[🇧🇩] Monitoring Bangladesh's Economy

[Saif]

Economic diplomacy in int'l relations

Modern-day diplomacy is all about enhancing collaboration between countries through promotion of trade and investment. Even the big power politics is centred around competition between big economies to get the better of the other in the field of trade and investment. Especially, for countries not p

thefinancialexpress.com.bd

Economic diplomacy in int'l relations
FE
Published :
Jan 10, 2025 21:18
Updated :
Jan 10, 2025 21:18

Modern-day diplomacy is all about enhancing collaboration between countries through promotion of trade and investment. Even the big power politics is centred around competition between big economies to get the better of the other in the field of trade and investment. Especially, for countries not pursuing a policy of expanding their spheres of influence through military power, economic, i.e., trade diplomacy is the best option to enhance cooperation among one another. In other words, a state's foreign policy objective here is mainly to use diplomacy not as a tool to promote any political ideology, but to benefit mutually through ensuring each other's economic growth. In a narrower sense, economic diplomacy boils down to export promotion and inward investment. So it is also called commercial diplomacy. With trade liberalisation gaining ground globally in the late seventies of the last century, Bangladesh, too, entered the era of trade diplomacy. But due to a lack of democracy in the political culture, the country's trade diplomacy could not flourish. Now that a favourable political climate has been created under the incumbent interim government, all concerned should grab the opportunity and leave no stone unturned to catapult the nation into the era of advanced trade or commercial diplomacy.

To this end, the government will be required to play a proactive role in building rapport between practising diplomats and the business community within the country as well as abroad so they may adapt well to the global trend and bring home positive results for the economy. But given that the age-old bureaucracy is still entrenched in pre-modern mindset inheriting the colonial legacy, it will not come of age automatically. In that case, those from bureaucracy engaged in the country's diplomatic service should undergo necessary re-education and training to learn the art of modern trade diplomacy. It would be worthwhile to note at this point that an apex trade body of the country, Bangladesh Textile Mills Association (BTMA), organised a meeting with a visiting UK-based trade mission, UKBCCI (UK Bangladesh Catalysts of Commerce and Industry), an umbrella organisation embodying successful British-Bangladeshi entrepreneurs in the UK and Bangladesh.

Obviously, as part of an effort to look for avenues for promoting trade cooperation between Bangladesh and the UK, the main focus of the discussion was to achieve the goal through innovative use of trade diplomacy. One way of doing that, as the visiting UK member of parliament, Rupa Huq, for instance, told the said discussion event, was through reaching a Free Trade Agreement (FTA) between UK and Bangladesh. Notably, the British MP, in question, happens to be part of the business team, UKBCCI. So, the event provided a good opportunity for both the working diplomats and those in the making to hone their skill from such occasions where the representative of an advanced Western economy is actively pursuing trade diplomacy alongside the members of business community from either nation. However, trade diplomacy is no magic concept, it has to be with the trend of the time. So, when Artificial Intelligence (AI) is fast emerging as the driving force to propel global trade and industry further forward, Bangladesh cannot stay behind. Needless to mention, the nation's diplomacy has to adapt itself to the dominant trend. Also, the businesses now evincing high growth potential these days include technologies, agriculture and AI.

The development is a reminder for the country to diversify its export basket which at present is overwhelmingly dominated by only a single group of items from the apparel industry. So, to ensure that Bangladesh thrives economically in the years ahead, it should emphasise international relations based on sound economic diplomacy.​

 

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The most challenging year for the economy

Reflecting on the five months of the interim government’s work, I’m reminded of those midnight performances. It seems there is a ruckus in the green room over an issue.

en.prothomalo.com

The most challenging year for the economy
Birupaksha Paul
Updated: 09 Jan 2025, 19: 35

On winter nights, I used to cross the Bhogai River in Nalitabari and go to watch jatra (traditional theatre) in the school ground. Back then, I was young, so even if people called me "Fatra" (irresponsibility and carefree), I didn't care. From that experience, I remember that if by midnight the songs like "Salam Salam Hazar Salam" or "Ek Sagar Rakter Binimoye" didn’t start at the theater, you could tell something was wrong backstage. Perhaps, the theatrical performance might have been ruined that night.

