Bangladesh foreign debt scenario is often perceived negatively because of the general populace's origin intertwined with their generational memory of being exploited by landlords. However, the need for Bangladesh's foreign debt has increased significantly to expand its economy and remain resilient in an increasingly volatile global economy. We take a look at the official development assistance received by the Government of Bangladesh and its current state.
Bangladesh foreign debt scenario can be understood in comparison with business entities. Businesses that intend to reinvest or self-finance different projects often take loans/credit facilities through debt instruments to leverage their balance sheet. Therefore, there is a general consensus in the business world that debt, if managed properly, can be instrumental for a business success. What about government debt?
Governments do not have a steady pattern of expenditure. Development expenditure can increase or decrease disproportionately year on year. Since the government has to largely rely on taxes for meeting its expenditure, funding development projects entirely on taxes can create regulatory uncertainty regarding tax rates, i.e. tax can be considerably higher in one year and astonishingly lower in the next year. Hence, in order to smoothen the tax regime and not disrupt the business environment, development expenditure has to be funded with external financing that limits the effect of expenditure on tax rates.
Foreign Debt Alternatives
What are the possible alternatives? Non-tax revenues cannot be increased overnight so it would be unrealistic to suggest so. Hence, the government must borrow from internal or external sources. Borrowing from internal sources such as central bank, commercial banks, NBFIs and debt instruments e.g. national savings certificates come with different types of challenges.
Borrowing from Central Bank: Central Bank does not have its own source of income to lend the government. Therefore, the only way for the central bank to lend the government is to print new currencies. But the government will spend the borrowed money on different development projects which will finally end up in people’s pockets and increase the amount of currency in circulation, inevitably risking a rise in inflation. For example, the increase in government borrowing from Bangladesh Bank during COVID has resulted in a subsequent inflation.
Borrowing from Commercial Banks and NBFIs: If the government borrows money from the commercial banks then the commercial banks have less funds available to lend to the private sector, crowding out private investors and driving down private sector credit growth, ultimately resulting in slow private sector growth and lessen private enterprises, and subsequently disrupting the business environment.
Borrowing through Debt Instruments: Government can always issue more debt instruments and loosen restrictions on national savings certificates. But national savings certificates have a higher interest rate for the government to bear, currently above 10% for most national savings certificates.
All the domestic sources of funds have considerably higher interest rates compared to foreign aid. On the other hand, foreign assistance often comes with highly concessional interest rates and flexible repayment terms.
Interest Rate Comparison
Percentages
No Data Found
Even though, day-by-day foreign debt is becoming costlier due to Bangladesh’s LDC graduation and economic development which deprives the country of the eligibility to attain concessional loans from certain schemes, foreign debt is still way less costly than domestic sources.
Bangladesh's Foreign Debt: Boon? Doom?
Therefore, foreign assistance is a tricky policy concern that can prove to be a boon or a doom in terms of consequences, depending on how it is utilized. If the fruits of investment done through foreign financing cannot be realized, the government might face difficulties with repayment in future. But how exactly does foreign assistance help the country?
The role of foreign assistance in the development of Bangladesh is often perceived as very limited since it’s a very negligible portion of the GDP (1.5% of GNI in 2021). The general attitude towards foreign assistance is it serves only the interest or agenda of providers and contributes to the budget deficit. It is difficult to reach conclusions on the growth-promoting role of foreign financing due to the absence of strong empirical data. One study remarks no strong connections between growth and external financing in Bangladesh whereas a disaggregated analysis showcased that social sectors such as health and education have greatly benefited from external financing. Government of Bangladesh (GoB) has leveraged foreign funding to expand primary education opportunities for children from underserved communities.
There are THREE exclusive benefits that can be attained by using foreign assistance in development efforts.
Firstly, foreign assistance allows the government to invest in sectors that do not pay back immediately, but ensures long-term sustainability of development. For example, taxing businesses and individuals heavily for spending on soft infrastructure like healthcare facilities, education, and nutrition will not help drive growth immediately. However, heavy investment in healthcare and education will ensure good health and quality of human resources in the future. Thus, foreign assistance helps domestic resource mobilization that can enable critical investments in some important areas of the economy. In the absence of a well-functioning revenue and tax generation capacity, such assistance has helped the country thrive in terms of public welfare and sustainable development.
