Bangladesh to drop 11 projects from Indian LoC due to prolonged process
The LoC size will be reduced to $4.68 billion, down from $7.34 billion
Highlights:
- The total LoC size will decrease from $7.34 billion to $4.68 billion
- "Umbrella-based" projects will no longer be included under the LoC
- Delays caused by lengthy approval processes, Indian consultant appointments, and multiple approval layers.
- Both nations agreed to accelerate the disbursement and implementation of ongoing projects
- Mandatory use of Indian contractors contributed to inefficiencies and slow project progress
- A joint committee will review and determine exit strategies for excluded projects
At least 11 of the 40 projects currently listed under the three Indian Lines of Credit (LoC) are set to be removed from the loan scheme.
This decision comes as projects in the approval stage or those approved but not yet under construction will be excluded.
Consequently, the total LoC size will decrease from $7.34 billion to $4.68 billion, according to officials from the Economic Relations Division (ERD).
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The agreement was reached during a bilateral LoC review meeting held on March 5-6 at the ERD office in Dhaka.
Mirana Mahrukh, Additional Secretary of ERD, and Suja K Menon, Director for Credit Lines at India's Ministry of External Affairs, led their respective delegations.
ERD officials stated that the recommendations from the review meeting will now be finalised by both governments. They described the two-day discussions as "fruitful," emphasising the mutual agreement to rationalise the LoC by carefully evaluating each project.
Future loan policy changes
The meeting also resulted in decisions to modify future Indian loan policies. Notably, "umbrella-based" projects will no longer be included under the LoC. Regarding ongoing projects, both sides agreed to expedite disbursement and implementation.
Challenges and criticisms of LoC implementation
Fahmida Khatun, Executive Director at the Centre for Policy Dialogue, highlighted the time-consuming nature of implementing Indian LoC projects, which typically involve 15 to 16 projects per loan. She pointed out that once a loan is disbursed for any single project, the grace and repayment periods for all projects under that LoC begin, creating a financial burden.
Fahmida also noted that both countries have cited reasons for the slow implementation. India blames Bangladesh for slow project proposal preparation, while Bangladesh points to capacity constraints in handling multiple proposals simultaneously, which limits fund disbursements.
Three LoCs
The first $1 billion loan agreement between Bangladesh and India was signed on 7 August 2010, with India offering $20 million. Additional loans raised the first LoC total to $862 million, covering 15 projects, 12 of which are completed, while the remaining three are ongoing.
As of June 2024, $768.7 million has been disbursed from the first LoC.
The second LoC, signed on 9 March 2016, for $2 billion, originally included 15 projects, with three later removed. Twelve projects are currently under this LoC, with $518.8 million disbursed by June.
Two projects, including the Khulna-Darsana and Parbatipur-Kaunia rail lines, were excluded from the LoC following the review meeting.
Other pending projects, such as the Syedpur Railway Workshop, Mongla Economic Zone, and Bangabandhu Sheikh Mujib Industrial City, remain in the approval stage and will be excluded from the LoC list.
The third LoC agreement, signed on 4 October 2017, for $4.5 billion, initially had 16 projects, but three were later dropped. To date, none of these projects have been completed, although eight are underway. For these projects, $513.2 million has been disbursed.
The construction of the Dual Gauge Railway Line from Bogura to Shahid M Mansur Ali Station, Sirajganj, has been excluded from the LoC due to delays in construction.
Additionally, five approval-stage projects, including the Syedpur Airport, Payra Port Terminal, and several infrastructure projects, will also be removed from the third LoC list.
Reasons for project removal
ERD officials explained that many LoC projects suffer from inadequate prior preparation. Project proposals are often developed only after the loan agreement is signed, followed by lengthy feasibility studies.
Implementation is further delayed by prolonged approval processes and the need for repeated consent from Indian authorities. The mandatory appointment of Indian consultants and multiple approval layers from India's Exim Bank contribute to these delays.
Furthermore, the requirement for Indian contractors, who sometimes neglect their responsibilities, and difficulties in securing contractors at the set price, adds to the problems.
Concerns over repayment and loan terms
Mamun-Al-Rashid, former planning secretary, noted that delays in Indian LoC-funded projects waste public funds. He emphasised the prolonged approval process, the "umbrella project" structure that lacks grace periods, and the mandatory sourcing of contractors and goods from India.
The LoC agreement provides a 20-year repayment period, including a 5-year grace period. However, the grace and repayment periods begin with the first disbursement. This leaves Bangladesh with significantly less time to repay the remaining loan amounts.
For example, the second LoC's repayment period ends on October 9, 2038, but only a fraction of the loan has been disbursed. The third LoC has also faced repayment challenges, with Bangladesh already paying principal, interest, and commitment fees despite no project completions.
Repayment difficulties
Meanwhile, according to ERD data, none of the 13 projects under the third LoC, signed in 2017, have been completed. By mid-September, only $513.16 million had been disbursed.
As the 5-year grace period has ended, Bangladesh is now repaying the principal. The government has already paid nearly $13 million in principal, interest, and commitment fees.
If any funds from the third LoC are disbursed now, Bangladesh will not receive a grace period, and the 20-year repayment window will be further shortened.
Technical committee
ERD officials said a technical committee from both countries will review projects exiting the LoC framework. This committee will determine exit strategies for these projects.
For example, some projects, despite starting implementation, were unable to proceed with construction due to delays in appointing consultants or other reasons.
These projects will undergo a more detailed review to identify possible solutions. The technical committee will include representatives from the ERD, the Indian High Commission, the Indian Exim Bank, and the implementing agencies.
During the LoC review meeting, both countries agreed to lift the 75% mandatory procurement of goods for existing projects from India under LoC projects. However, for construction projects, the requirement to source goods from India has been reduced to 65%.
Officials said India has assured that further relaxation of this condition will be considered, depending on the project. For instance, in the Mirsharai Special Economic Zone development project, it has been proposed that 90% of the goods be sourced from Bangladesh, with only 10% from India.