Reflecting on the five months of the interim government’s work, I’m reminded of those midnight performances. It seems there is a ruckus in the green room over an issue. Given the instability in the government and self-created issues, it can be said that 2025 will be the most challenging year for Bangladesh's economy.

The debate within the government over whether reforms should come before elections or vice versa will further add to the uncertainty of 2025. Even if elections are held, the problems might not be resolved until 2026. The root cause of the student and mass uprisings was economic issues—high inflation and unemployment.

The government should have tackled these two issues first. Instead of creating half a dozen reform committees, it was more urgent to form two task forces to address inflation and unemployment. Inflation is a short-term problem, but that doesn't mean it will go away quickly.

If inflation isn't reduced quickly, other complications arise. Just as prolonged cold or flu can turn into pneumonia, prolonged inflation leads to "stagflation," which is a situation of economic stagnation and high price instability. The United States experienced this kind of stagnation during the 1970s and early 1980s, and even president Jimmy Carter became unpopular as a result.

Controlling inflation is primarily the responsibility of the central bank, but a large part of Bangladesh’s current inflation stems from extortion and syndicates. The central bank has little power to deal with this. The government must take responsibility for maintaining peace, order, and security. This is where the issue arises, and it does not require a task force.

The home ministry has essentially become an "inactive" ministry. If this continues, growth will decrease, which is undesirable, especially given the global economic improvement in 2024. After president Trump assumes office in 2025, although a cold trade war may begin with China, the Western economies will be in a stronger position because central banks still have room to cut interest rates to stimulate the economy. Bangladesh, however, doesn’t have this advantage due to high inflation, which is making the situation worse.

Unemployment cannot be solved overnight. It requires a medium-term solution. The government should have recognized it as the nation's "number one problem" and formed task forces to address it accordingly. If the post-independence government had not identified population growth as the "number one problem," the population growth rate would not have fallen from 2.5 per cent to 1 per cent today. Pakistan, which did not focus on this, still has a growth rate of about 2 per cent, while India’s is 0.8 per cent, and Sri Lanka’s has even gone negative. As I read in my childhood, “Without effort, no one can achieve their desires.” In economics, the first step in solving any problem is recognizing it and then taking appropriate action.

There is no way to reduce unemployment without investment, especially private sector investment. No matter how good the relationship between the head of the interim government and world leaders, they won’t increase direct investment or FDI based on that relationship. Once an elected government is in place, they will invest based on its character. So, in the meantime, any hope for foreign investment is futile. The real hope lies in internal individual investment, but that has become stagnant or is even declining in some cases.

There have been frequent reports of factories closing and workers losing jobs. No white paper has been published on this issue, so unemployment has continued to rise over the past five months. The newspapers confirm this. Therefore, it is crucial that the election schedule is announced soon to reduce instability. It seems there is a ruckus in the government’s green room about this, and there are inconsistencies in their statements, which have halted investment. On the other hand, the government lacks the capacity to increase investment because there are concerns that tax revenues will be the weakest his fiscal year in comparisons to the past years.

Although reserves are increasing slowly, neither inflation nor unemployment will benefit significantly from it. Reserves are rising because the exchange rate is closer to the market, and remittances are increasing. However, exports have not increased, and imports have significantly decreased. From July to November 2023, compared to the same period in 2024, imports of consumer goods fell by 13 per cent, capital goods by 22 per cent, and intermediate goods by 15 per cent.

In other words, a major reason for the increase in reserves is the reduction in imports. Reducing weight by exercise and reducing it by starving are two different things, and the latter is dangerous. When the import of consumer goods decreases, the supply in the market decreases, and prices rise. Similarly, when the import of capital and intermediate goods decreases, future investment and economic capacity also decline. Some of this has already impacted the growth of national income, which, according to the World Bank, will drop to 4 per cent this fiscal year, the lowest in the last 22 years, excluding the COVID period.

