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Why Bangladesh Seeking $5 Billion in Easy Loans from China?

Why Bangladesh Seeking $5 Billion in Easy Loans from China?

Bangladesh's decision to seek $5 billion in easy loans from China is perplexing on the surface but understandable when considering the nation's current economic challenges. This substantial loan request deviates from Bangladesh's historical approach, which relied more heavily on loans from China structured as 'supplier's credit' rather than large-scale easy-term borrowing. Over the past few years, Bangladesh has indeed taken loans from China for various development projects, but the highest annual disbursement amounted to only $1.1 billion during the 2023 fiscal year.

However, the country's dire economic situation provides important context for why the government is now pursuing easy loans on a much larger scale. Bangladesh is grappling with a multitude of economic woes, including rapidly declining foreign currency reserves, slowing GDP growth rates, and persistently high inflation. Funds are desperately needed to service the country's mounting debt obligations and keep the economy afloat. The Center for Policy Dialogue, an influential Bangladeshi think tank, has warned that the government's strategy of taking on more loans to meet existing debt repayments risks creating a vicious cycle that could mortgage the nation's future.

The timing of Bangladesh's $5 billion loan request to China is notable, as it comes amidst ongoing negotiations between Dhaka and the International Monetary Fund (IMF) for a comprehensive bailout package. Bangladesh has already been approved for the third $1.4 billion tranche of a total $4.7 billion IMF loan, with subsequent disbursements contingent upon implementing a series of stringent policy reforms. Some of these IMF-mandated conditions, such as eliminating fuel subsidies and raising electricity tariffs, have proven highly unpopular and economically painful for average Bangladeshis. Indeed, electricity costs have already tripled over the previous year, with expectations that tariffs will continue rising in four more phases before the end of 2024.

The government's aggressive pursuit of external loans can be viewed as part of a broader strategy that commenced in the summer of 2022 to stave off a potential economic collapse. This borrowing spree represents an acceleration of a trend that has been underway since 2011, over which period Bangladesh's total outstanding external public and publicly guaranteed (PPG) debt has tripled from previous levels. Similarly, the country's annual debt servicing costs have increased 2.6 times over that same timeframe. Domestic debt levels have also skyrocketed in recent years.

Beyond Economy, Its Geopolitics

Beyond the economic dimensions, Bangladesh's overtures toward China for easy loan financing carry significant geopolitical implications. Over the past decade, China has rapidly expanded its economic footprint across the region through its Belt and Road Initiative and other investment activities. According to estimates from the American Enterprise Institute (AEI), a prominent Washington-based think tank, the total value of Chinese investment projects in Bangladesh currently stands at around $7.07 billion. Chinese companies have additionally secured lucrative construction contracts worth a staggering $22.94 billion across various sectors within the Bangladeshi economy.

However, the commercial relationship between the two nations remains highly imbalanced in China's favor. Official statistics indicate that Chinese exports to Bangladesh totaled $22.9 billion during the 2023 fiscal year alone, dwarfing the mere $677 million worth of Bangladeshi goods imported into China over that same period. This stark trade deficit underscores Bangladesh's position of economic dependence vis-a-vis its larger neighbor.

As Bangladesh finds itself increasingly reliant on Chinese loan financing to keep its economy stable, concerns are mounting among regional observers about the potential for China to leverage this economic leverage to exert political pressure on Dhaka. Some analysts have drawn parallels to other nations, like Sri Lanka, that have fallen into a Chinese "debt trap" after taking on obligations that eventually became unsustainable. Only time will tell how this new phase in Bangladesh-China economic relations will unfold and what concessions, if any, Beijing may seek to extract in return for its financial largesse.

The decision by Bangladesh to seek $5 billion in easy loans from China is part of a broader trend that has raised concerns worldwide. Along with extending loans, China's investments in infrastructure projects under the Belt and Road Initiative (BRI) have been criticized as a "debt trap" that can lead to economic distress and compromised sovereignty for recipient nations.

An analysis by the Associated Press (AP) in 2023 highlighted that countries that take loans from China often end up using that money primarily to repay existing external debt, rather than for productive investment. This pattern can create a vicious cycle of mounting obligations and financial dependence.

