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Bangladesh urges China loan tweaks amid scrutiny of BRI bailouts


Dec 31, 2010

Bangladesh urges China loan tweaks amid scrutiny of BRI bailouts​

Sources say letter asks to amend cancelation, dispute, maturity and fee policies

Bangladesh aims to build a China-backed water treatment plant, but it hopes to secure better loan terms first. (Source photo by Reuters)
SYFUL ISLAM, Contributing writerApril 1, 2023 11:38 JST

DHAKA -- Bangladesh is poised to finalize a new loan from China for a water treatment plant, but first Dhaka is pushing for changes to conditions it deems to be against its interests.

The new $276 million "tied loan" -- for a specific project whose contractor is chosen by the Chinese side without a competitive tender -- will be supplied by the Export-Import Bank of China. A signing ceremony is expected sometime in April, bringing years of talks to completion.

But Bangladesh's attempt to review key details of the deal are a sign of recipient countries pushing back against some of China's lending practices. These practices are under growing global scrutiny, including a recent study by researchers at the World Bank and other institutions on Beijing's hefty bailouts for Belt and Road Initiative participants that have run into trouble.

The loan in question will be used for the Rajshahi Water Supply and Sewerage Authority (WASA) Surface Water Treatment Plant. China committed around $20 billion in project loans to Bangladesh when President Xi Jinping visited Dhaka in 2016, although sources said that until now Bangladesh has signed agreements worth slightly less than half that.

The treatment plant is to be built by China's Hunan Construction Engineering Group, which was officially selected by the Ex-Im Bank in 2021. Parvez Mamud, chief engineer at Rajshahi WASA, said the authority had been planning the project with Hunan Construction since 2018.

According to the draft contract, the interest rate on the project will be 2%, with a one-time management fee of 0.25% and a 0.25% commitment fee per year on any unspent funds. But some observers say that tied loans have disadvantages, including higher costs than are first apparent.

M. Fouzul Kabir Khan, a former Bangladeshi government secretary and an expert in project financing, said that since the South Asian country has limited capacity to generate revenue, and multilateral donors do not fund all kinds of projects, Dhaka has little choice but to seek such conditional loan arrangements from China as well as India.

But he said that had there been an option to go for international bidding, the price could have been lower. "In this loan, the project contractor [is] selected by the lender, also from China," Khan said. "Since these are tied loans, their procurement price becomes higher."

Khan said that when the total costs are added up, the effective interest rate on such loans can balloon to as much as 10% to 15%. This has caused friction between Bangladesh and China in the past, when the former sought to re-evaluate high costs for rail projects.

Khan is critical of China's lending strategy, arguing it is more about promoting Chinese companies than assisting Bangladesh. "Before taking such costly loans, we will have to check how necessary the project is," he said.

Bangladesh appears to need the water treatment plant to supply the west-central part of the country. But authorities in Dhaka clearly agree that the terms of this and other loans are not ideal.

Chinese President Xi Jinping hosts Bangladeshi Prime Minister Sheikh Hasina in Beijing in 2019. © Reuters
Officials at the Economic Relations Division (ERD) Bangladesh have sent a letter to the Chinese side to seek a number of amendments. The letter has not been made public, but ERD sources shared some of the requests on condition of anonymity.

One is to change a provision that would give China the authority to cancel the loan at any stage, in the event of changes in Chinese government policy. Bangladesh also wants a reduction in the commitment and management fees, taking into account harsh global economic conditions.

ERD officials said there is no commitment fee on bilateral loans from Japan and South Korea, while India charges more targeted fees on specific projects instead, of assessing a fee on the total unspent loan amount. As for multilateral donors, they said that the World Bank does not charge commitment fees, while the Asian Development Bank charges 0.15%, and that most development partners do not charge management fees.

The ERD brought up maturity periods as well. They said the duration on Chinese loans is only 20 years, while other lenders offer anywhere from 25 to 40 years. Bangladesh hopes China will lengthen the term to 25 years, while boosting the grace period to six years from the current five.

Meanwhile, "to ensure neutrality," Bangladesh is seeking third-country arbitration in the event of disputes, rather than settling them under Chinese law as stipulated by Beijing.

A senior official at the ERD, who declined to be identified, told Nikkei Asia that every time Bangladesh sits down for loan negotiations with China, it seeks more flexibility. "We always want the loan tenure and the grace period to be higher," the official said.

The latest pushback from Bangladesh comes as the study on China's "rescue lending" highlights the strains of development debt.

China extended 128 bailouts in 22 debtor countries worth a total of $240 billion between 2000 and the end of 2021, according to the report released this week by researchers at AidData, the World Bank, the Harvard Kennedy School and the Kiel Institute for the World Economy. "China has developed a system of 'Bailouts on the Belt and Road' that helps recipient countries avoid default and continue servicing their BRI debts, at least in the short run," the report states.

Bangladesh is not mentioned, but South Asian neighbors Sri Lanka and Pakistan are included as examples of countries that have needed help. All three of these countries turned to the International Monetary Fund for support last year as well.

The study says that "China's rescue loans differ from those of established international lenders of last resort" like the IMF because they are "opaque," "carry relatively high interest rates" and they are "almost exclusively targeted" at BRI debtors.

China's government rejected the report's conclusions. Foreign Ministry spokesperson Mao Ning told reporters that Beijing invests on "the principle of openness and transparency," and that China "has never forced any party to borrow money, has never forced any country to pay, will not attach any political conditions to loan agreements and does not seek any political self-interest."

Back in Bangladesh, Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh, said the main problem is that China picks its own contractors. "Thus the costs go up," he said.

Mansur, a former top IMF official, called for Dhaka to tread cautiously. "If we fail to properly use the loan, we may face trouble."



Apr 18, 2012
United Kingdom
United Kingdom
China is pursuing her self interest and BD needs to pursue hers. If there is an intersection between the two strike the deal, other wise walk away.

I am always against taking any loans where the lender can dictate how you can spend the money, it is always a recipe for disaster.

If chinese contractors are to be used, do not go for a loan. Agree instead on a fixed price build, operate, transfer model where cost over runs are chinas problem... this would cost less over the life of the project.


Nov 20, 2009
United States
China has four objectives, there maybe more:
1) better ROI
2) geopolitical influence
3) sell more material and equipment
4) employment for Chinese citizens.

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