Only implementing efficiency can offset rises in foreign loan cost

As Bangladesh steps towards graduation from the status of a least developed country expected in 2026, new challenges are emerging. In 1972, food was a priority. For a few decades since then, the key focus was poverty reduction. Today, the challenge is to move upward – attaining the upper middle-income status by 2031.

To achieve this vision, Bangladesh needs to create jobs, develop a competitive business environment, enhance human skills and build efficient infrastructures. All these need money, huge investments, both public and private.

Bangladesh will need to invest $119.9 billion annually during the post-pandemic decade – from 2021 to 2030 – to achieve 7% GDP growth target set by the Sustainable Development Goals.

Being a bigger and faster economy compared to peers in the same LDC group, Bangladesh's investment need is the highest. While all the 46 LDCs will need a total annual investment of $462 billion to achieve 7% growth, Bangladesh alone will need about a fourth, according to Unctad's LDC report 2021.

Bangladesh Bureau of Statistics data shows Bangladesh's total investment amounted to $106 billion in the fiscal 2020-21, with the private sector accounting for 71% of it.

The share of investment in GDP is 22%, which needs to go above 36% if the country is to achieve higher growth rate needed to create jobs and sustain its success in reducing poverty.

In overall investment, public sector's contribution is still as low as 8% of GDP, despite a number of mega projects now in progress or in the pipeline.

More public investments are needed to build infrastructures to create an environment for the private sector to invest. Because it is the private sector that will create jobs and produce goods and services for both local and export markets.

Traditionally, local private sector is less interested in or capable of infrastructural projects because of the involvement of a large amount of money compared to much slow returns. The response the Public-Private Partnership Authority has got so far is not impressive for infrastructure projects.

The onus is, therefore, on the government alone to arrange funds required to build the much-needed public infrastructures.

But foreign funds are getting costlier for Bangladesh. Global lenders have started groundwork to review the terms of loans set for Bangladesh as a recipient of concessional loan as an LDC. Though the UN will decide on Bangladesh's graduation 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 concessions in interest rate and repayment period.

Funds will still be available, but the cost will go up by 3-4% from below 1% and the maturity period will be shorter from 30 years and above now.

The ERD has sounded a note of alarms as the World Bank's highly concessional International Development Association (IDA) loans carrying a flat 0.75% service fee are being replaced by "blend terms" loans with a higher interest rate and a shorter tenure.

Bangladesh has had to borrow a "good amount" from the World Bank's Scale Up Facility (SUF) at a floating interest rate, which is risk bearing, the ERD said in its annual report.

"These resources, however, are still cheaper than borrowing from the money markets. But Bangladesh should be ready to selectively use these kinds of resources for high priority programmes/projects that can generate future income, growth, and improvement in productivity, it suggests.

"But recent allocation of some of these relatively costly funds for the social sector, particularly for the health sector, returns from which would accrue to the economy over a longer period of time, is a cause for some concern," the ERD warns in the report.

The ERD itself finds "difficult challenges" to manage relationships with 33 development partners/organisations and overseeing 366 currently active programmes/projects spanning a wide range of fields.

It cites how the operationalisation of single-purpose vehicles (vertical funds) – the Green Climate Fund, the Global Environment Facility fund, the LDC Fund, the Adaptation Fund, Gavi, the Global Fund to Fight AIDS, Tuberculosis and Malaria, and the like – have complicated foreign resources management for Bangladesh.

Recent increase in commercial-type loans has pushed the cost of external funds for public investment to 1.3% in FY21 compared with 0.8% in FY16.

"As a result, debt servicing costs are likely to go up noticeably in the near future," it warns, referring to large amounts of budget support from the IFIs in recent times on LIBOR-based variable rate for procurement of Covid-19 vaccines, provision of health services, and for social sector programmes.

Although the ERD sees no immediate threat to external debt sustainability for Bangladesh, it feels that borrowing on market-based variable interest rates may become a curveball adversely affecting the external debt management in future, given the lack of appropriate skill and expertise to monitor the global financial markets.

Remedies?

Act prudently in allocating these costlier loans mainly for projects/programmes that have higher rates of economic and social returns – this is what the ERD suggests as a way to counteract the concerns regarding future hike in debt liabilities.

Bangladesh suffers from chronic inefficiency in implementing development projects, often riddled with cost and time overruns. Ministries are implementing foreign-aided projects worth over Tk18 trillion with dozens of projects revised for cost escalation and time extension more than once.

End of the easy-loan era will cost the exchequer much more if government agencies cannot implement projects in time and within the budget.

Before the maximum ceiling of lending rates was fixed at 9% by banks, private sector industries had to borrow money at 14% or higher. Even then businesses survived and thrived competing goods and services from abroad. Innovation and efficiency showed them the way.

The same recipe is for the public sector as well – efficient use of borrowed money.

"Reforming the institutional features to improve public financial management and particularly programme/project implementation capacity will be key to efficient and effective utilisation of high-cost foreign resources," the ERD report says.