Foreign Aid

Foreign Aid is essentially economic aid and is provided to a country a foreign one or by an international agency. Foreign aid is given in the form of grants or concessional loans and as food aid, commodity aid, project aid and technical assistance. In Bangladesh, the standard practice is to treat only the loans received on concessional terms and grants as foreign aid. Excluded from the category are fund transfers in the form of military assistance, aid provided by foreign private agencies, suppliers credit, export credit, foreign portfolio investment, foreign direct investment and hard-term borrowing with an interest rate of 5% and above and/or a repayment period of less than twelve years. The donors of foreign aid to Bangladesh include individual countries, multinational financial institutions and international agencies and organizations. Foreign aid to Bangladesh is classified on the basis of terms and conditions, source, and use. Accordingly, the various types foreign aid are loans and grants, or bilateral aid and multilateral aid, or food aid, commodity aid, project aid and technical assistance.

Food aid is the supply of food from the donor countries and organizations or payment to suppliers of food to Bangladesh by them. Donor payments of costs associated with food supply such as transport, storage, distribution, etc. are also considered as food aid. Likewise, commodity aid represents donor funding of the acquisition of commodities including consumer items, intermediate inputs and industrial raw materials. Sale of food and commodities imported under aid arrangements generates a counterpart taka fund in the government treasury. Projects or activities implemented with the help of that fund also fall under food or commodity aid programs. Major commodities imported into Bangladesh under commodity aid programs are edible oil, seeds, fertiliser and chemicals. Project aid is the provision of grants and loans for the financing of project costs. It also finances the import of equipment and commodities related to projects. In Bangladesh project aid relates to a large extent to the financing of projects included in the annual development programme (ADP). Technical Assistance, often seen as a part of project aid refers generally to foreign aid for the improvement of the institutional capacity, transfer of technology, import of expertise (foreign consultants and technicians), and development of human resources by providing training facilities, including foreign fellowships.

Background The international flow of capital involving borrowing and lending across political borders is a relatively modern phenomenon. The bulk of the international flows of fund during 1870-1913 comprised private flows across only developed countries and the long-term debt of these countries in 1920 was estimated at only $100 million. The aid industry, as it is termed today, was actually founded with the establishment of the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF) in 1945, institutionalizing official flows of capital from developed to developing countries. IBRD, however, had the initial mandate to facilitate private investment in Europe and in developing countries. The first IBRD loans on concessional terms for specific development projects in the Third World were made to three Latin American countries in 1948 and 1949.

In the imperial days of Britain, the dependency was to meet the costs of government and of development out of local revenue. If a dependency was ever given any grant-in-aid, the British Treasury took control of its finances. In this way the imperial government suppressed the development needs of its dependencies, one of which was undivided India. After World War I, when the movement for independence was intensified in the major colonies, the British rulers enacted the Colonial Development Act of 1929 to provide external help through regular funding of development activities in the colonial territories for mutual benefit. Such direct assistance to dependent territories was reserved until 1950, but India and therefore, Bengal, never came under the operation of the Act. Neither was it benefited by the Colonial Development and Welfare Act of 1940.

The United States started a program of bilateral aid in 1948 to provide support for the reconstruction of Europe and parts of Asia. The largest of these programs was the Marshall Plan spawned by the Economic Co-operation Act 1948 and administered by the Economic Co-operation Administration (ECA). The ECA was replaced in 1950 by the Act for International Development, which translated President Truman's Point IV proposal into the creation of the Technical Co-operation Administration to aid the efforts of the peoples of economically underdeveloped areas. Between 1951 and 1958, several changes were made in the US aid policy and in 1954, the focus had shifted to India, Pakistan and some countries of the Near East. Nearly $300 million was authorized under the new Development Assistance title to provide aid to these countries. At present, the US is the largest single aid donor and the USAID (United States Agency for International Development) is the implementing agency of its foreign aid programs throughout the world. The Organization for Economic Co-operation and Development (OECD) established in 1960 is a major provider of foreign aid and capital to developing countries. Worth mentioning among the active multilateral providers of foreign aid are the IDA, ADB, EC, IFAD, NDF, UNICEF, and UN System.