By mid-January, the reform committees will start publishing their reports one by one. This will increase instability, not decrease it. Those whose interests are not protected will take to the streets. This has become the easiest thing to do, almost a duty. Even then, there is little expectation for the committees' work. It seems that these committees will suddenly emerge as "heroes" from the green room, which is an unrealistic expectation.

It is somewhat predictable what the white paper committees will do, but the reform committees could end up being the opposite, potentially becoming a “time bomb” of instability. Many questions are being raised about the capabilities of these committees, and there’s a risk that all the reforms will collapse and force the election to become the central issue.
In Bangladesh’s history, during every election or government transition, instability increases and growth decreases. In 1943, Polish economist Michael Kalecki introduced the idea of a "political business cycle." In 1975, William Nordhaus applied it to the United States.

Some of the significant years when Bangladesh’s growth slowed down include 1975, 1982, 1991, 1996, 2002, and 2009. It seems that 2025 will be no exception. Thus, overall, 2025 will be a challenging year for Bangladesh. However, the government's responsibility will be to reduce conflicts and disagreements, take a strong and clear position, and then conduct a fair election to minimize the loss of growth.

*Dr. Birupaksha Paul is a Professor of Economics at the State University of New York at Cortland​

 

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Increase in VAT, move to gas price hike suicidal for economy: DCCI

Dhaka Chamber of Commerce and Industry president Taskeen Ahmed on Saturday said that increasing value added tax on more than hundred products, the rise in corporate tax for certain industries and...

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Increase in VAT, move to gas price hike suicidal for economy: DCCI
Staff Correspondent 12 January, 2025, 00:41

Dhaka Chamber of Commerce and Industry president Taskeen Ahmed on Saturday said that increasing value added tax on more than hundred products, the rise in corporate tax for certain industries and the plan to more than double the gas prices for industrial use would be suicidal for the economy.

At a press conference held at DCCI auditorium in the capital, he said that the country was facing significant economic challenges, including limited foreign exchange reserves, rising import costs, high energy prices, growing inflation, increased interest rates and limited access to credit.

‘Amidst global geo-political turmoil and the current challenges of the international and local economies, increasing VAT, rising tax on few industries and the initiative of increasing price of gas more than twice in the industry are catastrophic decisions for our business, trade and investment as well as for the overall economy,’ the DCCI president said.

He said that Bangladesh was on the right track for LDC graduation, but progress faced setbacks due to the Covid-19 pandemic, the Russia-Ukraine war, Middle East unrest, local political instability, geopolitical challenges and financial market instability.

‘Determining our preparedness in the current situation requires detailed discussions among public, private, and other stakeholders. If necessary, the government may consider deferring the graduation, taking into account the overall economy of the country and based on a collective national decision,’ DCCI president said.

If Bangladesh graduates in 2026, the government would need to ensure comprehensive cooperation with the private sector to help it overcome its challenges, the business leader mentioned.

Taskeen said that the country’s private sector had faced numerous challenges due to global geopolitical instability and its effects on both the international and local economies.

These included declining foreign exchange reserves, rising import costs, high energy prices, elevated inflation, increased interest rates, high tariff rates, rising VAT rates, and above all, a deteriorating law and order situation, he said.

This year the Dhaka Chamber will focus more on reducing interest rates, controlling inflation and keeping the foreign exchange rate stable, the business leader said.

He emphasised the need to expedite the flow of low-cost finance to the CMSME sector, highlighting it as the largest employment-generating sector in Bangladesh.

About the reform initiatives taken by the interim government, Taskeen expressed the expectation of the private sector that the government would complete the reform activities as per their set target soon.

He said that completing hundred economic zones by the year 2030 with all facilities was not an easy task.

