Bangladesh foreign aid

In 1980s Bangladesh's aid dependence was over 10 per cent of GDP and financed nearly 100 per cent of our Annual Development Plan (ADP). This meant that no Finance Minister could frame a budget without first being assured of aid pledged at the Paris Consortium meeting. This dependence on donors gave them a disproportionate leverage over our policies. The World Bank, in particular, used this leverage to impose an extensive program of Structural Adjustment Reforms (SAR) on the Government of Bangladesh, based on the neo-liberal economic philosophy associated with the so called Washington Consensus. Bangladesh, readily accepted this advice though many of these reforms were unsatisfactorily implemented. This raised tensions with the donors but did not lead to any discontinuity in aid. The donors and successive governments played a discrete game where Bangladesh accepted and promised to implement all reforms whilst the donors turned a blind eye on failure to do so. The era of aid dependence built up its own class of beneficiaries who prospered from aid and acquired a vested interest in its continuity. Aid dependence, thus, generated its own dynamics which influenced the political behavior of successive regimes and the workings of the administrative as well as the business community. The SAR process impacted on the political economy of Bangladesh where new social forces were financially and politically empowered whilst large numbers of people, from de-subsidized poor farmers to disemployed factory workers, became its victims (Sobhan: 2003).

While there is no denying that Bangladesh is heavily dependent on foreign aid and loans to finance its annual budget, it is also true that aid agencies and multilateral lenders in the West have to carry a lion’s share of the blame for Bangladesh’s burden of debt. Between 1980 and 2004, Bangladesh’s total outstanding international debt quadrupled. What is of immense significance in that statistic is that it was between 1980 and 1990 – during a decade of military dictatorships characterized by rampant corruption and political oppression – Bangladesh’s debt figure tripled from $3,921 million in 1980 to $12,439 million in 1990. The bulk of this surge in lending to the autocratic regimes came from the International Development Association, the soft-loan window of the World Bank. Can the World Bank and the IMF morally impose the burden of this debt on the Bangladeshi people, when in fact that money provided valuable succor to an autocratic regime that the people were struggling to topple at the time? Today, nearly two decades later, Bangladesh is still paying back loans that the dictatorial regime of General Ershad (1982-90) availed from the World Bank and the IMF in the 1990s, much of which was pillaged and squirreled away to foreign bank accounts.

The Global Development Finance 2007 (GDF 2007) report indicated that servicing the external public and private debt by developing countries amounted to 540 billion dollars in 2006. Taking into consideration the servicing of external public debt, since this falls under the responsibility of the state budget, it represented 280 billion dollars in 2006. Despite the fact that the external public debt/GDP ratio is decreasing, the total volume of the debt is continuing to rise and the amounts repaid increase once again in 2006 compared to the previous year. More ominously, if we include servicing the domestic public debt, which also falls under the state responsibility, it is the astronomical sum of more than 1000 billion dollars a year which the people of the developing countries have to repay for both external and domestic public debt. Domestic public debt is increasing rapidly. In 1998 the internal and external debts were almost equal. However, in 2006 the domestic public debt exceeded the external debt by a factor of three! This phenomenon is very important: from now on, it is no longer possible to measure the level of debt of developing countries solely on the basis of the external debt.

Despite improvements in recent years, public debt remains a serious problem for most countries in South Asia. While domestic public debt is becoming a larger component of total public debt, it has received relatively less attention despite its serious economic and social implications. Although official statistics show that the interest payment of total public debt remains at 13% of GDP, other estimates suggest that it is much higher than the officially disclosed one.

For example, some evaluation goes as follows: although Bangladesh’s debt service to export ratio (9.1 per cent) is slightly lower than for most of the HIPCs, its debt to exports ratio (180.3 per cent) is already well above the 150 per cent considered by the World Bank to be an indicator of un-sustainability, and it is clear that the country’s debt repayments are currently absorbing precious resources that are urgently needed to supply the basic needs of its people. (http :// jubileeresearch.org/ databank/profiles/ bangladesh.htm). The OECD calculation of country risk rating for 2004 produces a risk factor of 6 for Bangladesh. Same as Indonesia’s and Pakistan’s this risk factor indicates high risk of external debt default (www.efic.gov.au/static/efi/cra/bangladesh.htm).