Secondly, Official Development Assistance (ODA) does not come alone. It comes with technical support. Bangladesh might lack expertise to implement the projects effectively. But DPs come with a higher level of expertise to decrease the chances of implementational flaws. For example, Russia has not only assisted Bangladesh in construction of the Rooppur Nuclear Power Plant, but also provided training to Bangladeshi individuals to operate the power plant. Thus, a spillover effect of ODA is the enhancement of the quality of human capital in the country. Such technology and knowledge transfers have allowed countries such as China, India and Vietnam to build domestic capacity which further leveraged their FDI inflow.
Thirdly, Development Partners (DP) who provide ODA are also concerned with the outcome and efficiency of the development projects they have invested in. It helps Bangladesh in two ways. Since the DPs are concerned with attaining the intended outcomes, they focus on the transparency of the projects and thus higher levels of transparency can be achieved by assistance from DPs compared to internal resources like commercial bank borrowings or taxes.
Goals, Actors and Methods
In recent years, Bangladesh has seen unprecedented growth in foreign assistance which is not uncommon for developing countries. Most developed economies in Asia have seen a significant surge in foreign assistance in their early years of development. Singapore, now a developed country, has received significantly higher foreign aid throughout the early 70s to late 80s – in the two decades following which the country became a developed economy – same for Vietnam. Since 1986, the country’s foreign assistance has increased many folds until 2014, following which the country has seen unprecedented development. During the 60s, South Korea has seen huge amounts of foreign assistance, followed by massive industrialization and economic growth. The country finally joined the Organization for Economic Cooperation and Development (OECD) as a developed country in 1996. The same stands true for other major Asian economies such as Hong Kong and Malaysia.
Historical Foreign Aid Inflow to Major Asian Economies
In Million USD (since 1963)
No Data Found
Evolving Goals
Composition of foreign assistance disbursement has changed over the years. The share of grant is declining and the share of loan is gradually ascending. The share of grant and loan of disbursed assistance was 90.5% and 9.5% respectively in FY 1971-72 which stood at 6..4% and 93.8% respectively in FY 2020-21.
On the onset of its birth, Bangladesh struggled with providing food security and commodity supplies. Thus, food and commodity aid marked around 53-90% of total ODA in the first 10 years after independence. Commensurate with this nature of ODA, bilateral form of ODA accounted for 68-89% of total ODA. However, as the country strengthened its agricultural sector to achieve self-sufficiency in food production, food aids became negligent by FY 2000.
Important issues such as child mortality, sanitation, and education were still there and development assistance programmes predominantly focused on those areas. But with Bangladesh’s anticipated graduation from Least Developed Country (LDC) status in 2026, recently Bangladesh is receiving more assistance for projects, in the form of Project Aid (PA) to construct infrastructure for boosting self-sustained growth of the economy. For example, 33.1% of Bangladesh’s foreign assistance came as food aid and 52.39% came as commodity aid in 1973. But in 2021, 100% of the foreign assistance accounted for project aid. Hence, nowadays foreign assistance almost entirely means project aid in the context of Bangladesh.
Project aids are unique in nature as opposed to food or commodity aids. Food or commodity aids do not generate any output for years except for immediately ameliorating the sufferings of an underserved segment of the population. In contrast, when project aids are utilized to finance projects such as Dhaka Metro Rail, Matarbari Deep Sea Port, these projects start generating socio economic output for years after years. A deep sea port constructed by leveraging foreign assistance from Japan International Cooperation Agency (JICA) increases ease of import, saves time & cost, and boosts the overall economic growth. Although concerns surrounding effective and efficient utilization of the project aids are reasonable concerns and need to be ironed out, there is no denying that this form of foreign assistance plays a pivotal role in shaping the economy of the country.
Sectorwise Project Aid
In FY 20-21
No Data Found
Public administration, transport & power sectors are the largest current recipients of Official Development Assistance (ODA) and now constitute the majority of ODA.
Foreign Aid Inflow to Bangladesh by Purpose
Since Independence (Million USD)
No Data Found
Diversified Development Partners
With evolving priorities, it is crucial to form partnerships with the developing partners (DP) who align with the country’s priorities best and diversify DPs at the same time to manage risk.
