Bangladesh turns to AIIB for $1.5b budget support amid fiscal strain
$1.85b more is expected from World Bank and ADB this fiscal year
Highlights:
- Government seeks $1.5b AIIB loan for fiscal support
- Budget support covers deficits, reforms, and banking sector issues
- Bangladesh received record $3.4b budget support in FY25
- Slow revenue growth increases reliance on external budget loans
- AIIB loans costly, with up to 6% interest
- Rising foreign debt raises concerns over repayment and sustainability
The government has approached the Asian Infrastructure Investment Bank (AIIB) for $1.5 billion in budget support for the current fiscal year, reflecting a growing reliance on high-interest external financing to manage fiscal deficits and support reform initiatives including those for the troubled banking sector.
Sources at the Economic Relations Division (ERD) said the request, under the Climate Policy-Based Budget Support Program, was sent to AIIB on 13 August, with preliminary assurances received from the lender.
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In a recent reply, the Beijing-based lender stated its team will follow up with the ERD, Finance Division and relevant ministries to further discuss and assess the proposed programme. "We remain committed to working closely with all stakeholders to take this process forward in a timely and constructive manner," it read.
Besides AIIB, the government expects $1.85 billion more in budget support for the current fiscal year from the World Bank and Asian Development Bank (ADB), ERD and finance ministry officials said.
They added that budget support is used in covering deficits and bolster reserves, with the exact requirement for the current fiscal year to be finalised after the second quarter.
Zahid Hussain, former lead economist at the World Bank's Dhaka office, said budget support is intended to back reform initiatives. He explained that, for instance, the banking sector includes several weak and troubled institutions requiring restructuring funds.
"Some may need to be liquidated, while others must be recapitalised," he said.
He added that implementing such reforms necessitates budget support. The key question, he noted, is whether the programmes receiving support contribute to economic expansion, enhance competitiveness, or reduce risks.
"If they do, providing budget support is justified and makes economic sense," he added.
Record $3.4b budget support last fiscal
In the recently concluded FY25, the interim government secured a record $3.4 billion in budget support. According to ERD, budget support loans have risen sharply in recent years, accelerated by Covid-19 and the Ukraine-Russia war.
Disbursements were $1 billion in FY20, rising up to $2.59 billion in FY22 mainly on support for pandemic response.
According to NBR data, revenue collection in July and August rose 21% year-on-year but fell short of the target by Tk6,500 crore. Officials attributed lower revenue growth to last year's student-led uprising, which had slowed businesses.
Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said limited revenue has put pressure on budget execution, making budget support more necessary.
"Slower revenue collection forces the government to rely on budget support as an alternative, which previously came largely from the IMF, World Bank, ADB or Japan. Now, new sources like AIIB are also being tapped," she said.
Fahmida added that although such support mainly comes as loans, which increase government debt, the key is ensuring proper and efficient use of funds.
"If budget support is spent wisely, objectives can be met. Its necessity may fluctuate, but misuse and waste must be prevented to ensure optimal and effective use," she said.
Features of AIIB loans
ERD officials said AIIB loans carry market-based interest rates, making them hard loans that require high-level government approval.
The maturity period is 35 years, including a five-year grace period, with an interest rate reaching up to 6% if the current SOFR plus fee is calculated.
Previously, in June, the AIIB provided $400 million under the Climate Resilient Inclusive Development Program (Subprogram-2).
M Masrur Reaz, chairman and CEO of Policy Exchange of Bangladesh, said budget support has become essential due to macroeconomic challenges since June-July 2022.
"Pressures on foreign reserves and a near 40% depreciation of the local currency complicate the situation, making budget support crucial to maintain foreign currency supply, rebuild reserves, and stabilise exchange rates," he added.
Masrur added that post-Covid revenue shortfalls, high inflation, and slow growth have weakened the economy. With expected growth below 4% this fiscal year, government spending capacity is constrained, making budget support necessary.
He warned that rising foreign loans and repayment obligations are already alarming. "Any increase in non-concessional or hard loans could complicate debt management. Budget support or project loans should be prioritised for high-return sectors," he said.
Support from other sources
ERD officials said three budget support programmes are currently under discussion with the ADB, with at least $850 million expected to be secured under the lender's subprogram-2. The amount will be spent to strengthen economic management and social resilience.
Officials hope the loans will be finalised by June 2026.
Additionally, the ADB's Banking Sector Reforms Subprogram-2, included in its budget support pipeline, is expected to provide $500 million in 2027. Last fiscal year, the government received a maximum of $1.5 billion in budget support from the ADB.
Meanwhile, ERD officials said the World Bank recently shared a proposed $2.77 billion pipeline for the next two fiscal years, including a $500 million budget support proposal.
The government is also negotiating with the World Bank to secure this support within the current fiscal year, having received $1 billion from the bank in the previous year, sources said.
