Bangladesh moves into crisis of aid utilisation
For quite a few years, Bangladesh has been enjoying respectable economic growth, improvement in social indicators, and diminishing roles of foreign aid. This has been paralleled by remarkable changes in foreign aid architecture and aid environment amid protracted global recession, rising violence and insecurity, and influx of refugees in Europe.
Against this backdrop, Bangladesh government and its international development partners are going to meet today at the two-day Bangladesh Development Forum (BDF) meeting in Dhaka after a gap of nearly five years.
The last BDF meeting was held in February 2010. This long gap between the two meetings is usually attributed to the Padma bridge controversy, precipitated by the withdrawal of World Bank funding from the project on corruption allegations.
Debapriya Bhattacharya, distinguished fellow of the Centre for Policy Dialogue (CPD), expressed his surprise as the BDF meeting this time did not attract much media attention as he had seen on previous occasions.
“Possibly the media people are busy with other events happening around us,” he said.
This may also reflect the diminished role that foreign aid currently plays in the Bangladesh economy, he added.
“We have come a long and successful way from the first Aid Group meeting held in Paris in October 1974.”
However, he feels there is a need to keep the county's aid relationship under constant scrutiny, not only for its quantitative dimensions, but also for its qualitative aspects.
Bangladesh received about $55 billion as foreign aid in nominal terms in last four decades. The economist said the role of foreign aid has been gradually declining since 1990s. Data shows, during 1995-2004, foreign aid accounted for 2.9 percent of Bangladesh's gross domestic product (GDP), which came down to an average of 1.9 percent of GDP by 2014.
“Curiously, the diminishing dependence on foreign aid such as official development assistance (ODA) and other official flows (OOF) often gives us a deceptive sense of complacency,” Bhattacharya said.
If one looks at Bangladesh's annual development programme (ADP), it becomes evident that more than half of financing of the social and physical infrastructure is still sourced by foreign aid.
This means that while the aggregate dimensions of aid are falling, its strategic importance is still very pertinent to the country's development, he added.
Aid commitment has remained stable at 3.3 percent of GDP for the last two decades. As a result, the gap between disbursement and commitment is widening, reflecting the country's historical poor capacity to utilise the low-cost foreign resources.
Bhattacharya pointed out that, presently, Bangladesh is being able to use $60 for every $100 committed by its international development partners. The comparable figure a decade back was $65. Accordingly, unspent foreign aid in the pipeline doubled to $20 billion in 2014-15 in a span of three years.
“The rate of utilisation is not improving and I am concerned with this steep rise in aid money in the pipeline as it is affecting the pace of our economic growth and social development,” Bhattacharya said.
One may wonder whether this $20 billion amount is real or virtual money, he added. “It seems that having left behind the 'crisis of aid dependence', now we have entered into a 'crisis of aid utilisation',” he said.
“It is highly paradoxical that our leaders at the global platform, on the one hand, rightly demand fulfilment of the developed countries' pledge to deliver 0.15–0.20 percent of their GNI to least developed countries and, on the other hand, are not being able to utilise the committed funds by the international development partners,” Bhattacharya said.
The economist pointed out that some efforts were taken to improve utilisation of aid money. For example, he said a joint committee comprising officials from the government and development partners was formed to sort out obstacles to speedy disbursement of project aid.
The government has decided not to rotate project directors. A new portal has been created to have more transparency of aid data. Electronic-tendering of public procurement has been put in practice.
“There are positive moves, but visible improvements are yet to be seen,” said Bhattacharya.
Land acquisition for projects remains a complex issue and stricter standards now have to be followed for public procurement.
He also said Bangladesh must develop capacity to go for “blended finance” by strategically leveraging the grants and concessional loans to raise more resources, particularly from the private sector. In this case, the government will be able to keep the financial costs of big projects at a lower level.
The economist also talked about the foreign debt and debt servicing liabilities of the country, which he believes are quite “comfortable and manageable” at this moment. The total outstanding foreign debt of Bangladesh is about 12 percent of its GDP and annual debt servicing liabilities amount to less than 1 percent of GDP.
Bhattacharya also focused on the government's projections regarding gross foreign borrowing in the context of the new five-year plan. Such projections mention that the gross flow of foreign aid is expected to increase from $3.1 billion in 2015-16 to $5.5 billion by 2020-21.
At the same time, it is anticipated that ratios of external debt and servicing liabilities will not increase due to these incremental flows.
He suggested that, to achieve these ambitious targets, the government undertake a number of institutional and policy reforms. The government did draft of an aid management strategy, but never ventured to design an aid mobilisation and utilisation strategy. Bangladesh needs to have this strategy to tap into, among others, the new sources of financing in the Global South (for example BRICS Bank and Asian Infrastructure Investment Bank).
Bhattacharya said Bangladesh had been lucky that bilateral aid providers who mostly provide the money as grants have dominated the sources of its inflow. These grants have largely gone to underwriting human development-oriented projects as well as to reform and governance projects.
Currently, the bilateral aid providers come up with about 60 percent of the disbursed aid. Interestingly, the UK has secured the top position among the bilateral aid providers recently, superseding Japan.
Finance from multilateral sources had been also important as they provide finances at concessional terms, which are largely used in physical infrastructure projects, he added.
However, one of the challenges of Bangladesh in the coming days would be to fend off the emerging overtures of the development partners regarding putting in harder loan conditionalities as Bangladesh moves towards the middle-income trajectory.
Bhattacharya said there is still ample space for Bangladesh to negotiate advantageous terms from the multilateral and bilateral sources for the next three to five years.
“Thus, Bangladesh's negotiation capacity for concessional loans will be critical in the coming years.”
On global aid environment, he said, in the last ten years, a sea change has taken place in foreign aid architecture and its operational principles.
The development partners are redefining the ODA, linking it to improved concessionality and trying to also find broader measures of their contribution through such indicators as Total Official Support for Sustainable Development.
Incidentally, the “global environment is particularly not hospitable at this moment.
The USA and Europe are falteringly recovering from protracted recession. China and India are slowing down. A large number of countries have fallen into conflicts and, consequently, a large part of aid is being channeled as humanitarian assistance, he said.
“Similarly, the recent influx of refugees has put the development partners under further pressure as many of them have to divert resources from ODA to manage refugee crisis,” he said. The aid flow to the LDCs went down in 2014, although the aggregate flow recovered, he pointed out.
“One of the most interesting aspects of the BDF meeting to observe will be the signals from the development partners regarding how they are going to adjust their country assistance strategy and project portfolio in the context of the 2030 agenda of sustainable development goals,” he said.