If foreign aid inflows do not rise, there is a high probability that government borrowing will continue to rise
Bangladesh is currently implementing several mega projects along with other development projects under the Annual Development Programme (ADP). The timely completion of these projects is important for a number of reasons – including to avoid rescheduling the projects and cost overruns.
Bangladesh is currently investing more in fast-track development projects – which is undoubtedly desirable. However, these should be completed in a timely manner as well, or else these will increase costs without timely benefit flows. For example, it is estimated that the completion of the Padma Bridge could raise Bangladesh's GDP by about one percentage point. Failure to do so would entail additional costs without the flow of benefits in time. The same is true for the metro rail and other projects.
In the ADP, funds for project implementation come from the government and from foreign assistance. However, due to the slow rate of the project implementation timeline, net foreign aid flows have reduced in recent years, and this year, alone, foreign aid has dropped by Tk9,800 crore – which may create additional pressure on government funding.
In the 2019-20 fiscal year, the government had set a target to borrow Tk47,363 crore from the banks. This has already been used up with the borrowing of more than Tk48,000 crore during the first six months. Additionally, if foreign aid inflows do not rise, there is a high probability that government borrowing will further rise as well.
However, if the government borrows more from the banks, this might negatively affect the banking sector's lending capability. As a result, the private sector credit flows may be inadequate to meet demand. This will adversely affect private sector investments – the lifeblood of Bangladesh's economic growth. Plus, if the private sector is credit-constrained, the overall economy will be affected negatively, and the effects will be evident in all sectors of the economy.
Also, there is a chance the banks will lose cash liquidity as well. The banks generally provide loans from the deposits they get from depositors. However, the low savings deposit rates, as stipulated in the present policies, might encourage the depositors to move away from the banks and invest their money in other sectors – such as land, gold and real estate.
Often projects are included in the ADP for which secure funding does not exist. These types of projects mostly miss the timelines for completion. Undoubtedly, development projects are necessary for the development of the country, but these projects need to be well-designed and serve priority needs in a timely manner so that cost overruns can be avoided and projected benefit flows can be realised.