Foreign aid: Will a few bandages suffice?

Imagine a patient suffering from anaemia; the doctor prescribes iron supplements. It will help his haemoglobin count increase. But will it be enough for the long term? For this, he will need to work on his diet and lifestyle. 

For Bangladesh, the reserve crisis has been a similar case. Since 2022, after the outbreak of Russia's invasion of Ukraine, the reserve has been on a downward spiral. At one point, Bangladesh needed an IMF bailout to keep the economic engine running. 

After 5 August, the situation started to look brighter for our foreign reserve. In July, the remittance inflow was the lowest in 2024 but the figure rebounded in August. Also, a number of our development partners, such as the IMF, World Bank, Asian Development Bank (ADB) and USAID have pledged loans and grants to the interim government. 

But unless the necessary reforms are carried out, will it work in the long run to cure the disease that has been eating away our foreign reserves? 

The lack of data authenticity and inflated figures during the past regime have obscured the true state of affairs. Thus, institutional reforms are essential to instil discipline and accountability within the economic system.

The challenges confronting Bangladesh are formidable. High inflation, dwindling foreign exchange reserves, inefficiencies in public project implementation, a low tax-to-GDP ratio and a weak financial sector plagued by high non-performing loans are just a few of the pressing issues. 

Furthermore, the country faces significant obstacles related to capital flight, unemployment, depression-induced poverty and inequality. Addressing these challenges will require a multi-faceted approach to governance and economic management. 

On 31 August, the finance ministry announced that the interim government received verbal confirmations of $3.5 billion in budget support from the World Bank (WB) and $1 billion from the Asian Development Bank (ADB). The government also expects budget support from the WB. 

This fund is critical for settling overdue power and energy import bills. Let's not forget that there is still an outstanding payment of $2.2 billion for electricity and energy imports. 

In addition to these commitments, Japan has also responded favourably to the government's request for budget support, prompting officials to prepare a wish list for $2.7 billion in aid from the Japan International Cooperation Agency (JICA).

Furthermore, the government is pursuing an additional $3 billion in budget support from the International Monetary Fund (IMF), building upon the $4.7 billion already agreed upon. And according to Dr Salehuddin Ahmed, the Finance and Commerce Advisor, the attitude of the IMF officials is positive. 

Now comes the question — will the aid help? Will the sectors in urgent need of funds get the money? For foreign aid to work, the government needs to ensure that the utilisation of the funds is transparent and efficient. Also, there should be accountability. 

"It is good to see all the loan pledges. But we must make the best use of the loans. For this, we need a good strategy for where we want to go as an economy. Some of the loan components will help stabilise the economy. 

But I am thinking beyond stabilisation to growth and development, both medium and long term," said Dr Syed Akhtar Mahmood, economist and former Lead Private Sector Specialist at the World Bank Group. 

Relying on World Bank or IMF funds to fix our budget deficit or gap in the balance of payment is not prudent.

"As the saying goes: something is better than nothing. Although the WB loan will not solve all woes, it would be satisfactory if the loan can be distributed to small enterprises and dampen the liquidity plus credit crisis which is overwhelming at this moment," said Dr Birupaksha Paul, a professor of economics at SUNY Cortland in the United States. 

"Let me focus on two subjects: employment and export diversification," he added, "These are separate subjects but also complementary. Some activities related to export diversification will create job opportunities for large numbers of semi-skilled workers while others will create opportunities for skilled workers. We need a strategy that creates a balance between these two paths." 

Dr Akhtar Mahmood cautioned. He said, "Bangladesh needs to avoid falling into a middle-income trap. This would require high rates of productivity growth and much-expanded exports."

"These, in turn, would require export diversification, moving beyond the cheap-labour paradigm to more sophisticated, higher value-added products or services, such as electronics, automotive parts, or chip design. Bangladesh needs to get a foothold in the global value chains of such products." 

Another important factor is to ensure better efficiency in using the aid. Bangladesh has an unflattering track record of implementing the Annual Development Programme (ADP). The ADP implementation in the fiscal year was the lowest in four years. 

Sectors crucial to keeping domestic economic activities running need to get the aid on a priority basis. The allocation of funds should be disbursed accordingly. 

"To make the best use of the loan promise, it would be wise to keep a portion of it in the reserve for meeting emergencies if any such need arises," said Dr Birupaksha Paul. 

He said, "The other part should be used to provide loans to SMEs which will generate more employment to subside the crucial pain of massive unemployment. Loans must be short-term in nature because of the uncertainty surrounding the next political choices."

It is a matter of great importance, as the tenure of the interim government is not fixed yet. In this kind of situation, it is important to ensure what reforms they are willing to pursue. 

"We need a good strategy that addresses things that the interim government can do within its term but also talks about things the elected government can do. It will be important to build consensus on the strategy here," explained Dr Akhtar Mahmood. 

Fixing a country teetering on the verge of economic collapse is a Herculean task. 

Dr Akhtar Mahmood said, "In many cases, we may find that our domestic resources are not sufficient to design and implement such policies and programmes, and we may go to the development partners for assistance."

To initiate this process, social governance reforms must be prioritised. Combating corruption and enhancing the efficiency of public institutions are equally important. 

Establishing a constitutional framework is crucial for creating an environment where businesses can thrive is important; as the businessmen have suffered a lot during the movement. Even now, Bangladesh is losing RMG orders due to a volatile political situation. 

To ensure the rule of law that will allow industries and businesses to grow and bring back the confidence of the investors, good governance is essential. Here, a grant of $202.25 million, targeting three key sectors: good governance, social, human and economic opportunities, and resilience, provided by the US Agency for International Development (USAID) may help. 

But once again, being too optimistic may end up unfulfilling. Dr Birupaksha Paul has said, "Economic woes are deep-rooted in institutional weakness and corruption that ran over the last 15 years, and solving them in a year doesn't seem reasonable or practicable." 

More rigorous evaluation of the projects funded by foreign aid is necessary. 

"We also need to have in place systems to monitor and evaluate the implementation of the projects. We should start with a good logical framework of project evaluation," Dr Akhtar Mahmood added. 

"What are the outcomes and impact we expect from the project? What outputs should the project produce in order to have that impact? And then we should have indicators to monitor and assess progress against the indicators." 

The current moment of aid inflow is welcomed, but it is imperative that the reforms are ensured first. By doing so, Bangladesh can not only address its immediate challenges but also lay a strong foundation for sustainable economic growth and democratic governance in the future. 

Taking all this into account, perhaps the most important point to make is that the interim government has a tall order. As challenging as things stand, the use of foreign aid must be scrutinised and assessed thoroughly to rebuild a system fresh off a 15-year-old rot and misuse. And perhaps it is fair to say that a few bandages are not going to fix it.