Bangladesh Liberalises Outward Investment

Trade & Policy

Bangladesh Liberalises Outward Investment

Until recently, outward investment was something corporate Bangladesh could only dream about. But a loosening of government controls has prompted a raft of proposals for overseas expansion as companies seek to diversify their earnings.

In October, Bangladesh's cabinet gave permission to Akij Group, a conglomerate, to buy Robin Resources, a Malaysian fibreboard and composites maker, for US$ 80 million. Akij, which has interests in those sectors as well as in food and beverage, tobacco, cement, jute and textiles, was allowed to transfer US$ 20 million to Malaysia to partially finance the acquisition, with the balance to be paid through offshore borrowings.

"We're experienced in Bangladesh," said Shamsuddin Ahmed, chief financial officer of Akij Group. "Now we want to further extend to the foreign land. We want to project Bangladesh on foreign soil." Approval was conditional on continued employment requirements in Bangladesh and the repatriation of overseas profits.

Until 2015, Bangladeshi companies were all but forbidden from making investments overseas because of government controls intended to focus available capital investment on domestic development. However, controls have been relaxed since the South Asian nation of 160 million was accorded lower middle-income status by the World Bank in July 2015.

The government amended the country's 1947 foreign exchange regulations in 2015, paving the way for capital account transactions. Offshore investment applications have since been considered on a case-by-case basis. Up to half have been rejected, and even the largest Bangladeshi companies remain little known outside the country. However, that could start to change as they begin spreading their wings abroad.

Central bank officials say they have drafted an "overseas investment policy" that will be finalised soon with the objective of formalising the outward investment regime, replacing the current ad hoc approach. In the meantime, a cabinet committee on economic affairs will consider outward investment proposals based on central bank recommendations, according to Eunusur Rahman, secretary of the government's bank and financial institutions division. Companies that have recently gained approval for overseas investment include DBL Group. The textile and clothing producer is spending US$ 9.5 million to set up an apparel factory in Ethiopia that is slated to become operational in April. DBL employs 30,000 people in Bangladesh and 1,700 in Ethiopia.

Mohammed Abdul Jabbar, the group's managing director, said that although labour was still cheaper in Bangladesh, DBL had been lured to Ethiopia by its preferential market access to the US -- Ethiopian goods are eligible for duty-free access under the US African Growth and Opportunity Act. "We're global," Jabbar said. "We can now have same kind of competition with international suppliers and claim 'global' price. Buyers can't give us any price they want."

Bangladesh has made significant economic progress in recent years, averaging annual growth in gross domestic product of 6.2% between 2007 and 2016. Moody's Investors Service, a ratings agency, praised the country's economic performance in a review in April, noting its "robust and stable growth performance" & "relatively low government debt burden."

Ajit Kumar Paul, a senior official of the Bangladesh Investment Development Authority, the state investment promotion agency, said companies are ready to expand outward. "Outbound investment is the need of the hour. We're now mature," he said. Paul said that priority should be given to companies that have foreign currency income.

However, years of heavy-handed government controls have crushed the global ambitions of many Bangladeshi companies. PRAN-RFL, a diversified conglomerate, applied repeatedly for permission to build several food processing and packaging plants in India, but the central bank blocked the proposals.

Deshbandhu Group, a commodities company, sought permission in 2011 to set up a sugar mill in Brazil or Thailand, but was also blocked by the central bank. A number of other companies, including Summit Group, Meghna and Walton, have also failed to secure approval to invest overseas. In each case, the central bank said the proposals lacked detail, ruling that the desire to invest overseas was not sufficient.

Two major applications currently before the central bank will provide a strong indication of how far the state authorities are prepared to liberalise. Nitol Niloy Group, a vehicle producer, is seeking permission to invest US$ 7 million in Gambia's banking sector, while Ha-Meem Group, a textile producer, wants to spend US$ 10.44 million to establish an apparel factory in Haiti. Both deals are awaiting approval. Nitol Niloy is also planning a further application for a US$ 50 million investment in the Indian textile industry.

Business leaders are pushing the government to liberalise further. Hafizur Rahman Khan, president of the International Business Forum of Bangladesh, said the government should allow more companies to invest overseas, perhaps with conditions such as those imposed on Akij.

"Remittances from wage earners alone are not enough," Khan said, referring to Bangladesh's significant inward flow of funds from citizens who have migrated to work overseas. "We need to boost foreign exchange income through outbound investment, as this will help bring in dollars." Some critics oppose widespread liberalisation, arguing that domestic private investment remains sluggish. Mirza Azizul Islam, a former finance minister, said that private investment has hovered between 21% and 22% of GDP over the past eight to nine years, which equates to roughly US$ 47 billion a year.

"Outbound investment is not desirable," said Islam, who teaches economics at BRAC University in Dhaka. He said that if investment outflows increased, foreign exchange reserves would be drained.

"The open capital regime had a role in the Asian financial crisis of 1997-1998," Islam said. However, he added that outward investment should be allowed in certain sectors on a "limited scale."