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A General Scenario of external resource flow to Bangladesh

Razu Ahmed August 02, 2008

External assistance has played a vital role in the economic development of Bangladesh, assisting in bridging the internal gap (savings-investment gap) and external gap (export-import gap). The costs, risks and maturity structure related to external debt management analysis are important. The cost of external debt is low as the most of the foreign loans received are through the concessional window of IDA, ADB and Japan. The structure of maturity of the external debt of Bangladesh is composed of medium and long term debt with an average grace period of 10 years and a repayment period of 20 years. With the shrinkage of share of grant aid in the external aid package in recent years, the volume of external borrowings is increasing which has resulted in a progressive increase of per capita debt obligation which stood at US$ 139.9 in 2006.

From 1972 to 30 June 2006, a total of about US$ 53.93 billion of foreign assistance was committed of which about US $ 44.83billion of aid was disbursed. 44.74 percent of the disbursed aid was grants and 55.26 percent was loans. In 2007, Bangladesh received $1631 million as foreign economic assistance of which $1040 was loan while the amount of grant was $590, almost half of the amount received as loan.

Aid is received from both multilateral and bilateral sources. The multilateral sources include World Bank (WB), Asian Development Bank (ADB), United Nations Development Programs (UNDP) and other UN organizations. The bilateral donors include individual countries.

Since independence, Bangladesh has received highest amount of bilateral aid from Japan in terms of cumulative disbursement followed by USA. International Development Association (IDA) is the largest amongst the multilateral development institutions followed by the Asian Development Bank. IDA contributed 26.68% of the total aid disbursed between 2001-2007, followed by ADB which contributed 15.45% over the corresponding period. Japan’s contribution during that period is 9.9% percent followed by UK (4.95%). However, from 2004 UK has been the largest bilateral donor to Bangladesh.

There has been a significant change in the composition of aid to Bangladesh over the years. The key features demonstrate the fact that the share of grants has been decreasing steadily over the past few decades. The share of grants which was 89 percent in 1971/73 has reduced to only 31.9 percent in 2006. The declining volume of grants resulted in a larger share of loans in the total aid package. Bilateral aid has shown a declining trend whereas multilateral aid has increased positively over the years. Bilateral aid that was 75.4 percent of total aid in 1973/78 has declined to about 43.8 percent in 2005. Multilateral aid, on the other hand, has grown from 24.6 percent to about 56.2 percent in 2005. The flow of food aid and commodity aid has shown a declining trend while project aid has increased sharply from 1.3 percent of total aid in 1971-72 to 93.8 percent in 2006.

As the ratio of grants in the total aid has been declining with respect to both commitment and disbursement, the aid flow is contributing to mounting external indebtedness. The total public sector external debt has increased from US$ 973.8 million in 1974/75 to about US$ 19.420 billion in 2005/06.The total debt service payments have increased considerably in the past. The increasing external debt along with expiry of grace periods and unfavorable exchange rate movements has resulted in increased external debt service.

Per capita debt obligation of the country has risen from US$ 6.59 in 1974 to US$ 139.91 in 2006. The reductions of the share of the grants in aid package and the rise in the volume of external borrowing have contributed to the increasing growth of per capita debt obligation.

(This article is a part of a research report jointly prepared by Monowar Mostofa and Razu Ahmed)