Foreign Direct Investment and Balance of Payments of Bangladesh

A REPORT ON
Impact of Foreign Direct Investment On Bangladeshs Balance Of Payments: Some Policy Implications
Impact of FDI on Bangladeshs balance of payments: some policy implications
Submitted To: Mrs. Tasmia Thalil Lecturer, Faculty of Business Studies Premier university, Chittagong
Submitted By: Sudeshna Das 8th semester 16th batch Department of Finance & Banking ID No-0816112280 (Section-A)
Submission Date: 2nd October 2012
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Letter of Transmittal
June 24.06.12 Mrs. Tasmia Thalil Department of Finance & Banking Premier University Subject: Submission of the Report.
Honorable Madam, It is my great pleasure to submit the report titled Impact of Foreign Direct Investment on Bangladeshs Balance of Payments: some policy implications to you. I have prepared this report, on the basis of a part of one of our course International financial management. To make this report up to the standard I tried my best to fulfill the requirements by implementing the knowledge I have gather from the course. Thank you very much for providing me this type of opportunity and giving us the necessary guidance and direction needed for preparing the report. I have tried our level best to make this report holistic and informative enough. Besides this, there may be some shortcomings. I would be grateful if you consider those from excusable point.
Sincerely . Sudeshna Das Batch16, 8th Semester Section #A Department of Finance and Banking Premier University, Chittagong
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Letter of Acceptance
This is to certify that the term paper report on Impact of Foreign Direct Investment on Bangladeshs Balance of payments: some policy implications has been prepared by Sudeshna Das bearing Roll No-0816112280 , a regular student of BBA program, 8th semester, 16th batch , Premier University, Chittagong, under my direct supervision and guidance. During the program her devotion, sincerity and modesty were quite impressive and
praiseworthy.
I wish her every success in life
Mrs. Tasmia Thalil Lecturer of Finance, Faculty of business studies Premier University, Chittagong
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Table of contents
Name
Acknowledgement Executive Summary 1.1 Introduction
Page No
5 6 8 9 10 10
Chapter 1
1.2 Objectives 1.3 Methodology 1.4 Limitations
Theoretical Aspects
2.1 Defining FDI 2.2 Five different types of FDI 10 11 12-13 12-17 17 18
Chapter 2
2.3 Benefits of FDI 2.4 Risks associated with FDI 2.5 Balance of payment 2.6 Favorable and unfavorable balance of payment 2.7 Components of Balance of payment 2.8 Difference between capital account and current account
18 18-19
Practical Aspects
3.1 FDI In Bangladesh 3.2 FDI inflows by components 3.3 FDI inflows by Areas (EPZ and Non EPZ) 3.4 FDI Inflows by Sectors: 19-20 20-21 23 23-24 25 26 26 26-28
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Chapter 3
3.5 Balance of payment of Bangladesh

Current Account
Goods Account Services Account

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Income Current Transfers Recent Current Account of Bangladesh Imports of goods and services Major Import Items of Bangladesh Recent Imports of Bangladesh Exports of goods and services Major Export Items of Bangladesh Recent Exports of Bangladesh Bangladesh Balance of Trade Capital and Financial Account Capital Account Financial account 3.6 Recent Capital Account of Bangladesh 3.7 Features and weaknesses of balance of payments: 3.8 Impact of FDI on Balance of Payments 3.9 Key findings of the report
29 30 32 32 32 32 33 33 33 33 34 34 34 36 38 39 41
Conclusionary Aspects
4.1 Recommendations 4.2 Policy implications Conclusions 43 44-45 45
Ending matters
Bibliography 48
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Acknowledgement:
At the starting of my report, I would like to thank God for blessing me with the strength, aptitude and patience for successfully completing my assignment.
I would like to thank my supervisor Mrs. Tasmia Thalil for giving me this assignment as a result of which I have got the opportunity to know many more about Foreign Direct Investment and its impact on Balance of Payment of Bangladesh, its different components, its history of trends and so on which has widened my knowledge. I have tried my best to implement her suggestions while doing this assignment.
I would also like to thank some of the personals of Bangladesh Bank who have helped us through providing 10 years information regarding Balance of Payment of Bangladesh. Our sincere gratitude goes to them for giving us time from their busy schedule, providing us with information that was required to complete this assignment.
Finally my sincere thanks go to each and everyone who has helped and supported us significantly in different stages during the completion period of this assignment.
I would like to dedicate this project to my friends and family members who have given me the strength to build my career in life.
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Executive Summary
Foreign direct investment (FDI) is a potent weapon of economic development, especially in the current global context. It enables a capital-poor country like Bangladesh to build up physical capital, create employment opportunities, develop productive capacity, enhance skills of local labor through transfer of technology and managerial know-how, and help integrate the domestic economy with the global economy. This study reports high positive correlation between FDI inflows and Bangladeshs aggregate exports and imports. The net impact on the current account balance and the balance of payments is positive. Bangladeshs investment incentives and regulations for FDI are found competitive with those offered by similar other countries. Effective implementation of these measures and success in attracting higher FDI inflows, however, needs significant institutional reforms, radically reduced levels of control, better provision of essential infrastructures, perceived improvement in investment climate, and sustained socio-political stability.
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Chapter 1
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Introductory Aspects
1.1. Background
Foreign direct investment (FDI) is a potent weapon of developing the Bangladesh economy and can play an important role in achieving the countrys socio-economic objectives including poverty reduction goals. In a capital-poor country like Bangladesh, FDI can emerge as a significant vehicle to build up physical capital, create employment opportunities, develop productive capacity, enhance skills of local labor through transfer of technology and managerial know-how, and help integrate the domestic economy with the global economy. Balance of payment of any country is a systematic record of all economic transactions between the residents of that country and of the residents of the rest of the world in an accounting period. The balance of payment transactions includes all the receipts of and payments by a country during a given year. The Bangladesh Bank follows a classificatory scheme for BOP presentation as per the5th edition of the IMF's Balance of Payments Manual (BPM5).
The Balance of Payments is a statistical statement for a given period showing Transactions in goods, services and income between an economy and the rest of the world; Changes in the economys monetary gold, special drawing rights (SDRs) and other financial claim son and liabilities to the rest of the world; Transfers and counterpart entries that are needed to balance, in an accounting sense, any entry for the foregoing transactions and changes which are not mutually offsetting.
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This policy note provides an assessment of the current situation of FDI in Bangladesh and examines its impact on the countrys balance of payments.
1.2 Objectives of the Study

The main objectives of this assignment are:
To gather knowledge broadly about FDI and Balance of Payment. To know the trends of Balance of Payment of Bangladesh. To evaluate FDI status in Bangladesh. To know about the real accounting method and format used to calculate the Balance of Payment in Bangladesh which however cannot be understood properly by reading books and studying in classrooms. To gain an in-depth knowledge about how different accounts are recorded, calculated and what are their impact in the overall Balance of Payment. To know the impact of FDI on Bangladeshs Balance of Payments
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1.3 Methodology
This assignment has been completed by taking information from primary and secondary sources. I have completed our assignment by taking information from different journals from Bangladesh Bank regarding Balance of Payment of Bangladesh. I have also taken information from different websites.
1.4 Limitations
While preparing this assignment, I faced some limitations in terms of having poor knowledge regarding different elements and steps of Balance of Payment. Although we had this limitation, however we have tried our level best to fulfill the objectives of this assignment properly.
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Chapter 2
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Theoretical Aspects
Foreign Direct Investment:

2.1 Defining FDI:
The definition of FDI will be allowed in accordance with the United Nations Conference on Trade and Development (UNCTAD) and its World Investment Report 2006, FDI is defined as an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). The fifth edition of the IMFs Balance of Payments Manual (BPM5) defines FDI as a category of international investment that reflects the objective of a resident in one economy (the direct investor) obtaining a lasting interest in an enterprise resident in another economy (the direct investment enterprise).
FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. FDI may be undertaken by individuals as well as business entities. Flows of FDI comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an FDI enterprise, or capital received from an FDI enterprise by a foreign direct investor. FDI has three components: equity capital, reinvested earnings and intra-company loans.
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In a capital poor country like Bangladesh, FDI can emerge as a significant vehicle to build up physical capital, create employment opportunities, develop productive capacity, and enhance skills of local labor through transfer of technology and managerial know-how, and help integrate the domestic economy with the global economy. This policy note provides an assessment of the current situation of FDI in Bangladesh and examines its impact on the countrys balance of payments.
2.2 Five Different Types of Foreign Direct Investment (FDI)