‘Rather, if the government is able to ensure all required infrastructure and other facilities in the five economic zones, then domestic and foreign investors will be more optimistic and there will be a possibility of expanding investment activities,’ DCCI president said.

Regarding the continuation of the policy, he said that entrepreneurs had been encouraged to invest based on the assurance of a long-term supportive tax structure.

However, he cautioned that sudden decisions to increase taxes or duties midway would negatively impact entrepreneurs, which was highly undesirable.

Such measures could hinder both local and foreign investment, ultimately harming the economy, Taskeen said.

The DCCI president mentioned that Bangladesh’s tax-GDP ratio was very low, and the number of taxpayers in the country remained below expectations.

To address the budget deficit and ease economic pressure, he recommended that the government implement austerity measures in public spending.

Taskeen urged the government to avoid unnecessary projects and strengthen monitoring of the Annual Development Programme to ensure projects are completed on time.

DCCI senior vice-president Razeev H Chowdhury and vice-president Md Salem Sulaiman and members of the board of directors were also present on the occasion.​

 

[Saif]

NBR's puzzling move and IMF loan strings

The move of the National Board of Revenue (NBR) to raise value-added tax (VAT) and supplementary duty (SD) on nearly 100 goods and services has evoked both surprise and anguish. Surprise, because the hike that has come halfway through the current financial year has all the potential to fuel inflat

thefinancialexpress.com.bd

NBR's puzzling move and IMF loan strings
Shamsul Huq Zahid
Published :
Jan 12, 2025 00:19
Updated :
Jan 12, 2025 00:19

The move of the National Board of Revenue (NBR) to raise value-added tax (VAT) and supplementary duty (SD) on nearly 100 goods and services has evoked both surprise and anguish.

Surprise, because the hike that has come halfway through the current financial year has all the potential to fuel inflation, which hovered between 10 per cent and 11.5 per cent in the preceding months. Though essential food items have been spared, the latest tax increase -- in many cases, the increase is nearly 200 per cent -- covering a number of food and non-food items will surely impact the overall price situation.

A case in point is the hike in VAT rate on medicines. NBR says the hike is negligible but, in reality, patients will have to pay more than what the Board estimates. Taxmen are aware of this arithmetic. People have been hard hit by an unabated rise in the prices of medicines for a long time, as the government is found to be reluctant to take up the price issues with pharmaceutical companies, for reasons best known to it.

What is most surprising is that the latest tax hike effectively dilutes the serious efforts of the central bank to rein in inflation. It, with a few exceptions, has stopped printing high-powered money that fuels inflation. Besides, it has hiked the policy rates several times, as part of its contractionary monetary policy.

Two key institutions of the government -- the Bangladesh Bank and the NBR, it seems, are not in sync and operating in opposing directions, as far as the task of reining in soaring inflation is concerned.

The central bank has been partially successful in stabilizing the country's reserves situation, thanks to increased exports and remittance earnings in recent months. Its efforts to contain inflation have not met with success up to the desired level.

The food inflation last month dropped a little, mainly because of the increased supply of vegetables and fish. Despite a notable fall in the prices of the two food items during the current month, it is hard to make any prediction about the price situation in the coming months, as the country's main staple -rice -- is becoming costlier even during the peak harvesting season. The men in authority blame the so-called syndicates or millers for the price rise but they do little to stop the malpractice. Such a failure pains the poor consumers. So, the nominal decline in food prices could be short-lived because of the possible supply crunch and the increase in VAT and SD.

The last week's hike in tax rates has aroused deep anguish among consumers, particularly those who belong to the lower to middle classes and poorer sections of society. These people are truly hard-hit. In fact, they are skipping or have cut down on food items the prices of which have gone beyond their reach. Also, many of them have put on hold their travel and leisure plans for the time being.

