Experts warn a sharp decline in both fund commitment and release may negatively affect the economy
There has been a massive drop in both foreign aid commitment and fund release in the current fiscal as development partners tighten purse strings amid the Covid-19 pandemic. A slowdown of development work during the pandemic period is also to be blamed for the drop in fund disbursement.
According to Economic Relations Division (ERD) data, foreign aid pledges shrank in the first two months of fiscal year 2020-21 by a whopping 75.51% year-on-year while fund disbursements from the pipeline dropped by about 29%.
The country received aid commitments of slightly over $354 million during the July-August period in fiscal 2020-21. But it was $1,446 million in 2019-20.
The ERD report also said development partners disbursed $528 million to Bangladesh during these two months, which was nearly $221 million less than the amount year-on-year.
ERD officials say amid the present crisis, development partners have become more cautious in committing new aid and are releasing already-approved funds.
Many projects of the current fiscal year have already been agreed upon but no deal has been signed yet because of the same reason, they said.
The country, however, obtained some large emergency aid promises from global and regional lenders for reviving the ailing economy.
Experts warn that such a sharp decline in both fund commitment and release will increase pressure of debt repayments which may negatively affect the economy.
Dr Sajjad Zohir, executive director of the Economic Research Group, said a decline in the foreign aid will put pressure on external balance and a short-lived increase in remittance may not be sufficient to offset the pressure. Unless terms of loan repayments are renegotiated by the ERD, the pressure on external balance can lead to devaluation of our domestic currency.
The economist further said that these will not necessarily lead to inflation in the non-food sector. He suggested that there is ample evidence of highly inflated project budgets, and establishing proper accounting and governance in project expenses may counterbalance the adverse effects (on the economy) of a decline in foreign aid.
ERD officials, however, say the pandemic-induced crisis has been a cause in the delay in loan approvals by the agencies. They hope that the foreign aid promises would rise towards the year end.
Dr Zahid Hussain, former lead economist of the World Bank's Dhaka office, said development partners pledged large sums from their Covid funds. They quickly approved the loan as it was crucial at these critical hours.
"However, their headquarters are yet to become fully functional owing to the pandemic. Many of their officials are still working from home, which has been hampering regular communication with different government bodies.
"The priorities before getting loan pledges and signing agreements are being carried out at a slower pace resulting in a slower rate of commitments."
Dr Zahid said project works did not gain momentum due to the pandemic and foreign experts in many projects could not join their work. It also contributed to reduced fund release.
Besides, the expenditure on development projects is traditionally less at the beginning of a financial year, he added.
The economist was optimistic that it would not be difficult to collect more commitments and recover from the present slowdown as all development agencies were providing support here through multi-year packages.
The commitments that have been pending since July and August will come through, though it may roll into January or February next year or more, he hoped.
Sector insiders said utilising foreign aid efficiently has to comply with different conditions set by the lenders. But the implementing agencies lack competence and so the funds are not utilised fully.
Commenting on this point, Dr Zahid Hussain said that any delay in the ongoing projects would hamper the economy adversely.
ERD officials said aid utilisation is at a critical juncture now and it has been caused by the slow implementation of projects requiring extra time and ballooning of cost. It is also negatively impacting the balance of payments, leading to increased borrowing from domestic sources.
However, Ahsan H Mansur, executive director of Policy Research Institute – a local think tank, opined there would be no problem in the balance of payments as the slow pace in implementation would also cut imports related to the projects.
This is because project implementation would be slower this fiscal year and so would be the release of funds, he added.