Decades of foreign-funded local governance projects yield little while debt mounts

Highlights:

• Foreign-funded governance projects delivered limited gains, increased Bangladesh's debt burden
• ERD opposes high-interest foreign loans for non-revenue governance projects
• Donor-funded local governance projects failed to achieve sustainable reforms
• Loan funds largely spent on consultants, trainings, workshops, not structural change
• ERD questions UGDP-II's economic justification and higher interest costs
• RAISE project failed to create jobs while adding future debt risks

Despite 25 years of foreign loans for local governance and capacity-building projects, Bangladesh has seen limited gains while debt burdens and dependence on external financing have increased manyfold, according to an assessment by the Economic Relations Division (ERD).

In a recent meeting, ERD officials flagged problems with projects under the Local Government Division (LGD) and objected to initiating or continuing them in phases, citing high interest rates and the ineffective outcomes of past initiatives.

For example, the Tk1,151.5 crore Jica-funded Upazila Governance and Development Project (UGDP-I) had a concessional interest rate of 0.01%, whereas the proposed Tk2,310 crore UGDP-II, if undertaken, will carry a much higher rate of 2.35%. 

Officials also pointed to the World Bank-backed Recovery and Advancement of Informal Sector Employment (RAISE) project involving Tk2,440 crore, which failed to generate employment, providing only one-time handouts to some people, according to meeting minutes seen by TBS.

The meeting was held on 11 December at the ERD conference room in Sher-e-Bangla Nagar, Dhaka, marking the second fact-finding mission kickoff for the proposed Jica-funded UGDP-II, where ERD strongly objected to taking new foreign loans for the project's second phase.

Infograph: TBS

The session was chaired by ERD Additional Secretary and America–Japan Wing Chief Mohammad Mizanur Rahman, with the Jica delegation led by Fujii Teruaki.

During the meeting, the ERD said multiple donor-funded projects under the Local Government Division (LGD) – including three phases of the WB-financed Local Governance Support Project (LGSP), the UNDP-supported Union Parishad Governance Project (UPGP), and the Jica-funded Upazila Governance and Development Project (UGDP-I) – have fallen short of delivering structural or sustainable reforms.

Large portions of loan funds were spent on consultants, workshops, seminars, and training activities, while tangible administrative reform and durable capacity-building at the local level remained limited, ERD officials said, noting that similar objectives could have been achieved more efficiently through domestic financing and policy reforms rather than foreign borrowing.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, told TBS, "Spending on capacity building or local governance does not produce direct financial returns. When such spending is financed through foreign loans, the risk increases significantly because the liability is in foreign currency."

"Without a clear answer to whether a project will increase foreign exchange inflows or reduce outflows, taking foreign loans cannot be justified," he added.

The ERD concluded that due to policy gaps, many projects suitable for domestic financing are instead being implemented with foreign loans. This trend, it warned, is making external debt increasingly costly and heightening future repayment risks – posing a growing concern for the country's financial stability.

Why is ERD against UGDP-II

According to ERD officials, UGDP-I involved Jica loans of Tk1,151.5 crore, while the proposed UGDP-II seeks $188.67 million (around Tk2,310 crore) at a sharply higher interest rate of 2.35%, compared with UGDP-I's concessional 0.01%. 

The ERD considers such high-interest borrowing unjustifiable for governance and capacity-building projects that do not generate direct financial returns.

Jica stated that UGDP-II builds on lessons from UGDP-I (2015–2025) and aims to institutionalise performance-based grants for upazila parishads and strengthen the capacity of elected representatives and officials.

However, the ERD questioned the project's economic basis. 

Quoting the meeting chair, official minutes noted: "Countries that succeeded at the early stages of development did not rely on loans for governance reform. Continued dependence on foreign borrowing will prevent the Local Government Division from building its own sustainable systems and governance structures."

The ERD also argued that the need for a second phase after a decade of UGDP-I casts doubt on the first project's effectiveness. Consequently, the ERD has instructed the Local Government Division to submit a consolidated evaluation of some projects – LGSP, UPGP, ELAG, and UGDP-I, and advised exploring government funding rather than foreign loans for UGDP-II.

WB-backed RAISE project under scrutiny

Similar concerns have been raised regarding the World Bank–funded Recovery and Advancement of Informal Sector Employment (RAISE) project. The ERD believes the project has failed to deliver sustainable employment outcomes, despite providing one-time incentives of Tk13,500 to migrant workers who returned home due to the Covid-19 pandemic.

Beneficiaries say the assistance was too small to create income-generating activities. Anjana Khatun, a returnee migrant from Sirajganj Sadar Upazila, said the money was quickly spent on household necessities. 

Sajjadur Rahman from Sharsha upazila in Jashore, who returned from Italy, said he attempted to start a small business with government support but found the amount insufficient to sustain any meaningful venture.

Running from October 2021 to June 2026, the RAISE project involves $200 million in World Bank loans. Of this, $150 million is being implemented through Palli Karma-Sahayak Foundation (PKSF), while nearly $50 million is allocated to the Wage Earners' Welfare Board (WEWB).

The ERD approved the PKSF portion, as the organisation disburses funds to beneficiaries at fixed interest rates, allowing the government to recover the loan. However, officials objected to an additional $75 million loan proposal for WEWB, noting that the funds are distributed as non-recoverable grants, making the loan financing policy inconsistent.

ERD officials said direct communication with beneficiaries in 20 districts showed that such small incentives were largely ineffective. As a result, the project's core objectives are not being met, while future debt repayment obligations continue to grow.

Zahid Hussain said social assistance and grants for the poor do not generate financial returns and should therefore be funded from domestic revenue rather than foreign loans.