In such a situation, one question might be agitating the minds of many why has the interim government taken such an unpopular move of raising taxes right at this moment when people are unhappy with the price situation? The skyrocketing prices of most essentials had been one of the key reasons that had prompted low-income and poor people to take to the streets alongside the students. They expected some price relief under the non-political interim government. Unfortunately, their hope has been largely dashed, primarily due to the failure of the authorities concerned. The latter are clueless about the price increase. The reason/s they cite in their public statements, however, are not different from the honchos of the immediate past regime.

The latest NBR decision coupled with the proposal placed by Petrobangla to raise gas prices has also stirred up deep resentment among the businesses who feel that the move would further push up their cost of production and reduce the ability of the local exporters to compete in the international market. The economy has been stagnant for a considerable time. This is evident from the continuous slide in the private sector credit growth. Last week's tax measures are likely to intensify the crisis.

What, it seems, has prompted the NBR to go for such an unpopular move to raise VAT and SD on many items in the middle of the fiscal year is the compliance issue. The Board will have to collect a sum of Tk.120 billion in taxes over the amount to be mopped up normally by June 30 next, to meet the target set under the IMF's US$ 4.7 billion loan facilities approved earlier for Bangladesh. The NBR has been facing a serious shortfall in revenue earnings this fiscal. During the first five months of the fiscal year 2024-25, the deficit vis-à-vis the revenue target amounted to more than Tk. 420 billion. The revenue shortfall is feared to be bigger at the end of the year. So, it is very difficult to justify the NBR's move to collect an additional amount of Tk.120 billion by raising VAT and SD on a large number of goods and services. These are indirect taxes that are passed on to the consumers. The NBR should have mobilized more revenues, particularly through direct taxation, by raising its efficiency level.

Many see the IMF as an institution that maintains double standards. They complain that the Bretton Woods institution extends bailouts in crisis time to countries but causes enormous suffering to their poor consumers in return. At the policymakers' level, the multilateral lender is seen as a saviour, but some others have reservations about its role. The bailout often falls through.​

 

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US top remittance source in Nov, Dhaka top recipient

The biggest source of all the remittance received by Bangladesh last November was the US, according to the latest report of Bangladesh Bank (BB)..Moreover, Dhaka secured the lion’s share of the foreign currencies..Bangladeshi migrants sent home $2,199.99 million in November. Of it, $

www.thedailystar.net

US top remittance source in Nov, Dhaka top recipient

Our study showed that it is possible for a factory to reach a high level of social compliance and at the same time be fully competitive by using audits to improve conditions for both workers and the business.

The biggest source of all the remittance received by Bangladesh last November was the US, according to the latest report of Bangladesh Bank (BB).

Moreover, Dhaka secured the lion's share of the foreign currencies.

Bangladeshi migrants sent home $2,199.99 million in November. Of it, $511.96 million came from the US and $684.58 million was sent to Dhaka district.

Chattogram and Sylhet divisions followed suit, receiving $603.9 million and $199.6 million respectively.

The BB report stated that remittance inflows in that month witnessed a year-on-year growth of 14 percent.

"In the current political and economic landscape, marked by inflationary pressures, exchange rate fluctuations, and rising import costs, remittances have provided much-needed relief," said the BB in its monthly report on remittance inflows.

The foreign currencies bolstered foreign currency reserves and supported millions of households across the country, it said.

Remittance inflow surged 23 percent year-on-year to nearly $27 billion in 2024, the highest on record.

"The steady flow of remittances has been a stabilising factor, contributing to poverty reduction, improved living standards, and regional development," said the report.

"In the context of the ongoing economic recovery post-pandemic, coupled with political transitions, remittances are even more critical in sustaining economic growth, ensuring liquidity in the banking sector, and reducing reliance on external borrowing," it added.

The BB reported that during the first five months of fiscal year 2024-25, which began last July, remittance inflows grew 26.44 percent year-on-year to $11,137 million.

The United Arab Emirates (UAE) was the largest source of remittance during this period, followed by the US.

