By Salsabeel Khan
The net foreign financing has steadily increased with the increasing size of the budget to reflect the growing economy. In 2011-2019 the net foreign finance was Tk. 118 billion whereas it was Tk. 240.77 billion in 2016-2017 and budgeted to be Tk. 199.63 billion in 2017-2018.
Loans vs grants: the Shift in foreign financing
Foreign ‘aid’ is usually given to the government in the form of loans or grants. Loans carry the heavy burden of future repayment while grants are viewed as free resources and directly feed into the government’s overall revenue. The international development landscape is changing. Northern aid agencies are recognizing a broader range of financing instruments. Unless the aid giving is primarily motivated by humanitarian objectives, there is a global shift away from direct grants and countries are reluctant to give out ‘free money’. Bangladesh particularly faces this predicament upon the anticipated graduation from a lower income country to middle-income country.
The total of the grants and loans received, with money spent on loan repayment deducted, constitutes the net foreign financing. The net foreign financing has steadily increased with the increasing size of the budget to reflect the growing economy. In 2011-2019 the net foreign finance was Tk. 118 billion whereas it was Tk. 240.77 billion in 2016-2017 and budgeted to be Tk. 199.63 billion in 2017-2018. Despite this overall increase in foreign financing, the amount received from grants has remained the same over the last five years, averaging at Tk. 50.7 billion each year. This is in contrast to the amount received via loans which have increased and is a much greater proportion of our financing than grants.
This preference in financing through foreign loans can also be attributed to the lower interest rates on concessional loans compared to interest on domestic bank loans. On the flip side, concessional loans require proper institutional structure and overall transparency. There are higher repercussions concerning repayment and stricter rules in the process, especially in public procurement. When these conditions cannot be met, there is a large difference in the aid committed and the amount disbursed. Even if large loans are committed each year, only a fraction of it is disbursed due to inefficiency and inability. ERD officials attribute the cause for a large portion of unused funds to the implementation of projects being hindered by faulty design, and complexity in land acquisition. In practice when a loan agreement is signed with a development partner it is considered a commitment from that moment. Both countries have lengthy approval processes. While complexity in projects is part of the reason these resources are unused, we may be signing up for more than we can manage and sign agreements for loans under conditions that we cannot structurally meet.
If we do not have ‘our house in order’, we cannot meet the conditions for these loans in the targeted timelines.
From Accounts to Action: How Are We Using the Money?
During the period immediately after independence, Bangladesh received a significant amount and share of food and commodity aid in total aid. Since the early 1980s both food and commodity aid has declined. Bangladesh is closer to ensuring food security and is less dependent on aid, with a higher capacity for production and import. Today, almost all foreign assistance is used for project aid and is directed towards infrastructure development, especially transport, physical planning, water supply, housing, and power. The other economic sectors in which foreign aid is being disbursed is public administration and education.
Aid is used to finance the budget deficit as reflected in the budget speech for 2018-2019 where the Finance minister explicitly stated: “The overall budget deficit will be Tk.1,25,293 crore which is 4.9% of GDP. Of this, an amount of Tk.54,067 crore (2.1% of GDP) will be financed from external sources while an amount of Tk.71,226 crore (2.8% of GDP) will be financed from domestic sources. I believe that if we can use the huge external resources in the pipeline, we will be able to largely reduce our dependence on domestic sources and we shall, therefore, persistently make efforts to scale up the use of foreign assistance.” This also reiterates the government’s focus on disbursing foreign assistance that is committed at the beginning of each year.
Foreign assistance also finances the annual development program (ADP). Although, the contribution of foreign assistance is reducing (it less than 2% of the GDP in 2014), the government still needs a significant amount of aid to implement its annual development plan (over 30% of the ADP in 2014 was funded by foreign aid). The planning commission formulates the ADP of the government of Bangladesh in the light of basic objectives and goals stated in a Five-Year Plan. The share of foreign funds in financing ADP allocations was more than 70% until 1979-1980. In 2000-2001, 42.6% of project aid for ADP was from foreign sources. In 2015-2016, 27% of the ADP was funded by aid. This decline is used as an indicator for demonstrating a reduction in dependency on foreign aid (this reduction in dependency does not speak to any change or decrease in influence of donors in policy matters). Once again, the issue of insufficient disbursement arises as only 47.7% of aid allocated for ADP was utilized last year.
Assistance from Different Directions
In the early post-independence years, bilateral sources accounted for the bulk of the foreign aid the country received; however, by the early 1990s, the pattern began shifting in favor of multilateral sources. The main sources of multilateral aid for Bangladesh are the International Development Association (IDA- World Bank) and the Asian Development Bank (ADB). The IDA contributed 39.6% ($13 billion) of the foreign assistance in 2016-2017 and ADP contributed 18.7% ($749 million) of the foreign assistance. The highest source of foreign assistance from an individual country (not via multilateral funds) is from Japan at $645 million. Other significant sources of aid are UN organizations (especially UNICEF), USA, India, China, and Russia. Russia committed $11.38 billion for the Rooppur nuclear power plant project. Of the funds, $1 billion was spent in 2017-18 and the rest will be spent by 2023-24, the year when the plant is supposed to be fully implemented. South Korea’s contribution has almost halved from $60 million in 2011-2012 to $26 million last year. The foreign assistance from the UK has also drastically reduced from $106 million to $65 million in four years.
The Checks and Balance between Accountability and Effectiveness
Although Bangladesh could never use more than $4 billion of foreign aid a year, the government plans to utilize about $7.55 billion of aid in the fiscal year 2017-18. These targets are set with the intention of funding megaprojects and accelerating growth, however, the assistance needs to be properly monitored and allocated appropriately and used effectively. In order to help the country in its goal to better manage foreign aid, the UNDP has launched the Aid Effectiveness project. The main goal of the project is to “increase effectiveness, transparency, and accountability in the allocation, management and use of foreign assistance by strengthening national aid management capacities and systems.” The project has supported the Economic Relations Division in developing a homegrown online aid portal called Bangladesh Aid Information Management System that will help the country track and manage foreign aid flows. The online platform is accessible for citizens with a user-friendly dashboard to see the breakdown of projects, the status of approval, the implementing partner for each project among other details. Agencies (USAID, DFAT, etc) also display their data on their websites. While this access to information for is an improvement on a citizen level, measures must be in place for the effective utilization and allocation on a policy and institutional level.
*All data is collected from the Ministry of Finance budget reports and the Economic Relations Division (ERD), the primary agency of the government responsible for aid coordination and aid management.