Pattern of foreign aid undergoes transformation

One of the early proponents of international power and wealth redistribution ideology was President Julius Nyerere of Tanzania who mentioned: "In one world, as in one state, when I am rich because you are poor, and I am poor because you are rich, the transfer of wealth from the rich to the poor is a matter of right; it is not an appropriate matter for charity" (Bauer and Yamoy 1977: 27). However, evidence shows that external aid flow does not always guarantee development of poor countries. Sensible domestic policies and governance are the key determinants of sustainable economic and social transformation of the poor countries rather than injection of development aid which, in most cases, arguably fails to deliver the promised benefits.

In the contemporary development literature, debate on the role of foreign aid in development is still going on. For example, some researchers argue that the conclusions derived from the aggregative view on aid are not likely to be tenable for individual countries whereas the quality and relevance of domestic economic policy explain the differences in performance among individual countries despite unprecedented globalisation and increasing interdependence among the countries in the world.
The issue is thus not simply whether aid increases dependency and reduces the role of domestic policy. What is necessary is to identify the "essentials of development aid" that can play the critical role in unleashing the forces of development of the poor countries and identifying the country-specific ways of making aid influence, not determine the development of the poor countries. In the context of the unresolved controversies relating to the developmental role of external aid, it is important to highlight the importance of country-specific insights in understanding the mechanisms and processes that explain why, how and when aid works in particular societies which are key considerations for making the design and delivery of development aid effective.
The pattern of foreign aid has undergone a striking transformation in Bangladesh during the last four decades. The average yearly aid totalled US$ 1.3 billion over the 40-year period. Although aid only accounts for roughly 2.0 per cent of GNI (gross national income), it constitutes almost 50 per cent of the country's annual development prgramme (ADP). In this globalised world international financial cooperation holds a crucial role, especially for Bangladesh, in bridging the gap between demand and supply of resources for investment and to offer cushion to our balance of payment. However, the scope of mobilising concessional aid has been shrinking over the years due to global economic recession and growing demands for external aid among developing countries. The primary objectives of resource management are to ensure mobilisation of government's external resource in line with national development strategy at the   lowest possible cost and to contain debt burden in a comfort zone consistent with a prudent degree of risk.
AID FLOW, COMPOSITION AND TREND: For the period since independence up to June 30, 2013, a total amount of about US$ 59.31billion of foreign aid was disbursed, of which US$ 24.66 billion is grant and US$ 34.65 billion is loan. Of the total amount, US$ 6.76 billion as food, US$ 10.91 billion as commodity, US$ 38.38 billion as project aid and US$ 3.26 billion as budget support were disbursed.
Significant changes have taken place in case of the total aid package to the country over forty two years since independence. The share of grant is declining gradually vis-à-vis the share of loan. Considering sources of the total aid flows, multilateral aid has been growing through years compared to bilateral aid. Shifting priorities and strategies of the development partners, recent global economic recession, oil price hike, vulnerable food security and shifting in global economic power-structure have made aid mobilisation more difficult than ever before.
Co-ordination with development partners has an important bearing on the mobilisation of economic assistance. It is facilitated through a variety of means such as holding meetings regularly of the Bangladesh Development Forum, greater interaction of the Local Consultative Groups which aims at aid effectiveness and harmony, regular triangle portfolio meetings of ERD (Economic Relations Division), donors and project implementing ministry/agencies, etc. Some key features of the financial year 2012-2013, along with latest available data related to external aids, are discussed below:
Disbursement: In the FY 2012-2013, a total amount of US$ 2.81 billion was disbursed which registered a record of disbursement in a single financial year since independence. Of this US$ 726.3 (26 per cent) million is grant and US$ 2,084.8 million (74 per cent) is loan. Of the total amount, food aid, project aid and budget support are US$ 50.2 million, US$ 2,418.6 million and US$342.2 million respectively. Multilateral donors disbursed lion share of the total disbursement amounting to US$ 1,858 million and bilateral donor disbursed US$ 953 million.
Considering cumulative aid flow over the years, the major multilateral development partner is IDA followed by ADB. On the other hand, Japan ranks as the largest bilateral development partner followed by USA.  Top 10 development partners according to contribution have been presented in figure -1.
Figure-1
Changing scenarios in aid composition: Over the past several years changes have taken place in the composition of foreign aid disbursement. The share of grant is declining and share of loan is increasing gradually. The share of grant and loan of disbursed aid was 90.5 per cent and 9.5 per cent in FY 1971-1972 which stood at 25.8 per cent and 74.2 per cent respectively in FY 2012-2013. Similarly, multilateral aid has crossed the stock of bilateral aid. The share of bilateral aid has decreased from 85.7 per cent in FY 1971-1972 to 33.9 per cent in FY 2012-2013. On the other hand, share of multilateral aid has increased from 14.3per cent in FY 1971-1972 to 66.1 per cent in FY 2012-2013. Moreover, over time, the flow of food and commodity aid has drastically declined. Food aid, which was 47.9 per cent in FY 1971-1972, has decreased to 1.79 per cent in FY 2012-2013. Similarly, commodity aid has come down to nil in FY 2012-2013 from 50.8 per cent in FY 19971-1972. On the other hand, project aid has shot up from 1.3 per cent to 98.21 per cent during the same period.
Sectoral allocation of foreign aid depicts that power sector (16 per cent) is the highest recipient of foreign aid followed by public administration (14 per cent) and transport (14 per cent). It is notable that infrastructure sector is the highest recipient as in line with the policy of the government. Infrastructure gaps are the major hindrance of development in Bangladesh highlighted by the most of the research organization including Planning Commission. Public administration sector gets the highest portion of foreign aid in 2012/13 FY which underscores the need for the improvement in governance. It is also notable that education sector (14 per cent) gets priority over transport (9.0 per cent). Power sector gets second highest allocation as expected due to the dire need to reduce the gap between demand and supply of power generation.    
Aid utilisation: Aid utilisation is in a state of a critical juncture. This criticality arises from slow implementation of projects. Over time, food aid and commodity aid have lost their pace as important constituents of total aid package. On the other hand, project aid has become more and more popular and important mode of assistance considering the purpose of aid. From independence to June 30, 2013, a total of US$ 59.31 billion of foreign aid was disbursed on a cumulative basis. As a policy the donors reduced commodity and food aid as a young nation matures over years. The food and commodity aid is generally replaced by more and more soft loans. The bilateral aids give way to more multilateral concessional loan. The share of total food aid, commodity aid, budget support and project aid have been shown in the following pie chart.
Figure-2

