FDI In SME Could Be The Savior

Reports emerged on the press insinuate that government plans to finance huge budget deficit by borrowing more than Tk 470 billion from banks. The ailing banks are facing liquidity crisis. Many private investment projects stalled due to cash crisis. The decision will put the banks further into trouble by diverting funds from investment towards budget financing. In addition, job creation will also be affected as funds for investment and SME opportunities will dry out.

In the wake of withering number of large and medium enterprises, as indicated by another news report, SMEs remain a beacon of hope for employment creation and revenue generation, relieving the worries of cash-strapped government and financial institutions. Perhaps no other sector  like the SME adds so much value to the  economy. Its small size and dependence on local markets for ingredients and final products make it special. But its glorious journey may come into a halt if government decision comes into effect.

This sector is already a victim of government's biased policy. When it comes to industrial credit, we see that there is discrimination in its disbursement. Moreover, much of the blames for accumulation of bad loans should be attributed to large and medium industries.

Bangladesh Bank SME statistics say that during the July-December in 2017-18 , our  banks disbursed Tk 1693.4 billion of  industrial credit. Of which Tk 1313.6 billion went to large industrial units, Tk 221.5 billion went to medium units and Tk 158.3 billion went to small industrial units. In 2018-19(Jul-Dec), industrial credits for larger and smaller enterprises increased to Tk 1569.77 billion and Tk 179.62 billion respectively. Whereas medium enterprises’ industrial credit decreased to 203.06 billion.

(Data source: Bangladesh Bank)

Now if one takes a look at the default loans, he will be puzzled. In 2017-18 (Jul-Dec), default loan for large industries was Tk 325.09 billion, it was Tk 117.3 billion for medium industries. For small industries , it was Tk 55.18 billion. Within a year, default loans registered an increase. In 2018-29(Jul-Dec), default loans for large, medium and small industries were TK 370.61 billion, Tk 149.09 billion and Tk 76.43 billion respectively. Please note on both occasions default loans for small enterprises were relatively small.

(Data Source: Bangladesh Bank)

Many of this diverted funds will again be pumped into trouble-ridden banks to keep them operational. And we just see all they did in the past to increase the volume of default loans. Since government is cash strapped and wants to create jobs, it behooves the government to allow FDI in SMEs. There are many unseen benefits.

Recently India allowed FDI in retail sectors. Its impact reached beyond borders. As global supermarket brands are opening their outlets across India, RMG factories witness a jump in orders emanating from India.Bangladesh's recent RMG export growth in India is largely ascribed to this factor. Indians are getting top-notch woven items and Bangladesh gets a chance to diversify its RMG export market.Now more orders mean more jobs and reduction in trade deficits.But the biggest advantage of FDI in SME is superior management, supply-chain network and introduction of new services and technology, which will change the whole industry to the core by bringing professionalism and alleviating worries from market uncertainties.

I have been arguing for FDI on SMEs for quite some time. Government seems busy fetching huge amount of FDI in sectors where value addition to the economy is little and and worsening of government expenditure is on the rise. A recent report says Bangladesh's entrance to LNG market also augments subsidy to Bangladesh Petroleum Corporation as LNG price oscillates between  low and high prices in international market. Furthermore, this kind of huge investment only fills the coffers of crony capitalists, who have deep ties with politicians , bureaucrats and defense establishment.

FDI in SME will not be astronomical amount like that in the power or infrastructure sector. But the value they will generate will be enormous. Take for instance the example of our agro-processing and food processing industry. Idea that simple bakery items could be produced using automation never crossed our minds. Quality, price, hygiene and value addition were ensured. Mango pulp and pickle  factories or tomato sauce production units in the muffossil towns introduced contract farming model and saved the marginalized farmers from volatility in the market.

I think government should welcome with open arms if a Philippino wants to set up a boutique shop in Dhaka, a Thai wants to launch a food processing business or a Tamil desires to open a restaurant in Dhaka. One may argue Bangladeshis know how to run this kind of business so we do not want any FDI here. Wrong. Better management, introduction of new ideas and technologies, better worker-employer environment are lacking here. Many years ago I read a report on BBC Bangla about a Pakistani RMG exporter based in Adamzee Export Processing Zone. His factory offered salaries more than his Bangladeshi counterparts do in addition to benefits. Plus he is very kind to his Bangladeshi workers and set up a grievance redressed system that took attention to workers' woes.None of his workers descended to street even when unrest broke out in that industrial zone. This kind of management services and good practices will spread to whole industry when others will take notice of them.

But the biggest advantage will be a great leap forward to an intervention free market. Our country is infested with cadre-based political ideologies and unwanted intervention of  men-in-uniform and men-in-plain clothes. Businesses incur costs to entertain their demands and the parasite-infested business environment drives the good ones out of the market. FDI in SMEs, it is expected, will significantly improve that climate by acting like a scarecrow. Reason for optimism lies in the examples set by donor-funded projects. Since these projects require a certain degree of accountability and transparency, many government officials are not interested to siphon off money from these projects. On the other hand, quality of solely government funded projects has recently been called into question.

