Investment Outlook in Bangladesh

Khan Mohd Eshtiaque of IE Business School

With a US$ 110 billion economy, 160 million people, 90 million of which are under the age of 25 and a FY2013 growth projected at 7%, Bangladesh possesses key attributes of an emerging market poised for an extended period of high-growth. With cheap labor costs and improving regional trade relations, Bangladesh has the potential to become the next regional manufacturing hub. The following underscores Bangladesh’s economic potential.

■ Strategic Location

■ Located between China and India, two of the largest and fastest engines of economic growth in the 21st century

■ Ease of access to maritime trade routes in the Indian Ocean

■ Growing Middle Class

■ Bangladesh has a rapidly growing middle class with a young demographic and high disposable income

■ Average consumption per capita will continue to rise

■ Large Youth Segment

■ A young population and rising income will also drive increasing labor force participation

■ 57% of the population is under 25 years old

■ High literacy rate (72%) among youths aged 15-24

■ Increasing Urbanization

■ Industrialization, infrastructure development, and demographic forces will double the urbanization rate over the next four decades

■ UN forecasts Dhaka will be the world’s 5th largest city with a population of 19 million by 2019

■ Increasing trade integration

■ Labor Cost Advantage

■ Labor costs less than half the average of other Asian states

■ Already the second largest garments exporter globally

■ Trend expected to continue in other industries such as ceramics, light engineering, IT outsourcing etc.

■ Energy Cost Advantage

■ Bangladesh boasts between 5 and 12 TCF of gas reserves, and enjoys some of the lowest gas prices with an average discount of 50% compared to its regional peers

■ The country has just under 3 billion tons of untapped coal reserves – equivalent to approximately 67 TCF of natural gas

■ Strong Inflow of Remittances/Large Diaspora

■ Entrepreneurial spirit of the citizens has led to a 15% CAGR in remittances over the last two decades

■ This growth has given Bangladesh one of the highest remittance to GDP ratios (11%) in the world

■ Diaspora of ~5.5 mln on par with China’s in terms of % of population (>3%)

■ People have developed skill sets abroad and helped increase overall domestic consumption

■ ‘Reverse brain drain’ flow will likely persist as in Vietnam, India and China, serving as growth catalyst

■ SME Loans

■ SME loans have grown rapidly at a 28% CAGR over the last 5 years, demonstrating citizens’ high risk appetite

■ Success in building sustainable enterprises amidst national disasters and poor infrastructure substantiates the resilience and business acumen of the people

■ Despite buoyant growth in SME lending, business segment remains under served by financial community

The financial sector in Bangladesh is continuously evolving towards a more modern and efficient system of finance which is supportive of greater investment and inclusive economic growth. The financial system of Bangladesh consists of The Bangladesh Bank, scheduled banks, non-bank financial institutions, micro finance institutions, insurance companies, co-operative banks, credit rating agencies and stock exchange.

Type of Bank Number Number of Branches

State Owned 4 3404

Specialized 4 1382

Private 30 2816

Foreign 9 62

Total 47 7664

■ Bangladesh has applied for membership of Egmont Group to operate its newly-established financial intelligence unit in line with international standard.

■ Bangladesh Post Office is going to introduce postal cash card (e-money order) system through which people, across the country even in the remotest areas, will be able to send and receive money through mobile phone.

■ The central bank has raised the ceiling of foreign currency for Bangladesh nationals allowing them to spend more while traveling abroad.

■ The Bangladesh Bank launched the automation project of its Credit Information Bureau aiming at providing credit information in a faster and efficient way.

■ Bangladesh Bank has once again lowered different banking charges, fees and commissions to provide assistance to businessmen hurt by falling exports.

Agriculture Potential Sectors for Investment

■ Huge supply of raw materials exist for the agribusiness industry.

■ A tropical climate for all year growing, a lot of fresh water, indeed a land interspersed with numerous rivers, available land with fertile soil.

■ Government and NGOs conduct regular training programs to develop skilled manpower in the industry.

