China has become the fourth largest source of foreign loans in Bangladesh thanks to the latter’s growing interest. Japan, the World Bank, and the Asian Development Bank (ADB) now precede China in terms of loan disbursements.
Currently, Bangladesh sources nearly 10 per cent of its total annual borrowings from China, with at least $1 billion disbursed annually over the last two years.
Bangladesh has registered a surge in Chinese loans after 2016 when president Xi Jinping paid a state visit to Dhaka. The country has disbursed nearly $3 billion during the last four fiscal years, which is around 40 per cent of their total lendings till the date.
The other side of the coin is that the Chinese loans are gradually mounting pressure on Bangladesh for loan repayments. Also, the high volume of Chinese loans is believed to be playing a crucial role on the geopolitical ground.
The loans from the World Bank, ADB, or Japan come with an extended repayment period, while the timeframe is quite shorter for the Chinese loans. This is creating pressure for repayment.
Ahsan H Mansur
Chinese loans have now been dominating different countries in Africa. Earlier, Sri Lanka swallowed an excessive amount of Chinese loans to develop its ports and other infrastructures and is now going through a huge pressure of repayment liabilities in the aftermath.
Ahsan H Mansur, executive director of the Policy Research Institute, highlighted the currency and tenure of repayment as a concerning issue. Since the Chinese loans are being repaid in dollars and the currencies are underperforming against the greenback, it is eventually mounting pressure on Bangladesh.
He said the loans from the World Bank, ADB, or Japan come with an extended repayment period, while the timeframe is quite shorter for the Chinese loans. This is creating pressure for repayment.
The noted economist also underlined a positive aspect of Chinese loans, saying it only requires an alignment with the trade strategy, rather than any political negotiations.
Loan disbursement doubles in four years
Bangladesh registered an unusual rise in Chinese loans throughout the last four years as the disbursement has almost doubled during the period.
According to the Economic Relations Division (ERD), China disbursed $600 million in loans in the fiscal year 2019-20, and it plunged to $240 million in the following fiscal year.
But the disbursal bounced back with a bang, and Bangladesh received a total of $1.004 billion in loans from China in the fiscal year 2021-22, and it rose further in the following year to $1.126 billion.
Thus, China is gradually gaining a strong foothold as a major lender for Bangladesh. It now comes after Japan in terms of bilateral loans.
China provided $2.97 billion in loans to Bangladesh in the last four fiscal years, while its total loan disbursal since 1975 stands at $7.5 billion. It means China released around 40 per cent of its total lending in the last four fiscal years.
In the last fiscal year, the World Bank provided the highest $1.93 billion in loans to Bangladesh, while Japan provided $1.9 billion and the ADB $1.56 billion. China secured the 4th spot with a total lending of $1.12 billion.
Bangladesh has received $9.26 billion in total from different lenders in the last fiscal year.
A senior official of the ERD said it is tough to avail cheap loans like those from China from other sources. Bangladesh requires around $10 billion of overseas loans per year, while prominent global lenders like the World Bank, ADB, and Japan can afford around $f to $5.5 billion.
“Where do we find the remaining fund? Hence, as an alternative source, we have been taking loans from bilateral sources, like China and India, since our developments cannot be halted,” he added.
In the loan scheme, the lending country enjoys sole authority over the selection of contractors for a project, while the contractors enjoy sole authority over product pricing during loan negotiations.
In the aftermath, China climbed up as the fourth-largest lending country for Bangladesh and some eight per cent of the latter’s total loan liabilities are to China.
According to ERD sources, among the 27 China-funded projects, the authorities have signed deals worth $7.5 billion for eight projects. Currently, some 14 projects are being implemented with Chinese loans amounting to nearly $10 billion.
40pc loan released in four years
China, for the first time, granted loans to Bangladesh in 1975. It provided no significant loans to Bangladesh in the following decades.
The scenario took a significant turn in 2016 when Chinese President Xi Jinping came to Bangladesh and announced large-scale loan schemes. The country promised nearly $20 billion in loan assistance for 27 projects in Bangladesh.
According to the ERD, China provided $2.97 billion in loans to Bangladesh in the last four fiscal years, while its total loan disbursal since 1975 stands at $7.5 billion. It means China released around 40 per cent of its total lending in the last four fiscal years.
A positive aspect of Chinese loans is that their interest rates, which range from two per cent to 2.15 per cent with a service charge, are fixed.
Pros and cons of Chinese loans
All Chinese loans fall under the supplier credit category. Under the scheme, the lending country enjoys sole authority over the selection of contractors for a project, while the contractors enjoy sole authority over product pricing during loan negotiations. It calls the quality and expense of a project into question since the method does not allow tender bids by multiple contractors and subsequent determination of a reasonable price.
The ERD sources said China, last December, agreed to a limited tendering method (LTM) with the participation of only Chinese contractors. However, it is yet to come into effect.
Another negative side of Chinese loans is its shorter repayment period. Excluding the grace period, the entire repayment period for Chinese loans usually ranges from 10 to 15 years, which eventually increases the amount of installments and scales up the overall repayment pressure.
However, a positive aspect of Chinese loans is that their interest rates, which range from two per cent to 2.15 per cent with a service charge, are fixed.
The other lending entities, including the World Bank and the ADB, place comparatively flexible conditions, but their interest rates, which usually range from two per cent to four per cent, fluctuate as per the secured overnight financing rate (SOFR).
But they provide a longer time for repayment, usually from 30 to 40 years.