Food aid: Food aid is now availed of in reduced volumes and occasionally received in larger amount to support natural calamities like floods, cyclones and unfavorable weather conditions. This is because self-sufficiency has been achieved in recent years with the increased food production. Although, a persistent level of food aid is essential to assist the poorest section of the population and to run the targeted safety net programs like VGD (Vulnerable Group Development) and FFW (Food for Work). The share of food aid has gradually declined over the years which is presented in the bar chart below.
Figure-3
Commodity aid: Generally, commodity aid is offered cushion to balance of payments as well as to finance development projects. Increasing export volume and tax revenue growth, consistent increased flow of foreign remittance have eased balance of payment deficit from own resources. In the process, the share of commodity aid has declined considerably in the recent years and zeroed in FY 2012-2013.
Figure-4

Project aid: The largest share of foreign assistance comprises of project aid. It is extended by the development partners primarily to finance projects included in the Annual Development Program (ADP). The share of project aid excluding budget support has increased over years as shown in figure 5.
Figure-5
Budget support: Budget support is extended in one single- or multi-tranche to undertake different priority programmes. The payments against budget support are triggered on fulfillment of certain agreed policy objectives between the recipient country and Multilateral Financial Institutions. It gives recipient country more flexibility to align aid spending with national priorities in comparison to project aid. Therefore, budget support is becoming more popular form of receiving external aid. However, the budget support does not come by very frequently. They are usually offered sparingly in occasion where development partners trigger payment only after recipient countries achieve previously agreed benchmarks. Disbursement under budget support scheme for last couple of years has been shown in figure-6.
Figure-6
Professor Dr. Shamsul Alam is Member, General Economics Division
of Bangladesh Planning Commission. Dr. Md. Taibur Rahman,
Senior Assistant Chief, has provided research support in
preparing this policy brief.
 [email protected]