It is regrettable that government plans to draw money from banks to finance projects that bear no fruit while neglecting vital sectors like SME. FDI in SME will create the aseptic conditions in our economy, gradually destroying the favorable breeding ground for parasites. At first glance it may appear eccentric. Given the deteriorating business climate, no other solution seems pragmatic and more appropriate beside it.

Allow FDI In SMEs

This week a leading think-tank has revealed that every year nearly 800,000 youth added to an army of job seekers. It appears that it does not ring any alarm bell across the corridor of power in government machinery. Ruling party seems little troubled by the news.

The revelation has been made in the wake of a High Court verdict that put a complete stop on all forms of extra tuition by school and college teachers outside classroom. Luckily the court, at a later ruling, spared the the "freelancers" who are private lesson providers but not involved with any educational institution.
It is incontrovertible that coaching culture in Bangladesh has rotten to the core. It puts extra cost on parents and the parallel system some how challenged the mainstream education system.

Solution to the degeneration of existing private lesson providing services is not a total halt but to regulate the industry. Despite the sparing of freelance private lesson providers, the verdict will have adverse implication on the job market. Because many teachers whose sole mean to get a decent living out of this will switch to moonlighting, putting further pressure on whatever job opportunities available in the market.

On the other hand, the form of "extra care" will take resort to classroom. It is highly likely that after this defining ruling extra care will take place within the boundaries of a classroom and parents have to bear the same extra cost as it was before the ruling. A pragmatic decision is widely anticipated where the teachers will be allowed to provide private lesson subject to restrictions. It however was not the case.

In brief, the ruling may have negative consequences for the job market as well as the on classroom teaching.

Unfortunately, we fail to create quality jobs in this country. If there were quality jobs then I think this coaching culture would not take a virulent form and teachers would be contend with their jobs.

In other sectors too, there is a dearth of good jobs. Highly polarized politics is partly to blame. Growth of private firms is synonymous with the tenure of ruling party that maintains some kind of ties with businesses. The other successful ones have closer ties with the men-in-fatigue. Rare are the firms that avoided any kind of ties with these two and stretched their businesses at home and abroad. The sheer level of uncertainty made the private sector jobs less attractive. So more and more people vie for public services jobs.

The SMEs, bloodline of an economy, are not doing well. Deteriorated governance and free season of corruption made it a victim. There have been reports that SME funds have either been swindled or laundered abroad. So the growth and employment generating sector never pitched up and true entrepreneurs remained shy throughout the period of this regime. Rare are the sectors that create jobs and add real values to economy by increasing revenues for governments and installing a formidable supply chain management system across different sectors of the economy. Our agro-processing industry is the shining example.

India has already opened up its retail market to FDI. India is more cautious about FDI. Unlike other sectors, tax evasion attempt, corruption and other fraudulent activities will be much lower in FDI on SMEs. In addition, small and medium foreign entrepreneurs who have a true commitment to stay in a country will invest here.

Bangladesh can take cue from India. In a country like Bangladesh, allowing FDI in SMEs is quintessential to propel growth and employment opportunities. Our politically blessed businessmen feel insecure here and have shown inclination towards laundering money abroad. Providing fund to these cronies never translated into job creation and value addition.

So government can seriously think of allowing FDI in SMEs and RMG industry. Please note in these two sectors our local entrepreneurs are doing well. Local RMG bosses have always been critical to such proposal. But allowing FDI in these two sectors will be boon for the two.

A more pertinent example will be in this regard our financial institutions. While our desi banks have become subject of incessant plundering,  foreign private banks in this country are doing quite well and smattering of fraudulent activities are detected in these banks over these years. Management board of these banks have always remained out of local politicians' reach. Perhaps that must be the reason behind their less troubled balance sheets.

Germans have shown keen interest in investing SMEs. I don't know whether that offer is still on the table. Bangladesh should give serious thought in its implementation. With the FDI, our SMEs will have a chance to meet superior management system, innovation and good work environment.

Since the PM is on a official visit to Germany, Bangladesh could initiate dialogue with Germany to facilitate this business proposal as soon as possible.
Given the pool of job seekers and presence of politically blessed businessmen whose only job is to siphon off public and private funds, FDI in SMEs could be seen as a game changer.

Unfortunately, we procrastinate to implement these business deals. If there were well functioning foreign SMEs in the country we would have some foreign pressure group who would help us improving the business environment in spite of significant presence of cronies.

As it appears, institutionalized corruption holds our economy back and slows further down the trickle down process of the growth distribution, we should mobilize our efforts to find extraordinary ways to make every one on board of this much trumpeted doing-well development vehicle. Allowing FDI in SMEs will be one of those extraordinary steps.