Bangladesh: 2023 Investment Climate Statements
Bangladesh is the most densely populated non-city-state country in the world, with the eighth largest population (170 million) within a territory the size of Iowa. Bangladesh is situated in the northeastern corner of the Indian subcontinent, sharing a 4,100 kilometer border with India and a 247 kilometer border with Burma.
In 2023, Bangladesh obtained an International Monetary Fund (IMF) loan to bolster its foreign currency reserves. The IMF Executive Board approved USD 3.3 billion under the Extended Credit Facility/Extended Fund Facility and USD 1.4 billion under the Resilience and Sustainability Facility.
According to the IMF, “Bangladesh’s robust economic recovery from the pandemic has been interrupted by Russia’s war in Ukraine, leading to a sharp widening of Bangladesh’s current account deficit, depreciation of the Taka and a decline in foreign exchange reserves.”
The 42-month program “will help preserve macroeconomic stability, protect the vulnerable, and foster inclusive and green growth.”
Historically, Bangladesh had annual GDP growth of over six percent between 2010-2020. Its strategic location between the emergent South and Southeast Asian markets and its large workforce were reasons for U.S. companies to invest. Bangladesh received USD 3.44 billion in foreign direct investment in FY 2021-2022, according to Bangladesh Bank (the central bank). The COVID-19 pandemic and Russia’s war in Ukraine impacted Bangladesh by reducing demand for its main export—ready-made garments—while contributing to a sharp rise in the prices of energy and food.
Bangladesh’s rising commodity prices and a surge in imports in 2022 resulted in a widening balance of payments deficit. Foreign currency reserves declined from USD 48 billion in August 2021 to under USD 32.2 billion in January 2023. The Government responded with measures to delay foreign currency payments. The foreign currency shortage also coincided with a banking scandal in which several major Bangladeshi banks made large, questionable loans to companies that then defaulted on the loans. In September 2022, nonperforming loans (NPL) in the banking system reportedly surged to a record USD 12.8 billion, much of which the Government has been unable to trace.
Bangladesh has made gradual progress over the past decade in reducing some constraints on investment, such as 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. The Government has made efforts to improve the business environment, but the full implementation of its foreign investment policies has yet to materialize. Capital markets in Bangladesh are still developing and the financial sector is highly dependent on banks, which suffered a major scandal in 2022 in which 11 banks faced a collective shortfall of USD 3.1 billion. A sluggish and reportedly corrupt judicial process and limits on alternative dispute resolution mechanisms impede the enforcement of contracts and the resolution of business disputes.
In the areas of labor, intellectual property rights (IPR), and environment, the Government has passed various modern laws but does not effectively enforce many of them. It devotes limited resources to IPR protection. Although Bangladesh has made measurable progress over the past decade to improve fire and building safety standards, workers’ rights to associate freely and bargain collectively are limited. Despite the many environmental conventions Bangladesh joined, Dhaka is among the world’s worst cities for air pollution.
Bangladesh is historically moderate, secular, peaceful, and stable, but as the country nears general elections in late 2023/early 2024, the political and security situation may become volatile. The last election in December 2018 was marred by irregularities, violence, and intimidation. Prime Minister Sheikh Hasina and her ruling party, the Awami League, adopted legislation and policies that diminished space for the political opposition, undermined judicial independence, and threatened freedom of the media and civil society.
Bangladesh seeks foreign investment and offers a range of investment incentives under its industrial policy and export-oriented growth strategy. Foreign and domestic private entities can establish and own, operate, and dispose of interests in most types of business enterprises. Sectors with foreign investments include agribusiness, electronics, energy and power, garment and textiles, healthcare, ICT, infrastructure, leather and leather goods, light engineering, light manufacturing, medical equipment, pharmaceuticals, and plastic.
Bangladesh seeks foreign investments, but in certain industries the Government places restrictions on foreign ownership and control. Four sectors are reserved for Government investment: arms, ammunition, and defense equipment; forest plantations and mechanized extraction in reserved forests; nuclear energy production; and security printing (e.g., currency). Bangladesh allows private investments in power generation and natural gas exploration but does not permit full foreign ownership in petroleum marketing and gas distribution. Foreign ownership in telecommunications is limited to 60 percent (70 percent for tower sharing). Seventeen sectors require permission to operate from ministries such as: aviation; banks and financial institutions; coal, natural gas, and mineral exploration, extraction, and supply; crude oil refining; deep sea fishing; insurance companies; large-scale infrastructure projects; power generation, supply and distribution; satellite channels; seaports; and VOIP/IP telephone.
