China’s investment and lending in South Asian and African countries has dramatically increased following the “Going Global” strategy of 1999, reaching new heights with the ambitious Belt and Road Initiative (BRI) launched in 2013. This strategic expansion positioned China as a key trading ally for many middle and low-income countries, especially in South Asia. Chinese government’s interest in Bangladesh gained prominence around 2009 and intensified after Xi Jinping’s landmark visit to Dhaka in 2016—the year Bangladesh joined the BRI and cemented its status as Beijing’s strategic partner.
Post-2016, Chinese investments in Bangladesh have boomed, particularly in large infrastructure projects. Additionally, since 2015, Beijing has been Dhaka’s largest trading partner in both economic and defence sectors. Given these developments, analysing the impact of China’s growing investments and loans on Bangladesh, a steadfast ally in Beijing’s network, is crucial.
Since Bangladesh joined the Belt and Road Initiative in 2016, Chinese investments in the country have skyrocketed, surging sevenfold to $1.346 billion in 2022 from $241 million in 2016. Bilateral trade also soared, reaching $25 billion in 2022 from $15.3 billion in 2016, with Beijing injecting $800 million in investments last year alone. To further enhance economic ties, China granted duty-free access to 97 per cent of Bangladeshi products in 2021, later increasing this to 98 per cent. In terms of Foreign Direct Investment (FDI), China has become the frontrunner, contributing over $2.6 billion to Bangladesh over the past decade and emerging as a top investor in the country’s exclusive economic zones. Unquestionably, Chinese investments have significantly boosted Dhaka’s economy. Nevertheless, the Dragon’s embrace may carry more curses than blessings.
Chinese lending in Bangladesh demands special scrutiny. According to the Economic Relations Division (ERD), Chinese loans to Bangladesh have reached $3 billion over the last four fiscal years, constituting about 40 per cent of the nation’s total external lending. In each of the last two fiscal years, Dhaka received at least $1 billion in Chinese loans, positioning China as the second largest bilateral lender and the fourth overall, accounting for 10 per cent of Dhaka’s total annual borrowings.
However, these loans come with an interest rate of about two per cent and a commitment fee of about 0.25 per cent, but with a notably short repayment period of 10-15 years—much shorter than the 30-40 years typically offered by multilateral lenders like the World Bank. This shorter repayment timeline results in higher instalment payments, exerting additional pressure on the repayment capacities of economically vulnerable countries like Bangladesh.
A glance at Dhaka’s economic landscape paints a concerning picture: the country has been grappling with inflation, hitting an 11-year high in May 2023, with rates hovering around 9.74 per cent as of this April. Food inflation escalated to 10.22 per cent last month. Its foreign reserves have been dwindling since September 2021, standing at a gross of $18.42 billion and a net of $13.22 billion currently. External debt has breached the $100 billion mark for the first time, and the trade deficit last fiscal year hit $15.49 billion. A dollar shortage exacerbates these issues, with the currency depreciating to 117 Bangladeshi Taka this year. Given these circumstances, the structure of Chinese loans undoubtedly adds to Bangladesh’s economic burdens.
In terms of bilateral trade, there exists a stark trade imbalance in favour of China. During the last fiscal year, Dhaka imported goods valued at $22.9 billion from China but exported merely $677 million in return. Despite the duty-free advantages, Dhaka’s exports to Beijing have remained disappointingly low for three consecutive years. Regarding bilateral external debt, Bangladesh ranks among the top 10 nations indebted to China. According to the World Bank’s International Debt Report (2023), Bangladesh’s bilateral external debt to China stands at $6.05 billion, representing 9 per cent of its total external debt and 24 per cent of its bilateral external debt as of the last fiscal year. This debt has seen a dramatic increase, climbing from $0.97 billion in 2016 to $6.05 billion in 2022, driven largely by Chinese funding for infrastructure projects in Bangladesh.
During Xi Jinping’s 2016 visit to Bangladesh, China pledged loans totalling $24.45 billion across 27 deals under the Belt and Road Initiative (BRI). However, the disbursement of these funds has been notably sluggish. Delays in Beijing’s loan approvals have led to significant cost inflations, as observed with projects like the Dhaka-Ashulia Expressway, which waited four years for financial clearance, resulting in escalated costs. According to the Economic Relations Division (ERD), five projects involving $2.47 billion in Chinese loans are currently experiencing setbacks due to these prolonged approval and disbursement processes, further inflating costs. Additionally, concerns about Chinese debt-trap diplomacy have surfaced in Bangladesh, similar to cases in Sri Lanka and Pakistan, highlighted by underperforming initiatives like the Payra Power Plant. A report from US-based AidData indicates that 59 per cent of Chinese-backed projects in Bangladesh are grappling with ESG risks, with the affected project value skyrocketing from $1 billion in 2015 to over $12 billion by 2021.
In this light, the recent Chinese approval of a substantial soft loan worth $5 billion (over 36 billion Chinese yuan) to Bangladesh warrants close scrutiny. This financial infusion is expected to alleviate the strain on Dhaka’s dwindling foreign reserves and provide crucial budgetary support, enabling the import of raw materials essential for local businesses. Although negotiations are still ongoing regarding the interest rates and repayment terms, the dynamics of Chinese investment in Bangladesh must be approached with prudence. Amidst a cascade of economic challenges, Bangladesh cannot risk falling into a debt trap like its neighbours and becoming yet another instrument in China’s strategic ambition to dominate the global stage.
The writer is an author and columnist and has written several books. His X handle is @ArunAnandLive. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect News18’s views.
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