■ Wide range of biodiversity exists for different crops.■ Agricultural commodities have a comparatively higher value

added than non-agricultural commodities.

Sector Highlights

■ Cold storage facilities serving the supply chain, especially fresh produce for export.

■ Fresh produce production for local and export markets.■ Production of fertilizers and cultivation of seeds.■ Eco-friendly jute production, supported by jute technology

development institutes.■ Shrimp farming.■ Halal foods.■ Milk and dairy products.■ High value-added foods for export, including herbs, spices,

nuts and pulses.

Investment Opportunities

Bangladesh has the essential attributes for successful agri-based industries namely rich alluvial soil, a year-round frost-free environment, available water and an abundance of cheap labor. Increased cultivation of vegetables, spices and tropical fruits now grown in Bangladesh could supply raw materials to local agribusiness industries for both domestic and export markets.

Progressive agricultural practices, improved marketing techniques and modern processing facilities have raised the quality of agribusiness and expanded production levels significantly.

Industry Outlook

The government encourages development of the agricultural sector through measures to increase crop sector productivity and production of non-crop agriculture. To achieve this it provides increased credit, and facilitates greater access to inputs and modern technology. Investments in agribusiness industries in Bangladesh are encouraged with the following support measures:

■ The Equity Entrepreneurship Fund for development of agribusiness industry.

■ Special loan facilities available to set up an agribusiness.■ Agribusiness industry enjoys tax holidays.■ Any investment in this sector will enjoy similar tax amnesty

as available in other sectors.■ Imposition of supplementary duty on mango, orange, grape,

apples, dates and others to utilize the high quality and cheaper local resources.

■ Cash incentives to the exporters ranges from 15% to 20% in various sub sectors.

Industry Incentives

The economy of Bangladesh is primarily dependent on agriculture. About 84% of the total population lives in rural areas and are directly or indirectly engaged in a wide range of agricultural activities. Agriculture contributes about 20.29% to the country’s GDP- 23%. About 43.6% of the labor force is employed in agriculture with about 57% being employed in the crop sector.

The abundance of natural resources available in Bangladesh supports a range of highly profitable investment opportunities in agribusiness. Over 90 varieties of vegetable are grown in Bangladesh, yet in this fertile land there is under utilization of the country’s agricultural capacity. This presents many opportunities for investors seeking to export agricultural products, or to meet the rapidly growing local demand.

Ceramics Potential Sectors for Investment

■ Technical expertise and skilled manpower in tableware and other ceramics.

■ Clean gas reserves in certain locations to fire kilns for competitive cost advantage.

■ Bangladesh ceramic tableware has a good reputation in the international markets like North America and EU countries.

■ Sanitaryware and insulators have a strong domestic demand as well as international market demand.

Sector Highlights

A few ceramic tableware manufacturers dominate the industry producing high quality products for the international brands. A pool of skilled manpower has been developed. The latest technological advancements in ceramics are also being utilised. Bangladesh produces high quality bone china, transferring the technology from Japan.

Industry Status

The global ceramic tableware industry is currently going through a phase of acquisition and consolidation as smaller firms in the developed countries are becoming uncompetitive and bankrupt. As a result, the big names like Noritake, Wedgewood, Lenox, Villeroy & Boch and Royal Doulton are all individually becoming billion-dollar operations.

Traditionally, the tableware industry is labor-intensive and companies in developed countries experience difficulties in remaining competitive. Bangladesh, being a gas-rich and low-labor-cost economy, is perfectly positioned to be a strategic partner in production and supply of ceramic products. Investment interests in this sector are strongly welcome.

Industry Outlook

The global ceramics industry is worth in excess of $10bn. Bangladesh is perfectly positioned to expand rapidly in this sector with its high quality:cost ratios and creative human resource base.

Year Amount in USD

2012-2013 (July - March) 27,779,246

2011 - 2012 33,748,128

2010 - 2011 37,579,260

2009 - 2010 30,775,334

2008 - 2009 31,167,227

Growth of Ceramic Tableware Export from Bangladesh

Electronics Potential Sectors for Investment

■ Manufacturing of semiconductors could be established as a stand alone industry.

