Economists back foreign loans for infrastructure

They say Bangladesh has scope to broaden fiscal deficit; BIDS’s development conference ends

Bangladesh has leeway to widen its fiscal deficit and borrow funds from external sources to finance the country’s transformative infrastructure projects, economists said yesterday. 

The country can widen its fiscal deficit by two percentage points for five years, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

In so doing, $20-35 billion can be raised from international markets for infrastructure financing. “This money will be spent only for transformative infrastructure projects,” he said.

The suggestion from Mansur was supported by Zahid Hussain, lead economist of the World Bank’s Dhaka office, and Mustafizur Rahman, executive director of the Centre for Policy Dialogue.

They spoke at a discussion on financing infrastructure deficit at the two-day conference, BIDS Critical Conversations, held at the capital’s Bangabandhu International Conference Centre. 

The Bangladesh Institute of Development Studies organised the event, which ended yesterday.

Historically, the government has kept the budget deficit below 5 percent of the gross domestic product; it ranges between 3.5 percent and 4.5 percent.

Mansur said Bangladesh can also set aside another two percentage points of funds from its Annual Development Programme, which is 7 percent of GDP. 

The borrowing from external sources and setting aside funds from ADP will give Bangladesh about $60 billion for infrastructure projects, said the former economist of the International Monetary Fund. He also said the seventh five-year plan envisages an infrastructure spending of $65 billion. “If we don't invest the money our productivity will go down.”

Bangladesh needs to borrow from external sources more aggressively, as interest rates are 1 percent to 1.5 percent in international markets compared with the domestic market's 10-12 percent.

But first, Bangladesh will have to use about $20 billion of the official development assistance that lie in the pipeline.

He said there is a lot of investment in the power and fuel sectors because they offer profits. “As long as there is honey, there will be bees.”

Hussain of the WB said the infrastructure condition is bad and there is a consensus on what it would take to sort it out. “We need a quantum jump in infrastructure financing.”

Bangladesh will need $7-10 billion a year for infrastructure financing, according to an estimate of the WB conducted in 2013.

Hussain said the problem lies in the implementation and projects suffer from time and cost over-runs. As a result, the government does not get the value for money.

Adequate data on prioritisation of projects in Bangladesh is not available.

“Projects are taken on the basis of aspiration. We only get data on expenditure side, not what we get from a project.”

Projects also get delayed as the authorities arbitrarily renegotiate contracts even after the contract is signed. “Korean Export Processing Zone (KEPZ) is one such example. It has to be ensured that such arbitrary renegotiation does not take place.”

The WB economist said public investment is rising whereas private investment is not picking up, although the former is supposed to energise the latter. “How will you explain that?”

Hussain also said there is scope for innovation in using finances from multilateral development organisations.

CPD's Rahman said time has come for Bangladesh to become an efficiency-driven economy from a factor-driven one.

“If we can't be competitive, our presence in the export as well as domestic markets will be undermined.”

Bangladesh will have to focus on infrastructure in a bigger way if it wants to reap the benefit of the World Trade Organisation, the Bangladesh-Bhutan-India-Nepal's Motor Vehicle Agreement and other regional connectivity initiatives.

While there is leeway for widening the fiscal deficit, there is also scope for resource mobilisation without touching the deficit, as Bangladesh's tax-GDP ratio is low.

The CPD economist also called for value for money for projects in Bangladesh.

He said it costs $3-9 million in Bangladesh to construct a kilometre of road whereas the cost is $1 million in India and $2-4 million in the European Union.

Referring to a government analysis of over 200 projects under ADP in 2014, Rahman said the projects were supposed to take 2.9 years on average whereas in reality it took 5 years. Only 14 percent of the projects were completed on time, while the costs escalated by 51 percent.

“If we can't use the money properly we will have to spend more. Still, we may not be able get the expected result.”

He gave example of the Padma bridge whose cost went up to Tk 28,000 crore from Tk 10,000 crore originally. “We have to see how cost-effectively we can invest.”

Rahman said when contract is signed due diligence is practiced to a level.

But when a project is over-run and corrective measures are taken in between, there is little due diligence.

He said there is huge pipeline for foreign loans but there is little effort to use them.

All attention goes toward implementing projects with domestic resources, for which the requirement to maintain due diligence is not too strict. Rahman said many countries have used pension funds to finance infrastructure projects. “We have to see whether we can do the same.”

Abdul Matlub Ahmad, president of the Federation of Bangladesh Chambers of Commerce and Industry, said because of infrastructure constraints Bangladesh is not able to bring in industrial development and high levels of economic growth.

The business leader also said he felt ashamed of the tussle over KEPZ. 

“This gives a message to international investors that Bangladesh does not keep its promises. When we meet businesspeople abroad they also talk about it.”

The FBCCI will take an initiative to get the two sides to sit and find an amicable solution. “I will definitely talk to the government about the issue.”

Ahmad also said Bangladesh will have to be serious about fighting corruption and taking the help of information technology to curb the menace.

During her presentation, BIDS Senior Research Fellow Nazneen Ahmed said the country is lagging behind other countries in all sorts of infrastructures such as electricity, roads and highways, ports and rail network.

She said insurance companies are holding huge amounts of money but they keep them in banks. “We have to see whether we can tap their capital.”

Sovereign bonds can be another option, she said, adding that it might not be easy to raise funds for infrastructure from the capital market.

Faisal Ahmed, senior economic adviser of Bangladesh Bank, called for creating a pool of expert project directors and empowering them. 

“Nothing will change unless we have efficient resource allocation and their efficient use,” said Monzur Hossain, senior research fellow of BIDS.

Khan Ahmed Sayeed Murshid, director general of BIDS, also spoke. 


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