Bangladesh is the most densely populated non-city-state country in the world, with the eighth largest population (over 165 million) within a territory the size of Iowa. Bangladesh is situated in the northeastern corner of the Indian subcontinent, sharing a 4,100 km border with India and a 247 km border with Burma. With sustained economic growth over the past decade, a large, young, and hard-working workforce, strategic location between the large South and Southeast Asian markets, and vibrant private sector, Bangladesh will likely attract increasing investment, despite severe economic headwinds faced by the global outbreak of COVID-19.
Buoyed by a growing middle class, Bangladesh has enjoyed consistent annual GDP growth of more than six percent over the past decade. Much of this growth continues to be driven by the ready-made garment (RMG) industry, which exported $34.13 billion of apparel products in FY 2018-19, second only to China, and continued remittance inflows, reaching nearly $16.42 billion in FY 2018-19.
The Government of Bangladesh (GOB) actively seeks foreign investment, particularly in the agribusiness, garment/textiles, leather/leather goods, light manufacturing, power and energy, electronics, light engineering, information and communications technology (ICT), plastic, healthcare, medical equipment, pharmaceutical, ship building, and infrastructure sectors. It offers a range of investment incentives under its industrial policy and export-oriented growth strategy with few formal distinctions between foreign and domestic private investors.
Bangladesh received $3.6 billion in foreign direct investment (FDI) in 2018, a 67.9 percent increase from the previous year. However, the rate of FDI inflows is only slightly above one percent of GDP, one of the lowest of rates in Asia.
Bangladesh has made gradual progress in reducing some constraints on investment, including taking steps to better ensure reliable electricity, but inadequate infrastructure, limited financing instruments, bureaucratic delays, lax enforcement of labor laws, and corruption continue to hinder foreign investment. New government efforts to improve the business environment show promise but implementation has yet to materialize. Slow adoption of alternative dispute resolution mechanisms and sluggish judicial processes impede the enforcement of contracts and the resolution of business disputes.
A series of terrorist attacks from 2015-17, including the July 1, 2016 Holey Bakery attack in Dhaka’s diplomatic enclave, resulted in increased security restrictions for many expatriates, including U.S. Embassy staff. National elections, which were held on December 30, 2018, are prone to instances of political violence. The influx of more than 700,000 Rohingya refugees since August 2017 has also raised security concerns.
International brands and the international community continue to press the GOB to meaningfully address worker rights and factory safety problems in Bangladesh. With unprecedented support from the international community and the private sector, Bangladesh has made significant progress on fire and structural safety. Critical work remains on safeguarding workers’ rights to freely associate and bargain collectively, including in the Export Processing Zones (EPZs).
The GOB has limited resources devoted to intellectual property rights (IPR) protection and counterfeit goods are readily available in Bangladesh. Government policies in the ICT sector are still under development. Current policies grant the government broad powers to intervene in that sector.
Capital markets in Bangladesh are still developing and the financial sector is still highly dependent on banks.
India’s GDP growth in 2019 declined to the slowest rate in over six years. Prior to the onset of the COVID-19 pandemic, the International Monetary Fund had reduced its growth prediction for FY 2020 to 4.8 percent from a previous estimate of 6.1 percent. The slowing growth reflected a sharp decline in private sector consumption and reduced activity in manufacturing, agriculture, and construction. The stock of foreign direct investment (FDI) in India has declined a full percentage point over the last six years according to data from the Department for Promotion of Industry and Internal Trade (DPIIT). This mirrors a similar drop in Indian private investment during the same period.
Non-performing assets continue to hold back banks’ profits and restrict their lending, particularly in the state banking sector. The collapse of the non-bank financial company Infrastructure Leasing & Financial Services (IL&FS) in 2018 led to a credit crunch that largely continued throughout 2019 and hampered consumer lending.
Demographic increases mean India must generate over ten million new jobs every year – a challenge for the economy and policy makers. While difficult to measure, given the large size of the informal economy, several recent studies, in 2017-18 suggest India’s unemployment rate has risen significantly, perhaps event to a 40-year high.
The Government of India has announced several measures to stimulate growth, including lowering the corporate tax rate, creating lower personal income tax brackets, implementing tax exemptions for startups, establishing ambitious targets for divestment of state-owned enterprises, withdrawing a surcharge imposed on foreign portfolio investors, and providing cash infusions into public sector banks. India’s central bank, the Reserve Bank of India (RBI), also adopted a monetary policy that was accommodative of growth, reducing interest rates by a cumulative 135 basis points throughout 2019 to 5.15 percent. However, transmission remained a problem as banks, already struggling with large volumes of non-performing assets pressuring their balance sheets, were hesitant to lend or pass on the RBI’s rate cuts to consumers.
