Nearly half of foreign aid used to repay interest and principal

Economists fear pressure will increase in coming days

Abu Tahar

Bonik Barta graph

A significant chunk of the country’s development spending comes from foreign loan assistance. The government’s spending on repayment of interest and principal amount is gradually increasing. According to information from Economic Relations Division (ERD), different countries and donor organizations released $5.63 billion ($1 equals to Tk 117) in favor of Bangladesh in the first three quarters (July-March) of ongoing 2023-24 fiscal year. During this period, the government had to spend $2.57 billion on the repayment of interest and principal. Based on this calculation, nearly half of the loans (about 46%) released in first nine months of current fiscal was spent to repay the loan installments (interest and principal).     

Economists think that the pressure of repaying foreign loans will increase in coming days. They are of the opinion that installments of loans taken for quite a few mega projects will begin. In that case, the amount of released loan money and repayment of interest and principal could even be nearly same.

During July-March period of 2022-23, foreign loans of $5.36 billion were released. At that time, $1.73 billion was spent to repay interest and principal which represented over 32 percent of the released money.   

ERD statistics indicate that the repayment of interest and principal happened at a faster pace than that of release of loans in the first three quarters of the fiscal. Out of the repaid money in nine months, interest accounted for $1.05 billion. During the same period of the previous fiscal (2022-23) the interest payment stood at $485.9 million. The payment of principal amount in the first nine months of the current fiscal was $1.52 billion while during the same period of the previous fiscal it was $1.24 billion.

The government is spending more on importing and repaying debt than earning foreign currency, including from remittance and exports. As a result, foreign reserve cannot reverse the downward trend. According to the updated information of Bangladesh Bank, as of Thursday, the gross foreign reserve of the country, as per the central bank’s own calculation, stood at $25.27 billion. However, according to BPM6 mechanism, which is regarded as international standard, Bangladesh’s reserve stands at $19.82 billion.                

The pressure to repay the debt taken for implementing mega projects has been gradually increasing over the last few years. Experts fear that this pressure will further intensify once the debt repayment of Rooppur power plant, Matarbari power plant, Metrorail and Karnaphuli tunnel will begin. Till now, highest amount of loans in history of the country were taken for the projects in power and energy sectors. Of them, Bangladesh signed a loan agreement to take a staggering $11.38 billion for the construction of Rooppur power plant. The repayment for this loan will commence on March, 2027. Of course, ERD in March formally requested Russia to defer the commencement of loan repayment by two years (March, 2029).       

The government has taken out loans from the International Monetary Fund (IMF) in order to ensure foreign currency to repay foreign debt. Bangladesh has already received the second tranche of $4.73 billion loans. An IMF delegation has just concluded a visit to Bangladesh to discuss the release of the third tranche. The global lender is asking Bangladesh to carry out different reforms in order to get the loans. As parts of the reforms, IMF advised the government to be strict in earning revenue, including withdrawal of subsidy in power sector, return of defaulted loans and introduction of crawling peg system.   

“The maturity period of loans taken for few projects is going to begin. The repayment of interest and principal has begun. It is increasing gradually and in future this will go up even more. Reserve is going down, but the repayment of interest and principal is up. If the situation is not like this, our economic scenario could have been different,” Dr Mustafizur Rahman, distinguished fellow of Centre for Policy Dialogue (CPD), told Bonik Barta.        

He also said, “We are repaying the debt by selling services, electricity and gas as well as by collecting toll on the highways. The main reason for the increase in spending is the rise exchange rate. We need good governance to get out of this. We will have to opt for projects that are financially profitable to avoid big debt in future. Alongside, effort must be on to enhance the reserve through remittance and export earnings.  

Majority of the country’s development infrastructure is being implemented with the foreign assistance. Different projects are being implemented subject to the availability of overseas aid. The size of annual development program (ADP) in 2022-23 fiscal was Tk 2.63 trillion. It was downsized to Tk 2.45 trillion due to the failure to spend money. Of the amount, the target of foreign loans was Tk 940 billion. In the revised ADP, the targeted foreign loans also went down to Tk 835 billion. A target of taking foreign loans of Tk 1 trillion has been set for ADP for the upcoming 2024-25 fiscal. The amount is the highest in the country’s history.

For the release of less amount of foreign loans, economists blame the slow pace in implementing the projects. They say that significant chunk of the foreign loans comes centering the projects. Therefore, reforms are needed to fix this.   

“Foreign aid already in the pipeline is not coming to the country due to lack of our capability. It would have been possible to get more of the promised money released if there was more pace in implementing the projects. This would have decreased the repayment of debt against the released money. So, structural reforms are necessary for increased capacity,” Mohammad Muslim Chowdhury, former Finance Secretary and Comptroller and Auditor General (CAG), told Bonik Barta.

ERD data show that World Bank, Asian Development Bank (ADB) and Japan pledged the maximum amount of loan assistance in first three quarters of the current fiscal. The World Bank pledged $2.62 billion and released $1.4 billion. ADB promised $1.42 billion and released $967.3 billion. The promised and released money from Japan was $2.04 billion and $1.36 billion respectively.               

MA Mannan, Chair of the Parliamentary Standing Committee on Ministry of Planning, was not immediately available for comments.

But, he told Bonik Barta recently, “We hope that in the coming days not only debt, earnings will also go up. Economy is expanding, growth is taking place. Earnings will also increase. We have invested a lot in infrastructure and expect a good return from that. And, we are already getting some return.”

“But, we have to remember one thing. We borrowing in dollars, but earning in takas. Now, we have to increase earnings in dollars. That means, earnings will have to be increased through diversifying exports. Alongside, remittance should be enhanced,” he said.   

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