■ Bangladesh is going to be one of the largest cell-phone markets in South Asia.

■ The home appliance market in Bangladesh is growing rapidly.■ The labor-intensive nature of the electronic industry matches

the ability of Bangladesh to provide a high skilled labor source.

Sector Highlights

The electronics industry in Bangladesh mostly produces consumer items. Home appliances includes televisions, radios, DVDs and CD players, refrigerators, air conditioners, ovens, electronic fans, blenders etc. are being assembled to a large extent. To ensure the performance reliability, the key challenges in this sector are technical assistance and proper technology orientation of the industry. Developing the significant capacity and skill in assembly and manufacture of a wide range of electronic components and parts is crucial.

As yet, Bangladesh does not have any telecommunication equipment industry in the private sector. However, an urgent need for diversification and modernization is felt among the existing entrepreneurs, government and professionals. The government is keen to provide and ensure enabling assistance to the development of this sector.

Industry Background

Bangladesh's experience in basic electronics spans over two decades. In recent years, European and Asian electronic firms have established technical collaboration with their Bangladeshi counterparts to produce some electronic goods at competitive prices. This has tremendous potentiality for expansion.

The government of Bangladesh has adopted National Telecommunication Policy, 1998. Investment is encouraged through BLT-BOT/BOO/BTO* and other joint venture schemes which by greatly increasing the capacity, quality and type of services, will create improved efficiencies in other sectors such as transportation energy and the textile industry.

To meet the telecommunications' requirements of the country the government has been developing and expanding the systems and services of Bangladesh Telegraph and Telephone Board. Private sector operations in the rural telecommunication, paging, cellular telephones and riverine radio trunking have already been allowed. At present seven private operators are providing their services to about 100,000 customers. Government has allowed expanding 300,000 digital telephone lines in Dhaka by private sector participation through open tendering.

In accordance with overall national policy, liberalization of the telecommunications sector will continue. However, the government retains the sale authority to determine the number of competitions that are economically viable for certain services. The strategy is to provide equal and rational opportunities to all competitors.

Skilled, easily trainable and low-cost human resources are the main cost advantage of setting up electronic industry in Bangladesh. Growing domestic demand and international market access are some key attractive issues to the investors. In the economies like Malaysia, Singapore, Korea and Thailand, electronics contribute a major portion in the GDP. They are encouraging electronic industry to shift from low-end assembly operations with high import content of inputs to upstream higher value-added activities. In this context, relocation, outward investment and joint venture with Bangladeshi companies could be gainful strategies. To capitalize on the comparative advantages, substantial foreign investment from those countries is highly encouraged.

Industry Outlook

The high skill, low cost labor resource of the electronics sector in Bangladesh offers companies great returns on investment. Whilst the global market for semiconductors is worth in excess of $200bn and is dominated by the Asian economies, Bangladesh has significant financial and economic factors in its favor that make it the best choice for many companies.

Frozen Food Potential Sectors for Investment

■ The government is promoting semi-intensive shrimp farming.■ Shrimp processing and export industry is largely dominated by

the small business sector.■ Government has developed initiatives of quality assurance for

frozen foods in co-operation with exporters.■ 15% cash incentive offered to shrimp export amount.

Sector Highlights

The private organization and the public sector corporation offer the following products for export:

■ Frozen shrimp & prawn■ Frozen fish■ Fresh & chilled fish■ Frozen fillets & steaks of fish, sharks shells skates & rays■ Shark fins & fish maws■ Salted & dehydrated fish■ Dry fish■ Live crabs & tortoises■ Fish meals & crushed■ Value added shrimp & fish products

Exportable Products

This export oriented industry includes the following sub-sectors which are themselves promising investment opportunities:

■ Hatcheries■ Sustainable aquaculture technology■ Feed meals plants■ Processing unit for value-added products.