According to Chryssochoidis, Millar & Clegg, 1997 there are five different types of foreign direct investment (FDI). The first type of FDI is taken to gain access to specific factors of production, e.g. resources, technical knowledge, material know-how, patent or brand names, owned by a company in the host country. If such factors of production are not available in the home economy of the foreign company, and are not easy to transfer, then the foreign firm must invest locally in order to secure access. The second type of FDI is developed by Raymond Vernon in his product cycle hypothesis. According to this model the company shall invest in order to gain access to cheaper factors of production, e.g. low-cost labor. The government of the host country may encourage this type of FDI if it is pursuing an export-oriented development strategy. Since it may provide some form of investment incentive to the foreign company, in form of subsidies, grants and tax concessions. If the government is using an import-substitution policy instead, foreign companies may only be allowed to participate in the host economy if they possess technical or managerial know-how that is not available to domestic industry. Such know-how may be transferred through licensing. It can also result in a joint venture with a local partner. The third type of FDI involves international competitors undertaking mutual investment in one another, e.g. through cross-shareholdings or through establishment of joint venture, in order to gain access to each other's product ranges. As a result of increased competition among similar products and R&D-induced specialization this type of FDI emerged. Both companies often find it difficult to compete in each other's home market or in third-country markets for each other's products. If none of the products gain the dominant advantage, the two companies can invest in each other's area of knowledge and promote sub-product specialization in production. The fourth type of FDI concerns the access to customers in the host country market. In this type of FDI there are not observed any underlying shift in comparative
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advantage either to or from the host country. Export from the companies' home base may be impossible, e.g. certain services, or the capability to request immediate design modifications. The limited tradability of many services has been an important factor explaining the growth of FDI in these sectors.
The fifth type of FDI relates to the trade diversionary aspect of regional integration. This type occurs when there are location advantages for foreign companies in their home country but the existence of tariffs or other barriers of trade prevent the companies from exporting to the host country. The foreign companies therefore jump the barriers by establishing a local presence within the host economy in order to gain access to the local market. The local manufacturing presence need only be sufficient to circumvent the trade barriers, since the foreign company wants to maintain as much of the value-added in its home economy.
2.3 Benefits of FDI

At the theoretical level, the benefits of FDI include the following: 1) Overcoming domestic resource constraint. FDI can close the domestic resource gap by providing an outside source of financing for investment. FDI inflows are believed to be more stable and easier to service than other sources of foreign private capital such as commercial debts or portfolio investment. 2) Raising the productivity of labor and capital. FDI raises the productivity of labour, and so raises the quality of employment. Economies of scope and scale and managerial efficiency can raise the productivity and returns of all production inputs. In technical jargon, when foreign capital is used with locally available labor and capital, the marginal productivity of these domestic inputs increases. This will lead to an increase in the real wages for workers and to an increase in the real rate of return to the domestic capital.i 3) Generating employment. By creating new productive facilities, FDI creates more jobs in the economy. Increased employment, like investment, will have a multiplier effect on the economy and stimulate a dynamic growth cycle. 4) Easing the balance of payments constraints. FDI leads to an improvement in the host countrys balance of payments and possibly also terms of trade. Foreign
investment constitutes an inflow on the capital account and therefore allows the economy to sustain the deficit on the current account without devaluing the currency or introducing austerity measures. 5) Raising exports. Export-oriented TNCs can raise exports significantly. This is in fact one reason why developing country governments try to attract FDI through the creation of export processing zones (EPZs). 6) Access to technology. FDI brings in new technology, which may have positive spillover effects for other local firms. 7) Access to markets. TNCs can help host countries gain easy access to the lucrative markets of the rich countries. 8) Benefits to environment. TNCs have better access to and knowledge of environmentally sound technologies and are expected to bring such technologies to the host country. 9) Benefits to consumers. Consumers are likely to benefit from increased FDI inflows in the form of lower prices and improved product quality when the investment is costreducing and product-improving. Benefits also accrue to consumers because FDI is likely to introduce new products and thus widen the choice in consumer goods markets. 10) FDI may also contribute increased revenue to the government.
2.4 Risks associated with FDI

At the same time as FDI offers many potential benefits, it also poses some real risks for the host economy. Empirical studies on the effects of FDI on savings, financial inflows and outflows, trade, and growth conclude that successful growth in developing countries is premised essentially on raising the domestic savings rate to a high level and productively investing the savings. This is more important than the role of foreign capital aid, debt and FDI. The East Asian growth success is based mainly on high domestic savings rather than FDI, although FDI has many advantages as mentioned above.
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A UN economist, addressing a seminar in Dhaka recently, said that FDI should not be considered indispensable for economic progress. Countries like Taiwan, Korea, Japan, China and even western economies did not rely much on foreign investment. Economic progress there was actually always laid by the domestic ventures. Foreign investment is necessary to gain access to certain foreign markets or certain fast-changing technologies.ii Impact on domestic savings: Normally FDI should raise real income and domestic savings. But this effect may be offset by redistribution of income away from domestic capital if the foreign investment competes with home investment and reduces profits of domestic industries. The consequent reduction in domestic savings is an indirect cost of foreign investment. The FDI may also have a negative effect on domestic savings, as it gives room for an increase in consumption in the recipient country. Recapitalization effect: FDI generates both positive and negative effects on the flow of foreign exchange on two accounts: financial and trade. On the financial side, FDI brings in capital, but also leads to a stream of return flow of profit, other investment incomes and accumulated interest, and repatriation of capital. This return flow increases through time as the stock of foreign capital rises. Thus, FDI has a tendency to lead to recapitalization. Since the rate of return of FDI is much higher than the rate of interest paid on aid or debt, the recapitalization effect of FDI is likely to be greater than that of aid or debt. Effects on balance of payments: On the trade side, FDI has a positive effect through higher export earnings and a savings on imports (for products locally produced), but a negative effect through higher imports of intermediate and capital goods. In many cases, FDI is heavily reliant on large imports of capital and intermediate goods. The high import content reduces the positive trade effect. If investors import more than they export, FDI can end up worsening the balance of payments situation of the country. In order for FDI to have a positive effect on balance of payments, there must be a strong enough positive trade effect to offset the negative recapitalization effect. Without careful policy planning, the negative effect could grow through time and be serious as profit outflow builds up. Denationalization effect: Too rapid a buildup of FDI could lead to denationalization, where the ownership of firms is transferred from domestic to foreign hands and the foreign share of the nations wealth stock increases relative to local share. To avoid economic or
social problems that this may cause, the rate of growth of domestic investment should exceed FDI growth. Impact on development: The impact of FDI on development also depends upon the type of FDI, i.e., whether it is in the form of Greenfield investment or merger and acquisition (M&A). Greenfield investments should be preferred by developing countries because they create new productive facilities and create jobs, instead of FDI through M&As, which consists of the purchase of existing assets, especially through privatization and in the services sector. M&A type FDI, which is often called yellow field investment, does not generate employment at the time of entry into the host economy and may even lead to lay-offs as the acquired firm is restructured. Developing countries should also encourage FDI in tradable sectors, which has a positive trade effect, rather than FDI in the non-tradable services sectors, which do not yield much export earnings. Instability: Contrary to the conventional wisdom that FDI is a stable form of longer-term foreign capital inflows, an UNCTAD report shows that FDI can also be a source of considerable financial instability. Even when FDI is governed by long-term considerations, aggregate FDI flows can respond rapidly to changes in short-term economic conditions. Thus, profit remittance and profits retained (profit re-investment) by the subsidiary are now significant components of FDI flows in many host countries. The composition of FDI in Bangladesh, too, has been undergoing a shift away from equity capital in the direction of reinvested earnings. In 2009, reinvested earnings accounted for 52 percent of all FDIs (Table 8). These are highly volatile and indeed can be just as volatile as portfolio investment flows, especially during an economic crisis. Therefore, the old presumption that FDI flows are less volatile than portfolio investment may no longer hold.
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Table : Components of FDI Inflow in Bangladesh, 2008 and 2009

