Posted On May 19, 2024

Why is Bangladesh not receiving the expected foreign direct investments (FDIs) needed to elevate its economy to the next level? Mohammad Zaved Akhtar, president of the Foreign Investors Chamber of Commerce and Industry (FICCI), has an answer.

He identifies the issue in three Cs: credibility, consistency, and capacity. Credibility and consistency relate to policies, including fiscal, monetary, and trade policies. Capacity pertains to institutional capabilities, such as those in logistics, and investment promotion.

He highlighted the need for effective coordination with the government and relevant organisations. 

This approach, according to Zaved Akhtar, also chairman and managing director of Unilever Bangladesh Limited, would create a more favourable environment for both foreign and local investors, thereby supporting the country's economic growth and development.

"One of the main bottlenecks for investment in a country like Bangladesh is the need for credible and consistent policies, including fiscal policies," he said during an interview with The Business Standard on Saturday at the Unilever head office in the capital's Tejgaon.

Providing an example of the lack of policy credibility in Bangladesh, Zaved Akhtar said, "There is an alternative dispute resolution (ADR) mechanism in place to resolve disputes efficiently, saving time. However, after a dispute is resolved through ADR, the case can be reopened, even though the company may have already closed its books of accounts."

"This is currently happening, and it seriously undermines investor confidence," he added.

The head of one of the country's largest fast-moving consumer goods (FMCG) companies also stressed the importance of consistent policies, particularly those related to the National Board of Revenue (NBR).

"An investor is informed about a tax rate system and plans their payback period accordingly. However, when a sudden, significant tax burden is imposed, it definitely disrupts their plans," he said. "New investors often consult with existing investors in a country before making their decision."

He said, "This inconsistent policy decision is detrimental to foreign investments." 

"Upon learning about the inconsistent fiscal policy, they may reconsider their investment decision. I know of a potential foreign investor who was planning to invest at least $200 million in the FMCG sector, and they are currently rethinking their decision," said the FICCI president, whose association currently comprises 200 foreign companies with about $29 billion in investment here since independence.

Zaved Akhtar also said the government has reduced the corporate tax by 7.5 percentage points over the years, bringing it down to 27.5%, which is a positive step for attracting investors here. "However, we need to consider the effective tax rate in Bangladesh, which in most cases is 40% or higher."

"An investor always considers the effective tax rate, not just the rate on paper, and it is still one of the highest in the world," he said. "Disallowances of promotional expenses, perquisites, taxes imposed on contributions to the workers' profit participation fund, and the minimum tax on turnover even when a company incurs a loss are all responsible for increasing the effective tax rate and undermining business confidence."

The Unilever Bangladesh boss also highlighted several issues, including the complicated VAT rate structure, over-reliance on indirect taxes, lack of inter- and intra-government agency connections, insufficient digitization and automation, lower productivity compared to other countries, and the absence of tax incentives for companies addressing environmental issues.

He said, "To start an operation in Bangladesh, there is a need for about 150 types of approvals from at least 23 agencies, and the process taking at least one and a half years, is much longer than in competitive countries."

Referring to his own experience with tax refunds as a good example of automation during his tenure in neighbouring India in recent years, Zaved said, "There is an integrated and automated system in India's tax department, which automatically deducts taxes in most cases and processes refunds quickly."

"After the reconciliation, the country's tax department refunded me additional taxes within two weeks. However, we have never seen this in Bangladesh," he added.

In 2023, year-on-year net FDI in Bangladesh decreased by 14%, amounting to a little over $3 billion, according to Bangladesh Bank data.

However, according to the FICCI boss, global FDI amounted to $1.3 trillion in that year, with half of it going to Asian countries. Moreover, FDI increased by 9% in South Asian countries, whereas it dropped in Bangladesh.

The FICCI president also highlighted Bangladesh's lower productivity and lack of logistics support, which are key factors affecting the competitiveness of the export market.

According to the latest report of the World Bank's Logistics Performance Index, released in April 2023, Bangladesh's ranking was 88th out of 139 countries, making it one of the lowest performers among competitive countries.

However, the report also shows that the country improved compared to the previous year's performance.

"India can export lotion products, including to Africa, with a 30% lower cost than us, thanks to lower production costs with their own raw materials and higher productivity," said Zaved Akhtar. "However, due to inefficiencies in the logistics sector, low productivity, and some other issues, our production costs increase, putting us behind."