Following a period of strong investment in technology, processes and regulation the frozen foods sector has flourished and earned itself an excellent reputation with trading partners.

Exporters have earned credibility and trustworthiness in the global market and are committed to maintaining a competitive advantage in product quality. Continuing investment in technology, marketing and quality remain at the forefront of the industries' strategy to meet the challenges of international trade in price, quality, time and service.

Industry Outlook

Shrimp is the second largest source of export from Bangladesh which earned as much as 437.40 million US dollar in the year 2009-10. Commercial culture of shrimp increased rapidly in the coastal belt of Bangladesh and it went through several stages of transformation. During the last ten years, Bangladesh has earned international credibility by responding to the food-safety and quality requirements of its destinations, mostly, the United States and the European Union countries. Continuous investment has enabled the sector to progress in the teeth of competition from other countries.

There are 105,000 galda farms, mostly located in the Khulna area although this method of cultivation is spred ading rapidly in other parts of Bangladesh. Unlike brackish water cultivation of bagda (black tiger shrimp, Penaeus monodon), freshwater galda cultivation is not restricted to the coastal regions and is expanding at a rate of 10–20 per cent per annum.

Industry Incentives

Frozen foods is the second largest export sector of the economy. The massive natural resources available in Bangladesh make this sector particularly promising for investors looking to supply in international as well as in domestic markets.

The Public sector corporation and the private organizations have setup about 148 numbers of shore based export oriented fish processing plants at Dhaka, Chittagong, Khulna, Jessore, Satkhira, Bagerhat, Cox's Bazar, Chandpur, Kishoregonj, Syihet and Patuakhali. These plants produces Fresh Water shell On (FWSO), Ser Water shell On (SWSO), Peeled and Deveined (P&D), Peeled and Undevined (PUD), shrimp products under the most hygienic and sanitary condition under the supervision, control and guidance of foreign trained handling & processing experts. At all levels, USFDA registrations and directives of the European Communities concerning the production and exportation of frozen foods are strictly followed.

Garments Potential Sectors for Investment

■ Cost and quality of products that are produced on time, reliably and very competitively with a highly skilled labor force.

■ A unique regional location for expansion into key Eastern and other markets.

■ Favored trading status with the EU and the USA.■ Clusters of companies providing a local supplier base with real

depth in skilled labor, training and technical development facilities.

The growing demand for yarn in the local market, comparatively low cost of doing business, lucrative incentive packages and a favorable investment policy regime are important reasons for investment in this sustainable sector.

Sector Highlights

Enormous investment opportunities exist in this sector. In the RMG industry demand for fabric significantly exceeds local supply and so is currently being met by imports. Backward linkage is a significant trading opportunity and is supported by a government backed incentive: 15% cash subsidy of the fabric cost to exporters sourcing fabrics locally.

Additionally the government has created a highly favorable policy framework for investment in these sectors offering investors the following choices:

■ Establishment of new textile/RMG mill in the private sector■ Joint ventures with the existing textile/RMG mill■ Acquisition of public sector textile mills that are being privatised■ Indirect investment through financial services and/or leasing

The most beneficial public policy of introducing back to back LC* and bonded warehouse facilities provide a tremendous impetus to the export scenario in Bangladesh.

■

Investment Opportunities

Bilateral agreements with 28 countries and Generalised System of Preferences (GSP) of the EU are key reasons for Bangladesh RMG products having access to global markets. The current cycle of GSP applied from 1 January 2009 to 31 December 2011. Bangladesh is now a significant RMG supplier to North America and Europe. Bangladesh has also taken a better position in the USA market through competition. Bangladesh is expected to maintain its tariff-free access to EU under the European GSP, since the GSP is not covered by the Uruguay Round Agreement. Recently Canada has also provided tariff-free access for all the items from Bangladesh.

Meantime, the Bangladesh RMG industry has become very competitive as a global standard RMG source. Marketing investments have been made in trading partner economies; end users can often differentiate products with confidence.