Saudi Arabia, which employs over 2 million Bangladeshi migrant workers, was the third-largest source of remittance.

Other notable contributors included Malaysia, the United Kingdom, Kuwait, and Italy.

Among the banks, Islami Bank Bangladesh collected the highest amount of remittance in November 2024.

Agrani Bank and Janata Bank also performed well, reflecting their extensive networks and efficient remittance services.

The BB emphasised that workers' remittance plays a pivotal role in Bangladesh's economy, serving as one of the largest sources of foreign exchange.

Approximately 13 million Bangladeshi nationals are working in various parts of the world.

"Inward remittances from Bangladeshi expatriates are very significant for the nation... Expatriates' remittances are one of the largest sources of foreign currency," the BB noted.

The BB suggested targeted strategies to support the migrant workforce, enhance the economic benefits of remittances, improve the financial inclusion of recipients, and address the needs of migrant workers abroad.​

 

[Saif]

Why is Bangladesh failing to draw in foreign investment?

When a wealthy person in Bangladesh thinks about investing his surplus wealth, does he consider buying land, keeping it in a high-interest fixed deposit, or investing it in industries? Similarly, when a wealthy person, or company, in Dubai, Singapore, Mumbai, Kuala Lumpur, London, Paris or New...

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Why is Bangladesh failing to draw in foreign investment?

The way to increase foreign direct investment in Bangladesh is to create a skilled workforce and decrease political unrest. The main factor in attracting foreign investment in Bangladesh is cheap labour. But now cheap labour alone is not enough to being in significant investment.

Mamun Rashid Contributor image
Updated: 14 Jan 2025, 19: 07


When a wealthy person in Bangladesh thinks about investing his surplus wealth, does he consider buying land, keeping it in a high-interest fixed deposit, or investing it in industries? Similarly, when a wealthy person, or company, in Dubai, Singapore, Mumbai, Kuala Lumpur, London, Paris or New York wants to make a new investment choice, what factors does he take into consideration?

From over 35 years of investment opportunities at home and abroad or management experience, I feel that businesspersons, rather than perusing the newspapers, give most importance to the experience of persons or companies that are already in business. Then comes the matter of capital or prospects of investment, the strength of the financial sector and ease of availing bank loans, getting skilled workers or managers, communication or transport infrastructure, the facilities to transfer profits overseas and the scope to keep corruption at bay. Also taken into consideration is the purchasing capacity of the consumers and the consumer expenditure trends.

From my university days I have been hearing about the need for creating new business establishments to bring diversity to the economy and expand employment. Investment, that is, foreign investment, is an important catalyst in this regard. When foreign investment is made in a country, that means it must have an investment-friendly environment and business is profitable there. But in the case of foreign investment, post-independence Bangladesh has not seen significant success. While it is said that Bangladesh is an attractive destination for investment, the matter of investment environment is restricted to discussions alone.

While all sorts of policies have been devised to attract foreign investors, there is no continuity to this. Bangladesh time and again fails to win the trust of being fit for investment. And the delays and discordance in services that are required to hold on to investment, have not been dispelled in the last three decades. Other than a couple of companies, the country has not achieved any significant success in foreign investment.

Given its per capital income, increase in consumer expenditure and an increased growth of the middle class, Bangladesh can become an attractive or prospective market for foreign investment. The reason for not being able to attract large investments is internal. The factors working behind this sparse investment are lack of discipline in the financial sector, lack of stability in the investment policies, that is, frequent changes in the investment policies, lack of capacity of the agencies responsible for investment, and bureaucratic complications.

Also, there is still no visible impact of the initiatives that have been taken up to attract foreign investment. Foreign Direct Investment (FDI) has played an important role in the economic transformation of developing countries. In the post-eighties period, FDI had contribution in the economic expansion of countries like Vietnam, China, Mexico and India. In particular, FDI plays a role as a catalyst in generating employment in the manufacturing sector, technology transfer and keeping the foreign exchange reserves stable.

