Bangladesh and India initiated their first Line of Credit (LoC) agreement 12 years ago, with India pledging $7.36 billion to Bangladesh; however, as of last December, only $1.65 billion has been disbursed.
Although talks between the two countries have been ongoing for the last few years to speed up the implementation of the agreement, progress has been slow.
Therefore, to expedite the process, Bangladesh Prime Minister Sheikh Hasina will emphasise the issue during her upcoming visit to Delhi, where it will be a key topic at the summit meeting with Indian Prime Minister Narendra Modi, sources said.
Upcoming high-level summit
Following the formation of new governments in both countries, Prime Ministers Sheikh Hasina and Narendra Modi are set to meet in Delhi this Saturday for a summit.
This meeting will outline the future direction of the relationship between the two neighbouring countries. Sources from the Ministry of Foreign Affairs and the Economic Relations Division have confirmed that economic cooperation, connectivity, and energy will be prioritised in the discussions.
Discussions between the two countries have been ongoing for the past few years to speed up the implementation of the loan agreement.
Officials from both countries are working on a new framework agreement to expedite the process. However, it is unlikely to be signed this time. However, the new framework agreement may be included in the joint declaration issued after the summit meeting.
Historical context of LoC agreements
Bangladesh's first loan agreement with India, known as the first Line of Credit (LoC), was signed in August 2010, amounting to $860 million. Additionally, the second LoC was signed in 2016 for $2 billion, and the third LoC was signed in 2017 for $4.5 billion. Altogether, India pledged $7.36 billion in loans to Bangladesh under these three LoCs.
According to sources from the Economic Relations Division (ERD), despite the three LoC agreements, the disbursement rate has been lower than expected. As of last December, only $1.65 billion has been disbursed. This includes $800 million from the first LoC, $400 million from the second LoC, and $450 million from the third LoC by the Indian Exim Bank. Additionally, Bangladesh has repaid around $180 million from the first LoC so far.
So far, a total of 40 projects have been undertaken across the three LoCs in sectors such as road and rail connectivity, energy, and infrastructure development. Of these, 15 projects have been completed, eight are ongoing, and the rest of the projects are at the stage of hiring consultants and contractors or preparing project proposals.
Disbursement challenges and adjustments
Officials from the Economic Relations Division (ERD) have stated that the pace of Indian credit disbursement is much slower than that of other development partners. One main reason is the condition that 75 per cent of purchases for projects funded by Indian loans must be made from India, with 65 per cent specifically for construction projects. Additionally, at least 10 per cent of purchases must be sourced within Bangladesh.
However, facing objections from various parties concerned, including Indian contractors, the lenders have agreed to relax this condition to 65 per cent for the Hi-Tech Park construction project.
Dr Zahid Hussain, former lead economist of the World Bank's Dhaka office, told Business Post that one of the main problems in disbursement of funds from the Indian LoC is the complex conditions of purchase.
"Contractors show less interest in project implementation due to procurement conditions after securing the work. Such problems occur in almost every project," he said.
He believes that if this condition is relaxed, the disbursement on the Indian line of credit may increase.
Reform efforts and project issues
To address these issues, Bangladesh and India agreed to speed up the disbursement process during the 21st review meeting on LoC projects. Although these review meetings are held annually, solutions have been minimal, leading many implementing agencies to drop projects from the Indian loan list.
According to ERD sources, due to the unwillingness of the implementing agencies, a proposal was sent to the Indian authorities to withdraw these projects from the Indian LoC list. With the consent of the Indian authorities, two projects were removed from the list in May 2023.
Officials mention that other issues with Indian loans include the requirement that only Indian contractors can undertake the projects. Every step, from project inclusion to contractor appointment, requires approval from the Indian Exim Bank, often taking one to two years. Sometimes, contractors bid excessively high, increasing project costs.
Specific project example: Hi-Tech parks
For example, the government is building hi-tech parks in 12 districts with LoC loans, and Indian firm Larsen & Toubro (L&T) has been appointed as the contractor consultant. Approved by the Executive Committee of the National Economic Council (ECNEC) in 2017, the project was supposed to be completed by 2021. However, the three-year project has extended to seven years with only 15 per cent progress, and loan repayment has already begun.
Currently, a proposal has been tabled to extend the project deadline to 2027, revising for the second phase and increasing costs by 127 per cent. The total project cost is set to more than double from Tk 1,796 crore to Tk 4,197 crore. Stakeholders attribute the repeated delays mainly to disputes over the sourcing of materials for the project.
Bangladesh is a major borrower of Exim Bank
Nearly two decades ago, India's Exim Bank began lending to various countries under the LoC concept, starting in the fiscal year 2003-04. The bank provides financial assistance to support India's exports, investments, and business expansion. In 2010, Bangladesh received its first Line of Credit from Exim Bank, amounting to $1 billion, including grants.
Over the past twelve years, Bangladesh has become the largest borrower of Exim Bank loans. Other countries on the bank's borrower list include Vietnam, Cambodia, Sri Lanka, Nepal, Maldives, Cuba, Nigeria, Syria, Myanmar, Senegal, Congo, Ghana, Ivory Coast, and Angola. To date, Exim Bank has signed loan agreements worth $28.15 billion with these countries, with Bangladesh receiving the highest share, nearly 32 per cent of the total loan commitments.