Foreign Aid Inflow to Bangladesh by Type of DP
Since Independence (Million USD)
No Data Found
Multilateral assistance has increased over the years. The share of bilateral assistance has decreased from 85.7% in FY 1971-72 to 55.1% in FY 2020-21. In contrast, the share of multilateral assistance has increased from 14.3% in FY 1971-72 to 55.1% in FY 2020-21. However, there is an ascending trend in the share of bilateral assistance since FY 2010-11 compared to the past couple of years.
The International Development Association (IDA) of the World Bank has always remained Bangladesh’s largest development partner, followed by Asian Development Bank (ADB). From FY 1971-72 to FY 2020-21, IDA has disbursed around 24,971.5 million USD, and ADB provided 17,952.5 million USD. Japan provided an foreign assistance of 16,189.2 million USD – becoming the third largest development partner among all the development partners and largest bilateral donor in till FY 2020-21.
In terms of grants, the entire UN System has provided around 4,407.4 million USD till FY 2020-21 – standing as the largest donor. Japan is the largest bilateral donor and second largest donor since independence – contributing around 3,480 million USD in form of grants till FY 2020-21.
Japan International Cooperation Agency (JICA), Japan Bank for International Cooperation (JBIC), Japan Interna Cooper Center (JICE), and Japanese Grant Aid for Human Resource Development Scholarship (JDS) – these 4 organizations are largely providing foreign assistance to Bangladesh.
In recent times the share of ADB’s assistance has decreased and Japan, the largest bilateral development partner of Bangladesh has risen above ADB and became the 2nd largest development partner.
From FY 1971-72 to FY 2020-21, the United States has provided 763.5 million USD in form of loans whereas it heavily contributed in form of grants – supporting the country with grants of 2,800.5 million USD. The United States is the 7th largest development partner of Bangladesh, operating through 3 organizations – United States Agency for International Development (USAID), United States Department of Agriculture (USDA), and Mennonite Central Committee (MCC).
From North America, Canada, besides USA, is the 9th largest development partner which has disbursed around 2,214.4 million USD till FY 2020-21.
The United Kingdom is the 8th largest development partner – which has disbursed around 2,725 million USD (2,636.3 million USD as grants and 88.7 million USD as loans) till FY 2020-21. Among the European countries, Germany is the second largest bilateral assistance provider of Bangladesh and 10th overall largest partner – supporting the country with 2,164.3 million USD till FY 2020-21. The Netherlands is the 3rd among European countries and 15th among all the development partners. The European Union is the 11th largest development partner of Bangladesh since Bangladesh’s independence.
Among the Nordic countries, Denmark, Sweden and Norway played a pivotal role in providing foreign assistance to Bangladesh since the country’s birth – becoming the 16th, 18th and 20th largest development partner of Bangladesh respectively.
China’s share has risen significantly in recent years as a bilateral development partner, becoming the 6th largest development partner of Bangladesh – strengthening the South-South Cooperation. Even though China’s assistance increased 4 times from 2016 to 2019, it slowed down later. After 2021 the rise in assistance from China has been very steady.
Cumulative Commitment of Major Development Partners
in Million USD (Source: Flow of External Resources into Bangladesh by ERD, Press Releases of ERD in 2022, and Yearly Borrowing Plan of ERD FY 2022-23)
No Data Found
Does it Mean a Chinese Debt Trap ?
Clearly, it does not. As of 2021, only 8% of Bangladesh’s debt liabilities are to China, significantly less than IDA, ADB and Japan to whom we have 36%, 23% and 18% of our total debt liabilities respectively and 77% cumulatively. China’s Asian Infrastructure and Investment Bank (AIIB) also does not have any major share in Bangladesh’s foreign debt.
But it is important to open up new avenues of financing. Bangladesh has become a member of the New Development Bank (NDB) established by the BRICS countries which can provide an alternative avenue for development financing.
Debt Liabilities to Major Development Partners
As of FY 2020-21 (% of total debt liabilities)
No Data Found
The global south has increased cooperation between them. As part of the increased South-South Cooperation (SSC), we have noticed an increase in the flow of funds from countries in the global south. India is the 13th largest development partner of Bangladesh till FY 2020-21. India has disbursed around 1,477.8 million USD till FY 2020-21 of which 1,058.6 million USD in form of loans and 419.2 million USD in form of grants. Saudi Arabia is the 17th largest development partner of Bangladesh – provided around 1,061.8 million USD till FY 2020-21.
