FY) 2023-24, private investment constituted 23.5 percent of GDP—lower than the 23.7 percent in FY 2015-16. Public investment showed a modest increase from 6.5 percent of GDP in FY 2015-16 to 7.5 percent in FY 2023-24. Foreign direct investment (FDI) remains a critical concern, as it has consistently accounted for less than 1 percent of GDP since FY 2015-16. In FY 2023-24, FDI was little over 0.3 percent of GDP. These figures highlight the need for urgent actions to unlock the full potential of trade and investment in Bangladesh.
A broad spectrum of factors, that determine export competitiveness and economic attractiveness for investors, influence Bangladesh’s trade and investment climate. These factors include the soundness of macroeconomic policies, the strength of economic and political institutions, the functioning of the legal and regulatory framework, the quality of infrastructure and services, the skill sets of human resources, and the level of technological adoption.
The lack of sound macroeconomic policies, a cornerstone for creating a stable and conducive environment for trade and investment, has weakened Bangladesh’s macroeconomic stability over the years. It is currently reflected in the country’s fiscal and monetary policies, exchange rate, financial and debt situation, affecting growth performance. Governments stimulate aggregate demand and economic activity through a well-managed fiscal policy; for instance, generating employment and enhancing logistics through public infrastructure projects, thus contributing to overall economic efficiency. However, in Bangladesh, the effectiveness of fiscal policy has eroded because of the abysmally low tax collection and mostly questionable, inefficient government spending.
Monetary policy is another vital component. Effective management of money supply and interest rates is crucial for controlling inflation and promoting sustainable economic growth. However, the previous governor of the Bangladesh Bank did not use monetary policy tools to control inflation. He decided to keep the interest rate fixed even when the inflation rate was high to benefit a certain group of businesses and express loyalty to them by sacrificing professional duty. Additionally, exchange rate policies by the Bangladesh Bank during the ousted government’s regime were wrong and inadequate, which significantly impacted trade competitiveness and foreign investment. Stable currency management, particularly through a market-driven exchange rate, is crucial to reduce uncertainties, bolster investor confidence and increase exports.
Financial stability is indispensable for macroeconomic resilience. But Bangladesh’s financial sector, dominated by banks, has been grappling with various inefficiencies and poor governance. It is reflected in the sector’s overall poor performance and high non-performing loans. Currently, the banking sector is undergoing various reforms, but it will take several years to overcome the challenges of the sector. Besides, there is also a lack of diverse financing options and products, including venture capital and credit for small businesses, which can enable economic participation across all sectors.
Moreover, prudent debt management is critical for Bangladesh as its domestic and external debt are increasing. Megaprojects’ implementation through foreign loans has not followed the rationale spending path, but has instead led to high corruption, and wastage. As a result, projects became much more expensive than in other comparable countries and the economic return is costly.
All these impact economic growth, which was illogically inflated by the previous government, leading to the weakening of the macro fundamentals, reflected in the lower growth of gross domestic product (GDP). The World Bank has projected Bangladesh’s growth to be 4.1 percent in FY 2024-25. Sustained economic growth is essential for job creation and poverty reduction. Therefore, without addressing these issues, Bangladesh’s macroeconomic foundation will continue to erode, hampering its trade, investment and development.
Bangladesh also faces significant institutional weaknesses that hinder trade and investment. Institutions such as the Bangladesh Bank and the National Board of Revenue, the Bangladesh Investment Development Authority, the Bangladesh Securities and Exchange Commission severely suffered from political interference all these years, reducing their efficiency and independence. Political institutions captured these economic institutions preventing any meaningful reforms. Besides, overlapping regulations, bureaucratic delays, high compliance costs and a complex, multi-layered legal system deter new businesses and foreign investors and cause inefficiencies.
There are also issues of policy consistency and alignment. Unified and coordinated policies are needed to improve the trade and investment climate. Existing trade and investment policies should be revisited to address gaps and redundancies. There is an anti-export bias in Bangladesh which is reflected through high tariffs. On the other hand, the National Industrial Policy 2022 protects the import-competing industries through various tax exemptions and tax holidays—facilities that are provided even to inefficient sectors. This policy should be reviewed for proper trade promotion.
In addition, the complexity of tax laws should be reduced, so that their predictability would attract long-term investments. Also, Bangladesh should now transition towards a market-based exchange rate system to boost trade competitiveness. Access to finance should be enhanced by diversifying financial products and ensuring affordable interest rates to support both domestic and foreign investors. The infrastructure deficits must be met by increasing energy availability, improving port operations, and upgrading road networks to reduce logistical challenges. As Bangladesh is set to graduate from the least developed country category in 2026, preparation for a smooth graduation should be expedited. The National Tariff Policy 2023 should be implemented to streamline tariff structures and rationalise tariffs.
The export sector should be strengthened through compliance improvements, green transitions, and continued support. The stabilisation of law and order and protection of both domestic and export-oriented industries are urgently needed. Investment in education and skills development is required to overcome the shortage of skilled labour. E-governance through digitalisation should be enhanced in public services and logistics to reduce costs and improve efficiency. It is also important to establish clarity, consistency and continuity of policies to build investor confidence.
Finally, businesses do not start and cannot thrive in an environment lacking sound regulation and market-supporting laws, that are implemented fairly. These are essential “public goods”—which the government must provide to enable trade and business. Corruption, which has become all-encompassing, must be eradicated. Public offices should not be used for private gain—rather they should enable a conducive business environment and meet the needs of the economy and people.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD) and non-resident senior fellow at the Atlantic Council.
Views expressed in this article are the author’s own.