In the late 1950s, when many African countries became independent and the British started to pay more attention to India, it declared at the Commonwealth Trade and Economic Conference in Montreal in 1958 that development aid would be extended to independent members of the Commonwealth. Since then, British bilateral aid has gone to such countries. The aid effort includes (a) budgetary grants and technical assistance grants, (b) colonial development and welfare loans and grants, (c) loans to colonial governments, and (d) loans under the Export Guarantee Act. The terms of British aid were growth-oriented. The repayment period for loans was long, with an extended grace period, and the interest rate was low. The British aid system has, however, become increasingly aligned with the efforts of other developed countries and thus the Commonwealth link has lost its importance.

Following its emergence as an independent state in 1947, Pakistan, especially its eastern part, East Pakistan inherited a vulnerable agricultural system characterized by low yield, primitive farm practices and poor agricultural lands affected by salinity, water logging, soil erosion and floods. Industries hardly existed and the few units that fell within its boundaries had become constrained by the severance of links with the source of raw material and/or the market for their products. The province had to import almost everything including even the simplest type of manufactured articles. The exports consisted of a few agricultural commodities with an uncertain world demand. The standard of education was low, literacy was poor and technical education was practically non-existent. Health and social welfare measures were scanty and means of transport and communication required urgent rehabilitation. Establishment of a stable state machinery covering civil administration, defence services, financial institutions, including banking and commerce, and the creation of the stable infrastructure of a modern progressive state was essential. As a result, economic planning was accorded the highest priority as a matter of national policy.

As early as 1948, a Development Board was set up to co-ordinate development programmes in both provinces of the country and different sectors of the economy. A six-year development programme was formulated in 1950 to cover both public and private sectors. After detailed studies in consultation with the central and provincial governments as well as with local and foreign experts, the National Planning Board was constituted in 1953. It prepared the First Five Year Plan covering the period between July 1955 and June 1960. The Plan envisaged a total development expenditure of Rs 10.8 billion of which Rs 5.76 billion was to come from domestic savings and Rs 5.04 billion in the form of foreign aid. The Second Five Year Plan (1960-65) envisaged a development expenditure of Rs 23.0 billion of which Rs 12.05 billion was financed from domestic savings and Rs 10.95 billion from external resources in the form of project aid and loans (Rs 6.85 billion), commodity aid (Rs 3.5 billion) and foreign private investment (Rs 600 million). The share of foreign aid in funding the Second five-year Plan was 38% of the total expenditures and the ratio came down to 32% for the Third Plan.

In the early years of Pakistan all foreign commitments were confined to technical and project assistance. Later, when harvests failed in 1951 and 1953, wheat shipments were received from the USA, Canada and Australia. Non-project assistance was extended by the USA for the first time in 1954-55 and under the Agricultural Trade Development and Assistance Act of 1954 (Public Law 480), USA provided surplus agricultural commodities. There were five different categories of assistance, namely technical assistance, project aid, non-project commodity aid, foodgrains and emergency aid, such as flood relief. The first two were entirely investment aid and the third provided intermediate goods such as iron and steel to serve development purposes.

Commitments of foreign aid to Pakistan by different friendly countries and various international organizations up to 31 December 1961 was $1.384 billion as project, commodity and technical assistance, and special food and relief aid. The country however, actually received $457.58 million up to the same date.

The major aid and loan-giving countries to Pakistan were USA, Canada, Australia, United Kingdom, New Zealand, West Germany, Japan, Sweden, France, Singapore, USSR, Yugoslavia, and the agencies were the World Bank (IFC and IDA), United Nations and its specialized agencies, the Ford Foundation, and Export-Import Bank of USA. An international consortium was formed in 1961 to help Pakistan in its development program and the first members of the consortium were Canada, Germany, Japan, the UK, and the USA. Pakistan had also received from the member countries of the Colombo Plan technical assistance in the form of training facilities, advisory services in a number of fields, such as education, medicine, agriculture, power and fuel, engineering, industry, trade, transport, communication, co-operatives, and also equipment for educational institutions, research organizations, hospitals. The share of East Pakistan in the total aid inflows into Pakistan during the period between 1948 and 1965 was only 34%.