Historically the Bangladesh RMG industry has depended largely on imported yarns and fabrics and produced only 10% of the export-quality cloth used by the garments industry. The need for establishment of backward-linkage industry has become an immediate concern to the government and the exporters and there are enormous opportunities to set up a composite textiles industry combining textile, yarn and garments.

Industry Outlook

From spinning to weaving, from knitwear to leisurewear and high street fashions, the textiles and clothing industry is Bangladesh’s biggest export earner with value of over $ 16 billion of exports in 2009-10. Our factories design and produce for the world’s leading brands and retailers. This rapidly growing sector of the Bangladeshi economy offers a unique competitive edge that supports profitable expansion into new strategic markets.

Light Engineering Potential Sectors for Investment

Thriving in this sector are machinery parts and consumer items.

■ Increasingly affluent middle class creating demand for consumer durables.

■ About 40,000 small scale light engineering enterprises existing over the country.

■ Export-oriented production has experienced strong growth in past few years.

■ Currently about 10,000 types of different items are manufactured for the local industry.

■ As demand grows for engineering and electronic goods, so does demand for light engineering products.

■ Government provides cash incentive facilities to exporters of value-added light engineering products.

Sector Highlights

The light engineering industry in Bangladesh continues to grow each year. This labor-intensive sector produces a diverse range of items, including import substitute machinery spares, plant machineries, small tools, toys, consumer items and paper products for the domestic market. Most of these enterprises are located in and around Dhaka metropolis. Entrepreneurs from China, Japan and Korea have taken advantage of Bangladesh's cheap and easily trainable labor and its infrastructure facilities to manufacture products for the export market.

Industry Outlook

The Light Engineering Sector (LES) that draws the least attention of the policymakers has emerged as a potential cost cutting sector by producing at least 50 percent substitutes of imported items in the country. This important sub-sector is now providing critical support to industrial, agricultural and construction sectors by manufacturing a wide range of spare parts, castings, moulds and dices, oil and gas pipeline fittings and light machinery, as well as repairing those. Sector players claim that electrical goods like switch, socket, light shed, channel, cables and electrical fans, generator, which are manufactured by the LES are now meeting 48% to 52% of the country's demands, which was earlier met through import. Export growth was estimated at 30%. The light engineering sector as 'the mother of all sectors,' because it provides backup support to cement, paper, jute, textile, sugar, food processing, railway, shipping, garments capital machineries by repairing and maintaining those. A recent study conducted by International Finance Corporation (IFC) in partnership with UK Department for International Development and Norwegian government shows that LES has in its employment 6,00,000 people involved in 50,000 micro enterprises and 10,000 Small and Medium Enterprises. Another study conducted by Bangladesh University of Engineering and Technology however, estimates that LES comprises of around 40,000 enterprises employing around 8,00,000 people.

Leather Goods Potential Sectors for Investment

■ Abundant, low cost labor – ideal for labor intensive industry.■ Good quality domestic supply of raw materials, as by-products

of large livestock industry.■ Government support in the form of tax holidays, duty free

imports of raw materials and machinery for export-oriented leather market, export incentives.

■ Tariff and quota free access to major markets such as the EU.

Sector Highlights

Industry Outlook & Investment OutlookIn 2008-09 total export of leather, leather goods was $381.14m.

Bangladesh produces between 2% and 3% of the world’s leather. Most of the livestock base for this production is domestic, which is estimated as comprising 1.8 % of the world’s cattle stock and 3.7 % of the goat stock. The hides and skins (average annual output is 15m sq.m.) have a good international reputation.

Foreign direct investment in this sector along with the production of tanning chemicals appears to be highly rewarding due to this presence of basic raw materials for leather goods including shoes, a large pool of low cost, trainable labor, and a tariff concession facility to major importing countries under Generalized System of Preferences (GSP) coverage. Thus Bangladesh is an ideal offshore location for leather and leather products manufacturing with low cost but high quality.

The government is in the process of setting up a separate Leather Zone, relocating the existing industry sites to a well-organised environment. Exports include some ready-made garments, although that aspect is confined mainly to a small export trade in "Italian-make" garments for the US market. Footwear is more important in terms of value addition. This is the fast growing sector for leather products.

