Cost of project delay: Bangladesh misses WB grace periods

Highlights:

• Grace periods expired before projects finish, triggering early loan repayments
• World Bank approval precedes Bangladesh's slow project preparation process
• Undisbursed $1.93 billion still accrues repayments and fiscal pressure
• Grace periods never extend, shrinking concessional financing benefits
• Government shifting to negotiate loans only after full readiness
• Early repayments strain budgets, reserves, and long-term debt sustainability

Imagine a factory owner forced to start repaying bank loans before the factory produces a single product. Inevitably, financial stress and eventual default would almost be assured.

That, in effect, is what is happening to the Bangladesh government. The key difference is that, unlike private borrowers, governments do not default; instead, the repayment burden is passed on to taxpayers.

A recent review by the Economic Relations Division (ERD) shows that grace periods of four to six years have already expired for 29 World Bank–financed projects, even though Bangladesh has failed to utilise $1.93 billion of the borrowed funds. As a result, loan repayments are beginning before many projects are completed, pushing up debt-servicing costs and adding to fiscal pressure.

Infograph: TBS

What a grace period is and why it matters

In international lending, a grace period refers to the initial, specified timeframe after a loan agreement is signed during which the borrower is not required to repay the principal amount. While principal repayment is deferred, interest may still accrue or be payable, giving borrowers time to start projects, generate returns and put financing structures in place.

Such grace periods are designed as a cushion, particularly for developing countries, allowing projects to become operational and deliver benefits before the burden of repayment begins. When that cushion erodes, repayments start early, often before projects are capable of generating economic or fiscal returns.

Structural mismatch at the core

ERD officials say the problem stems from a structural mismatch between the World Bank's financing framework and Bangladesh's project approval process.

Under World Bank rules, grace periods begin immediately after board approval. In Bangladesh, however, it often takes up to two years after board approval to complete feasibility studies, prepare development project proposals, secure inter-ministerial clearances and obtain final approval from the Executive Committee of the National Economic Council (Ecnec). Loan agreements are signed only after Ecnec approval.

As a result, a substantial portion of the grace period is consumed before projects even become operational.

ERD officials admit that negotiations with the World Bank frequently begin without adequate preparatory work. Once negotiations conclude, board approval follows relatively quickly, while domestic procedures move slowly.

"Our projects are like premature babies — they often need treatment, from extending completion timelines to escalating costs," a senior ERD official told The Business Standard. "We have decided we will not take loans without full readiness."

$1.9bn stuck after grace periods expire

According to the ERD report, several large projects still have substantial undisbursed loan amounts even though their grace periods have already expired.

These include the Western Economic Corridor and Regional Enhancement Programme (Phase I) with $444.64 million undisbursed; the Dhaka Sanitation Improvement Project ($144.18 million); Operation for Supporting Rural Bridges ($152.39 million); Livestock and Dairy Development ($141 million); the Regional Waterway Transport Project ($91 million); Enhancing Digital Government and Economy ($63 million); and Enhancement and Strengthening of Power Transmission ($54.66 million).

While disbursement deadlines can be extended, ERD officials noted that grace periods are never extended, permanently shortening the concessional window and eroding the benefits of low-cost financing.

Strategy shift — but only recently

A senior ERD official, speaking on condition of anonymity, said Bangladesh had previously entered loan negotiations without sufficient preparation, partly due to pressure from the World Bank.

That approach is now changing, the official said. Even when the World Bank signals that delays could result in financing being redirected to other countries, ERD is no longer accommodating such pressure. Instead, preparatory work is now being completed before negotiations begin, leading to delays in several planned loans in the current fiscal year.

While this may reduce World Bank lending in the short term, it lowers the risk of losing grace-period benefits, the official added.

Bay Container Terminal: five years on paper, four in practice

The $650 million Bay Container Terminal project highlights how grace periods shrink in practice.

The loan agreement was signed in April 2025 with a five-year grace period. However, under the World Bank's repayment schedule, the first principal instalment is due on 15 February 2029, effectively reducing the usable grace period to about four years.

ERD officials said implementation has begun but remains slow, with disbursements falling short of expectations, further increasing the risk of grace-period erosion.

In a statement sent to The Business Standard on 21 December, World Bank Operations Manager Gayle Martin said, "The World Bank Group's IDA provides financing on highly concessional terms. This means that IDA credits have a near-zero interest charge. Repayments start after a 5- to 10-year grace period, and are paid over 30 to 40 years. The grace period starts from the date of approval of the financing."

Approved but unsigned projects add to the risk

ERD officials also flagged risks from projects approved by the World Bank board but still awaiting loan agreements. These include the Strengthening Institutions for Transparency and Accountability (SITA) Project, approved on 12 June 2025 for $250 million, and the Bangladesh Clean Air Project, approved on 18 June last year for $290 million.

The Bangladesh Private Investment and Digital Entrepreneurship Project shows how the pattern repeats. The World Bank approved $500 million for the project on 19 June 2020, while the loan agreement was signed on 13 April 2021, leaving the project with a four-year grace period.

According to ERD data, Bangladesh lost $440.15 million in grace-period benefits. Nearly a year elapsed before the agreement was signed, followed by further delays during implementation.

Project officials cited slow tender processes, delays in appointing procurement consultants and compliance with World Bank regulations — challenges they said could have been avoided with better preparation.

Why grace periods matter

ERD officials said grace periods are designed to allow projects to be completed and benefits realised before principal repayments begin. When grace periods shrink, repayments start early, raising debt-servicing costs, increasing budgetary pressure and straining foreign exchange reserves.

Many infrastructure and social sector projects do not generate immediate revenue. Shortened grace periods weaken key financial indicators such as Internal Rate of Return (IRR) and Net Present Value (NPV), while repayments must still be made in foreign currency amid global economic uncertainty.

Expert warning

M Masrur Reaz, chairman of Policy Exchange Bangladesh, said multilateral loans are considered concessional mainly because of low interest rates, long tenures and grace periods.

"When grace periods are missed, a major part of that advantage disappears even if interest rates remain low," he said. "Early repayments increase pressure on reserves, squeeze development spending and weaken long-term debt sustainability."

He added that structural reforms are needed, including stronger project preparation, better inter-agency coordination and closer alignment between board approval, loan signing and grace-period timelines.