Chinese Loans To Bangladesh: Risk Of A Debt Trap? 3

The trade relationship between Bangladesh and China favors the latter as the former imports much more than it exports. As shown by the graph below, China is the top import source for Bangladesh. At the same time, it is only its tenth largest export destination.

Bangladesh has been a big beneficiary of China’s One Belt, One Road (OBOR) initiative as the latter continues to increase its influence in the region. The strategic geographic location of Bangladesh as it pertains to China’s energy imports is also important to note.

However, Bangladesh needs to exercise caution when it comes to the loans that have been extended by the Asian major.

Financial help, but at what cost?

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During a visit by China’s President Xi Jinping in October 2016, companies representing the two countries had signed trade and investment deals amounting to $13.6 billion. Loan agreements to the tune of $20 billion were also reached. Since these deals were reached in the presence of government leaders, Bangladesh had deemed them to be soft loans.

However, as the Economic Times has reported, China is pushing the country to convert these loans to commercial credit as it holds that there was no promise of implementation of these loans on a government-to-government basis.

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A conversion to commercial credit would make these loans very expensive, and has thus elicited a strong response from Bangladesh.

For now, China seems to have taken a step back from its aggressive stance on the nature of the loans given the outcry from Bangladesh over the issue, but the government needs to be cautious about the prospect of falling into a debt trap.

A tough challenge

This debate is arguably the toughest one faced by the country at present. The loans offered by China are sizable and would provide a needed leg-up to industries across the spectrum, thus helping Bangladesh continue on a strong growth path and improve its negative image as a business destination.

However, at a time when remittances have fallen and export growth has declined, a conversion of the loans to commercial credit would deal a body blow to government finances, and in turn, its economic growth.

If Bangladesh intends to remain on the 7%+ annual growth path, it needs to tackle slowing export growth, support its readymade garments industry, and find a sustainable solution to the Chinese loan problem so that it can continue leveraging its position as a strategically placed fast growing economy with availability of an attractive labor pool for manufacturing businesses.

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