FDI Components US$ m Equity Capital Reinvested Earnings Intra-Company Loans Total 809.3 245.7 31.3 1,086.3 2008 Share 74.50% 22.62% 2.88% 100% US$ m 218.55 364.94 116.67 700.16 2009 Share 31.21% 52.12% 16.66% 100% -73% 48% 273% -36% Growth %
Source: Bangladesh Bank FDI Survey Report, July-December, 2009
Impact on domestic investment: FDI does not necessarily lead to an increase in investment by the same amount, because it may crowd out domestic investment. Since they have access to cheaper capital than most firms in the host country, TNCs are able to snap up profitable investment opportunities that domestic investors would have made if they had the chance. Crowding out may also take place because TNCs have privileged access to skilled personnel, again because of their reputation and size? They can thus raise entry costs for local firms, or deprive them of the best factor inputs. Note that foreign firms are usually able to attract top graduates at the expense of local firms. Impact on domestic competition: FDI and in particular M&As are likely to have a negative impact on the level of competition in the domestic market. Developing countries are understandably concerned that the takeover of domestic firms by giant TNCs will allow them to engage in anticompetitive practices and abuse of their dominant market positions. These points to the pressing need for developing countries to strengthen their domestic competition policies and law. For countries that do not yet have any national competition law or policy should quickly move towards enacting legislation in that regard, if they want their local firms stay alive alongside powerful multinational companies. Transfer pricing: Transfer pricing refers to the pricing of intra-firm transactions of goods, services, know-how and intellectual property. The prices at which such items are transferred do not reflect the true value of products entering and leaving the country, and hence transfer pricing may result in a
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drain of national resources. Countries involved may lose out on tax revenue from TNCs as they are able to juggle their accounts in such a way as to avoid their tax liabilities. Developing countries can deal with the transfer pricing issue by enacting legislation whereby there shall be a system of penalties on firms for deliberate manipulation of records to avoid tax obligations. Risk of loss of control over strategic sectors: The host countrys politico-strategic interests will be at stake if FDI comprises a large component of total investment and involves loss of local control over strategic sectors, infrastructure and natural resources. Effect on R&D: An important argument raised against FDI concerns its effects on domestic research and development (R&D). Foreign ownership of important parts of a countrys industry can stifle scientific research and development work in the host country. Foreign direct investments usually tend to be made in technologically advanced industries, but research for further development of these key industries tends to be located in the investing country. Thereby the host countries are deprived of the important stimulus given by research in these industries. The tendency, inherent in direct investments, to lead to a reallocation of research activities could also induce scientists and technicians to leave their own country and move to the investing country a phenomenon popularly called the brain drain. How one views the effects of direct investment on research activity and the consequent brain drain is largely a matter of values, because while brain drain tends to siphon off scientific and technical talent from the relatively poor host economies to the richer home countries, it also enables the immigrant population to remit at least part of their earnings back to their own countries and improve their balance of payments position. Cost of FDI incentives: Given the limited supply of global FDI, resource-poor countries compete fiercely with one another to attract foreign investment. They are prone to engage in a race to the sky, offering investors more and more attractive financial incentives, or in a race to the bottom, reducing regulatory requirements on firms. Engaging in this type of competition almost inevitably means that even the country that wins the investment has to pay a heavy price. One way in which a country may be able to attract FDI without engaging in reckless competition on incentives is to establish specific EPZs, where businesses are offered a combination of reduced tax rates, tax holidays, subsidies (e.g., based on the number of jobs created), and reduced regulation. Other costs of FDI: Other costs are damages to the physical environment, if FDI is involved in projects that pollute the environment; distortion of consumption patterns, if costly foreign foods from FDI supplant local and more nutritious foods in the diet of the urban poor; the net loss of jobs when capital-intensive FDI displaces labor-intensive local firms; fiscal costs, in the form of increased Department of Finance Premier University Page 21
government expenditure or foregone revenue, involved in providing subsidized inputs and additional services; and so on. All these factors have to be taken into account in an overall net evaluation of the costs and benefits of FDI.
2.5 Balance of Payment:

Balance of payment is a record of all transactions made between on particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports including all financial exports and imports. BOP may be used as an indicator of economic and political stability. A negative balance of payment means that more money is flowing out in the country than coming in and vice-versa.
2.6 Favorable and unfavorable balance of payment:

If credits are more that is exports are more than it is a positive sign for the economy and it is known as favorable B.O.P If debits are more that is imports are more than it is a negative sign for the economy and it is known as unfavorable B.O.P
2.7 Components of balance of payment:

Balance of payment is generally grouped under the following heads, Current Account Capital Account Unilateral or Current Transfer Account Official Settlement Account
In the Bangladesh Balance of Payments statements are grouped under two major categories as given below, Current Account and Capital and Financial Account
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2.8 Difference between capital account and current account

The current account is the Balance of Trade in goods Trade in services Net investment income from external assets Net transfers Capital account captures inflows and outflows of different forms of capital Portfolio investment e.g. money flowing into / out of stock markets, pension funds, hedge funds etc Direct capital investment e.g. fixed investment in factories Short term banking flows ... also known as hot money In principle a country running a current account deficit can balance things up by running a surplus on the capital account - the UK is a good example, because the economy has been a favored location for FDI and there is a strong appetite among foreign investors for UK government bonds A country running a current account surplus can run capital account deficits i.e. invest heavily overseas or just accumulate foreign exchange reserves e.g. China, Norway, Oil exporting nations some of whom have created their own sovereign wealth funds. In principle the BoP must balance.... it does so because of adjustments that countries make to their foreign exchange reserves using IMF agreed accounting measures and also because of the balancing item which reflects errors and omissions!
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Chapter 3
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Practical Aspects
3.1 FDI in Bangladesh:

Bangladesh has attracted USD 913 million foreign direct investments (FDI) in 2010 calendar year, a leap by 30 percent. This upgrades the countrys position to 114 from 119 out of 141 nations in the World Investment Report (WIR). During this period the telecom sector received USD 360 million FDI, the manufacturing sector received USD 238 million in investment from abroad, USD 145 million in the textile and clothing sector, while leather and leather products got USD 46 million. (The financial express, 27 July, 2011). As a developing country, Bangladesh needs Foreign Direct Investment (FDI) for its ongoing development process. Since Independence, Bangladesh is trying to be a suitable country for FDI. In order to accelerate economic growth, Bangladesh opened her economy in the late 1980s to reap the benefits of FDI. In 1989 the government set up Board of investment (BOI). The primary objective of which is aimed at attracting and facilitating investment from abroad. (Mondal 2003). The trend of Inflow of FDI in Bangladesh has increased over the 1980s as compared to earlier periods and this same momentum continues in 1990s as well. The total inflow of FDI has been increasing over the years. During the period of 1977-2010, total inflows of FDI were USD 8927.9 million, among which the total inflows of FDI during 2006-2010 was USD 4158.63 million. In 1977 this inflow was USD 7 million and in 2008, annual FDI reached to USD 1086.31 million. Unfortunately there was a declination in inflows of FDI in 2010 which was USD 913.32 million (Source: Survey Report, Statistics Department, Bangladesh Bank)
The figure shows an inconsistent proceeding of FDI inflows during the period. In 1999 there was a sudden decline in the FDI and the falling trend continued for many reasons again in 2001, 2002 and 2003. Serious political unrest during the period discouraged foreign investment and it took quite some time to regain the confidence of foreign investors. There were also some other factors that force this declination in the inflows. After that, there was very good news for Bangladesh. The FDI inflow was on the steady rise from 2003 to 2005. It raised US$ 1086.3 million in 2008 but slumped to US$ 700.16 in 2009 again increased to $913.32.
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Private Investment Statistics

