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As uncertainty persists, clouds get thicker over investment frontier
Rejaul Karim Byron and Md Fazlur Rahman
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Investment has not picked up in Bangladesh despite the reopening of the economy five months back largely due to the deep uncertainty caused by the coronavirus pandemic which continues to creep along.
Several entrepreneurs and economists now say the investment would not return to the pre-pandemic level until the crisis comes under control.
The opening of letters of credit for importing capital machinery, one of the major indicators to gauge investment sentiment in Bangladesh, plunged 24.93 per cent year-on-year in the July to August period of the current fiscal year. Correspondingly, the LC settlements plunged 38.93 per cent.
The opening and settlements of LCs for intermediate goods dipped 19.38 per cent ad 28.87 per cent respectively, showed data from Bangladesh Bank.
The opening of LCs for raw material import dropped 10.57 per cent while its settlements declined 6.99 per cent.
Disbursement of industrial term loans, another indicator, stood at Tk 28,063 crore in the April to June quarter, down 34.99 per cent from Tk 43,154 crore year-on-year.
Although the latest data is not available, the LC openings and settlements may have fallen in the entire first quarter of the current fiscal year as shown in the trend of imports, which declined 11.47 per cent year-on-year.
Asif Ibrahim, vice-chairman of the Newage Group of Industries, one of the leading garment exporters, said the drop in capital machinery import and disbursement of term loans were mainly due to the lack of confidence of investors due to the global coronavirus pandemic.
“Although Bangladesh performed remarkably compared to other countries in terms of GDP growth, investors will open up once the pandemic is on a downward spiral.”
He anticipated that by the end of spring 2021, these figures would again pick up gradually.
Humayun Rashid, managing director of Energypac Power Generation, said there had been a liquidity crunch in the banking sector since January. Besides, the bank interest rate had been high.
“So, investors did not go for expansion in a bigger way. The pandemic dealt another blow, slowing down many projects.”
Some projects of Energypac had also slowed after the crisis hit Bangladesh in March. Now, the implementation of the projects has started resuming, he said.
The company is importing some capital machinery that would help product automation. Some of the electrical products being manufactured would be exported to regional markets such as India, Pakistan and Nepal, said Rashid, also the president of the International Business Forum of Bangladesh.
Zaid Bakht, chairman of state-run Agrani Bank, blamed the 9 per cent lending rate ceiling, which has been in place since April this year, for the fall in industrial term loans.
“Private commercial banks are very conservative in lending at 9 per cent. They are giving loans on a priority basis. They don’t want to take any risks.”
The banks with excess liquidity are investing in the treasury bills, said the former research director of the Bangladesh Institute of Development Studies.
As a result, many entrepreneurs who usually do banking with private banks are coming to state-run banks for new loans. Agrani Bank’s credit growth is 17 per cent even during the pandemic, he said.
“The machinery import has gone up in recent months,” said Abdul Halim Chowdhury, managing director of Pubali Bank, a private commercial bank.
“This would be reflected in the quarterly report in December,” he said, adding that some clients have opened LCs with Pubali Bank.
Chowdhury also said banks were cautious in lending so that none could take out funds through forgery.
He said industries have received funds under the stimulus package introduced by the government. So, they did not apply for new loans.
“Banks also worried about the threat of the second wave of coronavirus. We are not sure how deep the effects would be. So, many banks have adopted the wait-and-see approach.”
Zahid Hussain, a former lead economist of the World Bank’s Dhaka office, said the significant decline in LC settlements for import of capital goods, disbursement of long-term loans and LC openings for the import of capital goods indicate continued weakness in investment.
He said investment recovery was stunted by lingering uncertainty on the trajectory of the domestic and international economy. These uncertainties are rooted in the unpredictability of the trajectory of the pandemic and how long it would take to be tamed once and for all.
“Investment is all about confidence which has remained fragile in Bangladesh for quite a while now.”
According to Hussain, returns on investment are hard to assess in an environment where both sales and costs are hard to project as economies all over the world struggle to crawl back from the pandemic-induced recession.
Simply lowering the costs of financing, as appear to be happening recently due to an abundance of liquidity in the banking system, does not do much to bolster the animal spirits in such an environment.
“Excess liquidity itself is in part a consequence of the lack of demand for investments.”
There are structural impediments to investment that hinder initiatives to start and expand production activities in sectors where new opportunities are opening up.
Reforms to ease these impediments such as establishing one-stop shops, economic zones and increasing the transparency and predictability of business regulations have stumbled.
“These are areas where the policy implementors can make a difference if only they could tear apart bureaucratic red tapes and speed up decision-making,” Hussain said.
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