Discrimination against foreign investors is not widespread but the Government generally favors local industries. For example, approvals for imported medicines are regulated if they compete with domestically manufactured products. New shipping and insurance companies must have local majority ownership (but there is an exemption for existing foreign-owned firms). In practical terms, foreign investors often find it necessary to have a local partner even though this requirement may not be statutorily defined.
The Foreign Investment Act (1980) bans the Government from nationalizing or expropriating foreign investments without adequate compensation. After Bangladesh’s founding in 1971, widespread nationalization resulted in Government ownership of 90 percent of the manufacturing sector’s fixed assets. After 1980, the Government moved to privatize industries. The private sector has developed into the main driver of Bangladesh’s sustained economic growth.
Bangladesh is a signatory to the International Convention for the Settlement of Disputes and the UN Convention for the Recognition and Enforcement of Foreign Arbitral Awards. It also signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Local law permits dispute settlement in a third country in contracts between an investor and the state. The U.S.-Bangladesh Bilateral Investment Treaty states that parties may agree to non-binding, third-party procedures such as fact-finding by the International Centre for the Settlement of Investment Disputes (ICSID) before the dispute is settled in accordance with procedures stated in the contract. However, the Government has challenged rulings when ICSID has ruled against it.
Bangladesh’s Arbitration Act (2001) is modelled on the UN Commission on International Trade Law but also incorporates provisions from India and England. It permits alternative dispute resolutions (ADR) and the enforcement of arbitration awards. Domestic arbitration is carried out in the district court and foreign arbitration is carried out in the high court. Slow adoption of ADR mechanisms and a sluggish judicial process impede the use of ADR for resolving business disputes. ADR is limited by a lack of funding to courts, limited cooperation by lawyers, and instances of participants acting in bad faith. The timeframe for dispute resolution is unpredictable with some decisions made within a few months while others take many years. Moreover, arbitration results are unevenly enforced by the courts, which appear to show a bias against foreign investors, according to local business contacts.
Anecdotal evidence suggests parties prefer to resolve their business disputes privately rather than through the courts. A favored venue is the Bangladesh International Arbitration Center (BIAC), an independent arbitration center established by local business leaders in 2011, which applies the Bangladesh Arbitration Act and can resolve cases in six months to one year. The American Chamber of Commerce in Bangladesh has also helped to resolve business disputes.
The Bankruptcy Act (1997) is outdated and applies mainly to individual insolvency. Bankruptcy laws are sometimes disregarded in business cases because of the numerous falsified assets and uncollectible cross-indebtedness supporting insolvent banks and companies. Some bankruptcy cases fall under the Money Loan Court Act (2003) which has more stringent and timely procedures.
To encourage investment, the Government has offered incentives, guarantees, and tax breaks (e.g., no VAT on exports, tax holidays for certain industries); however, several U.S. companies have experienced difficulties securing the incentives initially offered by the Government. They reported that infrastructure guarantees (ranging from electricity to gas connections) were not fully delivered and tax exemptions were delayed. These challenges are not specific to U.S. companies but reflect the broader challenges in the business environment.
“Thrust” (strategic) sectors and infrastructure projects established between July 1, 2019, and June 30, 2024, enjoy a tax holiday of 20 to 90 percent for up to ten years. These sectors include biotechnology; brickmaking technologies; cell phones; certain electronics; certain pharmaceuticals; chemicals or dyes; commercial boilers; compressors; computer hardware; contraceptives; fertilizer; fruit and vegetable processing; furniture; home appliances; leather goods; manufacturing of automobiles, agricultural machineries, tires, bicycles, and toys;
pesticides; petrochemicals; plastic recycling; rubber latex; textile machinery; and tissue grafting.
Infrastructure projects may receive tax exemptions for 10 years ranging from 20 to 90 percent. These include deep seaports, electricity transmission, elevated expressways, export processing zones, gas pipelines, industrial waste and water treatment facilities, information technology parks, liquefied natural gas terminals, ports, rapid transit projects, renewable energy projects, road overpasses, and toll roads and bridges.
