The Bangladesh Bank (BB) has suggested the government take into consideration a number of factors, including the ratio of private sector investment in the country, before allowing investments abroad, officials said.
In a recent letter sent to the ministry of finance (MoF), it made the plea after receiving loads of applications from businessmen who are interested in making overseas investments.
The central bank needs MoF's consent first before permitting anyone to make investment abroad, officials added.
In its letter, the BB mentioned the applications of three separate business groups who want to send US$ 20 million to Malaysia for acquiring two companies there, set up a garment factory in Haiti for which it needs to send $10.44 million, and establish a bank in Gambia by sending $7.0 million respectively.
Making equity investment abroad for resident Bangladeshis is not open under the existing foreign exchange regulation act. But under sub-section 6 of section-4 of the act, the central bank can give permission for capital account transactions to interested businessmen in consultation with the government.
The central bank in its letter said the foreign exchange reserve situation has to be taken into consideration first before making capital account convertible.
It said the convertibility can only be considered if adequate foreign currency remains in hand after meeting necessary import cost, if export earnings show continuous rise, remittance inflow and foreign investment continue to increase for a long period.
"Though the foreign exchange reserve crossed $32 million in Bangladesh quickly, its current growth rate is very slow," the central bank said, adding that import of fuel oil, capital machinery and consumer goods increased significantly in recent months.
Side by side, the global economic crisis has lowered export earnings and remittance inflow, it noted.
The BB said Bangladesh's foreign currency earning is mainly dependent on export earnings and remittance. Though export earnings are showing a positive trend this fiscal year, remittance earnings are showing a negative trend.
But because of growing imports and low remittance inflow, the current account has gone to negative territory by $0.79 billon in December last. With the current foreign currency reserve, import needs for 7/8 months can be met.
The central bank also said until November last year some Tk 2.77 trillion remained idle in the banking system. It further said minimum domestic investment needs to be 32 per cent of gross domestic product (GDP) to attain the optimum growth target of GDP.
"Whether allowing investments abroad instead of encouraging local investment will be appropriate, at this stage, requires careful thought," the letter mentioned.
The BB also mentioned that the government has already decided to form a $10 billion sovereign wealth fund in next five years by taking $2.0 billion each year from reserve. Besides, a $2.5 billion export development fund (EDF) has been formed taking money from the central bank. At the end of February, the balance of private sector external debt stood at $9.4 billion.
The central bank reminded that the government has recently decided to set up 100 economic zones across the country to promote domestic and foreign investment.
Bangladeshis who are interested in making investments abroad have the opportunity to invest in these economic zones which may contribute to employment creation and socioeconomic development of the country.
It also suggested taking into consideration whether the equity fund, to be sent abroad, will be invested in the same what was mentioned in the application, ensuring return of earnings from the investment and the capital itself, sectors which may produce good returns, and ensuring employment generation for Bangladeshis in investments abroad.
The BB also said equity investment on a limited scale for opening bank branches or exchange houses, facilitating remittance inflow, is being allowed. Besides, utilising fund for opening offices from export retention quota account has also been allowed for some companies so far.
But it said until now no local companies is given permission to send such a big amount ($20 million by a business group) abroad for making equity investment.
The central bank also said it has been receiving a good number of applications seeking permission for making equity investment abroad. If the applications are considered, the pressure on central bank foreign exchange reserve may heighten, it said.
A senior finance ministry official told the FE that sending money abroad through unofficial channel has been increasing as capital account is kept non-convertible.
Referring some reports he said in recent years billions of dollars have been siphoned off from the country. He said permission for investments abroad on a limited scale can be given.
When contacted over telephone Friday, executive director of Policy Research Institute of Bangladesh Dr Ahsan H Mansur said the capital account should have been made convertible when the reserve situation was good.
"Though the foreign exchange reserve growth has slowed down, it has not declined until now," he said suggesting allowing equity investment abroad on a limited scale.
Mr Mansur, however, suggested that the government should tag conditions like employment generations for Bangladeshi nationals in investments abroad.
He also advocated that reporting mechanising of equity investments should be very well to keep track on the capital went abroad.