‘Money is no problem’, but debt is

When the construction of the Padma Bridge was finally completed in 2022, Sheikh Hasina and her cronies gloated that they had shown the world that Bangladesh can build a bridge with its own money. 

Indeed, the bridge was almost entirely self-financed, though the construction cost was highly inflated. But this encouraged Hasina to make even bolder and arguably mistaken claims, such as the one from her speech on 22 December 2022. 

"Today we are financially independent. We have been able to self-finance 90% of our development projects. We want it to continue." 

Looking at the current state of the economy, marred by high inflation and dwindling foreign reserves, her comment did not age well. 

"Sheikh Hasina's philosophy of development was building shiny, new, expensive megaprojects," said Jyoti Rahman, an applied macroeconomist based in Australia. And these megaprojects have questionable returns.

Bangladesh's pursuit of large-scale infrastructure development had become a defining feature of its economic strategy under the Hasina regime. Projects such as the Padma Bridge, Rooppur Nuclear Power Plant (RNPP), and Dhaka Metro Rail have symbolised the country's ambitions to modernise and enhance connectivity. 

However, these projects have come at a steep cost, as Bangladesh's external debt has skyrocketed, raising concerns about the country's ability to service its loans and manage its fiscal responsibilities. 

A surge in external debt

Since 2009, Bangladesh's external debt has ballooned from $23.5 billion to an astonishing $103.79 billion as of June 2024 — a 341% increase in just 15 years. Much of this debt has been incurred to finance the government's ambitious infrastructure plans, with foreign loans becoming the primary means to fund the so-called development agenda. 

"If the Zia regime could build a barrage over the Teesta four decades ago with domestic finance and technology, then why should we doubt the Hasina government's ability to build a bridge over the Padma? What matters is that she left the country in huge foreign debt and a wrecking economy by building other megaprojects with inflated price tags and using foreign loans."

Jyoti Rahman, applied macroeconomist

The growing reliance on external financing has significantly altered the country's financial landscape, leaving it vulnerable to debt servicing challenges and increasing its exposure to foreign creditors.

The per capita debt of Bangladeshis has risen dramatically as a result of this borrowing spree. In the last three years alone, the per capita foreign debt has surged from Tk1 lakh to Tk1.5 lakh, reflecting the increasing financial burden on ordinary citizens. 

Despite these rising figures, the country's debt-to-GDP ratio of 39.8% as of June 2024 is still considered moderate by the IMF threshold. But the real challenge lies in Bangladesh's capacity to repay its debts, especially as global interest rates rise and the local currency depreciates.

Dr Zahid Hussain, former lead economist of the World Bank's Dhaka office, said, "Debt servicing is draining our foreign reserves. It is creating shortages in other sectors. We have seen bills overdue in the power sector. So, even if our debt-GDP ratio is still not bad, our lack of liquidity will create troubles." 

Debt-driven development

The infrastructure megaprojects that Bangladesh has pursued over the last decade, while impressive in scale, have also been plagued by inefficiencies, cost overruns, and corruption. These projects, while necessary for Bangladesh's economic growth, have been accused to be fraught with financial mismanagement.

The Dohazari-Cox's Bazar-Ramu-Ghundhum railway project, for example, was originally estimated to cost Tk18,034 crore. After revisions under the interim government, the cost was reduced by Tk6,600 crore to Tk11,434 crore. The project is being funded by the Asian Development Bank (ADB). 

Similarly, Tk2,500 crore from the China-funded Tk39,247 crore Padma rail-link project was also cut, revealing the significant over-invoicing and mismanagement in these projects. These savings highlight a broader issue: the inflated costs of Bangladesh's megaprojects, which have often been driven by corruption and overestimation of expenses.

Furthermore, many of these projects have been financed through non-concessional loans, as research by the Centre for Policy Dialogue (CPD) showed; meaning that they carry higher interest rates and shorter repayment periods than concessional loans. 

As a result, Bangladesh faces steep repayment obligations, with interest payments starting from the day loans are disbursed, even if the projects are not yet completed. 

Most of these projects will take 15-20 years just to repay the loans from external sources. While the long-term outlook may seem promising, current data paints a grim picture. The contract for the RNPP project exceeded the total development budget for FY2016 when the deal was signed, and it is still not operational. Moreover, we have yet to pay $587 million in overdue interest, commitment fees, and late fines on Russian loans. 

Regarding the reasons for the higher per capita debt, Dr Zahid Hussain said, "It rose as the loans were not utilised appropriately, and in fact, a portion of the funds may have been returned abroad through capital flight.

"Expensive contracts were signed for implementing projects financed by foreign loans, and looters sent their funds abroad," he further said. "Corrupt practices in project management and poorly chosen projects also fuelled the problem."

A toxic combination of corruption and financial mismanagement

One of the major factors contributing to Bangladesh's rising debt burden is the pervasive corruption and inefficiency that have marred its megaprojects. Investigations into several infrastructure projects have revealed massive over-invoicing and corruption.

For instance, in June 2017, the World Bank Dhaka office at a press conference said Bangladesh spends much more than China and India for constructing per kilometre of roads. High corruption,  work not being finished in stipulated time, and no competition in the tender process lead to this high cost.

