Only implementation efficiency can offset increases in the cost of foreign lending
As Bangladesh prepares to graduate from least developed country status in 2026, new challenges are emerging. In 1972, food was a priority. For several decades, the focus has been on poverty reduction. Today, the challenge is to move forward – to reach upper-middle income status by 2031.
To achieve this vision, Bangladesh must create jobs, develop a competitive business environment, build human skills and build efficient infrastructure. All this requires money, huge investments, both public and private.
Bangladesh will need to invest $119.9 billion a year in the post-pandemic decade – from 2021 to 2030 – to meet the 7% GDP growth target set by the Sustainable Development Goals.
Being a larger and faster economy than its peers in the same group of LDCs, Bangladesh’s investment need is the highest. While the 46 LDCs will need a total annual investment of $462 billion to achieve 7% growth, Bangladesh alone will need about a quarter, according to UNCTAD’s LDC Report 2021 .
Data from the Bangladesh Bureau of Statistics shows that Bangladesh’s total investment amounted to $106 billion in the financial year 2020-21, with the private sector accounting for 71%.
The share of investment in GDP is 22%, which must exceed 36% if the country is to achieve the higher growth rate needed to create jobs and maintain its success in reducing poverty.
In overall investment, the contribution of the public sector is still as low as 8% of GDP, despite a number of megaprojects currently underway or in the pipeline.
More public investment is needed to build infrastructure to create an enabling environment for private sector investment. Because it is the private sector that will create jobs and produce goods and services for local and export markets.
Traditionally, the local private sector has been less interested or capable of infrastructure projects due to the involvement of large amounts of money versus much slower returns. The Public-Private Partnership Authority’s response has not been impressive so far for infrastructure projects.
It is therefore up to the government alone to organize the necessary funds for the construction of the essential public infrastructures.
But foreign funds are becoming increasingly expensive for Bangladesh. Global lenders have started preparatory work to revise the loan terms set for Bangladesh as an LDC concessional loan recipient. Although the UN decides on Bangladesh’s withdrawal in 2026, the World Bank and the Asian Development Bank – two major multilateral lenders – are in talks with the Economic Relations Division (ERD) to find ways to phase out the concessions in interest rate and repayment period.
Funds will still be available, but the cost will increase by 3-4% from less than 1% and the maturity period will be shorter from 30+ years now.
The ERD has sounded the alarm as the World Bank’s International Development Association (IDA) highly concessional loans with a fixed service charge of 0.75% are replaced by “blended terms” loans with higher interest rate and shorter term.
Bangladesh had to borrow a “good amount” from the World Bank’s Scale Up Facility (SUF) at a floating interest rate, which carries risks, the ERD said in its annual report.
“These resources, however, are always cheaper than borrowing from the money markets. But Bangladesh should be prepared to selectively use these types of resources for high priority programs/projects that can generate future income, growth and improved productivity,” he suggests.
“But the recent allocation of some of these relatively expensive funds for the social sector, particularly for the health sector, whose benefits would flow back to the economy over a longer period, is cause for concern,” warns the Minister. ‘ERD in the report.
ERD itself faces “difficult challenges” in managing relationships with 33 development partners/organizations and overseeing 366 currently active programs/projects covering a wide range of areas.
He cites how the operationalization of single purpose vehicles (vertical funds) – the Green Climate Fund, Global Environment Facility, LDC Fund, Adaptation Fund, Gavi, Global Climate Fund AIDS, tuberculosis and malaria, etc. – have complicated the management of Bangladesh’s foreign resources.
The recent increase in commercial-type lending pushed the cost of external funds for public investment to 1.3% in FY21 from 0.8% in FY16.
“As a result, debt servicing costs are likely to increase significantly in the near future,” he warns, referring to the large amounts of IFI budget support of late on the LIBOR-based floating rate for the purchase of Covid-19 vaccines, delivery of health services and for social sector programs.
Although the ERD does not perceive any immediate threat to Bangladesh’s external debt sustainability, it believes that borrowing at variable market-based interest rates could become a snowball negatively affecting debt management. in the future, given the lack of appropriate skills and expertise to monitor the global situation. Financial markets.
Act prudently by allocating these more expensive loans primarily to projects/programs that have higher economic and social rates of return – this is what the ERD suggests as a way to counter concerns about future debt build-up.
Bangladesh suffers from chronic inefficiency in the implementation of development projects, often plagued by cost and time overruns. Ministries are implementing foreign aid projects worth more than Tk 18 trillion with dozens of projects being revised more than once for cost increase and time extension.
The end of the era of easy loans will cost the treasury much more if government agencies cannot implement projects on time and within budget.
Before the maximum cap on lending rates was set at 9% by banks, private sector industries had to borrow money at 14% or more. Even then, businesses survived and thrived on competing goods and services from abroad. Innovation and efficiency showed them the way.
The same recipe also applies to the public sector: efficient use of borrowed money.
“Reforming institutional features to improve public financial management and particularly program/project implementation capacity will be key to effective and efficient use of high-cost foreign resources,” the ERD report states. .