Independently owned power plants (IPP) that are not coal-fired have a tax exemption for 10 years that adjusts from 100 percent at the beginning to 25 percent at the end. Coal-fired IPPs starting production before June 30, 2023, have a tax exemption rate of 100 percent for the first 15 years of operations. Power projects can also waive import duties on capital machinery and spare parts.
For export-only companies, duties are waived on imports of capital machinery and spare parts. For export processing zone industries, duties are waived on raw material imports used in production.
Capital markets in Bangladesh are developing and the financial sector remains highly dependent on bank lending. The current regulatory infrastructure inhibits the development of a tradeable bond market. Foreign participation in Bangladesh’s stock exchanges is permitted but remains low due to perceptions of corruption, limited liquidity for shares, and the lack of publicly available and reliable company information. Bangladesh’s capital markets rely primarily on domestic investors.
Bangladesh has two stock exchanges: Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange. In 2022, DSE’s market capitalization grew from USD 30 billion to USD 72 billion due to the trading of 250 new treasury bonds and Islamic Sukuk bonds. The stock exchanges are regulated by the Bangladesh Securities and Exchange Commission (BSEC) which joined the International Organization of Securities Commissions Memorandum of Understanding in 2013. In 2019, BSEC launched derivatives products and allowed short selling in order to invigorate the bond market via the Exchange Traded Derivatives Rules, Short-Sale Rules, and Investment Sukuk Rules. It formed a central clearing and settlement company and installed a modern surveillance system called “Instant Market Watch” that provides real time connectivity with exchanges and depository institutions, with result that BSEC’s market abuse detection capabilities have improved significantly. The BSEC puts a limit on how much a stock can fall on a given day, which is a policy that domestic companies favor because it limits their losses; however, foreign investors dislike this policy because they cannot gauge the true price of a stock.
Bangladesh is an IMF Article VIII member, nevertheless, the Government maintains restrictions on the unapproved exchange, conversion, and/or transfer of proceeds of international transactions into non-resident Taka-denominated accounts. In 2015, some debits were permitted for outward remittances, but there is no timetable for the complete removal of the restrictions.
Since 2022, Bangladesh Bank has been navigating a foreign reserve shortage, currency depreciation, and a major banking scandal. Foreign currency reserves declined from USD 48 billion in August 2021 to under USD 32.2 billion in January 2023. This decline in reserves is due to a sharp rise in imports as well as a sharp decline in the value of the Taka. The Taka depreciated from 86 Taka per USD in mid-2022, to 107 Taka per USD in September 2022; this accelerated the foreign exchange shortage as banks scrambled to settle letter of credit payments.
Amidst this tense financial situation, the country’s largest private bank, Islami Bank, was the epicenter of a banking scandal in which 11 banks faced a collective shortfall of USD 3.1 billion. These banks made large, questionable loans to companies that defaulted on the loans. Industry-wide, banks experienced a sharp rise in NPL to USD 12.8 billion September 2022. Gross NPL ratio grew from 8.1 percent in September 2021 to 9.4 percent in September 2022, according to Bangladesh Bank data.
Bangladesh Bank oversees 61 banks, which can be divided into four types: state-owned commercial banks (6), state-owned specialized banks (3), private commercial banks (43), and foreign commercial banks (9). In September 2022, NPL surged to a record USD 12.8 billion, with six state-owned banks holding an average of 23 percent in NPL among their assets. The NPL rate was 11.75 percent at the three state-owned specialized banks, 6.25 percent at the private banks, and 4.75 percent at the nine foreign commercial banks.
At present, about one-third of the country’s banks are undercapitalized and many are being supported by the Government, although this process is not transparent. Bangladesh Bank reportedly sold over USD 7.8 billion from its foreign reserves in July-December 2022 to help banks settle their letters of credit payments. The Government has enacted measures to delay contractual payments in foreign currency and slow/block foreign companies from repatriating their profits/remittances from their businesses in Bangladesh.
Mobile financial services (MFS) such as bKash have created an alternative to traditional banking. In a nation with a population of 170 million, there are currently 187.5 million MFS accounts of which 83 million are in urban areas and 104 million are in rural areas. MFS carried out USD 9 million in daily transactions in October 2022.