Foreign aid to Bangladesh The emergence of Bangladesh as an independent state was accompanied by a devastation of the economy. In the very early years of independence, the country's industrial production had almost come to a halt, agricultural output had declined and the normal trading activities had virtually ceased. Without the help of the international community and massive inflow of foreign aid, it was almost impossible for the new nation to survive. Bangladesh started receiving foreign aid largely in the forms of food aid and disaster relief. Aid inflows gradually increased with growth in the country's development needs and along with the increase in volume, the aid became diversified. The aid committed to Bangladesh by donor countries and international agencies and organizations up to 30 June 1999 was $42.54 billion of which 14.08% was food aid, 24.42% was commodity aid and 61.50% was project aid. From a modest beginning with the disbursement of $270.8 million in 1972, the aid disbursed rose to $901.3 million in 1975, $1.27 billion in 1985, $1.81 billion in 1990 and $1.5 billion in 1999. Total foreign aid disbursed to Bangladesh during the period from 1972 up to 1999 amounted to $34.76 billion of which 48.2% was grants and 51.78% was loans. As a percentage of the country's GDP in current prices, foreign aid was 9.3% of the GDP in 1975, 7.0% in 1982, 6.76% in 1993, 4.53% in 1996, 3.67% in 1998 and 4.22% in 1999. The gradual decline in the foreign aid-GDP ratio during 1972-99 despite the consistent increase in the volume of foreign aid took place because of the increase in GDP during the same period. The per capita GDP has increased from $102.98 in 1976/77 to $284.11 in 1998/99 but the per capita debt obligation of the country however, has increased from $6.59 in 1973/74 to $115.9 in 1998/99. The progressive increase in per capita debt obligation is partly attributable to a shrinking of the share of grant in the external aid package.

Bangladesh received a total of US $1035.2 million as aid in 1998/99 and US $1950.7 million in 2007/08. This is consistent with the trends in flows of aid to Bangladesh in the past. However, there had been significant changes in the structure of the aid flows over the years and such changes continued to take place in the same pattern in recent years, too.

Food aid received by Bangladesh in 1973 was $182.55 million; it doubled within two years and continued to remain at that level up to 1980, since when it showed a declining trend and the annual inflows remained well below the $200 million level. However, there had been some individual years when the food aid inflows were relatively higher because of greater food shortages due to natural calamities. Because of this and due to the higher amount of food aid inflows in the early years, the annual average inflow during 1972-1999 accounted for $216 million. The food aid inflows accounted for $187.48 million in 1990, $137.43 million in 1995 and $176.94 in 1999. The total food aid in the 27 years between 1972 and 1999 was 16.8% of the foreign aid of all types on a cumulative basis. Statistics of the 19-year period between 1981-82 and 1999-2000 indicate that on an average, the country had to import 2.09 million metric tons of food in a year, of which 50% of it came under food aid. Figures for the period 1992-2000, however, suggest that the average annual food import requirements were much higher, 2.4 million MT. The share of food aid in food imports during this period significantly declined and accounted for just 785,000 MT per year and on average, the country imported the additional 1.61 million MT every year under cash purchase. Nearly the whole (more than 99%) of the food aid disbursed to Bangladesh comes as wheat and all the food aid is committed and disbursed as grants. The commitment of commodity aid to Bangladesh has drastically fluctuated and gradually declined during the period 2000-2011. The commitment of food aid was US $112.024 million in 2006-07 and US $110.831 million in 2010-11. The disbursement has also recorded decline 2000-2011. The disbursement of food aid was US $97.228 million in 2005-06, US $93.403 million in 2009-10 and US $54.971 million in 2010-11. The leading food aid donors include the UN system (mainly, World Food Programme), the USA, EEC/EU, Canada, Japan and Australia.

