Rebuilding FDI Post-Revolution: What Policy Reforms Does Bangladesh Need?

By Shaikh Afnan Birahim :

The July Revolution resulted in significant shifts in Bangladesh’s political and economic landscape, leading to a decline in foreign direct investment (FDI). Factors such as high inflation, currency volatility, and shortage of foreign reserves have further worsened the situation.

Additionally, weaknesses in the business climate, trade policies, logistics sector, and outdated regulations have contributed to the cause. And now, the FDI sector is weakened, and the investors are losing trust.

At present, only 0.5% of FDI represents the country’s GDP. In the July- September quarter of FY25, FDI fell by 71% compared to the same period in FY24, according to Bangladesh Bank data.

Several sectors in Bangladesh have experienced a shift in foreign direct investment (FDI) trends. Industries such as Agriculture & Fishing, Computer Software, and Information Technology (IT) have declined, with both sectors contributing only 1.5% of total FDI, indicating a reduced interest from foreign investors.

The Manufacturing sector, on the other hand, mainly driven by textiles and weaving, remains the largest recipient of FDI, attracting $1.32 billion, or 40.5% of total inflows. The power, Gas, and Petroleum sectors also continue to receive substantial foreign investment, drawing $690.59 million, or 21.3%, despite a decrease from previous years.

These trends reflect a shift in investment preferences, with traditional sectors like agriculture and IT facing challenges while manufacturing and energy sectors remain relatively stable.

Dhaka is already experiencing a decline in investment, while Chittagong is moving forward despite Dhaka being the country’s economic hub.

This shift is not a result of planned decentralization; it is mainly due to the overconcentration of firms in the capital, which leads to challenges such as high land prices, inadequate infrastructure, and poor energy supply, ultimately hindering business operations.

In contrast, Chittagong offers lower land costs, better services, and efficient logistics, making it an attractive alternative.Despite the decentralization effort, there has been no significant infrastructural development in regions like Gazipur and Mymensingh.

A series of comprehensive reforms are crucial to steer to the path of light from this shadow of uncertainty. First, the government must fully operate the One-Stop Service for foreign investors by integrating BIDA, BEPZA, BEZA, and BHTPA services into a unified and automated platform.

By streamlining the registration, regulatory services, and approval processes through this, bureaucratic delays will be significantly reduced. In parallel, tax policy reforms are also essential, like simplifying customs procedures, tariff classifications, and VAT requirements.

The current 15% VAT on industries in economic zones is a significant barrier, especially compared to more competitive regimes in countries like India and Thailand, which have no VAT in their respective economic zones.

Additionally, implementing full-scale e-governance will enhance transparency, accountability, and anti-corruption efforts.Strengthening intellectual property rights protection and law enforcement to safeguard investors’ innovations is also crucial. Public-private partnerships (PPPs) should be encouraged.

Furthermore, improving the financial system by addressing non-performing loans (NPLs) and bad loans is essential to restoring investor confidence and fostering a healthier economy. Establishing an independent arbitration body for business disputes will also offer a neutral and efficient platform for resolving conflicts to promote a more secure investment environment.

Fast-tracking energy projects is necessary to ensure uninterrupted electricity supply.The expansion of the Chittagong and Mongla ports will improve logistics and reduce supply chain bottlenecks. Improving rail and road connectivity for industrial zones will also facilitate the movement of goods and materials.

Last, a stable economic environment, controlling inflation, a well-maintained stable exchange rate, and healthy foreign currency reserves are vital to achieving long-term investor confidence and creating a more predictable and welcoming environment for foreign investors.

The Bangladesh Investment Development Authority (BIDA) has launched the FDI Heatmap, a strategic framework to attract Foreign Direct Investment (FDI) by prioritizing 19 sectors.

These sectors are categorized into four groups: Immediate Targets (e.g., Core Apparel, Pharmaceuticals), Enable Quick Entry (e.g., Automotive Parts, Footwear), Customized Deals (e.g., Logistics, Electronics & Assembly), and Policy & Capacity Development (e.g., EV Batteries, Medical Devices). The Heatmap, developed with industry leaders, aims to address Bangladesh’s low FDI-to-GDP ratio by aligning investment strategies with national development goals. It will be reviewed annually. This is a good initiative that will be beneficial for the investors as well as for Bangladesh.

In conclusion, Bangladesh’s future in attracting Foreign Direct Investment (FDI) depends on implementing key policy reforms to regain investor trust. However, urgent action is required because failure to act swiftly may drive investors to more competitive markets like Vietnam or India,as they currently offer more favorable investment climates.

The interim government and policymakers must prioritize creating stability, ensuring transparency, and improving infrastructure. By enhancing the key areas, Bangladesh can unlock its full economic potential, diversify its industries, and create a more sustainable and investor-friendly environment.

(The author is a Postgraduate
Student of Computing Science at the University of Glasgow).