Year Proposed Local Investment Project 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 * March, 2012 Source: Bangladesh Economic Review-2011 (Bangla version), Ministry of Finance 1754 1930 1615 1336 1470 1298 1604 BDT 18370 19658 19553 17117 27414 39976 497078 Proposed Foreign Investment Project 135 191 143 132 160 148 209 BDT 24986 11925 5433 14749 6261 26935 338910 Total Proposed Investment Project 1889 2121 1758 1468 1630 1446 1813 BDT 43356 31583 24986 31867 33678 66912 835989 124.62 -27.15 -20.89 27.54 5.67 98.71 212 Growth %
3.2 FDI inflows by components:
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FDI in Bangladesh consists of three components: Equity capital, Reinvested Earnings and Intra- Company loans. These components have fluctuated considerably in the last two decades. In the early year of 1996, the total FDI inflow was only 210 million USD where reinvested earnings were the bigger portion. This trend continued up to 1998. Then there is a sudden decline in terms of total inflow as well as component wise inflow of FDI. In 2008 the total inflows was 1100 million USD which is the highest ever. The shifting of component wise FDI inflow in Bangladesh is clearly in the figure 3.2.2 and 3.2.3. In present years the major share of FDI inflow in Bangladesh come in equity capital form. In 1996 the share of equity capital in total FDI was 30 percent which increases to 57 percent in 2010. In 1996 share of reinvested earnings was 53 percent which decreased to 40 percent in 2010. On the other hand, share of intra-company loan was 17 percent which then decreased to 3 percent in 2010. This shows that net transfer of resources from abroad into Bangladesh is fairly negligible. The contribution of FDI is very little in case of transfer of hard ware technology.
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3.3 FDI inflows by Areas (EPZ and Non EPZ)
Figure 3.3.1 reveals that despite the initial increase and steady continuation, FDI inflows in Non-EPZ areas was in declining trend during the period of 2001-2003. In 2004 it increased to 800 million USD and this trend continued up to 2005. The FDI inflows in Non-EPZ areas in 2010 recorded to USD 795.15 million which is 87 percent of total inflows whereas in the beginning of this period (in 1996) it was USD 189.3 million which is 82 percent of total inflows. In the EPZ areas, the FDI inflows were always in a steady direction.
3.4FDI Inflows by Sectors:

Sector-wise analysis of FDI reveals the fact that a shift has been made by the foreign investors in their investment in Bangladesh (Annex Table-3.4). The table shows the trend of FDI towards power and energy, manufacturing and telecommunications, whereas the neglected sectors were agricultural, Services and trade and commerce. In 2005, the main focus of investment was in the manufacturing sector. The pie chart shows the shift of FDI in the sectors in Bangladesh. The pie chart draws a clear picture how the dimensions of FDI inflows have changed in recent years.
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3.5 Balance of payment of Bangladesh

1) Current Account Current Account is the sum of the (A) Goods and Services, (B) Income and (C)Current Transfers. A) Goods and Services a) Goods Recording of goods implies provision or acquisition of real resources of an economy to and from the rest of the world. The credit entries of the flows measure the domestic real resources
provided to, while the debit entries stand for acquisition of real resources from the rest of the world. Exports of goods are credited and imports of goods are debited in the goods account and the net goods accounts are calculated by subtracting the amount of imports from the amount of exports. In equation, Net goods account= Value of goods exported - Value of goods imported Goods cover general merchandise, goods for processing, repairs on goods, goods procured in ports by carriers and non monetary gold.
General Merchandise: The credit entries cover mainly merchandise export son f.o.b. basis and are derived from customs records provided by Export Promotion Bureau (EPB). The debit entries, derived from exchange records, mainly represent merchandise imports and are reported on c.i.f. basis. To arrive at a uniform valuation with export, transportation and insurance services at an estimated rate of 10 percent are deducted from c.i.f. import data.
Goods for processing: Transactions in goods are recorded under this item when goods imported for processing are re-exported to the country from which those goods were originally imported and Vice-versa .
Repairs on goods: It includes the value of repairs with the provision of materials for major refits of ships, aircraft and other carriers. As per recommendations of IMF Mission 2009, repairs on goods have been included in transportation.
Goods procured in ports by carriers: The item refers to those goods, such as fuels, provisions, stores and supplies for carriers usually purchased for commercial use in ships, aircraft and other carriers.
Non monetary gold:

This represents gold that is held as a store of value which is not recognized as part of reserves in the financial account.
b) Services Recording of services implies provision or acquisition of services of an economy to and from the rest of the world. The credit entries measure the services provided to, and the debit entries measure the acquisition of services from the rest of the world. Exports of services are credited and imports of services are debited in the services account and the net services accounts are calculated by subtracting the amount of imports from the amount of exports. In equation, Net services account= Value of services exported - Value of services imported Different types of service accounts are discussed here.
Transportation: Transportation covers all transportation (Sea, Air, Rail, Road and Others ) services that are performed by residents for those of non-residents and Vice-versa and involved with carriage of passengers, movement of goods(freight), charter of carriers with crew and other related supporting and auxiliary services. Activities like freight insurance, goods procured in ports by carriers are excluded from transportation but repairs of transportation equipment are included in this item.
Travel: Travel represents receipts and payments under tourism and other travel for such purposes as business and personal. Business travelers are usually commercial travelers, government employees on official travel and employees of international organizations on official missions. Personal travel covers travelers going abroad for religious, educational, health purposes, visits to relatives and friends, participation in sports etc.
Communication Services:
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Communication services cover receipts and payments on account of telephone, telegraph, facsimile and telex including broadcasting and electronic mail services, postal and courier services.
Construction services: Construction services covers receipts for work abroad on construction projects and installation by personnel of resident enterprise sand payments on account of salary and allowances paid to the personnel of non-resident enterprises engaged in construction project in Bangladesh.
Insurance services: Credit entries cover net premium on direct insurance and reinsurance assumed by resident insurance companies. Debit entries cover premium on merchandise insurance on imports, which are not available separately but are included in freight. An estimated 10 percent of import freights is treated as insurance.
Financial Services: Receipts by banks operating in Bangladesh from their offices and correspondents abroad and payments by banks to their branches and correspondents abroad on account of commission, cable charges including fees associated with letter of credit, bankers acceptances, lines of credit, financial leasing and other fees etc. are included under financial services.
Computer and Information Services: It covers receipts and payments on account of computer and news related services including data processing, hardware consultancy, software implementation, export of computer software, maintenance and repairs of computers and news agency services.
Royalties and License Fees: The item covers receipts and payments associated with the authorized use of intangible no produced non-financial assets and proprietary rights, such as patents, copy rights, trademarks, industrial processes etc. and the use through licensing agreement of produced originals or photo types such as manuscripts and films.
Other Business Services: Receipts and payments on account of me chanting and other trade related services, operational leasing and miscellaneous business, professional and technical services are covered under this head.
Entertainment, Cultural and Recreational Services: It covers receipts and payments on account of audio visual and related services and other cultural and recreational services.
Govt. Services n.i.e.: Under this residual item the primary credit entries are service expenditures of foreign diplomatic missions and international organizations in Bangladesh and the primary debit entries are the expenditures relating to Bangladesh diplomatic personnel, diplomatic and trade mission, and military expenditures abroad.
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Bangladesh reported a trade deficit equivalent to 1015 Million USD in April of 2012. Historically, from 1995 until 2012, Bangladesh Balance of Trade averaged -1287.41 Million USD reaching an all time high of -56.40 Million USD in August of 2009 and a record low of -5370.60 Million USD in June of 2008. Bangladesh exports mainly readymade garments including knit wear and hosiery (75% of exports revenue). Others include: Shrimps, jute goods (including Carpet), leather goods and tea. Bangladesh main exports partners are United States (23% of total), Germany, United Kingdom, France, Japan and India. Bangladesh imports mostly petroleum product and oil, machinery and parts, soya bean and palm oil, raw cotton, iron and steel and wheat. Bangladesh main imports partners are China (17% of total), India, Indonesia, Singapore and Japan. This page includes a chart with historical data for Bangladesh Balance of Trade. B) Income The Income component of the Balance of Payments is restricted to income earned from the provision of two factors of production viz, labor and capital. Accordingly income earned from the labor is called compensation of employees while income earned from the capital is called investment income. Income paid to Bangladeshis from overseas sources is credited in the income account and income paid by Bangladeshis to overseas sources is debited in the income account. In equation, Net Income Account= Income Credits - Income Debits.
Compensation of employees: Wages, salaries and other benefits received by short term workers (less than one year) from non-resident employers and that of local staff of embassies, consulates and international organizations are treated as credit entries while the reverse are debit entries under this head.
Investment income
Direct investment The credit entry covers profit receipts on equity participation and interest receipts on debt by Bangladeshi direct investors from abroad and debit entry records the profit and interest paid
to the foreign direct investors by the reporting economy. Data on direct investment income are derived from banking records. Data on reinvested earnings are collected through enterprise survey.
Portfolio investment The credit entry covers dividend accrued on equity securities (shares) and interest received from holding of foreign bonds, notes, and money market instruments and associated financial derivatives, and the debit entry includes the payments on account of the same instruments to the foreign investors. Data on portfolio investment income are collected from the exchange records provided by authorized dealers.
Other Investment The credit entry under this head includes mainly interest and discount received by Bangladesh Bank from investment account and treasury bills and receipts of interest/discount on all other resident claims on non-resident other than direct and portfolio investment. The debit entry represents mainly interest payments of Medium & Long-term Loan (MLT) and other short-term loans, payments of IMF charges and payments of interest/discount on all other liabilities to nonresident other than direct and portfolio investment.
C) Current Transfers Official grants in food and commodity for immediate consumption and technical assistance are included in the current transfers. It also includes workers' remittances, other gifts and donations etc. Transfer of funds into Bangladesh is credited and the transfer of funds out of Bangladesh is debited. In equation, Net Current Transfer = Credits - Debits
General government:
The credit entries for current transfers of the general government (i.e. government official sectors) include grants in the form of food and commodity and technical assistance received from donor countries and international organizations. Debit entries represent payments on the same accounts.
Other sectors: Credit entries of other current transfer mainly cover workers' remittances and donations provided by foreign private organizations. Payments on the same accounts constitute debit entries.
Current transfers; receipts (BoP; US dollar) in Bangladesh
The Current transfers; receipts (Bop; US dollar) in Bangladesh was last reported at 12791082624.18 in 2011, according to a World Bank report published in 2012. Current transfers (receipts) are recorded in the balance of payments whenever an economy receives goods, services, income, or financial items without a quid pro quo. All transfers not considered to be capital are current. Data are in current U.S. dollars. This page includes a historical data chart, news and forecast for Current transfers; receipts (BoP; US dollar) in Bangladesh. Bangladesh is considered as a developing economy which has recorded GDP growth above 5% during the last few years. Microcredit has been a major driver of economic development in Bangladesh and although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of exports revenues come from garment industry. The biggest obstacles to sustainable development in Bangladesh are overpopulation, poor infrastructure, corruption, political instability and a slow implementation of economic reforms.
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Recent Current Account of Bangladesh