Microfinance institutions are the dominant players in rural financial markets. The Microcredit Regulatory Authority (MRA), oversees 746 licensed microfinance institutions, excluding Grameen Bank which is governed under a separate law. In 2020, the MRA-listed microfinance institutions had 33.3 million members and Grameen Bank had 9.3 million members.
Foreign investors may open temporary bank accounts called Non-Resident Taka Accounts (NRTA) in the proposed company’s name, without prior approval from Bangladesh Bank, to receive incoming capital remittances and encashment certificates. Once the company is registered, it can open a new account to transfer capital from the NRTA account. A foreign company’s branch, representative, or liaison offices can open bank accounts without opening NRTA accounts.
In January 2023, the IMF approved loans of USD 4.7 billion to Bangladesh to be paid out in seven installments over 42 months. In granting the loan, the IMF established policy objectives and performance criteria for needed structural economic reforms, including widening the tax base, enacting banking sector reforms, and integrating climate change risks into financial decision making.
The exchange rate is determined by Bangladesh Bank, which has been depreciating the Taka since mid-2022 from 86 Taka per USD 1, to 107 Taka per USD 1. Despite Bangladesh Bank’s 2022 depreciation efforts, its maintenance of a stabilized currency arrangement has contributed to the decline of its foreign currency reserves from USD 48 billion in August 2021 to under USD 32.2 billion in January 2023.
To conserve declining foreign reserves, the Government has implemented measures to delay foreign currency payments and to slow/block foreign companies from repatriating their profits/remittances from their businesses in Bangladesh. Before the current foreign reserve shortage, Bangladesh Bank did not have to approve the dividend remittance, returns on investments, interest, and payments on private foreign debts, and transfers were typically made within two weeks. In contrast, Bangladesh Bank’s approval was often required to repatriate lease payments, royalties, and management fees, which could take several weeks. If a company failed to submit all the proper documents, permission to send remittances could take up to 60 days. Additionally, some regulatory agencies reportedly slowed/blocked the repatriation of profits/remittances using sector-specific regulations.
In 2017, the Cabinet approved a “Bangladesh Sovereign Wealth Fund” of USD 10 billion to be funded by excess foreign exchange reserves, but the plan was subsequently scrapped by the Finance Ministry.
Bangladesh has 49 major non-financial SOEs that are spread among seven sectors: agriculture; communication; construction; industrial; power, gas, and water; transport (including rail transport); and services and trade. SOEs generally contribute to Bangladesh’s GDP, value-added production, and employment, but many spend in excess of their earnings, according to the Ministry of Finance. These include transport providers like Bangladesh Road Transport Corporation, Biman Airlines, and Bangladesh Railway, as well as manufacturers like Bangladesh Textile Mills, Bangladesh Jute Mills, and Bangladesh Sugar & Food Industries. SOEs are normally profitable in sectors where they are monopoly businesses, such as Petrobangla (which controls energy production-sharing agreements), submarine cables, and utilities.
The Government has restructured several SOEs with the intent make them more competitive. In 2007, Biman Airlines converted to a public limited company as did several SOE banks: Agrani, Janata, Rupali, and Sonali. In 2020, the mismanaged and unprofitable jute mills of Bangladesh Jute Mills Corporation were closed, and the facilities leased out to private companies.
The Government accepts the SOE guidelines of the OECD but the country’s practices are not up to OECD standards. For example, SOEs are required to prepare annual reports and make financial disclosures, but Bangladesh rarely makes these documents public. SOEs have strong ties with the Government’s ruling party which appoints most SOE leaders. According to local business contacts, the courts tend to favor the SOEs in investment disputes because judges are influenced by the Government.
Although SOEs retain a large economic role, particularly in the financial and energy sectors, the Government has privatized 74 SOEs over the past 20 years. SOEs can be privatized through a variety of methods such as: sales through international tenders; sales of government shares in the capital market; sales of government shares to a private equity company (restructuring); leasing; direct asset sales (liquidation); and transfer of some shares to employees when government shares are publicly sold in the capital market. In 2014, the Government moved away from directly selling SOEs to private owners to issuing shares in the stock market.