Commodity aid has been used in Bangladesh to meet the gap of balance of payments and also to generate local currency in the form of counterpart funds for financing development. The commitment of total commodity aid during 1972-1999 amounted to $10.39 billion, while disbursement was $10.09 billion and commodity aid accounted for 29% of total aid disbursement during the reference period. The disbursement of commodity aid continuously increased up to 1994 and then declined. The volume was $288.9 million in 1973, $378.48 million in 1980 and $456.71 in 1990, $333 million in 1995 and $324 million in 1999. Commodity aid received by Bangladesh is almost evenly distributed between grants and loans and during the 1990s the average annual share of loans in commodity aid was 48%. The commodity aid has declined unusually during 2001-2005 and Bangladesh did not receive any commitment, or disbursement of commodity aid during the period 2006-2011. Major commodity aid donors to Bangladesh include Japan, Germany, Netherlands, UK and USA.

Project aid comprises the largest share of foreign aid inflows into Bangladesh. Total commitment of project aid to the country during 1972-1999 was $26.17 billion, of which $18.84 billion was disbursed during the same period. The share of project aid in the cumulative amount of foreign aid to Bangladesh in the reference period ($34.76 billion) accounted for 54.19%. Technical assistance claimed approximately 4% of the total aid disbursed over the period. On an average, 63% of the annual project aid was received as loan and the rest as grants. Both commitment and disbursement of project aid had increased substantially during 1990's and afterwards. Growth of project aid in terms of commitment and disbursement respectively had been recorded as US $1584.602 million and US $1165.368 million in 1989-90, US $1585.177 million and US $1134.325 million in 2000-01, US $1772.873 million and US $1470.408 in 2005-06 and US $5857.795 million and US $1721.771 million in 2010-11. ADB, IDA, IFAD and OPEC are the major multilateral project aid donors and Japan is the single leader in the list of bilateral ones. Worth mentioning among others are France, Saudi Arabia and China.

Over the years the share of food and commodity aid in the total foreign aid to Bangladesh declined, while that of project aid including technical assistance experienced a substantial increase. This was basically a demand pool phenomenon although donor driven projects also had some role in it. Three-fourths of the total ADP allocation of 1972-73 was supported by foreign aid. The share of foreign funds in financing ADP had dropped to about 64% in the first two years of the eighties but increased again to about 80% in the next three years. However, the situation has improved significantly in the 1990s, when dependence on aid in the implementation of development projects has been significantly reduced. The development budget of 2000-2001 planned to finance 43% of the total ADP expenditures by foreign aid. A major weakness of the government of Bangladesh is its historical inability to properly utilize project aid and for many years the project aid disbursement averaged less then 20% of the opening pipeline. This was due to delays in identification, preparation and approval of projects, slow release of funds, poor infrastructure support, inefficiency in project management, the tied nature of aid and institutional weaknesses in meeting donor conditionalities.

There had been significant changes in the structure of aid to Bangladesh in the three decades after its independence. The share of grants was 89.0% in 1971-73 but it declined to 53.2% in 1979-80 and to 43.6% in 1998-99. Consequently, the aid volume contained increased amount of loans leading to increased debt-service liability. Bilateral aid, which was 73.9% of the total aid during 1971-76, has decreased to 42.6% in 1998-99 and accordingly the multilateral aid has increased from 26.1% to 57.4%. The share of food and commodity aid in the total flow of foreign aid showed a declining trend. Food aid has declined from 47.9% of total aid in 1971-72 to 11.5% in 1998-99. Similarly, commodity aid has fallen from 50.8% to 21.15% during the same period. And this has taken place along with a sharp increase in the share of project aid from just 1.35% in 1971-72 to 67.4% in 1988-99.

A special group of the recipients of foreign aid in Bangladesh is the non-government organisations. They are receiving increasingly large amount of funds from donor agencies and organizations. These funds are almost exclusively grants and are channeled through the NGO Affairs Bureau of the government. According to the Bureau sources, the donor fund received by the NGOs up to 30 June 1999 amounted to $180 million.

