Better use of aid can offset budget deficit

Making the best use of the growing aid pipeline can help the government manage the large deficit in the budget, economic analysts have said. 

They say the projected revenue shortfalls in FY2021 can be offset by an intensified use of foreign money in the aid pipeline, which stood at a staggering $49.28 billion at the end of June this year.  

“The budget for this fiscal has a large deficit. Foreign loans can play a vital role in narrowing the deficit. So, disbursement of foreign money from the aid pipeline is very important for the government this year,” former central bank governor Dr Salehuddin Ahmed said. 

The government announced a hefty Tk 5.68 trillion budget with Tk 1,900 billion or GDP’s 6 percent deficit amid Covid-19 eying to bring back the economy on track and meet the mid and long-term goals.  

For getting more funds from the aid pipeline, the government has to put some extra efforts for quick and quality implementation of aided projects alongside complying with fulfilling conditions tagged with the aid, Dr Salehuddin suggested. 

Otherwise, the economy could be in big trouble because of fund crunch due to slow economic activities amid corona pandemic, he warned. 

In contrast to a fear of a slump in project aid release in 2019-20 fiscal year, the government finally managed to get the highest ever $7.27 billion foreign funds released despite slow project implementation during the corona lockdown.   

The released funds were $730 million or 11.16 percent higher than $6.54 billion foreign funds disbursed by different development partners one year ago.   

Even the amount was $170 million or 2.39 percent larger compared to $7.10 billion project assistance (PA) disbursement target set by the government for 2019-20 fiscal year, ERD officials said. 

“Fund release was supposed to drop in FY20, but it reached historically highest level as development partners quickly released the money they committed as budget support to revamp the Corona-shocked economy,” an ERD official dealing with the matter said. 

Development partners made commitments for $1,732 million aggregate budget support immediately after the corona crisis hit the country, according to ERD.

The budget support includes $732 million from International Monetary Fund (IMF), $500 million from Asian Development Bank (ADB), $250 million from the World Bank and another $250 million from newly formed Asian Infrastructure Investment Bank (AIIB)  

Still, $2.28 billion foreign funds entered the aid pipeline in the last fiscal year as $7.27 billion fund release was lower than $9.55 billion total fund commitments. In FY19, $3.36 funds entered the pipeline.   

Usually, implementation of a foreign-funded project takes three to five years and the committed funds are disbursed in the whole execution period. 

“Aid pipeline is getting larger every year as undisbursed money is rising as well. There are some reasons for it. Much analysis has been done on these reasons, but that failed to yield any results,” former caretaker government adviser Dr AB Mirza Aziz remarked. 

There are some complexities from the part of the development partners, while other fund disbursement problems are created by the government agencies with slow project implementation.  

Several implementation challenges have to be addressed to make sure disbursements keep up with growth in commitments, according to economic analysts. 

Often, it takes more than a year for the project approval by the government. Delays in the appointment of project staff, contract approvals, and revision of project design and cost are often blamed.

Weak capacity of implementing agencies, coordination issues with the Planning Commission, procurement delays, and difficulties in managing the contractors further hinder implementation and slow down fund disbursements, analysts say. 

Commitments have shot up abnormally in the last three years that has contributed to the piling up of committed funds in the pipeline. 

Before the fiscal year 2009-10, Bangladesh used to receive aid commitments of $1 billion to $2 billion a year. 

Since 2009-10, Bangladesh had been getting $5 billion a year. From the fiscal year 2015-16 onwards, the amount has been rising.

For instance, Russia agreed to fund the $11.38 billion Rooppur Nuclear Power Plant. The plant would take 10 years to implement but all the loan agreements were signed within 12 months.

Similarly, India provided $7.5 billion, while China and Japan made handsome commitments too.

The moment a loan agreement is signed, the amount enters the pipeline, ERD officials said. 

There is still enough room for improvement in the government’s project implementation capacity for better use of foreign funds, according to economic analysts.