Why is Bangladesh asking for a 5 billion dollar loan from China on easy terms?
North East, May 11, 2024 : The Bangladesh government's decision to request a $5 billion loan from China on easy terms to replenish foreign exchange reserves and provide budgetary support to pay import bills is confusing but not surprising.
Perplexing because Bangladesh has never sought a loan from China before, especially for such a large amount on easy terms. In the past years, Bangladesh has taken loans from China for various projects. These are essentially 'supplier credits' and China's monetary concessions peaked (in FY2023) at $1.1 billion.
In any case, considering the country's ongoing economic crisis, Bangladesh's decision to seek loans on easy terms is not surprising. In view of dwindling foreign reserves, slow GDP growth and high inflation, the government appears to be running on borrowing. The country needs money to meet its debt (payment) obligations According to a Bangladeshi think tank, the country is increasingly resorting to borrowing to meet these obligations. And thus, a vicious cycle may be created by mortgaging the country's future.
The news of Bangladesh's request to China came at a time when Bangladesh and the International Monetary Fund (IMF) held staff-level talks and approved a third tranche of $1.4 billion of a total $4.7 billion loan to Bangladesh. IMF is giving loan waiver to Bangladesh as it fulfills certain conditions. Some of those conditions are very harmful to the common man – for example, rising fuel prices. Electricity costs have already tripled in the last year. Four more price hikes are expected by the end of this year.
The government's moves to borrow are consistent with its efforts since the summer of 2022 to avoid a recession and match the pattern of borrowing since 2011.
Between 2011 and 2023, total external outstanding public and publicly guaranteed (PPG) debt tripled. Debit servicing increased by 2.6 times. Domestic debt also jumped.
China's request for easy loans has economic and political implications.
China's growing footprint in Bangladesh and its display of economic prowess over the past year have been widely discussed in the media and public. The American Enterprise Institute (AI), a Washington-based think tank, estimated last year that total Chinese investment in Bangladesh was around $7.07 billion. Additionally, Chinese companies received construction contracts worth $22.94 billion in various sectors. Bangladesh-China trade is highly imbalanced, with China exporting goods worth $22.90 billion to Bangladesh (in fiscal year 2023) while importing only $677 million worth of goods from the country.
Along with borrowing from China, investment in infrastructure projects under the Belt and Road Initiative (BRI) around the world has been criticized as a 'debt trap'. This debt has caused economic hardship for many countries, forcing them to compromise the principle of sovereignty. According to an Associated Press (AP) analysis published in 2023, countries that borrow from China tend to spend that money on foreign debt repayments.
In some cases, borrowing from China has affected a country's relationship with multilateral institutions such as the IMF and the World Bank. The lack of Chinese debt transparency and the use of that debt in projects with high ESG (environmental, social and governance) risks have raised serious questions. Chinese funded projects in Bangladesh are also not free from such risks. Rather, 59 percent of the country's BRI projects face ESG risks, according to US-based research lab AidData. The proportion of this portfolio exposed to significant ESG risk has increased dramatically: from $1 billion in 2015 to over $12 billion by 2021. In addition, Chinese debt repayments are less time-consuming compared to loans from multilateral agencies.
There are also allegations that the absence of strict scrutiny of the use of Chinese loans encourages corruption. Studies have shown that Chinese debt tends to be misused for political purposes as well as reducing accountability. Andreas Kern, Bernhard Reinsburg, and Patrick E. Shia showed in a 2022 study that simultaneous Chinese borrowing and inclusion in IMF programs is highly problematic for good governance and encourages corrupt leaders.
Loans and investments from China—especially loans—have a political agenda to expand its sphere of influence. China's assertive policy towards South Asia using 'soft power' over the past decade is easily understood. Bangladesh's decision to lean towards China suggests that Beijing is making (more) inroads into the country and the region.
It is worth noting that the decision comes within months of the 2024 elections. Before the election, there was talk of a geopolitical 'showdown' between China and the US. China has extended its steadfast support to the Sheikh Hasina government. The US, on the other hand, emphasized on free, fair and inclusive elections. Some analysts argued that the US policy of supporting democracy in Bangladesh would backfire as it would push Hasina closer to China.
India, which has been unwaveringly supportive of Prime Minister Hasina since 2009; Insisted that the US must step back to prevent Hasina's possible move towards China. The United States has apparently retreated in the run-up to the January 7 election. Apparently, the Indian argument was that they would be able to contain Chinese influence on the Hasina government even though the record of the past decade (as such) does not indicate any success.
China's influence in Bangladesh increased significantly after 2009, a period described as the 'Golden Age' of Indo-Bangladesh relations. Along with this, the upcoming joint military exercises between Bangladesh and China and the possibility of China's involvement in the Teesta project indicate that the geopolitical 'Great Game' in Bangladesh will intensify.
It remains to be seen whether China will respond to Bangladesh's request for a loan. However, given the record of lack of transparency of both Bangladeshi and Chinese governments, Bangladeshis may not know what happened. However, the well-known fact is that the government of Bangladesh does not have to explain in any forum why it has to borrow from China in addition to borrowing from multilateral organizations. It can be said that the citizens do not know what conditions are being attached to the loan that Bangladesh is seeking. Why debt-burdened Bangladesh is adding this debt to its previous debt will not be discussed.
The reason why the government can unilaterally take such decisions without listening to those who have to bear this (debt) burden financially and politically is the absence of accountable governance.
[This article by Ali Riaz, Distinguished Professor of Politics and Government at Illinois State University, Non-Resident Senior Fellow of the Atlantic Council and President of the American Institute of Bangladesh Studies, Washington DC. Published in the prestigious 'The Diplomat' magazine on May 09.