Bangladesh’s business community is becoming aware of responsible business conduct (RBC) due to the example set by multinational firms operating in Bangladesh. Leading local firms have incorporated environmental and safety standards to appeal to, and to retain the lucrative contracts with, international brands. However, many local firms lack familiarity with international RBC standards. The Government has not adopted RBC standards and does not mandate any specific guidelines but encourages companies to follow general RBC principles.
Bangladesh has not joined the Extractive Industries Transparency Initiative or the Voluntary Principles on Security and Human Rights. There are two RBC NGOs in Bangladesh aimed at encouraging corporate social responsibility practices: CSR Bangladesh and CSR Centre Bangladesh. The latter is supported by the United Nations Global Compact.
Bangladesh is one of the most climate-vulnerable countries in the world due to its flat and low-lying topography; high population density; high levels of poverty; and the reliance of many livelihoods on climate sensitive sectors like agriculture and fisheries. Despite the Government’s ambitions for environmental management, Dhaka ranks among the world’s worst cities for air pollution due to toxic emissions from rampant construction, motor traffic, and unregulated burning of many materials.
Bangladesh has joined many international environmental conventions and designed many environmental plans. It adopted the UN System of Environmental-Economic Accounting (UN-SEEA), initiated activities for strengthening Environment, Climate Change and Disaster Statistics (ECDS) Project, and published the “Bangladesh Environmental Statistics Framework, 2016-2030.” The Environment Conservation Act (1995) established pollution rules and required all industrial projects to obtain an environmental clearance certificate. The Biodiversity Act (2018) allocated the equitable sharing of benefits arising out of the use of biological resources. The Bangladesh Climate Change Trust Fund, founded in 2010, has spent USD 250 million to support approximately 800 projects thus far. In 2019, the Government’s National Environment Policy adopted a blue economy action plan to balance conservation with marine resource extraction.
The Mujib Climate Prosperity Plan (2021) seeks USD 80 billion in foreign direct investment for environmentally resilient projects in energy, water, transport, supply chains and value chains. It outlines opportunities for technology-transfer partnerships and building manufacturing capacity in areas such as: electric vehicles, green hydrogen, modernized power grid, resilient infrastructure, and solar. Bangladesh aims to achieve 30 percent renewable energy by 2030 and 40 percent by 2041; the Government has undertaken this goal even as it experiences regular electricity brownouts and blackouts and prioritizes investing heavily in fossil fuels.
Corruption remains a serious impediment to investment and economic growth. Bangladesh is a party to the UN Anticorruption Convention and has laws to combat bribery, embezzlement, and other forms of corruption, but enforcement is inconsistent. Corruption is common in public procurement, tax and customs collection, and among regulatory authorities. Off-the-record payments by firms reduce Bangladesh’s GDP by two to three percent, according to some estimates.
The Anti-Corruption Commission (ACC) is the main institutional anti-corruption watchdog and investigator in cases of bribery and corruption. The police, National Board of Revenue, and Department of Narcotics Control can investigate corruption in their jurisdictions. The current Awami League-led Government publicly states its commitment to fighting corruption, but opposition parties claim the ACC is used by the Government to harass political opponents. Government efforts to ease public procurement rules and a recent constitutional amendment to diminish the independence of the ACC may undermine institutional safeguards against corruption.
Although Bangladesh is a traditionally moderate, secular country, political disturbances are likely to grow in size and intensity as national elections approach in late 2023/early 2024. In the last general election in December 2018, Prime Minister Hasina’s ruling Awami League party won 289 parliamentary seats out of 300 in an election marred by wide-spread vote-rigging, ballot-box stuffing, and intimidation. Harassment and violence during the pre-election period made it difficult for opposition candidates and supporters to meet, hold rallies, and campaign freely. Civil society groups are widely concerned about the trend toward a one-party state and the marginalization of all political opposition groups.
Bangladesh hosts one of the world’s largest refugee populations, with over 950,000 Rohingya from Burma as of February 2023. This humanitarian crisis will likely require sustained international financial and political support until a safe, voluntary, dignified, and sustainable return to Burma is possible.