In some cases, taking loans from China has strained countries' relationships with multilateral institutions like the International Monetary Fund (IMF) and the World Bank. The lack of transparency around Chinese loan terms and the high environmental, social, and governance (ESG) risks associated with many BRI projects have raised serious concerns among international observers.

The infrastructure projects funded by Chinese financing in Bangladesh are not immune to such ESG risks. According to research by the U.S.-based AidData lab, a staggering 59 percent of Bangladesh's BRI project portfolio faces significant ESG hazards. Notably, the value of this risky project portfolio has ballooned from just $1 billion in 2015 to over $12 billion by 2021. Moreover, Chinese loans often come with shorter repayment timelines compared to financing from multilateral development banks.

There are also allegations that lax oversight and due diligence surrounding Chinese loan disbursements creates opportunities for corruption and misuse of funds. Some studies have found evidence that Chinese loans tend to be directed toward political priorities rather than economically productive ends, decreasing accountability. A 2022 study by Andreas Kern, Bernhard Reinsberg, and Patrick E. Shea, based on AidData statistics, demonstrated that simultaneously taking Chinese loans while under an IMF program is highly problematic for governance and creates incentives for kleptocratic leaders.

Underlying these economic concerns are broader geopolitical dynamics at play. China has made no secret of its ambitions to expand its sphere of influence worldwide, with the lending sphere representing a key component of Beijing's "soft power" strategy. China's firm policy of economic engagement and strategic investment across South Asia over the past decade is clearly aimed at bolstering its clout vis-a-vis traditional powers like the United States and its allies.

In this context, Bangladesh's decision to lean heavily on China for easy loan financing can be interpreted as an indicator of Beijing's growing sway in the region. While economic desperation has been the immediate driver of Dhaka's loan request, the long-term implications could see Bangladesh becoming further enmeshed in China's economic orbit and beholden to its policy priorities.

As other nations have learned through bitter experience, the viability and true costs of relying on Chinese loan financing merit careful scrutiny. While the $5 billion may provide temporary economic relief, the risks of falling into a "debt trap" that compromises Bangladesh's sovereignty and development trajectory remain very real. Navigating this economic relationship with China will require deft statesmanship from Dhaka to safeguard the nation's interests.

It is noteworthy that Bangladesh's decision to seek $5 billion in easy loans from China came just a few months before the pivotal 2024 general elections. In the run-up to the polls, there was much discussion about an unfolding geopolitical "power play" between China and the United States over influence in Bangladesh.

China has extended unwavering support to the incumbent Sheikh Hasina government, while the U.S. has emphasized the importance of free, fair, and inclusive elections. Some analysts argued that the U.S. policy of advocating for democratic reforms in Bangladesh would backfire, potentially driving Hasina closer into China's embrace.

India, a steadfast backer of Prime Minister Hasina since 2009, insisted that the U.S. must back down to prevent a potential shift by Dhaka towards aligning more closely with Beijing. The U.S. appeared to take a step back in the context of the January 7th election. Clearly, India's argument was that it would be able to contain Chinese influence over the Hasina government, although the record of the past decade does not indicate any such success.

Despite what was once hailed as a "golden era" in India-Bangladesh relations after 2009, China's economic and strategic footprint in the country has expanded significantly during that same period. The upcoming joint military exercise between Bangladesh and China, coupled with the possibility of Chinese involvement in the Teesta river project, suggest that the geopolitical "great game" in Bangladesh is set to intensify further.

It remains to be seen whether China will respond favorably to Bangladesh's $5 billion loan request. However, given the track record of lacking transparency from both the Bangladeshi and Chinese governments, the public may never know the full details. The familiar reality is that the government does not have to explain or justify its rationale for taking loans from China in addition to financing from multilateral institutions like the IMF and World Bank.

Citizens are left in the dark about the specific terms attached to the loan Bangladesh is seeking from Beijing. There will also likely be no public discussion about why the government is adding this substantial new debt on top of the country's already mounting obligations.

The reason the government can make such a unilateral decision without consulting or considering the interests of those who will ultimately bear the financial and potential political burdens of this debt is the absence of a robust, accountable governance system in Bangladesh. With limited checks and balances, the opaque decision-making process surrounding major financial commitments to foreign powers like China remains insulated from public scrutiny or democratic oversight.

Ali Riaz

Ali Riaz

Professor and Political Scientist

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