Setting the priorities for external aid

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Shahiduzzaman Khan
With barely two months left for announcing the new budget for the forthcoming fiscal, the government is reportedly looking for ways to ensure expeditious disbursement of external assistance from the pipeline. With a budget deficit of Tk 395 billion in the current financial year, the government is, thus, weighing various options for getting, what a national daily hinted at, this week, at least Tk 185 billion from the bilateral and multilateral lenders for financing its budgetary deficit.
According to a report published in that daily under mention, the government has advised its Economic Relations Division (ERD) also to speed up the negotiation process with the multilateral donors whose foreign loans carry a rate of interest at around 2.0 per cent. The government would like to go for overseas loans, as the rate of interest against borrowing from the local sources is otherwise high. Compared to one per cent rate of interest annually for some overseas loans, the government has to pay more than 7.0 per cent on account of interest charges for loans taken from the local sources. The authorities, as the reports said, will have to spend Tk 146.90 billion in the current fiscal for interest payment.
The latest trend suggests that the foreign exchange reserve, which has been hovering over US$ 10 billion during the last one year, may come under some pressure in the coming months because of slow export growth and the likely downward inflow of remittances. The International Monetary Fund (IMF) last week observed that the pace of foreign exchange reserve growth would slow down substantially in the forthcoming fiscal that might put additional pressure on the government to help maintain the balance of payments.
On the contrary, the government's domestic debt-servicing, in terms of payment of interests on such borrowings, has been on the rise over the years. A preliminary estimate shows such spending is likely to reach Tk 170 billion in the next budget from Tk 146.90 billion in the revised budget of the current fiscal year. The next budget deficit has been projected at Tk 390 billion, 54 per cent of which is planned to be borrowed from savings instruments and the banking sector. Here too, there is one notable development. The sales of various savings certificates by the government have marked a high growth so far during this fiscal. This has otherwise enabled it to reduce its borrowings from the banking system.
The rate of interest on foreign loans remains, however, low. But such loans and grants need to be properly used for the purpose for which these were taken. In fact, the government has not able to get the release of a substantial part of the amount committed by donors and this has been the situation over the past several years. At present, $8.5 billion foreign aid is in the pipeline. About half of that amount has not yet been disbursed, as the implementation of the programmes and projects, supported by external aid, has not been up to the mark. In the last two fiscal years, the donors, as the reports said, pledged $2.44 billion, but the disbursement was only $1.84 billion. In fiscal 2007-08, $2.84 billion was pledged, but the government could get the return of $2.06 billion from the available pipeline. This amount was the highest disbursement in a single year in Bangladesh's history. Normally an amount between $1.4 billion and $1.5 billion is disbursed in a year.
As disbursements of aid have not matched the situation in the pipeline and the lists of conditions attached thereto are extending, mobilisation of more domestic resources has become imperative for reducing dependence on foreign assistance. Donors do often tag "reforms" to disbursement of external aid. But such reforms should have been undertaken at government's own initiative. Here too, the scorecard of successive governments has not been satisfactory.
The government, in partnership with private sector, needs to draw up reforms programme and implement the same, rather than allowing donors to force the government to swallow any better pill. If government carries out reforms of consequence -- institutional, sectoral or otherwise -- on its own, it would show more sincerity and bring more credibility among the people about goals and objectives of such reforms. There is no denying that the country needs foreign assistance from its development partners for implementing large infrastructure projects. But the government should take here the driving seat and pursuade the donors on accepting its priorities for providing aid.
However, the country cannot depend on foreign aid forever. It has to use local resources effectively for transforming Bangladesh economy from an aid-dependent to a self-reliant one. Everyone should take the stand of relying more on domestic resources and productive uses of available foreign aid. Sadly enough, the country has not reached to a position that is free from need of foreign assistance.
Meanwhile, there should be an appropriate study about evaluate costs and benefits of foreign aid to evaluate the effectiveness of aid utilisation. In this context, some knowledgeable quarters have been pointing out that what actually happens when aid begins to pour in, a substantial part of it finds its way back to the lenders in the form of consultancy fees and sales of equipment. Of course, the government officials, politicians and the influential persons, who are involved in the process, are the other beneficiaries of foreign aid. Not much of aid reach the poor through some services or benefits. This is unfortunate.
In such a situation, it is high time for the government to streamline overseas assistance by bringing reforms in its administrative set-up and set the priorities in seeking such aid. It should, however, remain cautious as far as possible about taking suppliers' credit and hard-term loans at this stage of Bangladesh's growth. szkhan@dhaka.net