Foreign loan commitments up but disbursements down

Rabiul Haque: Foreign loan commitments to Bangladesh have reached new highs and at the same time debt repayment pressures and costs have increased. However, despite the increase in promises, the discount has decreased. This figure has emerged in the data provided by the Economic Relations Department (ERD). During the July-November period of the current financial year, the foreign loan commitments given to Bangladesh increased by 1,170 percent and exceeded $5.85 billion compared to the same period of the previous financial year. This is indicative of the confidence among development partners to provide more financial assistance to the country.
On the other hand, foreign debt relief has been on the decline, while debt servicing costs have increased. This is putting more pressure on the country’s foreign exchange reserves as it dwindles. This makes it more challenging to maintain a stable balance in international payments. According to the data of ERD, during July-November of the current financial year, the foreign loan disbursement has increased by 14 percent to $2.12 billion. In comparison, debt servicing costs rose 51 percent, reaching $1.33 billion over the same period.
The officials of ERD said that the preparation was good in all the processes to go through for taking the loan. Due to this, many project loan agreements with development partners have been made possible in the first quarter of this financial year. Due to lack of preparation in the previous financial year, many projects could not be contracted at the beginning. The former chief economist of the Dhaka office of the World Bank Zahid Hossain feels that although the increase in pledges is promising, the real test will be how effectively these funds will be invested.
He said funding for the new project has been secured as a commitment from development partners. How much impact these new projects will have on public investment depends on the readiness of the implementing agencies to spend this money. There has been no change in the slow pace of project implementation in our country, a reality that development partners have now realized. So,the promise does not mean a discount; Here, increasing implementation capacity is the key to disbursement. The eminent economist further commented that if this important issue is not addressed, the promised money will remain in the pipeline and our development will not play a role.
Regarding the increase in commitments, he said, we see that the climate change, environment, agricultural support and social protection sectors are gaining importance for development partners in recent times. And the loan process in these projects is also speeding up. In the announcement of the International Monetary Fund (IMF) after the Marrakesh Climate Conference, it has been said to emphasize the financing of climate related projects in Bangladesh. A development platform has been made in this regard. Here various organizations, including the World Bank, are told about climate-related financing. As a result, the commitment of development partners to climate change-related projects can be expected to increase significantly. According to ERD estimates, the target is to collect $10.2 billion in pledges from various development agencies in the current fiscal year. In the first 5 months of the financial year, 57.3 percent of the commitments have been fulfilled. Last fiscal year, Bangladesh received $8.79 billion in loan commitments from development partners.
Why the disbursement has decreased: ERD officials said that due to lack of implementation capacity, government ministries and departments cannot implement projects on time. Which is the main reason for the withdrawal. Several initiatives are taken every year to increase the foreign debt relief. Like every year, there is a tripartite meeting of ERD and implementing agencies with various development partners including ADB, World Bank, Asian Infrastructure Investment Bank (AIIB). There was a discussion about the complications in project implementation. But, still many projects are stuck in disbursement or disbursement is slow. Former Director General and Economist of Bangladesh Development Research Institute (BIDS) Mustafa K. Mujeri said that there are some strict conditions in the foreign loan project, and the government agencies lack the ability to implement the project in accordance with these conditions. Along with this traditional trend, the current political situation has also affected the implementation of development projects. Due to the National Assembly elections, there is a backlog in government ministries and departments, which is hampering the effective implementation of the project. Besides, our economic crisis especially high inflation and reserve crisis has slowed down the implementation process significantly. He also said that the discount on foreign loans has decreased. ERD’s data shows a decline in loan defaults. Development partners released a record $10 billion in fiscal year 2021-22. Compared to that, in the last fiscal year (2022-23), the deficit was $9.26 billion. Still, there is a target of $11.2 billion in spending cuts this fiscal year.
Rising Debt Repayment Pressure: Meanwhile, Bangladesh’s foreign debt repayment pressure has increased due to the end of grace period for several major projects, increase in interest rates and economic slowdown in the global market. ERD officials say real repayments for major projects like the Bangabandhu Sheikh Mujibur Rahman Tunnel have begun as the grace period ends, which is the main reason for the increase in loan repayment costs. During the July-November period of the current financial year, the actual repayment of foreign debt has increased by 20 percent compared to the same period of the previous financial year. During the economic crisis, the government’s market-based loans and their floating interest rates also increased. Even two years ago, the secured overnight financing rate (SOFOR) on market-based loans was less than 1 percent, which has now risen to 5 percent. Which has intensified the external debt servicing pressure. As a result, interest payments increased by 136.5 percent during the July-November period of the current fiscal year compared to the same period of the previous fiscal year.
Commitments and disbursements, to whom and how much: In the first five months of the fiscal year, Bangladesh received more commitments from mainly three development partners. Its highest commitment of $2.06 billion has been received from ADB. In addition, a commitment of $1.5 billion has come from Japan. The World Bank has pledged $1.41 billion. On the other hand, Japan had the largest monetary deficit during the July-November period. Japan International Cooperation Agency (JICA) released $610.98 million during this time. Besides, ADB disbursed $444.27 million, Russia $493.96 million and World Bank $387.93 million.