Terrorist activity has decreased in recent years due to an increase in terrorism-related investigations and arrests following the Holey Artisan Bakery terrorist attack in 2016. American travelers are advised to exercise increased caution due to crime and terrorism when traveling to Bangladesh. For more information, see the State Department’s travel website.
Bangladesh’s 170 million population provides a large and young workforce. But the country’s comparative advantage in cheap labor for manufacturing is partially offset by lower productivity due to poor skills development, inefficient management, pervasive corruption, and inadequate infrastructure.
The informal economy is about 30 percent of the total economy and represents about USD 450 billion of GDP based on purchasing power parity levels, according to media. The garment sector has a shortage of skilled labor due to the furloughing of 357,000 workers during the COVID-19 pandemic who were not rehired due to the garment industry’s pursuit of automation. Automation and limited opportunities for women to advance in their careers have contributed to a steady decline in the number of female garment workers.
The total unemployment rate in 2021 was 5.23 percent and the female unemployment rate was 7.5 percent. In November 2022, the total unemployment rose to 6.9 percent, which led local media to conclude that economic growth was not strong enough to create jobs for the youth.
The Bangladesh Labor Act (BLA) specifies compensation for injured workers, employment conditions, freedom of association, health and sanitary conditions, leave policies, minimum wage setting procedures, right to join unions, and working hours. But in practice, the Government does not consistently and effectively enforce labor laws and independent trade unions face persistent barriers to registration. Charges for unfair labor practices are rarely brought against employers for violating labor rights, but workers in unions have been subjected to police violence, mass dismissals, and arrests of union leaders for asserting their rights to protest, according to labor rights groups.
Companies frequently discourage or prevent the formation of independent worker-led labor unions, preferring pro-factory management unions. Labor organizations reported most workers feared reprisal if they exercised their rights to form unions, attend meetings, or bargain collectively with employers. The Government reports over 1,000 registered trade unions, but labor leaders estimate less than 200 active trade unions are in the country’s dominant export sector, Ready-Made Garments (RMG), and only 30 to 40 of these engage in collective bargaining negotiations because union activities are inhibited by intimidation, corruption, and violence.
In a notable exception to the Bangladesh Labor Act, the Export Processing Zones (EPZ) Labor Act bans trade unions and heavily restricts activities in the zones; this affects nearly 430,000 EPZ workers. The EPZ labor law only permits “worker welfare associations” which are prevented by law from engaging in collective bargaining. BEPZA has the discretion to ban any strike viewed as prejudicial to the public interest. BEPZA maintains the authority to conduct labor inspections and gives the Department of Inspections for Factories and Establishments (DIFE) the authority to conduct joint inspections.
The BLA differentiates between layoffs and terminations; no severance is paid if a worker is fired for misconduct. However, in the case of downsizing or “retrenchment,” the law requires factories and establishments to notify DIFE one week prior to temporarily laying off workers. These workers must be notified, paid 30 days wages for each year of service, get their full housing allowance, and get half their wages for the first 45 days of the layoff and 25 percent of their wages thereafter. However, media and trade unions report that employers not only fail to pay workers their severance or benefits, but also their regular wages. In 2021 alone, workers and organizers staged 172 labor protests in the garment sector over back wages, factory layoffs, and demands to reopen closed factories.
In January 2023, Parliament passed the Universal Pension Management Act to provide a social security system for private sector employees. Employees aged between 18 and 50 will pay a premium for at least 10 years and can start collecting their pensions at age 60. A National Pension Authority will be created to roll out the pension scheme.
The United States suspended Bangladesh’s access to the U.S. Generalized System of Preferences (GSP) after two major tragedies killed over 1,250 garment workers – the Tazreen Fashions fire in 2012 and the Rana Plaza collapse in 2013. Since then, Bangladesh has improved the garment industry’s fire and structural safety issues and has taken some steps to become more compliant with international labor standards. The United States funds efforts to improve the RMG sector’s occupational safety, health, and labor rights in partnership with international partners, civil society, businesses, and the Bangladesh Government. The United States works with other governments and the International Labor Organization (ILO) to assist Bangladesh with additional labor reforms needed to fully comply with international labor conventions. The U.S. Government is closely monitoring necessary legal reforms and implementation as required under the 2021 ILO Roadmap to ensure the law and practice come into compliance with international labor standards.
27 Jul 2023,22:28
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