Is Bangladesh at risk of falling into the Chinese debt trap?

Bangladeshi Prime Minister Sheikh Hasina with Chinese President Xi Jinping. Over the past two decades, bilateral relations between the two countries have evolved from a commercial relationship to a strategic partnership. Archive photo: Star


Bangladeshi Prime Minister Sheikh Hasina with Chinese President Xi Jinping. Over the past two decades, bilateral relations between the two countries have evolved from a commercial relationship to a strategic partnership. Archive photo: Star

Bangladesh, the second largest recipient of Chinese investment in South Asia after Pakistan, imports the largest volume of goods from China, making the country Bangladesh’s largest trading partner. This is the beginning of the story where China is offering Bangladesh financial aid and development experience for its “expensive megaprojects” in order to realize the latter’s “Vision 2041” – a well-conceived dream of being a country. developed. However, the massive amount of funding from China prompts critics to wonder, citing the example of Hambantota in Sri Lanka: “Is Bangladesh getting entangled in ‘debt trap’ diplomacy? China ?

Debt trap diplomacy, a narrative widely used against China, is believed to stem from the “infrastructure war” between China and the Western world. It is a bone of contention as to whether China really has a “Machiavellian strategy”, as Chinese projects in Bangladesh are too fragmented to achieve such astute strategic goals. Once “the sleeping giant”, now the “second most influential economic superpower,” China follows socialist ideology in political affairs, but adopts open market policies under the name of “market socialism.” Historical data shows that China still has a strong affiliation with South Asian countries due to the region’s “grand bazaar”. Bangladesh’s geopolitical eminence and commercial notoriety prompted China to pay close attention to cashing in this lucrative market.

To use the potential of becoming the “economic hub” of South Asia, Bangladesh needs external funding for its flagship development projects, the funding of which goes beyond national affordability. This led Bangladesh to seek external financing options on favorable terms. Bangladesh’s loss of substantial financial assistance from global lenders – for example the World Bank’s refusal to finance the Padma Bridge – and the attractive nature of Chinese investments have created a gateway for the country to enter the economy of Bangladesh. On the other hand, China, as part of its external orientation, is getting closer to Bangladesh by associating the country with different regional platforms led by China, for example the Asian Infrastructure Investment Bank (AIIB), the Belt and Road Initiative (BRI), etc.

Sino-Bangladeshi relations, which began in 1976, were limited to trade agreements until the first decade of the 21st century. Bilateral relations went through two different phases before and after the launch of the BRI. The relationship evolved into a strategic partnership after 2010, when countries signed a number of trade, transit and defense supply agreements. The two countries are working to reduce the huge trade deficit by establishing free trade zones. China is trying to prove that it is Bangladesh’s trusted friend by interweaving diplomatic, defense and economic ties.

Although Bangladesh and China have a distinct political and social status quo, collaborative efforts have brought them closer together. The principle of non-intervention by China in the internal affairs of its partners leads Dhaka to welcome more and more investments from Beijing. As an emerging economy, Bangladesh needs significant investments to deal with its socio-economic issues, which China can support. On the other hand, Bangladesh is very important in China’s strategic calculation, as it can connect the landlocked province of southeast China. In addition, Bangladesh’s cheap labor force provides an opportunity for China to relocate its declining industries. Yet critics take a controversial look at this relationship by denouncing China’s role – or lack thereof – in resolving the Rohingya crisis.

According to the World Bank and the International Monetary Fund (IMF), the fact that a country crosses the threshold of danger if its external debt exceeds 40% of GDP ensures that Bangladesh is in the “safe zone” because its loan total foreigner is less than 15% of its GDP. “Flow of External Resources into Bangladesh,” a publication by the Ministry of Finance, reported that the country’s total outstanding foreign loans amounted to nearly $ 44.06 billion, representing a per capita loan of about $ 278 billion. dollars for fiscal year 2019-2020. This clearly shows how the reality differs from the assumption that Bangladesh is overloaded with external debts. Another misconception that Bangladesh will fall victim to the Chinese debt trap, pointing to the growth of Chinese investment, also does not reflect the reality on the ground. Of Bangladesh’s total external debt in fiscal year 2019-2020, 38% came from the World Bank, 24.5% from the Asian Development Bank (ADB), 17% from the Japan International Cooperation Agency ( Jica), 6.81% from China, 6.14% from Russia and 1.3% from India. These data show that Bangladesh is on the right track.

The strategic advantage of cross-border trade has tilted Bangladesh exponentially towards China, leading critics to say that too much dependence on money from China will make Bangladesh beholden. But Bangladesh’s diplomatic maneuvers over the past decades demonstrate that the country has struck the right balance among its donors. By injecting money into Bangladesh, China is in fact trying to take its long-standing relationship to a new high. Although there is a story that Bangladesh is going to fall victim to “payday loan diplomacy,” but the counter story explains how Chinese soft loans reduce pressure from Western donors for economic and political reforms.

Bangladesh sees Chinese investment as a welcome addition to existing sources while creating a competitive environment. Before drawing any conclusions in advance by marking China’s debt trap with Bangladesh, it should be remembered that the financing options for Bangladesh are very limited. In addition, a loan becomes a burden if it is not used optimally. To date, all Chinese-funded projects in Bangladesh have proven to be financially viable. There is no instance where Bangladesh has accepted all diktats while signing financial deals blindfolded.

Bangladesh’s current stronger position in terms of China’s external debt will change as Chinese investment increases, but long-term returns will be more attractive if funds are used efficiently. Bangladesh needs to negotiate carefully before signing a financial agreement, focus more on soft loans and ensure rapid implementation of projects. In addition to taking funds for infrastructure strengthening, Bangladesh can also take advantage of China’s development experience to create a win-win situation. Not to mention that Bangladesh’s macroeconomic management policy is prudent enough to avoid China’s debt trap, even if one exists.

Hussain Shazzad is a strategic affairs and foreign policy analyst.

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