Bangladesh reported a current account surplus equivalent to 264 Million USD in the fourth quarter of 2011. This page includes a chart with historical data for Bangladesh's Current Account. Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account.
Imports of goods and services

Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country. Import of goods normally requires involvement of the Customs authorities in both the country of import and the country of export and is often subject to import quotas, tariffs and trade agreements. When the "imports" are the set of goods and services imported, Imports" also means the economic value of all goods and services that are imported.
Major Import Items of Bangladesh

The economy of Bangladesh depends on imports both for consumer items and industrial raw materials. The major import items of Bangladesh are: Wheat, oil, seeds, crude petroleum, raw cotton, edible
oil, petroleum products, fertilizer, staple fibers, yarn, iron and steel, capital goods. Major trading partners of Bangladesh for both exports and imports are: USA, EU countries, India, China, Japan, South Korea, Australia, Malaysia, Hong Kong, Taiwan, Indonesia, Thailand, Saudi Arabia, UAE .Bangladesh is the member of many International economic and trade blocks like, OIC,ICC, ISO, SAARC, G-77 and BIMST-EC.
Recent Imports of Bangladesh

Bangladesh Imports were worth 3346 Million USD in January of 2012. Bangladesh imports mostly petroleum product and oil, machinery and parts, soybean and palm oil, raw cotton, iron and steel and wheat. Bangladesh main imports partners are China (17% of total), India, Indonesia, Singapore and Japan. Bangladesh reported a trade deficit equivalent to 1196 Million USD in January of 2012. Bangladesh exports mainly readymade garments including knit wear and hosiery (75% of exports revenue). Others include: Shrimps, jute goods (including Carpet), leather goods and tea. Bangladesh main exports partners are United States (23% of total), Germany, United Kingdom, France, Japan and India. Bangladesh imports mostly petroleum product and oil, machinery and parts, soya bean and palm oil, raw cotton, iron and steel and wheat. Bangladesh main imports partners are China (17% of total), India, Indonesia, Singapore and Japan.
Exports of goods and services

Exports of goods and services represent the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude compensation of employees and investment income (formerly called factor services) and transfer payments. Major Export Items of Bangladesh The traditional export items of Bangladesh are: raw jute, jute manufactures (Hessian sacking, carpet backing, carpets), jute products, tea, leather and leather products. on- traditional export items are:
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garments, frozen shrimps, other fish products, newsprint, paper, naphtha, furnace oil, urea and ceramic products
Recent Exports of Bangladesh

According to a World Bank report released in 2011The Exports of goods and services(US dollar) in Bangladesh was last reported at 18471882566.67 in 2010. Exports of goods and services represent the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude compensation of employees and investment income and transfer payments. Bangladesh is considered as a developing economy which has recorded GDP growth above 5% during the last few years.
Bangladesh Balance of Trade

Bangladesh reported a trade deficit equivalent to 1196 Million USD in January of 2012. Bangladesh exports mainly readymade garments including knit wear and hosiery (75% of exports revenue). Others include: Shrimps, jute goods (including Carpet), leather goods and tea. Bangladesh main exports partners are United States (23% of total), Germany, United Kingdom, France, Japan and India. Bangladesh imports mostly petroleum product and oil, machinery and parts, soybean and palm oil, raw cotton, iron and steel and wheat. Bangladesh main imports partners are China (17% of total), India, Indonesia, Singapore and Japan. Graph 4: Current Account
From the above graph it is seen that in 1991-92 the current account line is very close to the horizontal line and in 2000-01 the balance of current account was lowest but in2009-10 it has reached to its highest position and the amount is 229,561 million US Dollar. At present the current account balance of Bangladesh is showing a positive sign. Balance on current account = Balance on goods and services + Net income +Net transfer.
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Current account balance (BoP; US dollar) in Bangladesh

The Current account balance (BoP; US dollar) in Bangladesh was last reported at 2502421559.43 in 2010, according to a World Bank report released in 2011. The Current account balance (BoP; US dollar) in Bangladesh was 3556126394.05 in 2009, according to a World Bank report, published in 2010. The Current account balance (BoP; US dollar) in Bangladesh was reported at 926185438.56 in 2008, according to the World Bank. Current account balance is the sum of net exports of goods, services, net income, and net current transfers. Data are in current U.S. dollars. This page includes a historical data chart, news and forecasts for Current account balance (BoP; US dollar) in Bangladesh. Bangladesh is considered as a developing economy which has recorded GDP growth above 5% during the last few years. Microcredit has been a major driver of economic development in Bangladesh and although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of exports revenues come from garment industry. The biggest obstacles to sustainable development in Bangladesh are overpopulation, poor infrastructure, corruption, political instability and a slow implementation of economic reforms.
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2) Capital and Financial Account:

Capital Account is the sum of the (A) Capital Account and (B) Financial Account A) Capital Account Money coming to Bangladesh are credited and the money coming out of Bangladesh are debited in the capital account. In equation, Balance of capital account = Capital transfer credited Capital transfer debited
Capital transfer: Capital transfer consists of transfer of ownership of fixed assets or forgiveness of financial liabilities between residents and non-residents without quid pro quo. It includes mainly official project grants (excluding technical assistance) data for which are collected from the ERD.
B) Financial Account Financial account records all transactions associated with changes of ownership in foreign financial assets and liabilities. Balance of Financial Account = Direct investment + Portfolio investment + Other Investment + Reserve Assets
Direct investment: This item covers remittances received from foreign direct investors in their enterprises in the reporting economy and remittances made abroad by Bangladeshi direct investors for equity participation. The data on foreign direct investment (FDI) transactions are collected through enterprise surveys.
Portfolio investment: Portfolio investment covers remittances received from(credit) and paid to (debit) on account of equity securities (share) and debt securities in the form of bonds and notes, money market instrument and financial derivatives. Information on portfolio investment are collected through banks. Steps have also been taken to collect additional information through enterprise surveys.
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Other Investment: Other investment includes all financial transactions that are not covered in the categories for direct investment, portfolio investment or reserve assets. Under other investment, the instrument classified under assets and liabilities, comprises trade credits, loans (including use of Fund credit and other loans from the Fund), currency and deposits and other assets and liabilities.
Reserve Assets: Data on international reserves comprise monetary gold, SDR, reserve position in the Fund and foreign exchange which are collected from the internal records of the Bangladesh Bank and IMF. Transactions of gold, SDR and foreign exchange of Bangladesh Bank, transactions in the reserve position in the IMF are reflected in the reserve assets.
Balance of Capital and Financial Account = Balance of capital account + Balance of Financial account
Net capital account (BoP; US dollar) in Bangladesh
The Net capital account (BoP; US dollar) in Bangladesh was last reported at 527614194.77 in 2011, according to a World Bank report published in 2012. Net capital account includes government debt forgiveness, investment grants in cash or in kind by a government entity, and taxes on capital transfers. Also included are migrants' capital transfers and debt forgiveness and investment grants by nongovernmental entities. Data are in current U.S. dollars. This page includes a historical data chart, news and forecast for Net capital account (BoP; US dollar) in Bangladesh. Bangladesh is considered as a developing economy which has recorded GDP growth above 5% during the last few years. Microcredit has been a major driver of economic development in Bangladesh and although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of exports revenues come from garment industry. The biggest obstacles to sustainable development in Bangladesh are overpopulation,
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poor infrastructure, corruption, political instability and a slow implementation of economic reforms.
3.6 Recent Capital Account of Bangladesh

The Net capital account (Bop; US dollar) in Bangladesh was last reported at470949802.86 in 2010, according to a World Bank report released in 2011. The Net capital account (Bop; US dollar) in Bangladesh was 474938510.33 in 2009, according to a World Bank report, published in 2010. The Net capital account (Bop; US dollar)in Bangladesh was reported at 490457363.36 in 2008, according to the World Bank.Net capital account includes government debt forgiveness, investment grants in cash or in kind by a government entity, and taxes on capital transfers. Also included are migrants' capital transfers and debt forgiveness and investment grants by nongovernmental entities. Data are in current U.S. dollars. This page includes a historical data chart, news and forecast for Net capital account (Bop; US dollar) in Bangladesh. Bangladesh is considered as a developing economy which has recorded GDP growth above 5% during the last few years. Microcredit has been a major driver of economic development in Bangladesh and although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of exports revenues come from garment industry.
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3.7 Foreign direct investment; net (BoP; US dollar) in Bangladesh

The Foreign direct investment; net (BoP; US dollar) in Bangladesh was last reported at 967400932.54 in 2010, according to a World Bank report released in 2011. The Foreign direct investment; net (BoP; US dollar) in Bangladesh was 713383102.55 in 2009, according to a World Bank report, published in 2010. The Foreign direct investment; net (BoP; US dollar) in Bangladesh was reported at 1009623163.99 in 2008, according to the World Bank. Foreign direct investment is net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other longterm capital, and short-term capital as shown in the balance of payments. This series shows total net, that is, net FDI in the reporting economy from foreign sources less net FDI by the reporting economy to the rest of the world. Data are in current U.S. dollars. This page includes a historical data chart, news and forecasts for Foreign direct investment; net (BoP; US dollar) in Bangladesh. Bangladesh is considered as a developing economy which has recorded GDP growth above 5% during the last few years. Microcredit has been a major driver of economic development in Bangladesh and although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of exports revenues come from garment industry. The biggest obstacles to sustainable development in Bangladesh are overpopulation, poor infrastructure, corruption, political instability and a slow implementation of economic reforms.
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3.8 Features and weaknesses of balance of payments:

The main features and weaknesses of our BoP are that it is import-dominated. The growth of import is significantly higher than that of export. If we can reduce the import dependency or increase the level of export, then it will help reduce the pressure on of our BoP, generated from import dependence. As our growth of export is lower than that of import most of the time our trade balance is negative [in 2010-11 it is minus $7328 million]. Our balance of trade consists of two components -- import and export. Our performance of export makes us both happy and worried. According to the Economic Review-2011, the contribution of readymade garments (RMG) to our total export revenue was 77.77%. Here we are proud of our golden goose or "RMG". The economy of Bangladesh is branded worldwide because of its quality RMG products. But our export is concentrated on a single item. It is not diversified. If the export of RMG falls by a significant per cent, then our BoP will come under a severe negative impact. That is why we should diversify our export items. To explore more export items we should have a national research and development (R&D) wing. Export diversification does not mean that we should stop searching for more RMG export markets. It only implies a strong commitment on our part to the realistic goals and objectives of economic diplomacy on a sustained footing to help explore more and more export markets.
The strongest component of our BoP for the fiscal year (FY) 2011-12 was the remittance
inflow. According to Bangladesh Bank, the remittance inflow in January, 2012 was $1.22 billion and $1.11 in February, 2012 which was the highest ever in the history of Bangladesh. Though there is the on-going political disorder in Middle East (the highest manpower market for Bangladesh), our remittance inflow demonstrated a satisfactory performance. A large number of foreign workers have come back to Bangladesh due to the Middle East and North African crisis. But we should be proud of our population and must not consider them as a burden. Now around 8.0 million (80 lakh) workers from Bangladesh are working at different countries of the world. We can increase our remittance in two ways -- by exploring new labour markets and increasing the skills of existing manpower working abroad. Now in the word there are many counties which have zero or negative growth of population.
3.9 Impact of FDI on Balance of Payments