Excessive reliance on debt, whether domestic or external, carries macroeconomic risks that can hinder economic and social development. Country’s macro-economic is thus disturbed by this factor alone. Scarcity of resources has already compelled the government to borrow afresh and/or impose new taxes on the citizenry to meet debt service obligations. High domestic public debt pushes up interest rates and crowds out private investment, which is much needed to promote economic growth. When most government revenues are devoted to debt servicing, fiscal policy cannot be used to provide basic services, such as education, health, safe drinking water and housing.

Bangladesh, in terms of population, is the largest Least Developed Country (LDC) and its external debt has grown from $4.2 billion to about $19.5 billion in the past two and a half decades. A substantive amount of national budget is allocated to debt-servicing -- at a tremendous socio-economic opportunity cost -- when nearly half of the population are illiterate and live below the poverty line. For example, in 2006, Bangladesh spent more on servicing its debt (2.4 % of GDP) than on providing public healthcare (1.06% of GDP). The majority of the people do not have access to safe drinking water, sanitation or quality education. During the past decades our per capita aid has dropped by 50 percent, but the repayment of external debt has increased from $100.9 million in 1975 to $1457.6 million in 2006 - a more than fourteen-fold increase. During this time MLT debt repayment increased from $70.8 to $678.1 million, almost ten-fold increase. Bangladesh's debt-servicing constitutes 2.4 percent of the GDP (2007) while, for example, the government's allocation to the health sector is 1.06 percent.

Unfortunately, the national budget — annual statement of the government’s income and expenditure — does not recognize the gravity of the situation characterized by its serious problem to finance the external debt servicing at the cost of basic human services. Every year Bangladesh pays, on an average $ 1060 million, to its foreign creditors. A 2003 study (SUPRO: 2003) exclusively revealed the fact that for every dollar in foreign grant aid received, the government spends over $1.5 in debt service to foreign creditors annually. These debt servicing payments has not come without cost. In 2006, the debt service bill of $1457.6 million exceeded the total revenue expenditure of the government on education ($945.9 million) and health ($388.23 million) which was just $1333.83 million.

Debt sustainability is an essential condition for macroeconomic stability and sustained economic growth. Most often, high public debt levels create repayment flows that can crowd-out much needed public spending, and can generate adverse incentives for private investors to engage in activities that spurt long-term growth. An excessive level of public debt can make the nation vulnerable to interruption in aid flow or to sudden shifts in domestic financial market sentiment. These problems are aggravated by a narrow export and production base and various structural, political, and institutional factors that reduce returns on investment (ADB, 2006).

Bangladesh is classified as a low-income country and is home to the third highest absolute number of poor people in the world, after China and India. Despite the huge amounts it spends servicing debt ($1457 million in 2006), the World Bank describes it neither as ‘severely’ nor even ‘moderately’ indebted, but instead classifies Bangladesh as ‘less indebted’. Instead of rewarding Bangladesh for its track record of prompt debt servicing, the World Bank has interpreted this to mean that Bangladesh’s debt must be sustainable. Arbitrary thresholds on indicators like debt/exports made Bangladesh ineligible for the Heavily Indebted Poor Countries (HIPC) initiative or the Multilateral Debt Relief Initiative. Bangladesh will not receive through either of these initiatives the debt relief that it desperately needs to finance public expenditures on school and hospitals among other basic necessities.

Despite lack of actions by the World Bank, IMF, and the Paris Club, some bilateral debt relief agreements have taken place. In recognition of extreme poverty levels and devastating floods, Canada cancelled Bangladesh’s bilateral debt of $600,000 in 1999. In 2000, the United States agreed to a debt-for-nature swap, forgiving $10 million in debt payments in return for $8.5 million expenditure by Bangladesh to protect mangrove forests and Bengal tigers. The United Kingdom has reached bilateral agreements with Bangladesh to write off their outstanding debts from loans made for development purposes. As a result, Bangladesh’s UK debt, which amounted to $1.3 million in April 1997, was written off by the end of March 2001.