Bangladesh also receives concessional loans and grants from Southern multilateral institutions. The Islamic Development Bank (IsDB) is the 14th largest development partner of Bangladesh which has disbursed around 1,213.4 million USD till FY 2020-21. Since 1976, Abu Dhabi Fund for Development has been involved in Bangladesh. Kuwait Fund for Arab Economic Development and SAARC Development Fund also strengthen the South-South Cooperation in Bangladesh.
Disbursement as % of Total Available
Disbursement of Project Aid as % of total available
No Data Found
Difference of Methods
- Output Orientation – Development partners are concerned with the outcome of the assistance they provide which is why there is an increased emphasis on the outcome of the assistance being provided. There are pre-agreed result metrics that Bangladesh should achieve. Previously, the main concern regarding foreign assistance was the quantity of assistance, which has shifted to the quality of assistance in recent times. Nowadays, development assistance is aligned with the interests and socio-economic situation of the recipient countries according to the UN Conferences on Financing for Development’s Addis Ababa Action Agenda and Paris Declaration on Assistance Effectiveness of the OECD countries – instead of being “One-Size-Fits-All”. Both the UN system and OECD countries comprise a significant part of the development assistance programs around the world. The recipient countries have also formed their alliance, the Global Partnership for Effective Development Cooperation. All their goals align in one place – a strong outcome orientation aligned with the interests of the recipient countries.
On the other hand, the method of disbursement of loans has changed significantly in recent years. There are two predominant approaches to disbursement of project aid –
- Cash on Delivery Approach – These are Reimbursable Project Assistance (RPA). In this case the recipient country has to finance the project themselves and after completion of the project, only after achieving the satisfactory level of pre-agreed development outcomes, the development partners usually reimburse the expenditure of the project.
- Foundational Approach – In this case, Bangladesh has to submit a detailed project proposal outlining the implementation costs and the outcomes of the project. Upon the satisfaction of the development partners, they provide development assistance to the recipient country.
- Grants vs Loans – During the earlier years after independence, Bangladesh used to receive huge amounts of grants that needed no repayment. But as the country developed, the grants got replaced by loans since the economic condition of the country kept developing. Now Bangladesh receives very little grants in crucial sectors. Especially since the country began hosting the Rohingya refugees, assistance targeted at the Rohingya refugees started to come in.
Foreign Aid Inflow to Bangladesh by Type
Since Independence (Million USD)
No Data Found
- Interest Rate – Fixed vs Floating
As mentioned earlier, development assistance used to be a cheap option for the country. Bangladesh’s graduation from the World Bank’s low-income category to lower-middle-income status means that the country is no longer eligible for what is called a ‘soft loan’ from the World Bank. For soft loans, the interest/service charge is very low, at 0.7% per annum, with 40 years’ maturity and 10 years’ grace period. Assistance committed in recent years have much tighter repayment policies, i.e., lesser grace period and repayment period.
In terms of the World Bank, the International Development Association (IDA), which offers soft loans, refills its fund and disburses loans by calling replenishment rounds—meetings that take place every three years. The 20th (IDA20) replenishment round, which took place in 2021, was the most recent one. IDA20’s three-year lending program, which will take effect in July 2022, approved a USD 6 billion loan for Bangladesh. This loan’s interest rate, which is 33%, is on market terms, also referred to as “non-concessional terms” in the business world. With respect to IDA19, the rate was about one-third less, or roughly 13.7% of the loan. With more non-concessional loans, lending organizations like the Asian Development Bank, based in Manila, are also following suit.
The lending conditions from Bangladesh’s bilateral partners are likewise becoming more restrictive. The grace and maturity periods for loans from China and Russia are shorter than they were ten years ago, and the interest rates are greater. These have been significant components of Bangladesh’s loan portfolio since the 2010s. Less favorable terms apply to these borrowings: suppliers’ credit has a grace period of four to five years and a maturity period of fifteen years, while buyer’s credit has a grace period of two to three years and a maturity period of twelve to fifteen years.