Many years have passed since our independence, but it still has not been possible to create an investment-friendly environment here. If we want to attract foreign investment, we have to clear up the existing problems. If investment is to be attracted, first and foremost branding of the country is essential.

In order to build up an investment-friendly culture, a stable and corruption-free environment for business must first be created. Investment security and the scope for businesspersons' licensing rights must be ensured. Above all, the government too must continuously make sincere efforts to attract investors.

In post-independence Bangladesh, alongside local investment, foreign investment has played an important role in the country's socioeconomic, economic and infrastructural development. Economic theory maintains that if local investment increases, foreign investment increases. This is because foreign investment comes through the local investors. That is why, if foreign investment is to be increased, local investment must be increased. Irregularities and corruption must be halted in the financial sector. All lack of coordination and bureaucratic complications faced by the foreign investors must be eliminated.

If Bangladesh receives foreign investment like Malaysia, Thailand and Vietnam, then undoubtedly the country's socioeconomic condition will improve.

The way to increase foreign direct investment in Bangladesh is to create a skilled workforce and decrease political unrest. The main factor in attracting foreign investment in Bangladesh is cheap labour. But now cheap labour alone is not enough to being in significant investment. There must be all-out efforts to create a trained workforce alongside development of information technology. At the same time, land for establishing industrial units along with the development of infrastructure and communication systems is essential. Industries that draw in large capital must be paid due attention. This is extremely important in a densely populated country like ours.

Investments from Japan, South Korea and other countries in Malaysia's electrical and electronics industries are behind the economic development of Malaysia. The multinational companies of Japan, South Korea and Taiwan invested hugely in Malaysia. Up until 1991-99, over 80 per cent of investments in Malaysia's electronics industry was foreign investment.

Due to Japanese investment, Malaysia's industrial sector flourished in 1980 and it aimed at graduating to a self-reliant industrially developed country by 2020. Many industries emerged though joint investment of local and foreign companies. Skilled workforce, abundance of natural resources, comparatively low wages, higher standard of living, digital communications systems, the government's foreign investment police, etc, helped in attracting foreign investment and achieving economic growth and development in Malaysia.

It was the same for Thailand and Vietnam. If Bangladesh receives foreign investment like Malaysia, Thailand and Vietnam, then undoubtedly the country's socioeconomic condition will improve. A country's image features prominently in attracting multinationals. A clean and aesthetic environment, wide roads, good treatment of foreign nationals, political environment, law and order, the capacity to maintain communications and connectivity, natural environment, abundance of resources, skilled and trained or trainable workforce, less bureaucratic complications, etc, attract foreign investment and project a positive image of a country to foreign investors, which helps in increasing investment.

In today's world, the importance of foreign investment in any country's economic development is limitless. While there is scope for foreign investment in Bangladesh, foreign investors have certain qualms concerning the investment environment here. These mainly concern corruption and bureaucratic complications. Various reports of the World Bank, IFC in particular, point to these bottlenecks to investment in Bangladesh, predominantly corruption and bureaucratic complications. Other issues are tax, tariff concessions and repatriation of returns. It is unfortunate but true that progress in this area is insignificant. Then there is a lack of skilled workforce, infrastructural weakness and difficultly to avail land.

If we want to attract investment in competition with other countries, we must immediately move away from expensive investment conferences and trade fairs abroad, update our existing polices, and improve our education standard. Our regulatory bodies need to move away from the 'licence-boss' attitude and become business-friendly and step up use of technology.

Attention must be paid to ensure companies can get good returns on their investment, that they can easily repatriate their returns and get justice in legal lawsuits. And there should be no discrimination among local and foreign companies.

* Mamun Rashid is an economic analyst.​

 

[Saif]

Viewing the defaulted loan saga through a micro lens

There’s a connection between non-payment of debt at micro and macro level.