The government actively courts foreign investment. In 2017, the government implemented moderate reforms aimed at easing investments in sectors such as single brand retail, pharmaceuticals, and private security. It also relaxed onerous rules for foreign investment in the construction sector. In August 2019, the government announced a new package of liberalization measures removing restrictions on FDI in multiple sectors to help spur the slowing economy. The new measures included permitting investments in coal mining and contract manufacturing through the so-called Automatic Route. India has continued to make major gains in the World Bank’s Ease of Doing Business rankings in 2019, moving up 14 places to number 63 out of 190 economies evaluated. This jump follows India’s gain of 23 places in 2018 and 30 places in 2017.
Nonetheless, India remains a difficult place to do business and additional economic reforms are necessary to ensure sustainable and inclusive growth. In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate to store all “data related to payments systems” only in India went into effect on October 15, 2018, despite repeated requests by industry and the U.S. officials for a delay to allow for more consultations. In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018. The RBI policy overwhelmingly and disproportionately affects U.S. banks and investors, who depend on the free flow of data both to achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity. U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and AML/CFT protocols. Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.
In addition to the RBI data localization directive for payments companies, the government formally introduced its draft Data Protection Bill in December 2019, which contains restrictions on all cross-border transfers of personal data in India. The Bill is currently under review by a Joint Parliamentary Committee and stipulates that personal data that are considered “critical” can only be stored in India. The Bill is based on the conclusions of a ten-person Committee of Experts, established by the Ministry of Information Technology (MeitY) in July 2017.
On December 26, 2018, India unveiled new restrictions on foreign-owned e-commerce operations without any prior notification or opportunity to submit public comments. While Indian officials argue that these restrictions were mere “clarifications” of existing policy, the new guidelines constituted a major regulatory change that created several extensive new regulatory requirements and onerous compliance procedures. The disruption to foreign investors’ businesses was exacerbated by the refusal to extend the February 1, 2019 deadline for implementation.
Pakistan’s government increased its positive rhetoric regarding foreign investment since it assumed power in August 2018, pledging to improve Pakistan’s economy, restructure tax collection, enhance trade and investment, and eliminate corruption. However, the government inherited a balance of payments crisis, forcing it to focus on immediate needs to acquire external financing rather than medium to long-term structural reforms. The government sought and received an IMF Extended Fund Facility in July 2019 and promised to carry out several structural reforms under the IMF program.
Pakistan has made significant progress over the last year in transitioning to a market-determined exchange rate and reversing its large current account deficit, while inflation has decreased each month of 2020. However, progress has been slow in areas such as broadening the tax base, reforming the taxation system, and privatizing state owned enterprises. Pakistan ranked 108 out of 190 countries in the World Bank’s Doing Business 2020 rankings, a positive move upwards of 28 places from 2019. Yet, the ranking demonstrates much room for improvement remains in Pakistan’s efforts to improve its business climate. The COVID-19 pandemic has had a significant impact on Pakistan’s economy. While the IMF had predicted Pakistan’s GDP growth to be 2.4 percent in FY2020, Pakistan’s economy is now expected to contract by 1.5 percent this fiscal year, which ends June 30.
Despite a relatively open foreign investment regime, Pakistan remains a challenging environment for foreign investors. An improving but unpredictable security situation, difficult business climate, lengthy dispute resolution processes, poor intellectual property rights (IPR) enforcement, inconsistent taxation policies, and lack of harmonization of rules across Pakistan’s provinces have contributed to lower Foreign Direct Investment (FDI) as compared to regional competitors. The government is working on a multi-year foreign direct investment (FDI) strategy which aims to gradually increase FDI to USD 7.4 billion by Fiscal Year (FY) 2022-23 from USD 2.8 billion in FY2019-20.
Over the last two decades, the United States has consistently been one of the top five sources of FDI in Pakistan. In 2019 China was Pakistan’s number one source for FDI, largely due to projects related to the China-Pakistan Economic Corridor. Over the past year and a half, U.S. corporations pledged more than USD 1.5 billion in direct investment in Pakistan. American companies have profitable investments across a range of sectors, notably, but not limited to, fast-moving consumer goods and financial services. Other sectors attracting U.S. interest include franchising, information and communications technology (ICT), thermal and renewable energy, and healthcare services. The Karachi-based American Business Council, an affiliate of the U.S. Chamber of Commerce, has 68 U.S. member companies, most of which are Fortune 500 companies operating in Pakistan across a range of industries. The Lahore-based American Business Forum – which has 25 founding members and 18 associate members – also assists U.S. investors. The U.S.-Pakistan Business Council, within the U.S. Chamber of Commerce, supports members in the United States. In 2003, the United States and Pakistan signed a Trade and Investment Framework Agreement (TIFA) to serve as a key forum for bilateral trade and investment discussions. The TIFA seeks to address impediments to greater bilateral trade and investment flows and increase economic linkages between our respective business interests.