48% of Bangladesh’s outstanding loans from China are either buyer’s credit or supplier’s credit. These have stricter conditions and higher interest rates than before (2.2-3.25% for buyer credit and 3.5-5% for supplier credit). They also charge expensive service fees.
Current Nature of Bangladesh’s Foreign Debt
Soft loans usually have 1-1.5% interest rate. Harder loans have higher interest rates. There are floating interest rates based on London Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR). These are market-based rates that fluctuate over time. Thus, makes the loan based on a floating exchange rate. LIBOR and EURIBOR rates can be as low as below 1% to as high as 4-5% based on market forces.
Analyzing data released by Economic Relations Division (ERD) of the Ministry of Finance (MoF), Government of Bangladesh (GoB) until FY 20-21, we have come up with the following summary –
As of FY 20-21, Bangladesh has a total loan commitment of 22069.746 million USD in LIBOR rate of which 10022.493 million has already been disbursed and 8953.908 million is outstanding and a total loan commitment of 1604.789 million EURO in EURIBOR rate of which 260.19 million is outstanding. Comparing it with the total amount of 5.8 billion total outstanding loans as of FY 20-21, this might seem to be a negligible amount. However, LIBOR rates have been low for a few years recently. Considering the future risk of LIBOR rates increasing, Bangladesh should enter swap deals to convert these floating rates into fixed rates. Already 10 such LIBOR swap agreements have been entered into
Can We Pay Back ?
In terms of paying back foreign debt, it is important to consider how the debt is being utilized. Funding subsidies and government’s fixed expenditure like pension and salary provides no future cash inflow. Rather, utilizing debt to construct infrastructure is more sustainable. Because the projects have their own cash inflow in future. For example – Padma Bridge has earned BDT 800 crore in one year. At this rate, it will take 35 years for the project to pay for itself. Hence, choosing profitable projects to spend on is crucial to self-sustain the projects in future.
Only comparing the year-on-year increase of foreign debt can be misleading because if debt drives economic growth then subsequently the capability to pay back increases. Therefore, we compare the debt to GDP ratio of Bangladesh since independence to provide a holistic visualization of debt servicing capability.
Debt to GDP Ratio
Bangladesh's Foreign Debt to GDP Ratio since Independence. Data approximated from graph published by External Resources Division, MoF, GoB.
No Data Found
The nation’s total public debt at the end of FY 21–22 was $166.1 billion, or 39% of GDP, far below the benchmark of 55%. Foreign loans make up $72.3 billion of the overall debt, or 17% of GDP, far below the threshold of 40% of GDP. Above is a graph showing the percentage of foreign debt to GDP. Earlier we had almost double the percentage of external debt to GDP throughout 2000-2005. Even though the amount of foreign debt has increased to unprecedented levels, comparing it with the GDP growth, the ratio of foreign debt to GDP has actually decreased, proving Bangladesh more resilient.
Yearly Debt Service Payments
During the Period 1973-2021 (Million USD)
No Data Found
Outstanding External Debt of Bangladesh to Bilateral Development Partners
As of 30 June, 2021 (Figures in Million USD)
No Data Found
Total Debt Servicing (TDS) Payments have increased over the past decade. However, the majority of those payments went for principal repayments.
Finally, TDS as percentage of exports is another important factor since TDS payments have to be made in foreign currencies. In 1987, 30.6% of Bangladesh’s export receipts went for debt servicing. Even in 2002 it was 9.8% of export receipts. However, in 2021 it came down to 4.7% of export receipts which is half of 2002. Therefore, Bangladesh’s debt repayment capability has increased over time. So the increased amount of foreign debt should not be a major concern. However, sustaining the amount of exports should be.
Total Debt Service Payments as % of Exports
During the Period 1973-2021 (%)
No Data Found
About the Authors
K.M. Najib Hayder is the Blog Manager at The Confluence. Formerly he has served as the Head of Policy Dialogue at Youth Policy Forum. A former debater, business graduate by chance and policy-enthusiast by choice.
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[…] setting up facilities such as power plants, sea ports, roads and physical infrastructure fueled by foreign assistance, it needs to ensure a profitable return for the economy. And a post-colonial country without […]