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Viewing the defaulted loan saga through a micro lens

FILE ILLUSTRATION: BIPLOB CHAKROBORTY

Over the years, the volume of non-performing loans (NPLs) in Bangladesh has increased so significantly that it has become a major reason for Bangladesh's economic woes. According to the recent data of Bangladesh Bank, NPLs rose to a record Tk 284,977 crore in September 2024, surpassing the earlier record of Tk 211,391 crore just three months prior, making up around 17 percent of the total outstanding loans.

The increasing trend of NPLs can be attributed to several factors, including poor governance, inadequate business and industry analysis, political influence, and the borrowers' inability to repay debt due to internal economic conditions, all of which are widely recognised even to a layman. Instead, let's look into whether the defaulted loan culture has evolved into an institutionalised practice at the micro level that ultimately translates into a higher NPL ratio at the aggregate level.

A brief introduction to institutional economics is needed to delve further into this discussion. Institutional economics encompasses a broad idea of institutions beyond what we typically understand. Rather, it deals with formal and informal institutions; officially recognised rules and written laws and regulations formulated by the government, organisations and other formal entities fall under formal institutions, and socially constructed rules and norms, customs and traditions, and unwritten ethical standards are viewed as informal institutions. Briefly, institutional economics explores how laws, regulations, social norms, customs and organisations shape and influence economic behaviour and outcomes.

In light of this framework, a link can be established between informal institutions at the micro level and the prevalence of NPLs at the macro level, questioning whether the practice of defaulted loans has become ingrained deeply enough to be considered an institution.

In the context of Bangladesh's economy, if we look around, the retail-level demand and supply are largely met through informal mechanisms, with most transactions occurring outside of established formal institutions, without any receipt. This serves in the interest of both consumers and sellers, who often benefit from the leverage provided by asymmetric information. As a result, the lack of evidence of transactions heightens the potential for both consumers and sellers to engage in deceptive practices.

For instance, in the absence of formal institutions, a sense of trust often develops between customers and sellers in grocery stores and road-side tea stalls. This trust enables smoother transactions, allowing consumers to acquire their desired products without paying the full amount upfront while giving sellers confidence in securing a sale, thereby reducing risks for both sides. At first glance, this may appear to be a positive phenomenon, as trust fosters regular transactions that contribute to economic growth. However, on the flip side, the lack of evidence for these transactions, such as receipts or written documentation, creates a chance for consumers to avoid repaying the money after fully maximising the utility from the product they have consumed. At micro level transactions, the story of defaulting starts simply from here.

Although specific data on this type of mismatch in micro-level transactions is unavailable, the above-mentioned scenario is one that almost anyone can relate to through their day-to-day experiences. Another common example, frequently featured in the media, is students with political ties who fail to make timely payments at their universities' cafeteria and other shops on the campuses. One report from last year cited how a student with political affiliation was suspended for allegedly attacking the cafeteria owner at a residential hall in Dhaka University for requesting the payment of dues amounting to Tk 2,650.

The habit of not paying back the promised amount after receiving a service has become so deep-rooted at the micro level that people no longer think much of it. It suggests that the reluctance to make payments has already become a norm, to the point where it can be considered an institution, according to institutional economics. Just as political influence on campus is used to avoid paying debts, and trust is overlooked when it comes to settling dues at the micro level, political influence prevents good governance from acting as a safeguard against the rising amount of defaulted loans at the macro level. Is it merely a coincidence that the dynamics observed at the micro level are mirrored at the macro level?

This is the question policymakers must explore to determine if defaulting on loans has already become an institutionalised practice. The similarity between avoiding payment at the micro and macro levels should not be overlooked. If loan-defaulting has indeed become institutionalised, addressing NPLs requires a whole new approach, confronting the core issue. In order to do that, mismatches in smaller-scale transactions should not be ignored. Last but not the least, taking steps to foster an ambience of goodwill in the micro sphere could create an institution capable of deterring the practice of loan default and NPLs in the macro sphere.

Tahsin Sahriar is assistant director (research) at the Bangladesh Bank.​