How slow Chinese loans lead Bangladesh to high costs

The Dhaka-Ashulia Expressway project, a government-to-government initiative, secured approval from Bangladesh's top economic authority Ecnec on 25 October 2017, with a budgetary allocation of Tk16,901 crore.

In the financing arrangement, the China Exim Bank had then committed to funding over $1.12 billion or Tk9,472 crore while the rest will be borne by Bangladesh. However, it was not until October 2021, nearly four years after project approval, that the government was able to finalise a loan agreement with China's Exim Bank. As of May this year, China's Exim Bank disbursed only $170 million. 

The delay in securing the loan agreement came at a cost, as the project's expenses escalated by Tk625 crore over the four-year period. 

Such slow-moving processes in finalising loan agreements are resulting in both cost overruns and delaying implementation of the approved projects. 

According to the Economic Relations Division (ERD), five projects earmarked for $2.47 billion in Chinese loans are now facing delays.

Md Shahabuddin Khan, project director of Dhaka-Ashulia Elevated Expressway project, said, "There was a delay in the agreement process as China initially proposed a 3% interest rate, which, after nearly one year's negotiations, was ultimately fixed at 2%."

But that did not end here. The loan became available seven months later on 10 May 2022. "It was a five-year period between approval and implementation, with the project's current 12% physical progress," said Shahabuddin.

Another project, Rajshahi Wasa Surface Water Treatment Plan, was approved on 11 October 2018. The $276.25 million loan agreement with China was concluded fifty-five months later, on 10 May this year.

Parvez Mamud, the project director, noted that the project, originally slated for completion in 2022, faced delays due to a lack of a timely loan agreement. "It is now scheduled for completion in 2027."

The loan deal for the Chinese-funded Padma rail link project came two years after it was approved.

A senior official from the ERD, who preferred not to be named, acknowledged the delays in the loan deals, particularly on the Chinese side. These delays are associated with a number of factors including project review to the signing of the loan deals, he said.

Long review process

Getting a loan approved from China follows a lengthy timeline unlike the quicker processes with other development partners, according to officials of the ERD.

They said China's evaluation of project and loan proposals typically extends over a lengthy period. This is in stark contrast to the mere months required by the World Bank (WB), Asian Development Bank (ADB), and Japan International Cooperation Agency (Jica).

There are several stages in getting a Chinese loan. In the initial phase, Bangladesh approaches China to assess interest in financing a project. Subsequently, China requests a project proposal, and upon approval, the process proceeds to the next stage.

China then seeks in-depth studies on the project and a formal loan proposal from Bangladesh. The entirety of these sequential steps typically spans a duration of 2 to 3 years.

All is not done with the signing of the loan deal; it usually takes another year for the funds to be available.

"For projects funded by the WB or the ADB, the approval of projects by the government and the loan processes goes concurrently. This parallel progression is the key reason why, shortly after receiving the government's approval, the loan agreement is swiftly concluded," said a senior ERD official.

"Besides, China provides loans to many countries, making it hard for the country to fund multiple projects in Bangladesh simultaneously. Typically, Bangladesh secures loans for one project each year from China," the official said.

Deal with delays

The ERD is currently negotiating loan agreements for two projects – establishing digital connectivity and procurement of six vessels.

Officials said only one agreement may be signed this fiscal year as China usually goes for one loan deal a year, and the others may have to wait.

The digital connectivity project to establish broadband internet connectivity all over the country was approved on 23 November 2021 with a completion date by June 2024. The Chinese loan commitment for the project is $473.75 million.

However, even in two years, the implementation of this project cannot be started due to the slow progress of foreign funding.

In September 2023, the government approved the project to buy six ships on a Chinese loan of $250 million. Jamal Hossain Talukder, general manager of the Bangladesh Shipping Corporation, said the date for signing the loan agreement remains uncertain.

Another China-funded project to set up six TV stations was approved on 15 March 2017, but after five years, the $125.12 million loan agreement has not been completed.

Officials say given the current economic situation, the project's importance has declined putting the implementation in doubt.

With the need for increasing cargo handling, Mongla port needs enhanced capacity. The government approved a Tk4,283 crore project to expand and modernise the facilities at Mongla Port with Chinese financing on 12 September this year.

With a completion target by 2027, Mongla Port authorities are not sure when the project work will start.

AKM Anisur Rahman, member, Mongla Port Authority, said the loan proposal will be forwarded to China Exim Bank through the ERD after approval from the Prime Minister's Office.

Besides, the project to convert metre gauge railway track into dual gauge in the Akhaura to Sylhet section was approved in April 2018 to be implemented with Chinese funding of $1,272.93 million.

Directed by the Prime Minister, the budget of this project was cut in 2021. There is concern about whether a loan agreement with China for this project will eventually be reached.

Bangladesh's outstanding loans with China: 

As of 30 June, Bangladesh had outstanding loan commitments totaling $62.31 billion with multilateral and bilateral development partners. Among these, China's share is $5.37 billion, constituting 8.62% of the total outstanding amount, ranking fourth, according to an ERD document.

The International Development Association (IDA), a wing of the World Bank providing low-cost loans to poorer countries, holds $19.53 billion or 31.34% of Bangladesh's total outstanding loans. The Asian Development Bank is next with $14.11 billion, representing 22.65%, and Japan with $10.99 billion, accounting for 17.65% of total outstanding loans.

Type and cost of Chinese loans

The Chinese government typically extends two types of loans: Preferential Buyer's Credit (PBC) in US dollars and Government Concessional Loan (GCL) in its own currency.

The interest rate for both types of loans is 2%, close to the loans offered by the World Bank (WB) and the Asian Development Bank (ADB). Additionally, a commitment fee of 0.25% is added. 

The IDA's loan features an interest rate of 1.25%, with an additional 0.75% service charge. Japanese bilateral loans have the lowest cost at 1.6%.

Notably, some of the World Bank's loans have interest rates based on market rates, currently exceeding 5%. 

Over two-thirds of the Asian Development Bank's loans are linked to market-based interest rates.