The Financial Express

Focusing on FDI for increased external financing  

Asjadul Kibria   | Published: February 06, 2020 22:04:57

Focusing on FDI for increased external financing   

Bangladesh has already set an ambitious goal to turn itself into a developed country by 2041 and a series of plans has been devised to reach the goal. Finalisation of the Eighth Five-Year Plan (8FYP), under the umbrella of the Perspective Plan 2020-2040, is now underway. These plans have also been synchronised with the UN Sustainable Development Goals (SDGs).

Implementation of the plans to achieve the ultimate goal of becoming a developed country requires a very big and continuous investment. But domestic resources are not enough to meet the investment requirement, so external financing is necessary.

Keeping such a reality in mind, the country's policymakers at Bangladesh Development Forum (BDF), held in Dhaka last week, urged the development partners to extend their assistance. They stressed on untied aid or assistance without rigid terms and conditions. The pitch for flexible external financing is made at a time when the country is going through transitions of various forms.

Bangladesh is at the final phase of graduation from Least Developed Country (LDC) status by 2024.  Four years ago, the World Bank classified it as a Lower Middle-Income Country (LMIC), an elevation from Low-Income Country (LIC) category. Consistent economic growth is the key to these achievements. The size of economy is increasing and it is one of the fastest growing economies. Ranked as the 43rd economy in the world, a number of global projections have already shown that Bangladesh will be 30th or even 26th largest economy by 2030.

The 8.0-plus annual economic growth rate, as envisaged by the Bangladesh Bureau of Statistics (BBS), means that there would be an incremental increase in the demand for resources. The status of ongoing mega infrastructure projects indicates that lack of adequate investment will increase social and economic costs of these projects.

Development partners or the so-called traditional donors are not apparently in a position to pump the required resources into this growing economy. The pattern of development finance has changed by this time, given the fact that the economy of Bangladesh has changed and turned more resilient. For a fast-moving economy with consistent higher growth, it is difficult to attract soft-aid or unconditional assistance.

The Word Bank, the Asian Development Bank and Japan International Cooperation Agency (JICA) have already increased the rates of interest and reduced the loan repayment periods. For instance, Japan raised the rate to 1.0 per cent in 2017 from minimal 0.01 per cent. To the aid-providing countries and international agencies, Bangladesh's economic advancement brings an opportunity to get better return on their investments.

The Finance Minister, however, said the development partners had pledged that at the BDF to provide an additional $4.25 billion alongside support to ongoing projects. Generally, donors don't make any financial commitment at such a forum (BDF) which is basically a meeting for review and exchange of opinions.

The amount of assistance, mentioned by the finance minister, is not an annual commitment. Different agencies have already expressed their willingness to support different development projects in next three to four years. In some cases, negotiations have been completed and in other cases, negotiations are underway. All these may be linked with the BDF.

There is a visible change in the pattern of external financing. Currently (as of FY19), the share of private sector external debt stood at 23.84 per cent of the total outstanding external debt. Eleven years ago (in FY09), it was 6.90 per cent. Incremental external borrowing by the private sector increased the outstanding amount of private external credit significantly within a decade - from $1.60 billion in FY09 to $14.24 billion of late. The outstanding amount of public external debt also increased from $21.90 billion in FY09 to $45.51 billion in FY19.

Overall, external debt in terms of gross domestic product (GDP) is still at a moderate level. For the last one decade, average ratio of outstanding external debt in terms of GDP (at current market price) stood at 19.0 per cent, which is considered 'easily manageable'. Nevertheless, the ratio of current account receipt (CAR) in terms of foreign debt has been declining slowly. CAR includes four types of external receipts: export, services, income and current transfer. The CAR to external debt ratio shows the strength of current external receipts against the external debt liabilities of a country. If the ratio is 100 per cent or above, it means that the country's external earnings through exports in goods and services as well as non-resident remittances are fully or sufficiently covering external debts.

Though there is still over 100 per cent coverage, gradual decline indicates that more external borrowing may at one stage pull down the ratio below 100 per cent, putting pressure on the country's balance of payments (BoP). The ratio reached as high as 155.40 per cent in FY12 and then started coming down gradually. It decreased to 107.20 per cent in FY19, according to the central bank estimate.

Thus, the rise in external debt, especially private commercial borrowing, has emerged as a new phenomenon of the country's external financing. In the near future, there will be more such borrowing to meet the investment requirement of the private sector.

External financing, however, isn't limited to external borrowing alone. Foreign direct investment (FDI) is an important source of external financing. Net inflow of FDI stood at around $3.90 billion in FY19, which was $0.96 billion in FY09. The rise in FDI is positive but far below the expected level in view of the projection made in the Seventh Five-Year Plan (7FYP). During the first four years of the plan period (FY16-FY19), the country received some $11 billion as net FDI against the five-year projection of $30 billion. So, the gap stands at $19 billion. In the terminal year of the plan period which is FY20 or the current fiscal year. According to the central bank statistics, inflow of FDI stood at around $2.2 billion so far (in July-November period). Thus even the annual inflow of FDI reached $4.5 billion in the current fiscal year; there will be a huge gap with the projected figure. The 7FYP rightly emphasised enhancing FDI to address the resource gap. Nevertheless, FDI is different from aid or debt. The government may negotiate debt, not FDI which largely depends on the business climate. The country needs to put focus on the FDI for increased external financing.



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