Bangladesh has a long established tanning industry which produces around 2-3% of the world’s leather from a ready supply of raw materials. The country is therefore an established and attractive location to source and outsource the manufacture of finished leather products. The leather industry is ideally suited to Bangladesh with its abundance of labor and natural resources at internationally competitive rates.

Power Potential Sectors for Investment

There are number of facilities and incentives would be provided to the foreign investors. Some of them as follows:

■ Tax exemption on royalties, technical know-how and technical assistance fees, and facilities for their repatriation.

■ Tax exemption on interest on foreign loans.■ Tax exemption on capital gains from transfer of shares by the

investing company.■ Avoidance of double taxation case of foreign investors on the

basis of bilateral agreements.■ Exemption of income tax for upto three years for the expatriate

personnel employed under the approved industry.■ Remittance of up to 50% of salary of the foreigners employed

in Bangladesh and facilities for repatriation of their savings and retirement benefits at the time of their return.

■ No restrictions on issuance of work permits to project related foreign nationals and employees.

■ Facilities for repatriation of invested capital, profits and dividends.

Facilities and Incentives for Foreign InvestorsElectricity is a key ingredient for the socio-economic development of the country. The government has given top priority to development of the sector considering its importance in the overall development of the country. The government has set the goal of providing electricity to all citizens by 2021. Adequate and reliable supply of electricity is an important pre-requisite for attracting both domestic and foreign investment.

As the power sector is a capital-intensive industry, huge investments are required in order to generate addition to the capacity. Competing demands on the government resources and declining levels of external assistance from multilateral and bilateral donor agencies constrained the potential for public investment in the power sector. Recognizing these trends, the government of Bangladesh amended its industrial policies to enable private investment in the power sector.

The Power Cell, created under the Power Division of Ministry of Power, Energy and Mineral Resources, received the mandate to lead private power development. The government is strongly committed to attract private investment for installing new power generation capacity on build-own-operate basis.

Industry Outlook

A number of fiscal incentives are provided to the private power companies. Some of them are as follows:

■ Exemption from corporate income tax for a period of 15 years.■ Allowed to import plant and equipment and spare parts up to a maximum of ten percent (10%) of the original value of total plant and equipment within a period

of twelve (12) years of commercial operation without payment of customs duties, VAT and any other surcharges as well as import permit fee except for indigenously produced equipment manufactured according to international standards.

■ Repatriation of equity along with dividends allowed freely.■ Exemption from income tax for foreign lenders to such companies.■ The foreign investors will be free to enter into joint ventures but this is optional and not mandatory.

Fiscal Incentives for Private Companies

Bangladesh is progressing through a phase of development where automation is the key to its economy and business. As the country continues to industrialise the importance of power generation and electricity supply becomes a key government priority.The abundance of natural resources available in Bangladesh supports a range of highly profitable investment opportunities in agribusiness. Over 90 varieties of vegetable are grown in Bangladesh, yet in this fertile land there is under utilization of the country’s agricultural capacity. This presents many opportunities for investors seeking to export agricultural products, or to meet the rapidly growing local demand.

At present, 48.5% of the total population of Bangladesh is enjoying the electric facilities. As of April 2010, the total numbers of transmission and distribution lines are recorded to 8,359 km and 266,460 km respectively. However, 53,281 villages have been electrified so far. In Bangladesh per capita generation is 220 KW hr which is comparatively lower than other developed countries in the world. Public and private sector produces 63% and 37% of electricity respectively. Public sector produces electricity through Bangladesh Power Development Board (BPDB), Ashuganj Power Station Company LTD (APSCL) and Electricity Generation Company of Bangladesh (EGCB). On the other hand, private sector produces power through small independent power producers and rental that government buys at a constant price. BPDB individually produces 46% of the total production.

For further information, please contact Khan Mohd Eshtiaqueeshtiaque@student.ie.edu