Sri Lanka has been dependent on China, our sources are diversified

There is a large deficit between the rising infrastructural demands in Bangladesh and our capacity to address them. This deficit now has to be covered with foreign aid. 

In this circumstance, all the routes matter to us. While securing loans, however, we have to carefully look at the terms and conditions, interest rates, maturity periods, grace period. We also have to explore if there are any upfront payment issues and other conditionals. 

To get the best outcome, we have to make decisions based on these evaluations. Also, we have to actively search where we can get favourable terms.  

In that light, what the Indian Foreign Minister cautioned about large debts – there are plenty such examples in Latin America – and there is nothing to argue about. It is not only Bangladesh, every country should evaluate the factors I mentioned while taking loans for infrastructural projects. 

What the Indian FM said is about the supply side of debt, but on the demand side, the recipient country should evaluate whether we are prioritising the projects appropriately and correctly; whether the projects are aligned to our long term goals, if they are well integrated with other parallel investments, and whether it is being implemented with good governance on time. 

These are the responsibilities of a recipient country. 

So debt doesn't only arise because of the supply side conditionality. It also arises because of the weakness of the implementing country. This caution, as the Indian FM said, can originate from both in terms of where the loans are accessed from, and in terms of the quality of implementation. 

However, I don't think comparing the situation of Bangladesh with Sri Lanka is right. Sri Lanka has largely been dependent on China. But Bangladesh has more diversified sources. I think this diversification is important; there are Japan, China, India LOC, World Bank, etc here. Both in terms of bilateral and multilateral aspects, our sources are diversified. 

Making comparisons with Sri Lanka would not be right, but Sri Lanka's lesson is important for Bangladesh. The lesson is – while taking such loans we should consider if they are prioritised, consistent with the long term plan, that the positive outcomes expected from the projects in terms of other investments are well taken care of, also the issues of private investments are considered. 

If these considerations are ignored, you could fall into a debt trap like Sri Lanka – this is the lesson.  We are not comparable with Sri Lanka, but we should learn from them what we should do and what we should not. 

The investments from both China and India are necessary for long term development, middle-income journey, increasing our competitiveness and incentivising our private sectors. 

In our long term projects, the risks increase when we come across time and cost escalation, when governance is not right; and when there is no accountability during implementing the projects. It becomes risky when we cannot go through the negotiations and implementations properly. 

We have seen that some of our project costs are increasing. As a result, we will have to pay extra tolls, our service charge will increase and our private sector will lose competitiveness. So, we should be careful that these projects are implemented with good governance, with accountability and transparency. 

If we are not careful enough, we will not have the returns we expect in terms of internal rate of return (IRR), financial return and economic rate of return. 

Since these are a huge amount of money, debt servicing is essential. If our returns are good, we can ensure debt servicing. Bangladesh's debt servicing, outstanding total debt as a percentage of the GDP are still at a tolerant level. 

But now we are taking a lot of loans since there is demand in the economy. We have to be alert because the loan costs are high because of our middle-income journey. 

For example, we used to receive the World Bank loan at 0.75 percent. Now Bangladesh is not an IDA [International Development Association] country. It is now a blended country – blending of concessional and non-concessional loans. 

After a few years, it will become a non-concessional country. Our cost of borrowing will increase. So we have to be careful so that we can mitigate the risk factors. If we are careful enough, we can avoid debt traps like Sri Lanka. 

In terms of the Indian LOC, we have the issues of procurement, infrastructural development, connectivity, capacity building, etc. Here the implementation is getting delayed. The first line of credit was in 2010, the second in 2015 and the third in 2018. But till now only a part of the first and second LOC have been implemented. 

We had big hopes with Ashuganj International River Port that will connect North East, Aratola etc. But we couldn't develop it yet. 

As a result, we are being deprived of the returns that we might have. Also, we needed to implement the motor vehicle agreement. 

See we have a coastal shipping agreement, but we cannot implement the LOCs in accordance with these good policy initiatives.  

I believe that this is a large weakness in Bangladesh-India LOC. Although there is a high-level commission to address these issues, we don't see any tangible acceleration yet. And if they are not accelerated, the costs of the projects will increase as it will take re-negotiation, and more time will be wasted – we will fall into a vicious circle. 

Consequently, the special economic zone and private sector investments will see a lack of alignment. The private sector will not be able to reap the benefits. Our competitiveness, export diversification, market diversification and all other contributions it could make is being delayed.  

Professor Mustafizur Rahman is an economist and a Distinguished Fellow at CPD.

Disclaimer: This analysis has been written based on a telephonic conversation between the author and The Business Standard.