The World Bank then said the cost was estimated at $6.6 million for four lanes between Rangpur-Hatikumrul, $7 million for Dhaka-Sylhet highway, $11.9 million for Dhaka-Mawa highway, $2.5 million for Dhaka-Chattogram highway and $2.5 million for Dhaka-Mymensingh highway. However, in India, four lanes cost just $1.1-1.3 million and in China, it costs $1.3 million to $1.6 million.

Similarly, the Bus Rapid Transit (BRT) project in Dhaka became the world's most expensive BRT system, with costs skyrocketing to $26 million per kilometre, while the global average is between $5 and $20 million. It took four years just to hire a consultant and prepare the detailed design for the BRT project, highlighting the inefficiencies that can plague these ambitious undertakings.

The Cox's Bazar Rail Link Project also saw an increase of almost 10 times more than the initial project cost approved in 2010. 

Another example might be the metrorail. Dhaka's first Mass Rapid Transit (MRT) line is significantly more expensive than similar projects elsewhere. While Jakarta's 15.2 km MRT cost $69 million per kilometre and Lahore's 27.12 km line cost $60 million, Dhaka's 21.26 km MRT from Uttara to Kamalapur costs $157 million per kilometre — more than double.

The Rooppur Nuclear Power Plant is being constructed at a cost of $5,625 per kilowatt, significantly higher than the $3,125 per kilowatt cost of a similar plant in India. These discrepancies point to the inefficiency and lack of accountability that have plagued Bangladesh's infrastructure development efforts.

Moreover, inadequate project planning frequently leads to design errors being discovered after project initiation, necessitating modifications at later stages, which invariably delay the project and increase costs. 

For example, though a feasibility study on constructing the Payra Sea Port project's jetty was undertaken by the Bangladesh University of Engineering and Technology (BUET), no hydrological survey was conducted because of a lack of funds.

Additionally, it was not clear what types of vulnerabilities the jetty faced; later, steps were taken to overcome the vulnerabilities. These changes inevitably increased the costs of the project. 

Another example is the Karnaphuli Tunnel, where a major design flaw was discovered after the construction was 75% complete. Even today, the project is bleeding money, as toll revenues cover only 30% of its expenses, resulting in a daily loss of over Tk26.50 lakh and accumulated total losses exceeding Tk90 crore. 

The burden on debt servicing 

Bangladesh's growing debt burden has created a vicious cycle of borrowing. With debt servicing costs rising, the government has been forced to take on more loans to meet its repayment obligations. And a lot of the terms and conditions of these loans, especially from China or Russia, are opaque. 

In FY24, Bangladesh's foreign debt servicing rose by 25.73%, with the government paying $3.35 billion in interest and principal. This trend is expected to continue in the coming years, as more loans come due and the grace periods for existing loans expire.

The country's dwindling foreign exchange reserves have also added to the challenges of debt repayment. As of mid-September 2024, Bangladesh's reserves stood at just $20 billion, down from $48.06 billion in August 2021. 

The depreciation of the Bangladeshi taka has further exacerbated the situation, making it more expensive for the country to service its dollar-denominated loans. With interest rates on foreign loans rising from 1-2% a few years ago to 8-9% today, the cost of borrowing has become unsustainable for many sectors of the economy.

"If growth is more than the interest rate, then debt-stress will be less," said Dr Zahid Hussain. "But if the growth rate slows down, then it will be difficult to manage. Also, even if you increase your internal revenue, the foreign loans must be repaid in dollars. For this, you need to export more. But our export earnings are not yet increasing that quickly. 

"After our LDC graduation in 2026, we will lose a lot of our preferential market access. The interest rate will increase. Also, we will lose our special access to the EU markets after 2029. We will face stiffer competition in our export markets," Hussain added. 

Jyoti Rahman spoke about historical precedence when asked about Sheikh Hasina's claim of self-financing. 

"In the late 1970s, international donors didn't want to pay for a barrage over the river Teesta. Ziaur Rahman defied the donors — at a time when Bangladesh was actually far more reliant on foreign aid and grants than it is today — and started building the barrage in 1979.  It was completed in 1984, with Bangladesh's own money and technology. 

"And at that time, he famously said, 'money is no problem.' If the Zia regime could build a barrage over the Teesta four decades ago with domestic finance and technology, then why should we doubt the Hasina government's ability to build a bridge over the Padma?" 

He added, "What matters is that she left the country in huge foreign debt and a wrecking economy by building other megaprojects with inflated price tags and using foreign loans." 

If you look at other aspects of development, Rahman said, like human development or education, the growth rate of Bangladesh has slowed down during Hasina's regime, compared to the rate before. 

"The growth trajectory in many indicators apart from infrastructural development has slowed down. Her model of development is not sustainable for us," he added.

While Bangladesh's megaprojects have been intended to drive economic growth and modernise the country's infrastructure, they have also led to a growing debt crisis that threatens the country's financial stability. 

With external debt now exceeding $100 billion and debt servicing costs on the rise, Bangladesh must act swiftly to reform its fiscal policies, improve project management, and reduce its reliance on foreign loans. Without these reforms, the country risks becoming trapped in a cycle of debt, with devastating consequences for its economy and its people.