The economic impact of FDI on the level of economic activity has been widely investigated in recent years across different countries. Some results suggest that the inflow of FDI can crowd in or crowd out domestic investment depending on specific circumstances. Overall, FDI has a positive impact on economic growth but the magnitude of the effect depends on the availability of complementary resources, especially on the domestic stock of human capital.
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In Bangladesh, FDI inflows are reported under the capital and financial account of the countrys Balance of Payments (BOP) statement which provides the direct effect on the BOP. Thus the inflow of FDI plays an important role in determining the surplus/deficit in the capital and financial account of the BOP statement. From the above, it can be said that the initial impact of an inflow of FDI on Bangladeshs BOP is positive but the medium term effect could become either positive or negative as the investors increase their imports of intermediate goods and services, and begin to repatriate profit.
After setting up capital machineries, the FDI-financed companies begin to export their products as most of these companies are export-oriented. Usually, FDI inflow tends to have a greater positive impact through augmenting exports than creating a negative impact through increasing imports. It is found that FDI-financed firms tend to export a greater proportion of their output than their local counterparts as these firms usually tend to have a comparative advantage in their knowledge of international markets, efficiency of distribution channels, and their ability to adjust and respond to the changing pattern and dynamics of international markets. Similarly, policies of creating Export Processing Zones (EPZs) contribute to strengthening the positive correlation between FDI inflows and exports. So, the inflow of FDI may play an important role in Bangladesh in the long run in reducing the deficit in the countrys trade balance. Empirical research in several countries suggests that the initial inflow of FDI tends to increase the host country's imports. One reason for this is that primarily FDI companies have high propensities to import capital and intermediate goods and services that are not readily available in the host country. However, if FDI is concentrated in import substituting industries, then it is expected to affect imports negatively because the goods that were imported earlier would now be produced in the host country by foreign investors. In order to see the impact of FDI on Bangladeshs BOP, we estimated separate import and export functions for Bangladesh. The results of the estimated import demand function suggest that FDI increases imports faster by current inflow than with a lag of one year.1 The coefficient is statistically significant with a positive sign and suggests that a 10 percent increase in the inflow of FDI increases imports by 1.3 percent. The income elasticity of import
demand is high indicating that a 10 percent increase in real GDP increases imports by nearly 27 percent.
Similarly, we estimated a simplified export function in order to see the impact of FDI on Bangladeshs exports.2 this shows that FDI with a lag of one year increases exports faster than contemporaneous period. The co-efficient is significant with a positive sign
1 The estimated equation is: ln (IMP) = -17.887 - 0.658 ln (IPR) + 2.676 ln (GDP) + 0.131 ln (FDI) + 0.051 ln (FDI -1) (-3.55) (-1.91) (3.70) (1.97) (1.16) R2 = 0.921 DW = 1.53 SER = 0.061 where IMP is real demand for imports, IPR is relative price of imports (price of imports deflated by GDP deflator), and GDP is real GDP. Figures in parentheses are t values.
2 The estimated equation is: ln (EXP) = 0.874 2.353 ln (XPR) + 2.184 ln (GDP) + 0.060 ln (FDI) + 0.162 ln (FDI -1) (0.05) (-1.36) (1.69) (0.75) (3.25) R2 = 0.895 DW = 1.70 SER = 0.078 where EXP is real exports, XPR is relative price of exports. and suggests that a 10 percent increase in the inflow of FDI increases exports by 1.6 percent. The above results show that FDI contributes positively to increasing imports and exports and can either improve or deteriorate the countrys trade balance depending on the relative magnitude of the two forces. However, with a. positive effect of FDI inflows on the financial account, it is more likely that the first round effect of FDI is positive on the BOP of Bangladesh.
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Key findings of the report:
During the time of preparing this report we have found that According to Bangladesh Bank (BB) at present our overall Balance of Payment (BOP) is negative US$502 million. Though the Workers' remittances increased to $9613 million, negative Trade balance of -$6430 million and negative Services balance of -$1993 million led to this scenario. BB is concerned about the matter and taking necessary steps to solve the liquidity problem and reduce the pressure on BOP. In this context, BB is encouraging our private firms to finance from foreign investments. Some of the firms such us Apex and Pran have already got green signal from BB.
We know international borrowing rates are more competitive than local banks' rates. Currently London Inter-bank exchange rate is less than 0.5 per cent. Our firms can finance with foreign currency loans at a rate of London Inter-Bank Offer Rate (LIBOR) plus 4.0 to 5.0 per cent. In spite of foreign currency risk this type of loan financing would yield around 5.0 per cent of savings as our local banks charge 15 to 18 per cent per annum.
On the other hand, in April 2011 net Foreign Direct Investment (FDI) stood at $631 million. Let us have a closer look at the countries providing us FDI. According to BB, FDI inflows for the period January-June, 2008 from major countries were: Egypt ($116.41 million) , U K ($ 77.97 million), UAE ($72.27 million), Switzerland ($61.11 million), Singapore ($28.77 million), USA ($23.78 million), South Korea ($23.50 million), Hong Kong (US$ 18.69
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million), Netherlands (US$ 16.56 million) and Pakistan (US$ 11.56 million).
This situation may brighten after the recent country risk by Moody and Standard and Poor (S&P). According to Moody's rating system Bangladesh has earned 'Ba3' ratings and according to Standard and Poor (S&P) Bangladesh has earned 'BB-' sovereign rating for stable monetary and fiscal management for two consecutive years 2010 and 2011. As we know, in case of Moody's rating 'Aaa' is considered 'Prime' rating or the maximum possible rating and in case of S&P it is 'AAA'. Whereas 'C' and 'D' are considered as lowest possible ratings in Moody's and S&P rating system respectively.
In case of Moody's system performance of Bangladesh is satisfactory if we compare it with the Philippines (Ba3), Pakistan (B3), Sri Lanka (B1), Vietnam (B1), Bolivia (B1), and Egypt (Ba3), but not better than the "medium economic strength" ranking of Indonesia (Ba1), India (Baa3/Ba1), Brazil (Baa3), and Turkey (Ba2). Still according to experts this is a great achievement.
In case of S&P 'AAA' is given to the best quality, reliable and stable borrowers. 'BB-' ratings for Bangladesh indicates less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. Standard and Poor ratings services affirmed its 'BB-' long-term and 'B' short-term foreign and local currency sovereign credit ratings on Bangladesh.
This will encourage foreign lenders to be confident about repayment. It may also lead to a lower risk premium leading to lower interest rates. But to have consistent better ratings is a huge task ahead specially, after the recent political crisis. Political violence may lead to a worse scenario; lower amount of foreign investment as well as lower country ratings. We must also keep pushing in terms of power generation which is one of the prime concerns for foreign investors.
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One risk of the foreign investment is volatility in exchange rates. If taka depreciates against dollar the borrower would have to pay more leading to a higher risk exposure. According to Bangladesh Bank, on June 22, 2011 USD traded at 73.9500 and 74.0500 for buying and selling respectively. It indicates the upward trend after the global financial crisis. We need to have a careful look at it as well.
While discussing the matter with a reputed local bank it has come out that local banks are evaluating the situation. They feel though it would create more competition, but strengthening our BOP should be our priority. But one of the bankers has also mentioned that a tight monitoring is also required or it may cause negative impact on our financial system. This would lead to the paradox of weak vs. strong taka. Balancing incentives of foreign investors, our local borrowers and workers providing remittance is a task to resolve.
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Chapter 4
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Conclusionary Aspects:
4.1 Recommendations:
In the view of foregoing detail findings, discussion on the key findings and subsequent conclusions, a number of recommendations have been offered. It is suggested that the offered recommendations are prioritized before going into action. Some recommendations have policy implication and so those should be dealt with cautiously with inclusion of strong policy advocacy strategy in the process. For FDI to be used successfully (with net overall benefit), the following conditions should be met: Availability of foreign capital should not detract from own saving effort. FDI must be concentrated in the tradable sector, especially in export oriented industries, instead of in non-tradable services sectors that do not contribute to export earnings. To prevent foreigners gaining control of the nations strategically important assets, the growth of domestic investment should exceed FDI growth. FDI should bring the most modern technology. Foreign investors that do not bring the latest technologies should not be allowed to do business in the country. To avoid dependence on foreign capital, the host country should increase its savings rate and maintain sound economic and political conditions. Bangladesh have also an opportunity to implement the beach of Coxs Bazaar to catch the eye of foreigners, it will also a good source of revenue. At Present Bangladesh have to provide necessary incentives to the FDI that will increase the capital account and thus overall balance. Also Bangladesh has to search new country to export labor. As we know the
remittance is the highest source of Current transfer of Bangladesh which plays an important role in increasing the overall balance.
4.2 Policy Implications:

Bangladesh has a number of positive attributes that can successfully attract the attention of foreign investors from both developed and developing countries. The increasing availability of skilled and unskilled labor at relatively low wages and the success in maintaining reasonably stable macroeconomic environment are a few factors behind making the country an attractive destination for foreign investors. They are generally aware that the wage rates in Bangladesh are among the lowest in Asian countries, the rate of inflation is usually contained within tolerable limits, the exchange rate is reasonably stable, custom regulations are investment friendly without discrimination between foreign and domestic investors, and attractive incentive packages are available for the foreign investors. Bangladesh needs to undertake effective promotion measures to convince the potential foreign investors that their involvement in business activities in the country is valued, they would be facing friendly regulations, and they can enjoy investment incentives that are competitive with those offered by other countries in the region and the developing world. The country also needs to move forward through implementing investment friendly policies, simplifying regulatory practices, and removing inefficient bureaucratic procedures.
Over the last decades, almost all developing Asian economies including Bangladesh have progressively adopted more open policies toward FDI and this trend is likely to continue in the foreseeable future. The general conclusion of this study is that FDI brings net benefit to Bangladesh. These benefits appear to be important for integrating the domestic economy with the global economy and in the area of technology and skill transfer. The global experience suggests that, depending on the country context, the benefits of FDI are highly uneven and can become ambiguous or possibly negative. However, given its present characteristics, Bangladesh is likely to benefit through more FDI inflows. It is important, therefore, for Bangladesh to ensure an investment climate that can attract more FDI flows to the country.
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Quality of bureaucracy and governance: Appropriate reform measures are needed in the country's administrative system. The bureaucracy needs reorganization in order to bring about a perceptible improvement in its efficiency and productivity. Bureaucratic control and interference in business and investment activities should be minimized on a priority basis.
3 For
similar results in the case of Pakistan, see Khan and Kim 1999.
Improvement of law and order situation: Law and order situation needs to be improved through appropriate reforms in law enforcement and introducing other measures. A social consensus is needed to establish the rule of law, avoid political confrontation, and reduce corruption.
- Development of infrastructure and human resources: Both the government and private sector need to come forward to invest in infrastructure development. For the purpose, appropriate policies are needed such that the private sector can smoothly operate in providing infrastructure services. Similarly, both public and private universities should come forward in introducing courses/programs that produce graduates with technical and management skills required in modern industrial and other activities. In this context, if the government and the private sector work together to implement effective economic reforms in a successful manner, Bangladesh stands a good chance of being able to participate in the prosperity and growth that are sweeping the rest of Asia.
- Improvement of port services: Despite recent improvements, the efficiency of port services can be further improved through appropriate measures. Similarly, the custom clearance procedures can be further simplified along with improvement in physical facilities and reforms in the labor management system.
- Privatization and further reforms: The privatization program of the state owned enterprises needs to be geared up that would stimulate domestic and foreign investments. Several financial institutions and some of the public utilities may be privatized in order to ensure better and more efficient services. The policies should encourage private sector participation in several key sectors like agricultural processing, manufacturing, infrastructure including transportation, telecommunication, power, port, and in the production of high value added products.
- Modernization of business law: It is important for Bangladesh to modernize and revamp all laws relating to business and investment keeping in view the international practices and requirements of globalization.
- Setting up of industrial parks: The development of new industrial parks can help in creating a favorable environment of foreign investment. The availability of ready infrastructure along with secure and enabling investment climate can act as a powerful catalyst in attracting foreign investors for investment in profitable ventures.
-Setting up of new EPZs: The government may come up with a phased program of setting up new EPZs in order to extend facilities to export oriented investors. The private sector may also be encouraged to set up new EPZs. -Improving the countrys image abroad: Positive developments regarding the countrys economy, society, and future prospects, including the hospitable investment climate existing in the country and the facilities available to foreign investors, should be projected abroad in an effective manner, especially among the potential investors. Such image building efforts would be crucial to dispel the negative images that have persisted for long and discouraged the investors to come forward. In addition to the above, maintaining consistency in policies and actions is important so that no wrong signal is conveyed to the investors.
- Policies regarding macroeconomic stability: The government should implement appropriate policies to ensure macroeconomic stability in a sustained manner, foster growth promoting and growth accommodating policies, and undertake further actions to reduce poverty at a faster rate. Bangladesh has already achieved notable success in this regard and achievements in both economic and social development should be actively publicized abroad to promote a positive image of the country among the prospective foreign investors.
- Economic and commercial diplomacy: Strengthening economic and commercial diplomacy is a key factor in attracting FDI in the present world characterized by rapid globalization and increasing competition. In this respect, improved bilateral relations with potential investor
countries can act as a catalyst to increasing FDI inflows to Bangladesh. Moreover, it is important not only to improve relations with countries that have already invested in Bangladesh, but also to identify potential investors in other countries and undertake appropriate measures to attract them to invest in the country.
Conclusions:
Despite offering lucrative incentives and protection to investors, Bangladesh has constantly been failing to attract foreign direct investment (FDI), which is putting pressure on the country's foreign exchange reserve and balance of payments (BoP). Though South Asia as a region receives a good amount of FDI every year, Bangladesh does not, which analysts attribute to the country's poor infrastructure and political uncertainty. South Asia received FDI worth $42.5 billion in 2009, but Bangladesh, a $110 billion economy, never received $1 billion worth of FDI. Even Pakistan with its extremist-infested conditions and seriously embattled political situation is seen attracting a much bigger amount of FDI than Bangladesh, said the Metropolitan Chamber of Commerce and Industry (MCCI) in its economic review for January-March of 2011-12. The inflow of FDI was $804 million in fiscal 2004-05, which came down to $743 million in 2005-06, $793 million in 2006-07 and $748 million in 2007-08. The situation improved in the following year attracting $961 million, the highest inflow in the country's history. Majority of the FDI was in oil and gas and telecommunication sectors.
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The FDI inflow during July-January of the current fiscal year was only $425 million and if the trend continues, the amount would not exceed $850 million by the year end. Bangladesh's failure to attract FDI despite offering lucrative incentives like repatriation of profits and tax waiver has become a curious case to analysts. According to the World Bank's "doing business report", Bangladesh ranks ahead of China, India and Vietnam in terms of protecting the interests of foreign investors. Political uncertainty is the biggest bottleneck, said Monzur Hossain, senior research fellow of Bangladesh Institute of Development Studies (BIDS). Hossain said the country has a huge potential for attracting FDI in the manufacturing sector as many developing countries, including China and India, are facing higher production costs. According to the BIDS fellow, Bangladesh is missing out on the chance. Business confidence and market access are the two other major barriers, he said. FDI has a positive impact on economic growth and plays a role in the BoP. But this year's FDI inflow is of grave concern to the economy and the government, which is struggling to maintain a healthy reserve and BoP for the outgoing fiscal year that ends on June 30. To maintain BoP stability, the government has allowed some of the country's private companies to seek funds from the international market. The government has also set up a committee to find ways to float sovereign bonds in the international markets. The MCCI identified lack of action by the country's missions abroad in projecting investment-drawing potential, weak infrastructures and political instability as the major reasons for poor inflow of FDI.
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Ending Matters:
Bibliography:
Book: International Economics by H.G. Mannur, M.A., PH.D (USA),University f Papua New Guinea, Port Moresby. International Economics by Dominick Salvatore. Last 20 years Balance of Payment of Bangladesh Bank.
Reference:
Balance of Payment Manual 4 and Manual 5 of IMF. Balance of Payment Component Information by Department of Economics, Cambridge University. Foreign Direct Investment in Bangladesh: An Empirical Analysis on its Determinants and Impacts by Quader, Syed Manzu
i ii
Bo Sodersten, International Economics. London: Macmillan, 1971.
Lecture by Jomo K. Sundaram at the Conference entitled Bangladesh: the Next Investment Destination organized by the Metropolitan Chamber of Commerce and Industry, Dhaka, on 1 December 2010.
Web sites:
http://www.thaibizbangladesh.net/Pdf_Content/pn0805.pdf http://jagannath.academia.edu/jony007ex/Papers/1643339/Balance_of_Payme nt_of_Bangladesh http://www.scribd.com/doc/27044050/Report-on-FDI-Bangladesh
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Foreign Direct Investment and Balance of Payments of Bangladesh

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A REPORT ON

Impact of FDI on Bangladeshs balance of payments: some policy implications

Submission Date: 2nd October 2012

Impact of FDI on Bangladeshs balance of payments: some policy implications

Impact of FDI on Bangladeshs balance of payments: some policy implications

I wish her every success in life

Impact of FDI on Bangladeshs balance of payments: some policy implications

1.2 Objectives 1.3 Methodology 1.4 Limitations

3.5 Balance of payment of Bangladesh

Goods Account Services Account

Impact of FDI on Bangladeshs balance of payments: some policy implications

Impact of FDI on Bangladeshs balance of payments: some policy implications

Impact of FDI on Bangladeshs balance of payments: some policy implications

Impact of FDI on Bangladeshs balance of payments: some policy implications

Impact of FDI on Bangladeshs balance of payments: some policy implications

Impact of FDI on Bangladeshs balance of payments: some policy implications

1.2 Objectives of the Study

Impact of FDI on Bangladeshs balance of payments: some policy implications

Impact of FDI on Bangladeshs balance of payments: some policy implications

Impact of FDI on Bangladeshs balance of payments: some policy implications