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The Financial Express

Bangladesh sees slump in FDI inflow as foreign investment falls worldwide

| Updated: January 27, 2021 10:59:19


Bangladesh sees slump in FDI inflow as foreign investment falls worldwide

Global inflow of foreign direct investment (FDI) showed a steep fall of US$859 billion in 2020 from $1.5 trillion a year earlier as the fallout of Covid-19, says a UN report.

The provisional estimate came at the 38th Global Investment Trends Monitor, unveiled by the United Nations Conference on Trade and Development (UNCTAD).

The report said the drop of 42 per cent of estimated global FDI was also more than 30 per cent "below the trough after the global financial crisis in 2009 and back at a level last seen in the 1990s."

The decline was led by the developed countries, where FDI flows fell by 69 per cent to an estimated $229 billion while flows to Europe contracted to -4.0 billion, including large negative flows in several countries, according to the estimate.

A sharp decline of 49 per cent was also recorded in the United States to $134 billion.

"The decline in developing economies was relatively measured at -12 per cent to an estimated $616 billion," said the report. "The share of developing economies in global FDI reached 72 per cent - the highest share on record," it said, adding China topped the ranking of the largest FDI recipients.

The UNCTAD estimate also showed that the fall in FDI flows across the developing regions was uneven, with 37 per cent decline in Latin America and the Caribbean, 18 per cent in Africa and 4.0 per cent in developing Asia.

East Asia was the largest host region, accounting for one-third of global FDI in 2020, according to the report.

FDI to transition economies declined by 77 per cent to $13 billion.

According to the UNCTAD report, the early phase of the pandemic caused steep drops in capital expenditures in China where FDI ended the year with a small increase of 4.0 per cent.

FDI in India increased by 13 per cent, boosted by investments in the digital sector.

The full year data of FDI in Bangladesh is yet to be available.

Bangladesh Bank statistics, however, showed that the net inflow of FDI in the country declined by 19.50 per cent in the first nine months (January-September) of 2020 and stood at around $1.74 billion. The amount was $2.15 billion in the same period of 2019.

The central bank data also showed that FDI through equity or fresh capital injection declined by around 22 per cent during the first nine months of 2020. At the same time, FDI through intra-company loans recorded a big drop of 74 per cent.

Reinvested earnings of the existing multinational corporations, however, increased by 12 per cent and recorded net FDI worth $1.12 billion.

The annual net inflow of FDI in 2019 in Bangladesh was recorded at $2.87 billion, which was 20.46 per cent lower than $3.61 billion in 2018.

In its outlook, the UNCTAD report mentioned the FDI trend is expected to remain weak in 2021.

"The data on an announcement basis, an indicator of forward trends, provides a mixed picture and point at continued downward pressure," it added.

For instance, sharply lower greenfield project announcements declined by 35.0 per cent in 2020, suggesting a turnaround in the industrial sector is not yet in sight.

Similarly, some 10 per cent decline in cross-border merger and acquisition (M&A) in 2020 was "cushioned by higher values in the last part of the year."

Looking at M&A announcements, strong deal activity in technology and pharmaceutical industries is expected to push M&A-driven FDI flows higher.

According to UNCTAD, the trends in greenfield and project finance announcements are a major concern for the developing countries.

"Risks related to the latest wave of the pandemic, the pace of the roll-out of vaccination programmes and economic support packages, fragile macroeconomic situations in major emerging markets, and uncertainty about the global policy environment for investment will all continue to affect FDI in 2021," the UN body predicted.

When contacted, Dr Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), said Bangladesh is not immune to the global trend and the decline in FDI was unavoidable during the pandemic.

"As most of the companies are struggling to survive and trying to continue the current operations, no fresh investment is taking place," he told the FE. "The demand is very low as consumption has plunged."

The economist explained FDI in Bangladesh is mostly domestic market-oriented like telecommunications, energy and financial services. The export-oriented investment is also there, but that declined due to slump in global demand.

Dr Moazzem also said Covid-induced uncertainty still prevails, which will make it difficult for Bangladesh to attract FDI in near future.

"We need to prepare ourselves with better soft infrastructure like a full-fledged one-stop licensing facility," he said. "When the global economy will start rebounding, the demand for foreign investment from different countries will increase and there will be a race to draw it," he added.

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