Why Is Bangladesh Seeking a $5 Billion Soft Loan From China?

Why Is Bangladesh Seeking a $5 Billion Soft Loan From China?

The Bangladesh government’s decision to request a $5 billion soft loan from China for budget support to replenish foreign currency reserves and pay import bills is both puzzling and not surprising, at once.

Puzzling, because Bangladesh has not previously sought soft loans from China, especially such a large amount. In past years, Bangladesh borrowed from China for various projects; these are largely “supplier credit” and the highest amount China released was $1.1 billion in fiscal year 2023.

However, Bangladesh’s decision to seek soft loans should not come as a surprise considering the country’s ongoing economic crisis. The government seems to be on a loan-seeking spree in the wake of dwindling foreign reserves, downward spiraling of GDP growth and high inflation. The country needs money to meet its debt obligations and, according to a Bangladeshi think tank, is resorting to more borrowing to meet these obligations. Perhaps a vicious cycle is being created, mortgaging the future of the country.

The news of Bangladesh’s request to China became known at a time when Bangladesh and the International Monetary Fund (IMF) held staff-level discussions and the third tranche of Bangladesh’s $4.7 billion loan, amounting to $1.4 billion, was approved. The IMF loans are being released as Bangladesh is meeting certain conditions, some of which are highly detrimental to the common people – for example, rising fuel prices. Energy costs have already increased three times last year, and four more price hikes are expected to come by the end of the year.

The government’s moves to borrow are consistent with their efforts since the summer of 2022 to avert an economic meltdown and fit the pattern of borrowing since 2011. Between FY2011 and FY2023, total external outstanding public and publicly guaranteed (PPG) debt tripled, and debt servicing increased by 2.6 times. Domestic borrowing has also leaped.

However, the request to China for soft loans has economic and political implications.

The growing footprint of China in Bangladesh and the demonstration of its economic prowess over the past year have been discussed widely in the media and public discourse. The American Enterprise Institute (AEI), a Washington-based think tank, estimated last year that the total Chinese investment in Bangladesh is about $7.07 billion. Additionally, Chinese companies have received construction contracts worth $22.94 billion in different sectors. Bangladesh-China trade is highly lopsided, with China exporting goods to Bangladesh worth $22.90 billion against its imports of $677 million in FY2023.

Borrowing from China, as well as its investments in infrastructure projects under the Belt and Road Initiative (BRI) around the world, has been criticized as a “debt trap.” These loans have become a source of economic hardship for many countries, forcing them to compromise policy sovereignty. According to an analysis by the Associated Press, published in 2023, countries borrowing from China tended to spend that money to pay off foreign debt.

In some instances, borrowing from China has impacted a country’s relationship with multilateral institutions such as the IMF and the World Bank. The lack of transparency in Chinese loans and their use in projects with high ESG (Environmental, Social, or Governance) risks have prompted serious questions. Chinese-funded projects in Bangladesh are not free from such risks; instead, according to AidData, a U.S.-based research lab, 59 percent of BRI projects in the country are facing ESG risks. The proportion of this portfolio facing significant ESG risks has increased dramatically, from $1 billion in 2015 to over $12 billion by 2021. In addition, Chinese loans’ repayment schedules tend to be of shorter periods 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 loans are prone to be misused for political purposes and diminish accountability. In an illuminating study based on statistics from AidData, Andreas Kern, Bernhard Reinsberg, and Patrick E. Shea showed in 2022 that the co-occurrence of Chinese loans and IMF programs is highly problematic for governance and encourages corrupt leaders.

Loans and investments from China, particularly the former, come with a political agenda of increasing its sphere of influence. China’s assertive policy toward South Asia, using soft power in the past decade, is easily discernable. Bangladesh’s decision to lean on China shows that Beijing is making further inroads in the country and the region.

It is worth noting that the decision came within months of the 2024 election. In the run-up to the election, there were discussions about a geopolitical tug-of-war between China and the United States. China extended unwavering support to the Sheikh Hasina government, while the U.S. insisted on a free, fair, and inclusive election. Some analysts argued that the U.S. policy supporting democracy in Bangladesh would backfire as it would prompt Hasina to move closer to China.

India, which has provided unqualified support to Prime Minister Hasina since 2009, insisted that the U.S. should back off to prevent Hasina’s potential slide to China. The United States, in the wake of the engineered election of January 7, 2024, apparently stepped back. Ostensibly, the Indian argument was that it would be able to contain the Chinese influence on the Hasina regime although the record of the past decade was not indicating any success.

China’s influence on Bangladesh increased remarkably after 2009 when the relationship between India and Bangladesh has been described as a “golden era.” This development juxtaposed with the upcoming joint military exercise of Bangladesh and China, and the possibility of Chinese involvement in the Teesta project, indicates that the geopolitical great game in Bangladesh will be more intense.

Whether China would respond to Bangladesh’s request for the loan is yet to be seen, but given the record of lack of transparency of both the Bangladeshi and Chinese governments, Bangladeshis may not know what transpired. What, however, is well-known is that no forum in Bangladesh requires the government to explain why it must seek loans from China in addition to the loans it has secured from multilateral bodies. It is unlikely that the citizens would know what terms and conditions are being attached to the loans Bangladesh is seeking. Neither will it be discussed as to why the loans are being added to the earlier secured loans, which are reported to be creating pressure on Bangladesh’s loan repayment.

The absence of an accountable system of governance is making it possible for the government to unilaterally make decisions without any input from those who will have to bear the burden, financially and politically.

News Courtesy:

The Diplomates | May 9, 2024

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