The G-8 debt cancellation campaign has primarily focused on the Heavily Indebted Poor Countries (HIPC) at the cost of other poor countries, mostly in Asia, who have been repaying their debts regularly. Paradoxically, debt relief is only provided to those countries who default on debt repayment. As such, the poor countries who maintain their repayment schedule, of course at the cost of its peoples’ basic needs, are considered "good debtors" and, consequently, penalized for not defaulting. One of the Bangladeshi development experts remarked that- “Bangladesh has regularly paid its debts, expanded exports and are now being punished for its success” (Bhattacharya: 2006). The whole argument is that, since these countries are able to repay they must have "sustainable" levels of debt. The sustainability of debt is primarily measured on the economic matrix called Debt Sustainable Analysis (DSA) introduced by the World Bank and IMF, which lays too much emphasis on the country's exports and does not fully reflect the true nature of the debt burden on government expenses. Thus, Bangladesh and other South and South-East Asian countries are not included in the HIPC and, therefore, were not eligible for debt cancellation.

In 2005, developing countries paid out $1.4 billion every day in servicing external debts. The poorest countries – those with an average daily income of less than $2.40 per person – spent over $100 million every day. Meanwhile, public services in these countries are, in general, disastrously under-funded, with services for women and girls particularly lacking. Kenya, for instance, is not eligible for multilateral debt relief, but spent more on servicing debt than on health care in 2006/7. The United Nations Development Program reports that Burundi spent more than twice as much on paying debts as on health and education combined in 2004.

Increased investment in public services is urgent: more than one billion people worldwide have no access to clean water; 11 million children die each year from infectious diseases; 40 million people are living with HIV and AIDS; and despite some progress in education, 80 million children in developing countries are not going to school, whilst millions more suffer from a severe shortage of teachers and facilities. Oxfam estimates that to meet the Millennium Development Goals on health, education, water and sanitation would require an extra $47 billion to be invested in these services each year: this is just 9% of the amount the developing world spends annually on servicing debt (OXFAM: 2007).

Bangladesh is no more an exception as it pays more on debt external debt servicing than on essential services. In this backdrop, any Bangladeshi citizen can raise the following questions essentially questioning the very intention of the international community as far as the concept of ‘debt sustainability’ and ‘debt cancellation’ is concerned.

How can Bangladesh’s debt be sustainable especially when it pays back on an average $1060 million to it foreign creditors in general and $860 million to its so-called benevolent development partners (multi-lateral and bi-lateral donors) annually? How can its debt be sustainable when the cost of external debt servicing exceeds the public spending on health and education, for example? In what criteria, the Bangladesh external debt can be measured as sustainable when it clearly demonstrates that MDG progress is being seriously hampered due to the excesses of debt servicing? Presumably, the international community has left a single choice for Bangladesh: servicing external debt at the cost of basic services let alone the MDG progress!

Undeniably, Bangladesh cannot afford to pay on average $1060 million a year to foreign creditors. Even though the country is making some progress with regard to the implementation of the MDGs, it is still home to 70 million people living in poverty. It has the highest incidence of poverty in South-Asia. In fact, Bangladesh cannot afford to pay a single dollar in debt service. If debt sustainability is based on the financing needs for the MDGs, Bangladesh would receive full debt cancellation. Bangladesh needs US$ 7.5 billion a year to finance the implementation of the MDGs.

To date, debt sustainability has been conceived of in terms of variables such as the ratio of debt service payments to export earnings or GDP, which can be criticized for being both arbitrary and overly optimistic in terms of the future path of these variables. However, as well as these shortcomings, these calculations take no account of estimated spending requirements to meet the MDGs, which has led many to argue that the concept of debt sustainability must be redefined to make it compatible with this vital goal.

Debt costs too much to Bangladeshi people in general and poor and marginalized in particular. People need a healthy and prosperous life that requires increased government spending on basic services such as health, education, water-sanitation etc. Bangladesh needs to achieve the MDG targets in time. To finance the Millennium Development Goals, every year a staggering US7.5 billion in external budget support is needed. This is about four times the amount of aid and concessional loans currently provided by foreign donors and creditors. Every dollar paid in debt service is a dollar lost for the MDGs. At this juncture, Bangladesh can no longer afford to pay a single dollar for debt servicing. Because….. “Every dollar paid in debt service is a dollar lost for the MDGs”.