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Dhaka Tribune

Strings firmly attached

Can Bangladesh avoid falling into the Chinese debt trap?

Update : 27 Apr 2023, 02:38 PM

Bangladesh is all set to finalize two different loan packages worth Tk5,000 crore from China for construction of the Rajshahi Water Supply and Sewerage Authority (WASA) Surface Water Treatment Plant and acquiring Chinese ships. Bangladesh is in final rounds of talks for the loans at a time when several nations, including neighhbour Sri Lanka, have tasted the bitterness of a Chinese loan.

Whereas the figure of the second loan for acquiring ships is not finalized or disclosed yet, the talks for the loan for developing WASA has reached to the final stages. The Economic Relations Department of Bangladesh has asked China to review the loan agreement as there are strings attached.

First and foremost, the rate of interest is higher and conditions in this agreement are hard. It's believed that the interest rate will be 2% more than usual rate. Additionally, Bangladesh will have to pay a one-time management fee of 0.25% and separately a 0.25% commitment fee per year on any unspent funds. The time for repaying the loan is 15 years while World Bank and Asian Development Bank offer 30-35 years time for repaying similar loans. 

China's economic footprint across the globe is something the elite Western capitals wonder about. From crossing a GDP mark in the trillions to pumping billions into its ambitious Belt and Road Initiate, China's economic rise has been nothing if not phenomenal -- perhaps this is China's century. Lending money (often called rescue loans) is one of its strategies to gain from sinking ships. The example of Sri Lanka here is apt.

According to a study carried out by AidData, the World Bank, the Harvard Kennedy School, and the Kiel Institute for the World Economy, China, a non-member of Paris Club, had undertaken 128 rescue loan operations across 22 debtor countries worth $240 billion till 2021. Moreover, China promotes its companies every time it lends to a nation. 

This is applicable even in the projects across Bangladesh. The contractors and consultants will be fixed by China. That's how the money flows back to China. Hunan Construction Engineering Group of China was picked up by the ExIm Bank in 2021 for the WASA water treatment plant. Faruque Hossain, who served in the Central Procurement Technical Unit of Bangladesh as the director general, in his piece argued that the Chinese credit not just increased the pressure of loans on Bangladesh but was also one of the reasons for corruption. In addition, not all of these Chinese contractors are known for the quality of their work.

The Economic Relations Department of Bangladesh has appealed to China to amend the contracts for the WASA loan. Although the communication is kept confidential from both the sides, the requests are made to bring a provision in the agreement to cancel the loan at any stage, even if the policy of the government of China gets revised. Bangladesh also wants a reduction in the commitment and management fees, taking into account harsh global economic conditions. Japan and South Korea don't charge commitment fees on bilateral loans, but Bangladesh will have to pay the commitment and management fees in case of China. 

A nation that had once vetoed Bangladesh's entry to the UN, China has shown significant interest to strengthen its ties in recent times. During President Xi Jinping's Bangladesh visit in 2016, a set of 27 MOUs were inked at the government level. Over a decade, Bangladesh has completed at least a dozen projects -- the Karnafuli underwater tunnel, Dhaka-Ashulia elevated expressway, modernization of telecommunication network, expansion of electricity network to name a few.

In 2021, just after the pandemic, Bangladesh's export to China crossed the mark of $1bn for the first time. But Beijing sticks to its profit count over assistance, when comes to disbursing loans. Sri Lanka is a victim of China's debt trap. Pakistan, a go-to-go ally of China's, has similar bad experience. Djibouti, Laos, Zambia, and Kyrgyzstan are also victims of China's debt trap.

As China intends to replace traditional institutions for lending money, nations in distress will have to be extremely careful in procuring loans from China. With its rise, Bangladesh should be strong enough on the negotiating table to avert undesirable conditions when it comes to loans.

Ayanangsha Maitra is an Indian journalist.

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