Bangladesh: Analysts Warn against Govt Using Foreign Cash Reserves for Infrastructure

The Bangladesh government’s decision to borrow funds from the central bank’s foreign currency reserves for development projects has analysts warning there is “no check-and-balance mechanism” ensuring accountability. 

The government of Prime Minister Sheikh Hasina launched the Bangladesh Infrastructure Development Fund (BIDF) last month, with officials touting it as an innovative way for the South Asian nation to reduce its spending on foreign currencies in paying off expensive loans by international lenders, such as the World Bank and China.

“This endeavor will be for an effective investment of surplus foreign currency reserve,” Hasina said during the virtual signing ceremony on March 15.

“It will not only be beneficial for the country but also help us to grow our own confidence and self-esteem, and we will be able to show the world that we can do it.”

Finance Minister A.H.M. Mustafa Kamal said the government created the fund by taking U.S. $2 billion from the foreign exchange reserves of the Bangladesh Bank – the central bank – to finance infrastructure projects.

“We have given $618 million from this fund to Payra Port to develop its channel,” he told BenarNews last week.

“We have yet to decide whether we will take more money from the central bank reserves. I think we need to develop a policy in this regard. We are working on formulating the policy,” Kamal said.

Bangladesh is the first government in South Asia to create such a fund, according to Mahmood Osman Imam, a professor of finance at Dhaka University.

“To the best of my knowledge, Bangladesh is the first country in south Asia to utilize foreign currency from the central bank reserve,” he told BenarNews.

“This move is good in one sense that we need not go to foreign countries or foreign lenders for funds so, we will not need to pay high interest for the loan,” he said.

Still, he expressed concern about the fund.

“One of the biggest risks is corruption. Very often we see the time and cost of projects are stretched. Any unjustified increase in cost would make the projects unviable or losing ventures – in that case, the whole investment would be in jeopardy,” Osman Imam said, noting there is no independent body to monitor the funding. 

Another analyst offered a similar take on the government action.

“The loan of $2 billion [from the reserves] is not a big amount, this is acceptable. But taking more loans from the reserves is risky,” professor Mustafizur Rahman told BenarNews, referring to the amount Hasina’s government had placed in the fund. 

“This is risky because there is no check-and-balance mechanism in the loan process,” said Rahman, a scholar at Center for Policy Dialogue, a private think-tank. 

The money was transferred into the BIDF from $44 billion in foreign currency held by the central bank, Kazi Sayedur Rahman, a deputy governor of Bangladesh Bank, told BenarNews.

“Actually, the decision to use funds from the central bank reserve for infrastructure development was taken by the government and we consented to it. We have provided the funds, and are involved in the execution of the government decision,” he said.

“We have no headache regarding the implementation and viability of the project.”

Salehuddin Ahmed, a former central bank governor, said the amount of foreign currency in the reserves is high because remittances sent by expatriates had continued through the pandemic while imports dropped off, requiring fewer expenditures. The government collects a portion of money sent back by expats and had to spend less this year because the need for imports dropped.

“Borrowing from the central bank reserves is not a good idea. For now, we can afford $2 billion, but this example must not open a floodgate of taking loans from the central bank reserve,” he said. 

According to a report in the Daily Star, a local newspaper, “the government will only use the fund to invest in projects that would have a high rate of return, and annual investment from BIDF would not be more than $2 billion.”

“[T]he government has decided to give it a go-ahead, hoping it will bring in hefty returns and also help save on foreign currencies spent in projects where costs often shoot up due to the interest rates and other hidden costs of foreign loans,” the Star reported.

Foreign loan issues

Mustafizur Rahman noted that the government was using those funds because it would be questioned by foreign lenders such as the World Bank, Asian Development Bank or the Chinese government.

“This is because the agencies and the countries have their own rules for approving loans to a country. The borrower must meet the conditions to get the funds. Also, they would ask questions on whether the projects they are going to fund were economically, socially and environmentally sustainable,” he told BenarNews.

“Besides, the lenders carefully examine whether there was any chance of corruption in the project.”

By setting up the fund, the government serves as evaluator of projects and receiver of BIDF allocations, Rahman said.

“There is no mechanism in place to raise questions about the project cost or viability,” he said. “The government’s say is final.”

Kamal said that is not the case even though the government does not have expertise to determine the cost of the Payra port and other major projects.

“This is not true that there is no mechanism to maintain checks-and-balance in allocating funds for projects,” Kamal said. “A world-famous German consulting company has assessed the cost of the channel development project. Based on the assessment, we have fixed the amount of loan to Payra port.”

Sonali Bank role

Subhash Chandra Das, chief financial officer of Sonali Bank, said his bank received the funds from the Bangladesh Bank and would handle the transfer of funds for the port project.

“We will give the money in 12 installments over the next three years. After receiving each installment, the finance ministry on behalf of the Payra Port Authority will pay us 2 percent interest – we will get 1 percent while Bangladesh Central Bank will get 1 percent interest,” he said, adding the port is to repay the loan over seven years after receiving the last payment.

Chinese loans carry 3 percent interest along with a service charge and take time for approval, according to authorities.

Last month, Kamal said the government had planned to use foreign loans for the Payra project.

“But we changed it and decided to implement it with our own funding,” he told reporters, saying that seeking foreign loans would increase the project’s cost.

“As we have our money, we will take a portion from the foreign currency reserve to implement the project – there is no ambiguity about it,” he said.

Since returning to power in 2009, Hasina’s ruling Awami League party has promoted the “politics of development.”   

In line with that policy, the government has been implementing the 6.15-km (3.8-mile) Padma double-decker bridge that would connect the capital with the south central and southwestern part of Bangladesh that is separated by the Padma River. It has been using general funds to pay for construction of the bridge’s road section while China is funding the rail portion scheduled to be finished in 2024.

The government also is implementing the first metro rail project to reduce traffic jams in Dhaka. Funded by Japan, the project is to be finished by the end of the year, according to officials.

In addition, the government has undertaken road, bridge and rail projects using funding from China and India.