Soft loan, hard debt: How Bangladesh is getting sucked into China's debt trap diplomacy

According to reports in the Bangladesh media, the Prime Minister’s Office has approved seeking over 36 billion yuan, approximately $5 billion, as a soft loan from China, with discussions underway regarding the interest rate and repayment schedule.

With mounting pressure on its dollar reserves, Bangladesh aims to stabilise its overheated economy by securing financial assistance from China. The funds will be utilised by Dhaka to facilitate the import of raw materials for businesses and to provide budgetary support, as reported by the Daily Star on Friday.

During the 13th Ministerial Conference of the World Trade Organisation held in Abu Dhabi from 26 February to 2 March this year, Bangladesh State Minister for Commerce Ahasanul Islam Titu raised the loan request with his Chinese counterpart on the sidelines.

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In the fiscal year 2022-23, data from the commerce ministry reveals a substantial trade deficit between Bangladesh and China. While Dhaka exported goods valued at $677 million to China, it imported goods worth $22.90 billion. This significant gap underscores China’s status as Bangladesh’s foremost trading partner.

As Bangladesh Bank reduced the Export Development Fund (EDF) cap from approximately $7 billion to around $2 billion in mid-2022 due to rising pressure on reserves amid a surge in imports, the financial flexibility of the business community was constrained. Furthermore, in April 2023, EDF loans became costlier with interest rates rising from 4 per cent to 4.5 per cent, the Daily Star said.

Approaching World Bank and ADB

Following its anticipated graduation from the category of least developed countries (LDCs) in 2026, Bangladesh has initiated discussions with both the World Bank and the Asian Development Bank. The aim is to secure sustained access to concessional loans at elevated levels over the next five to ten years.

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This proactive approach underscores Bangladesh’s commitment to ensuring continued financial support for its development goals beyond the LDC status, highlighting its strategic planning and engagement with international financial institutions. LDCs, characterised by low income and significant structural barriers to sustainable development, face considerable vulnerability to economic and environmental crises and possess limited human resources.

At the inaugural Development Studies International Conference in Dhaka on 5 May this year, Bangladesh also advocated for increased climate financing within the country while calling upon China to relax loan conditions including reducing interest rates and fees and extending repayment periods.

According to a report in The Business Standard, Mirana Mahrukh, additional secretary at the Economic Relations Division, conveyed that Bangladesh was experiencing challenging times in the post-Covid era due to the Russia-Ukraine conflicts leading to a changed global landscape.

Debt trap

In an article for The Diplomat, Ali Riaz, a Political Science professor at Illinois State University and a nonresident senior fellow of the Atlantic Council, expressed a mixed sentiment regarding the Bangladesh government’s decision to seek a $5 billion soft loan from China. He characterised the move as both perplexing and expected, highlighting the complexities surrounding the decision.

China takes a long time to approve loans, causing delays and increased costs for projects. This is unlike institutions like the World Bank and Asian Development Bank, which provide funds quickly. The difference highlights the need for smoother financing processes to ensure projects are completed on time and within budget.

An illustrative example is the Dhaka-Ashulia Expressway project, for which China’s approval process spanned over four years, leading to substantial cost inflation for Bangladesh, a report in The Business Standard said. Moreover, despite initial pledges, China has disbursed only a fraction of the committed amount thus far.

Delays in loan approval processes can significantly inflate the overall cost of projects and initiatives. These delays often result in extended project timelines, which, in turn, lead to increased expenditure on various fronts such as administrative expenses, maintenance costs and inflation-related factors.

Moreover, prolonged approval processes can also lead to missed opportunities and hinder the timely implementation of crucial developmental projects. As a result, the longer it takes for loans to be approved and disbursed, the more expensive they become, impacting both the borrower’s financial burden and the efficiency of the intended projects.

In October 2016, Bangladesh and China elevated their ties to a strategic partnership through an agreement inked between Prime Minister Sheikh Hasina and Chinese President Xi Jinping. Embracing China’s Belt and Road Initiative, both nations embarked on extensive cooperation, committing approximately $21 billion to enhance infrastructure, particularly in transportation, power and the IT sector.

Bangladesh’s increasing reliance on Chinese loans and investments for infrastructure projects has raised concerns about the potential for a debt trap scenario. With debt levels on the rise and a significant portion owed to China, there’s worry about the country’s ability to repay these loans, given the high interest rates and strict repayment terms.

This dependency on Chinese financing could compromise Bangladesh’s sovereignty and economic autonomy, as well as lead to financial instability if projects fail to generate sufficient returns. While Chinese investments have contributed to Bangladesh’s development, careful evaluation of terms and diversification of financing sources are essential to mitigate the risks of falling into a debt trap and ensure long-term economic sustainability.