Most major donors of foreign aid to Bangladesh are now members of an Aid Consortium, often referred to as the Aid Group, which meets every year to review developments in the economy of Bangladesh and to pledge aid according to the judgments on its aid requirements. Members of the Aid Group include Australia, Belgium, Canada, Denmark, France, Finland, Germany, Italy, Japan, Netherlands, Norway, Sweden, Switzerland, UK, USA, IDA, ADB, EU, IFAD, UN agencies, the Ford Foundation and Asia Foundation. Non-Aid Group donors of foreign aid to Bangladesh include China, India, Kuwait, Pakistan, Saudi Arabia, South Korea, Spain, UAE, the IDB and OPEC.

The aid package, covering both grants and loans, has undoubtedly contributed to the development of the economy, but it is also leading to growing indebtedness. The country's growing trade deficit and savings investment gap, slow growth of revenues and rapid growth of current public expenditure have contributed to the increase in public debt. The external borrowing of Bangladesh consists mainly of medium and long-term debt acquired from both bilateral and multilateral sources on concessional terms with an average grace period of 10 years and a repayment period of 20 years. Besides, there are loans from IMF and IDB, as well as other creditors for the purchase of crude oil, ships, aircraft and foodgrain on deferred payment terms. The country's debt obligation belongs mainly to the public sector. The share of private sector borrowing is negligible. The total public sector debt has increased from $501.4 million in 1973/74 to $14.84 billion in 1998/99. Debt service payments on the total public sector debt rose from $19.0 million in 1973/74 to $773.1 million in 1998/99.

Bangladesh is facing an increasingly competitive aid environment. Donors often face budget constraints due to an increase in the number of countries requiring aid, especially after the collapse of the Soviet Union. Further, donors' assistance to Bangladesh is now contingent on implementation of reform programs and efficient utilization of foreign aid. Coordination with the donors has an important bearing on the mobilization of economic assistance. It is secured through a variety of means such as holding frequent dialogues with the development partners and inter-ministerial consultations on a regular basis. Projects having co-financiers are usually more complex, and demand greater attention than those which are financed from a single source.

The dependence of Bangladesh on foreign aid has gradually decreased over the past few years. The average annual aid flow to the country in 1990s was about 8.0 per cent of the GDP, while the average had come down to about 3.0 per cent in more recent years. The external debt servicing payments of Bangladesh as percentage of foreign exchange earnings (from export and remittances) has also been low – compared to about 23 per cent in FY1991 it had come down to 2-3 per cent in more recent years.

In the 1990s, the foreign aid received by Bangladesh was almost the same in amount as the country’s export earnings, but in recent years, the average annual export earnings are larger than the aid inflows by a factor of about eight to one. However, aid flow to Bangladesh has significantly increased in 2017-18 and 2018-19 largely because of the mega projects undertaken by the government in the country’s power and communication sectors. About 60.0 per cent of the aid received by Bangladesh comes from DAC countries. Japan was by far the largest donor and the other major aid-providers are USA, UK, Germany and Netherlands. The World Bank Group has the highest share (about 70%) among the multilateral agencies, followed by the EU, ADB and the UN. The share of multilateral and bilateral creditors is 62 per cent and 23 per cent respectively in terms of the country’s outstanding debt.

Following are some key statistics on grant and loans (government borrowings) of Bangladesh from external sources and the repayments during the period between FY2014-15 and FY2019-20.

Fiscal year External Aid Principal and Interest Payment Net foreign Aid Flow
Grant Loan Total Interest Principal Sub-Total After Payment of Principal After Principal and Interest Payment
2014-15 571 2472 3043 188 909 1097 2134 1946
2015-16 531 3033 3564 202 849 1051 2715 2513
2016-17 459 3218 3677 229 894 1121 2783 2554
2017-18 383 5987 6370 299 1110 1409 5260 4961
2018-19 279 6263 6542 391 1202 1593 5340 4949
2019-20 168 3318 3486 283 817 1100 2669 2386

Source Finance Division, Ministry of Finance, Government of Bangladesh, Bangladesh Economic Review 2020

[S M Mahfuzur Rahman]